U.S. Defense Companies Face ITAR Challenges
KEN POLE
© 2010 FrontLine Defence (Vol 7, No 2)

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The United States’ tight grip on the export or sharing of defence technologies may not be providing the results they were looking for. On the contrary, when Washington imposed more restrictions through its International Traffic in Arms Regulations (ITAR) 11 years ago, it actually created new opportunities for ­foreign companies seeking more business. The ironic corollary has been that ITARs backfired on U.S. companies which saw some global markets shrink as competitors moved in.
 
Until those ITAR amendments, neither the Department of Defense (DoD) nor its U.S. suppliers needed permits to export most hardware and/or services to Canada; the few exceptions involved particularly sensitive technologies such as encryption, optics and surveillance hardware. There was an underlying and long-standing trust of Canada dating back at least to the harmonious 1963 Defense Development Sharing Arrangement between the two countries.
 
The Directorate of Defense Trade Controls (DDTC) in the State Department revoked that special status in 1999, leaving companies and government agencies on both sides of the border mired in a time-consuming and costly bureaucratic approvals process. The DDTC’s decision was precipitated by U.S. concerns about Canadian employment of dual-citizenship and third-country nationals (TCNs) from countries proscribed by Washington (China, Cuba, Iran, Sudan, Yemen and others), as well as Ottawa’s refusal to ban defence-related exports to those countries.
 
Revocation meant that the DoD and U.S. suppliers had to go through a complex licensing process before they could even talk to Canadian companies. Also, Canadians with proscribed dual citizenship and TCNs from these countries were prohibited from having access to any material deemed sensitive. It has posed a significant impediment to Canadian companies which had previously established some $1-billion in annual sales to the United States.
 
Nationality is not specifically defined under ITAR but, for now, the U.S. takes country of birth and any continued ties into account. For example, French natives with permanent U.S. residency and working for a U.S. company are considered U.S. “persons” and, hence, aren’t a potential problem. But if they move to Canada and opt for resident status only, they would be treated as a TCN.)
 
By mid-2000, after intense negotiations, Washington eased up on restrictions for technologies which would remain in Canada or be returned to the United States. Although Canada undertook to strengthen its controls and harmonize its Export Control List (ECL) with the U.S. Munitions List (USML), the Americans still balked at any dual-­citizenship Canadians or TCNs handling potentially sensitive material. Because the Canadian Charter of Rights and Freedoms ­prevents employers from asking employees about their country of birth, some companies opted for a “don’t ask, don’t tell” approach and risking penalties.
 
Ottawa and Washington eventually agreed, in May 2007, to allow access to Department of National Defence (DND) personnel and “embedded contractors and employees of other government departments” working within DND for ITAR-controlled technologies. That also applied to dual-nationals with at least SECRET-level security clearance, but not to employees “who maintain significant ties to foreign countries.”
 
Later that year, the dual citizenship conundrum for other countries was addressed in a further ITAR change. It simplified the approvals process for dual nationals, but only those who were citizens of Australia, New Zealand, Japan and Switzerland as well as countries within the North Atlantic Treaty Organization (NATO) and the European Union (EU). In both instances, industry was excluded from the changes.

 

Problems persisted nonetheless. In August 2008, Ottawa complained that ITAR undermined its plans to spend $17 billion on new military hardware, mainly because bureaucratic delays were driving up costs. Canada’s case was bolstered by American interests. “U.S. industry is becoming increasingly frustrated with the status quo as it impeded its own defence trade,” the Department of Foreign Affairs and International Trade pointed out at the time.
 
Since then, Canada, the United Kingdom and Australia all stepped up their long-term lobbying efforts on Capitol Hill. Canada, given its significant immigrant population, focused on the dual-citizenship issue while the others concentrated on their bilateral defence agreements with the U.S.
 
Meanwhile, U.S. industry, having also kept the issue simmering, turned up the heat four months ago in a letter to President Barack Obama. Signed by more than 100 Aerospace Industries Association (AIA) member companies, it lauded the Obama administration for at least agreeing to review the situation. The AIA urged, among other things, the development of criteria for identifying critical and sensitive technologies that had to remain rigorously controlled; the establishment of  “timely technology flows” between the U.S. and its closest allies and partners; and procedures to ensure that the DoD balances policy and technical considerations in reviewing any proposed release of U.S. technology.
 
These efforts are evidently paying off. On March 11, during a speech at the annual conference of the Export-Import Bank of the U.S., President Obama unveiled a package of “export control reform initiatives,” adding that his administration plans an on-line review and notification process for products that incorporate encryption algorithms. It would reduce the review process to “30 minutes” from the customary 30-60 days.
 
The President wants to harmonize ITAR standards with Export Administration Regulations so as to eliminate unnecessary obstacles for exporting products to companies with dual-national and TCN employees. Details of the DDTC and BIS regulatory proposals are expected to be published in the U.S. Federal Register – possibly in early April.
 
“President Obama’s remarks … on the National Export Initiative and the agenda for export control modernization together signal his commitment to protect our national security while strengthening U.S. exports,” responded the AIA. “In today’s intensely-competitive global economy, American economic leadership is increasingly at risk.”
 
The President’s Export Council, which currently includes eight members of Obama’s cabinet and 10 members of Congress, has been advising presidents on the whole gamut of export issues since 1973. It’s significant that Jim McNerney, President and CEO of The Boeing Company, has been named its new chairman. Aerospace, which accounts for the largest trade surplus of any U.S. manufacturing sector while directly employing more than 600,000 people, has always been a key issue for the Council.
 
As for Obama’s commitment to reconciling different standards of classifications for “dual national” importers by place of birth or current citizenship, the AIA said that “developing a new standard that maintains the highest focus on security while allowing for critical trade and technical cooperation with our closest allies is a long-standing priority for the aerospace industry.”
 
The DoD and State have agreed to address the huge and costly administrative burden that the nationality requirements have imposed, on both industry and their own bureaucracies, with little demonstrable benefit to U.S. national security. Canadian and other foreign interests still would be responsible for overall compliance with regard to USML-controlled technologies.
 
The Canadian Association of Defence and Security Industries (CADSI), in a report submitted to the federal government in late December and only made public the day before Obama’s speech, points out that the U.S. accounts for 80 percent of Canada’s defence exports and that the technologies developed by domestic companies partnered with U.S. companies are intertwined with U.S. technology. “Canadian companies face an almost impossible task: complying with both ITAR … and Canadian human rights and employment laws,” CADSI says. The evident consensus during consultations which were factored into its report is that if the problem is not addressed, “jobs would continue to be lost, weakening Canada’s industrial base and competitiveness.”
 
Asked to comment on Obama’s proposal, CADSI declined, explaining that it had signed a “non disclosure agreement” with the federal government, which precluded it from saying anything about ITAR. Nor could CADSI explain why such an agreement was necessary in the first place. PWGSC similarly declined specific comment, saying only that the government “continues to work with the U.S. administration to ensure an open dialogue” and that the goal is “a mutually agreeable and viable solution that will place the emphasis on security and will resolve ITAR issues and concerns for Canadian industry.”
 
It could be that PWGSC prefers to wait until Obama’s skeletal package is fleshed out when the U.S. regulatory proposals are published. As has been said, “the devil is in the details.” It’s also said that “better the devil you know than the devil you don’t.” This particular bureaucratic exorcism remains politically vulnerable to any Congressional maverick who sees a potential threat to a company in his or her state or even waves the “national security” flag that is key to the U.S. psyche these days. However, nobody is pushing for the status quo.
 
Given the obvious potential for huge fiscal and other penalties for ITAR violations, many U.S. companies are loath to take any initiative without documentation such as a Technical Assistance Agreement (TAA), which enables them to discuss and share regulated technical data with an overseas contact. However, securing a TAA can take six months and if there is a three-month window for bidding, the opportunity evaporates. Some firms get around this by having documentation routinely in place but that, too, can be a lengthy process and foreign firms sometimes will not supply parts or components to an American part for fear that the materials could become ITAR-designated.
 
The dilemma that arises when DND buys equipment from the U.S. is Canada’s policy of Industrial Regional Benefits (IRBs) which yield long-term employment and investment. “ITAR muddies the waters,” as one executive put it, and complicates cross-border business arrangement. Another important consideration is that in-service support, upgrades or modernizations are often are much more valuable than the original purchase and, when that source is US-controlled, transfer of the required data can easily be stymied.
 
A similar situation has surfaced in the Halifax-class frigate upgrade program. Lockheed-Martin Canada reportedly chose Sweden’s Saab Systems to develop its command and control system due to what a senior executive described as “a desire” by the client (DND) to use ITAR-free technology. DND spokesperson Jocelyn Sweet agreed in an e-mail to reporter David Pugliese that “any proposals related to the integrated combat system” had to address “how the contractor would mitigate any risk to the delivery schedule if they included sourcing of material or services from the U.S. that would invoke ITAR restrictions.”
 
ITAR complications may explain DND’s seeming acceptance of delays on Canada’s Cyclone maritime helicopter project and other defence programs.

The orbital satellite industry also has been mired in the ITAR morass. Patricia Cooper, President of the Satellite Industry Association (SIA) advised the House of Representatives Foreign Affairs Committee Subcommittee on Terrorism, Non-Proliferation & Trade last year that the U.S. prime manufacturing sector’s market share had hovered at around 40 percent for the past few years. That compared with 65 percent they held a decade earlier before satellites were brought under the ITAR umbrella.
 
Cooper said the industry worries about its manufacturing sector’s ongoing ability to bid on the relatively limited number of commercially-competed communications satellites. Until recently, most satellites needed ITAR-controlled U.S. components. “This is no longer the case. In the past few years, European manufacturers have developed the capability to produce the requisite parts and components for a spacecraft without U.S. content.”
 
Cooper’s testimony explained that “… it is increasingly clear that U.S. export controls have affected American firms’ ability to compete globally. Whether for real or perceived reasons, many international satellite customers maintain a strongly-held perception that U.S. export controls are unpredictable, excessively stringent and time-consuming … We are anecdotally observing increasing numbers of satellite operators from around the world preferring to purchase satellites that exclude U.S. technology and avoid the concomitant ITAR requirements.”
 
European primes have been taking contracts away from their U.S. competitors. For example, Thales Alenia Space is marketing an ‘ITAR-free’ satellite, and EADS Space Transportation Division says it is developing a satellite motor that will be “completely ITAR-free.” The application of ITAR to commercial and dual-use satellites has also prompted China and India to accelerate development of their own technologies – another opportunity to compete against U.S. companies.
 
The latest revisions mentioned by President Obama will have very positive repercussions for Canadian defence and security industries, but will also go a long way to removing the stigma of ITAR controls that have begun to plague U.S. companies.

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Ken Pole is a Contributing Editor for FrontLine Defence magazine.
© FrontLine Defence 2010

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