ITAR Hinders Transatlantic Defense Cooperation

George Monkhouse Kleuser
February 4, 2010
ITAR and trans-Atlantic Armament Cooperation : Current State and Future
Possibilities
The United States’ export controls in the defense realm are the main hindrances to
transatlantic defense cooperation. While many insist on its necessity for security ends, it is
often accused that the International Traffic in Arms Regulation (ITAR) is merely a façade for
protectionist measures. The following paper seeks to explain the debates surrounding
American export controls, illustrate the developments in ITAR reforms and to demonstrate
how European firms attempt to deal with these restrictions when doing business in the United
States. Finally, it will be argued that in the absence of ITAR reform in the short term due to
Congressional hostility, European firms will be faced with the challenge of creating industry-
led initiatives to make trans-Atlantic cooperation more attractive for American policy-makers.
It goes without saying that the constant threat, perceived or real, which formed the
basis of the Cold War is best illustrated in government defense spending. Interesting to note
as well is the pattern of spending between the United States and European governments with
the end of the Cold War. In 1988, on the eve of the Cold War’s end, the governments of the
United States, France and the United Kingdom had budgets of 5.7%, 3.6% and 4.1% of GDP,
respectively. Following 1988, the budgets of France and the United Kingdom steadily
declined to lows of 2.3% and 2.4% in 2007. As for the United States, the budget declined to a
low of 3% in 1999 until increasing once again in 2001, ultimately reaching a level of 4% in
2007.1
The United States’ large GDP, coupled with a larger percentage of it put toward
military R&D and production, as compared to European countries, means there is a significant
gap between European and American military capabilities. Many armies in Europe are in
desperate need of military hardware upgrades and, given the decline in European R&D and
procurement budgets, many see a necessity for transatlantic armaments cooperation to meet
these capabilities needs. With these decreasing defense budgets, the increasing complexity
and thus cost of defense equipment, transatlantic cooperative defense procurement programs
are a means to exploit economies of scale and scope, share costs, and increase interoperability
of NATO missions.2 For this to be successful the United States needs to recognize that its
European allies have significant capabilities in some fields.3 On a purely economic level, the
United States should realize that, despite its increasing budget over the last decade, projected
acquisition budgets are inadequate given dual requirements for equipment modernization and
1 Stockholm International PeaceResearch Institute. Accessed: 03/02/10,Available:
http://www.sipri.org/databases/milex
2 Bellouard,Patrick. “How to Ensure Progress for Armaments Cooperation in Europe?." Défense Nationale et
Sécurité Collective: Les Marchés Publics de Défense (2008),p. 165
3 James, Andrew. "European Military Capabilities,theDefense Industry and the Shape of Armaments Co-
operation." Defense & Security Analysis, Vol. 21, No. 1, (2005) p.6

transformational technologies, increasing personnel and operational costs from its current
engagement in two overseas wars, and an increasing overall national budget deficit.4
Moreover, for Europe, a ‘buy European’ doctrine must be avoided for defense procurement
due to the disincentives for industry competitiveness that it creates.5
Of course cooperative procurement projects are not easy and are riddled with
managerial difficulties stemming from economic opportunism. Europe’s ingrained policy of
“just retour” means all cooperative efforts must guarantee a proportional share of work for
contractors in each participating country. Essentially, a prime contractor must find sub-
contractors in every country and monitor their performance. Certain contractors, seeking
shortcuts in order to maximize profits, may produce sub-par equipment while others may
simply be incapable to create the high-quality, high-technology end products demanded by
militaries.6 Another contributing factor to complexities in cooperative programs are changing
demands made by governments, especially in the case where cooperating governments ask for
differing specifications within a single defense system project (e.g. the increasing cost and
delays in the A400M transporter project). Illicit technology transfer or technology
“poaching” is another challenge of a particularly problematic nature as not only industrial
partners but governments as well may seek to illegally acquire technology from one another.7
Anxieties over poaching present the most formidable barriers to transatlantic cooperation in
armaments programs due to the United States jealously guarded technology.
The United States’ concern, among others, over potential poaching of their
expensively developed technology is embodied in the ITAR, which acts as an export control
mechanism for articles and services on the United States Munitions List (USML). The USML
is a massive list of technology and equipment prohibited for export with non-US persons or
governments without authorization from the United States Department of State (DoS). Export
controls are generally applied by governments in order to promote foreign policy objectives,
enhance national security, prevent the exports of short-supply materials, and achieve nuclear
non-proliferation.8 While the United States has emphasized its position that ITAR is a means
of promoting security, opponents of the restrictions counter that ITAR is merely a means of
protectionism that the United States employs for economic ends, be they to ensure continuity
of domestic manufacturing or attempting to create a mercantilist linkage by way of defense
technological dominance.9 Still others believe that the trade limiting effects of ITAR reduces
4 Adams, Gordon. "Transatlantic Defence-Industrial Cooperation and American Policy." European Security
Forum, Brussels,25 November 2002, p.7.
5 Van Scherpenberg, Jens. "Transatlantic Competition and European Defence Industries:A New Look at the
Trade-Defence Linkage." International Affairs (Royal Institute of International Affairs1944-),Vol.73, No. 1 (Jan.,
1997),p. 120.
6 Kapstein,Ethan B. "Opening up European Defence Markets: the Challenges Ahead." Défense Nationale et
Sécurité Collective: Les Marchés Publics de Défense (2008),pp. 179-180.
7 Ibid.,p. 180
8 Parkhe, Arvind. "U.S. National Security Export Controls Implicationsfor Global Competitiveness of U.S. High-
Tech Firms."Strategic Management Journal, Vol. 13, No. 1 (Jan., 1992),p. 47.
9 Van Scherpenberg, Jens. "Transatlantic Competition and European Defence Industries:A New Look at the
Trade-Defence Linkage." International Affairs (Royal Institute of International Affairs1944-),Vol.73, No. 1 (Jan.,
1997),p. 111.

economic strength, which is vital for national security, and thus the export restrictions actually
lower national security.10
In November 2002, the Bush Administration did present NSPD-19: Review of
Defense Trade Export Policy and National Security which reiterated the classic American
concern for export control while putting a review of American policy in order to, among other
things, seek greater “U.S-Allied defense industrial cooperation.”11 A January 2003 article in
Defense News expressed discontent with the new policy, believing that it would allow Boeing
to sell Chinook helicopters to China, for example, and declared “the Bush administration is
poised to complete…the most sweeping change to U.S. arms export policy in more than 50
years. Certainly that kind of reform deserves at least modest public debate.”12 In short, efforts
at liberalizing American defense trade are criticized, as we will see, at the same time as being
both too little but also too far sweeping and thus putting the United States at risk.
Mechanisms available for export of ITAR controlled technologies include
Manufacturing License Agreements (MLS), DSP-5 and DSP-73 export licenses, and
Technical Assistance Agreements (TAA). However, the process to apply for these
exemptions are costly, time consuming and, of course, subject to rejection. Indeed, in recent
years the number of applications for ITAR licenses has grown, yet the number of case officers
processing the applications has not.13 Moreover, high technology is very unlikely to be
allowed for export through ITAR exemption due to the costs the United States government
has put into research and development programs.
The Defense Trade Security Initiatives (DTSI) was announced in May 2000 by then
Secretary of State Madeline Albright, representing a liberalization of United States export
controls but has serious limitations as it only covers unclassified technologies and does not
contain proposals to review the role of Congress in the export control process.14 On the other
hand, the European Union’s EDA ‘code of conduct,’ while having the goal of opening up
competition for defense contracts in Europe, is voluntary, countries have shown little
enthusiasm for it and it excludes sensitive goods and multinational equipment programs.15
The voluntary nature of the code and the fact that a term such as ‘sensitive’ may be open to
interpretation for protectionist ends does not bode well for a true opening of the European
defense market.
While the DTSI’s efforts of the late 1990s to liberalize defense trade and review the
USML were a start toward greater transatlantic cooperation, the Bush administration’s fears
10 Parkhe, Arvind. "U.S. National Security Export Controls Implicationsfor Global Competitiveness of U.S. High-
Tech Firms."Strategic Management Journal, Vol. 13, No. 1 (Jan., 1992),p. 49
11 NSDP-19 : Review of Defense Trade Export Policy and National Security. 21 November 2002. Accessed: 4
February 2010. Available: http://www.fas.org/irp/offdocs/nspd/deftrade.html
12 Schroeder, Matt and Stohl, Rachel. “Export-Control Murkiness:U.S. Secrecy Spurs Talk of Looser Standards.”
Defense News, January 6, 2003.
13 "United States Concludes Self-Executing Treaties Intended to Ease Statutory Controls on Military Tradewith
CloseAllies."The American Journal of International Law, Vol. 102, No. 2 (Apr., 2008),p. 374.
14 Ashbourne, Alex. "Opening the US Defence Market." Center for European Reform. October 2000,p. 2
15 de Vaucorbeil,Sophieand Daniel Keohane. "Opening up European Defence Markets: the Challenges Ahead."
Défense Nationale et Sécurité Collective: Les Marchés Publics de Défense (2008), p. 115.

over rogue states and the development of weapons of mass destruction meant the Department
of Defense had less enthusiasm of releasing technologies, which they were unsure they could
later control, and thus slowed DTSI initiatives.16
Although the DTSI slowed under the Bush administration, the cold reception of
transatlantic initiatives would change with the UK-US Defense Trade Cooperation Treaty
(DTCT) was signed in June 2007 between Tony Blair and George W. Bush in order:
to enhance interoperability between the UK and US’ respective Armed Forces, support combined
military or counter-terrorism operations, and reduce the current barriers to the exchange of defence
goods, services, related technical data and the sharing of classified information in support of co -
operative defence research, development and production and in certain defence and security projects
where the UK or the US is the end-user.17
The DTCT was drafted in the form of a bilateral treaty in order to bypass the United States
House of Representatives, and thus to streamline the process, as treaties only need Senate
ratification. Currently, the treaty is still awaiting ratification, and the true impact it will have
is questionable as it will not cover multinational efforts such as the Joint Strike Fighter.18
At the current time the transfer of technology from the United States to its allies
generally takes form through a TAA. In the case of Australia, for instance, a TAA must first
be obtained from the United States Department of State in order to permit a United States
party to enter discussions with an Australian party.19 Thus the ITAR controls are in place not
only for tangible goods but even to the extent that knowledge and work of United States
citizens are controlled. In the British case, should the DTCT be ratified by the United States
Senate, the process of attaining a TAA would be significantly streamlined. Three criteria
would regulate the transfer: (1) is the UK industry partner approved; (2) is the project in
question approved; (3) is the technology to be transferred excluded from export.20 Should all
criteria be met, then the United States and the United Kingdom firms are free to cooperate on
a joint project without the need to apply for ITAR exemptions.
At the current time the British have ratified the treaty and await an American vote. In
February 2009 the Society of British Aerospace Companies played their part in the process by
calling on the new American administration to push for the Senate ratification by urging the
United States Department of State to work to quell concerns of the Senate Foreign Relations
Committee in regards to the DTCT.21 Important to consider, of course, will be domestic
opposition in the form of Congressional veto in the United States made more possible in an
16 Adams, Gordon. "Transatlantic Defence-Industrial Cooperation and American Policy." European Security
Forum, Brussels,25 November 2002, p.9.
17 Taylon,Clair.“UK-US Defense Trade Cooperation Treaty.” SN/IA/4381. House of Commons Library.17
February 2009.
Défense Nationale et Sécurité Collective: Les Marchés Publics de Défense (2008), p. 120
19 Director US Export Control Systems. "United States' Defence Export Controls: Guidancefor Australian
Companies." August 2007. P. 7.
20U.S. Department of State. “Improvements to the Defense Trade Export Control System .” Accessed: 4 Feb.
2010.Available:http://merln.ndu.edu/archivepdf/nss/state/107505.pdf.
21 SBACpress release, 3 February2009

era where political discourse of rogue states developing weapons of mass destruction is a
common theme. It is not unbelievable that Congressmen may instrumentalize such fears out
of considerations more based on keeping jobs in their constituencies than out of genuine
security concerns. Indeed, such employment concerns are not lost to Thales who emphasizes
on their United States website: “With over 2,300 employees, Thales USA has demonstrated a
commitment to the U.S. economy by establishing a solid local workforce and production
capability.”22
Other European countries consider the United Kingdom’s relationship with the United
States, due to the bilateral nature of both DTCT and the earlier Declaration of Principles, as a
snub by the Americans and a sign that cooperation with them is not a priority. However, for
better or for worse, American policy in this regard is at least consistent. Even the DTSI
considers all countries on an individual basis, never dealing with multinational ventures.
Critics assert that this bi-lateral approach of the United States is effectively a ‘divide and
conquer’ strategy that will prevent the manifestation of a true European military-industrial
base. Yet, the bilateral American approach keeps in line with a stated ITAR goal of
preventing re-export and assuring that countries possessing American technology share its
general foreign policy objectives. Although the European Union has taken steps to create a
common foreign policy and defense strategy, the Pentagon insists that mergers and the
technology transfers that they imply will be most readily approved between firms in countries
with similar industrial security practices and restraints on arms exports.23 The ideal would be
that the United States extends the DTCT to all members of the European Union, however
without a common EU code of binding rules and defense market legislation, the United States
will not do so as the security of their exports and transfers cannot be assured.24
In the current climate, European efforts to deal with ITAR are best examined in light
of various approaches of European firms responding to globalization in the armaments
industry. Given the European need to strive for greater cooperation efficiency, economies of
scale, cost sharing and interoperability of national militaries, access to American technology
is a necessary factor for successful procurement processes. Given the difficulties of accessing
American high-technology goods through ITAR exemptions, European defense companies
seek industrial relationships with companies in the United States as means of accessing
technologies. This is becoming more feasible as European companies undergo privatization
and programs such as NATO AGS provide a point for transatlantic teaming and creating
relationships among prime contractors. Andrew James identifies three trends among
European defense firms in an era of globalization that we will term transatlantic bilateral,
European consolidation, and multinationals.
Those firms following a strategy based on transatlantic bilateral ties are, for the most
part, British firms. These firms include Rolls-Royce, Smiths Group, Meggitt, Ultra
Electronics, and Cherming which seek to make acquisitions in the United States from a strong
22 http://www.thalesgroup.com/Countries/United_States/About_us/. Accessed: 4 February 2010.
23 Markusen, Anna. "The Riseof World Weapons." Foreign Policy, No. 114 (Spring 1999),p. 45.
Défense Nationale et Sécurité Collective: Les Marchés Publics de Défense (2008), p. 120.

base in their home country and build transatlantic linkages through small and medium sized
acquisitions.25 The United Kingdom’s close relationship with the United States certainly
facilitates such acquisitions and lends greater efficiency through the acquisition of smaller
American companies by larger British contractors. In the case of Ultra Electronics, in 2009,
the company invested in the Boeing 787 project as well as the Airbus A-400M project,
acquired Xerion Systems and Scytale, Inc., both American companies, and considers that as
baseline defense budgets will remain stable in the United States, its main market, there is
considerable room for further growth and investment for the company in the United States.26
If the DTCT is to go into effect, these linkages would logically strengthen and the
facility of technology transfer allow for the cooperative development of more sophisticated
systems. In the case of technology needs that will not be transferred to British firms, a
modular production project may be an option. In this case, firms would work independently,
each respecting its constraints under ITAR and an American prime contractor with access to
needed technologies would then assemble finished projects. While this is not the ideal type of
production in economic terms, in the defense sector it may be feasible and still allow the
creation of transatlantic linkages that have the possibility of future development.
European consolidation is led mainly by EADS, with some even declaring it the
bastion of ‘Fortress Europe,’ however EADS still seeks linkages with the United States. In
February 2008, EADS/Northrop Grumman won the US Defense Department contract to
provide the US Air Force with the KC-45 Aircraft Tanker. The company website emphasizes
its low cost, providing tax payers with the ‘best deal,’ and that the essential design for the
tanker based on the A330 civilian passenger jet or “a derivative of a modern commercial
jetliner.”27 In this instance, possessing military technology of the highest level was perhaps
not as important as simply underbidding purely American firms, as evidenced by the
‘spinning-in’ of the A330 design from the civilian to the military realm.
The EADS/Northrup Grumman bid was eventually recalled following opposition in
the American Congress. Representative Duncan Hunter, a California Republican, introduced
an amendment to the 2009 Defense Authorization Bill that would require tankers under
contract with Northrop-Grumman/EADS to contain 85% American-origin components; a new
difficulty for the A-330 which was expected to include only 60% American content.28 In
addition, new specifications were introduced for the refueling tankers which favored a plane
much smaller than the A-330 and would lead to Northrop Grumman declining to pursue the
bid. For his part Louis Gallois, the CEO of EADS stated: “We can't say this would have an
immediate financial impact for us. It is roughly 15 planes a year and we produce 500
25 James, Andrew D. "ComparingEuropean Responses to Defense Industry Globalization." Defense & Security
Analysis, Vol. 18, No. 2, p. 128.
26 Ultra Electronics. Press Release,March 1, 2010,pp. 4-7. Accessed: April 1,2010. Available:
http://www.ultra-electronics.com/press_releases/236_2009_results.pdf
27 See : http://www.northropgrumman.com/kc45/operations/section.html
28 Tiron, Roxana.“Measures target Northrop tanker contract.” May 21, 2008. Available:
http://thehill.com/business-a-lobbying/3607-measures-target-northrop-tanker-contract

annually, so this is not something that will disrupt the balance at EADS.29
” We may interpret
this statement to mean that the possible tanker deal did not represent an economic necessity
for EADS, rather the potential means to gain a foothold in the American market through a
partnership with Northrop-Grumman and the construction of factories in the United States.
That being said, on April 20, 2010, EADS announced that it would indeed re-enter the bid
against Boeing alone.
Thales and BAE seek a foothold in the American market through a multinational
approach. BAE Systems/British Aerospace, mainly through joint ventures, claims home
markets in the UK, US, Sweden, France, Germany, Italy, Saudi Arabia, Australia, and South
Africa, while Thales Rayethon Systems Co. assures 51:49 per cent ownership in each country
it operates as a means to moderate American regulatory controls on foreign owned
companies.30 Thales’ system of multidomestic production is a pragmatic response to political
and regulatory constraints of defense companies. The multidomestic model runs into
problems of efficiency through reproduction in the event of blocked technology transfers
among various Thales branches, limits the scope for industrial efficiency and thus may not be
sustainable in the future.31 However, the defense industry has historically not been based on
the most efficient use of means and, given the constraints of ITAR, inefficient systems such as
modular production and multidomestic models may provide the only option for European
entry into the American market.
In certain ways, many European firms operating in the United States, be it through
joint partnerships or multidomestic forms, are putting themselves in a subsidiary position to
the United States’ traditional ‘dominant partner’ approach. Regardless of the business model,
the United States’ overwhelming technological superiority and reluctance to transfer
technologies ensures this dialectic. In this relationship, nonetheless, advantages are to be
reaped by both parties as Europeans gain a larger market share and more high-tech equipment
(though not the possibility to access the technology for their individual use), while Americans
are able to achieve greater economies of scale and capital access.
In conclusion, political motives are evident in the case of the DTCT with the United
Kingdom. Although there are obvious practical, economic, and security for arms export
control reforms, Senate resistance to ratification often comes from self-serving objectives of
individual Congressmen. At the same time, in a political system such as in the United States
where lawmakers are very dependent on lobbying, European firms have an opportunity.
Congressmen are often skeptical of transatlantic production when it means losing jobs or not
creating a greater share of jobs in their respective constituencies. At the same time, in many
instances, legislative changes are industry driven and this too could be true for European
29 “EADS sees no financial hitfromU.S. tanker loss.” Reuters. March 10, 2010. Available
http://www.reuters.com/article/idUSTRE62A0X820100311

industrialists. Arms exports treaties and European industry presence in the United States is
pushed for from the American executive level and the Department of Defense, yet receive a
cold reception in Congress. If European firms are able to achieve greater transatlantic
linkages with American firms, provide more jobs in the United States, improve economic
efficiency through partnership agreements and are able to prove their value in an industry
where ‘reputation matters,’ their economic importance will grow and thus their leverage for
lobbying for regulatory reform will become more substantial. This does mean that European
firms will have to be patient and accept a subordinate position, in the case of partnerships, or
follow business models which lack efficiency, as is the case with a multidomestic model. For
their part, American legislators need to accept that transatlantic cooperation has benefits and
avoid using ITAR for their own political ends. Of course, greater efforts at European industry
legislation, coordination, and cooperation, and larger budgets for research and development
would also be a start.

ITAR Hinders Transatlantic Defense Cooperation

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