House of Commons - Defence

Select Committee on Defence Third Report

2 Operation of the Treaty

10. The Treaty sets out a framework for arms trade and technology transfer between the US and the UK. The Government, in the Explanatory Memorandum accompanying the Treaty, states that it will:

only apply to defence articles listed on the United States Munitions List for US or UK Government end-use;

not cover the export to the UK of defence articles intended for use by other nations; and

not cover certain highly-sensitive technologies.[10]

The defence goods and technologies which will be exempted from the provisions of the Treaty will be set out in Implementing Arrangements (Article 3), which are considered further below. [11]

11. The Government also states in its memorandum that the Treaty arrangements will be in addition to, not a replacement for, both countries' existing export control arrangements. Arms and defence technologies not covered by the Treaty could still be exported if they meet the requirements of the UK's and US's current export licensing systems.[12] Exporters to whom the Treaty arrangements apply may use either the existing export control licensing arrangements or the Treaty arrangements. Those to whom the Treaty arrangements do not apply will have no option other than to apply for a licence through the existing arrangements.

12. The main provisions in the Treaty are as follows:

It provides for an "Approved Community" of companies and individuals in the UK and US. In the UK, the community will include Government facilities, Government personnel, companies and individuals; the eligibility requirements for inclusion in the Approved Community will be set out in the Implementing Arrangements (Articles 4 and 5).
It removes the requirement for goods and technologies that are exported from the US to companies within the Approved Community in the UK to be granted an individual export licence (Article 6). The Treaty will also allow for the subsequent transfer of those articles within the Approved Community without further US authorisation (Article 7).
It prevents goods and technologies exported to the Approved Community in the UK from being re-exported or transferred outside of that community without subsequent approval by both Governments. Certain exceptions to this provision, such as those for goods or services being used in support of the UK's deployed Armed Forces, will be mutually agreed and set down in the Implementing Arrangements (Article 9). In the UK, all relevant legislation, including the Official Secrets Act, will apply to the goods and technologies exported under the Treaty. Both Governments will be obliged to investigate any suspected violations and inform the other party of the result of such investigations. Each party shall also have the right to conduct end-use monitoring of exports or transfers conducted under this Treaty (Articles 11-13).
Both parties will consult at least once a year on the cooperative aspects of export controls, and review the operation of this Treaty (Article 17). Any disputes arising out of, or in connection with, the Treaty are to be resolved on a bilateral basis and will not be referred to any court, tribunal or third party (Article 18).[13]

The current US export control system

14. Industry found the US export system to be an administrative burden that tied up "huge amounts of resource" every time an application was made.[15] It questioned the point of this procedure as over 99% of applications to the UK were eventually approved.[16] EGAD said that, even after a licence had been issued, it was "very, very narrow and prescriptive" and, if the recipient wanted to step outside its terms, he or she had to go through the whole licensing process again.[17] Dr Sandy Wilson, President and Managing Director of General Dynamics UK, explained that he had had problems in getting clearance for Urgent Operational Requirements (UORs). UORs might be very short programmes, of perhaps four or nine months, and that was "almost outwith the timescale for getting TAA [Technology Assistance Agreement] approval".[18] While General Dynamics UK had been successful in negotiating with the US State Department a one-off waiver, it had taken "a long effort" and "the next time a programme appears with the same kind of timescales that process will not apply".[19] In UK industry's view, the US system was not capable of responding in the time required by modern business and modern defence requirements.[20]

15. Dr Jerry McGinn from the AIA said that "the frustrations that we have had on the US side are similar to those in the UK industry in that trying to meet the operational demands for the war fighter".[21] He described the system as it applied to exports to the UK as cumbersome and not reflective of the close UK/US bilateral relationship.[22] He said that in trying to meet the Armed Forces' operational demands:

speaking for my company [Northrop Grumman] […] we have had challenges of getting […] systems' TAAs or licences through fast enough to meet the needs of UK forces in the field.[23]

16. The operation of the current US export control system affects the speed at which equipment can be acquired for UK Forces in theatre—diminishing their ability to fight effectively alongside their US allies. The Government stated that there had been "some occasions when the ability to address problems on the ground has been delayed as the information that needs to be transferred at the operational level has been subject to licence".[24]

17. The primary purpose of arms export controls is to prevent goods and technology falling into the wrong hands. We asked industry how the US system operated and how much flexibility it could offer for exports to close allies such as the UK. EGAD considered that the operation of the system was "fundamentally […] a function of the rules rather than the number of people applied to the licensing system"[25] and that it was "an awkward mixture of legislation and […] regulatory practice."[26] In contrast to the UK export control system, the US system does not appear to take into account an assessment of risk.[27]

18. The US export control system imposes a large administrative burden on defence exports from the US to the UK. While we respect the wish of the US to control its defence exports, we consider that its current system of controls for exports from the US to the UK is unduly burdensome and time-consuming. The US and the UK are very close allies, cooperating closely on defence and security. Our soldiers are fighting side by side in Iraq and Afghanistan. It is vital to the interests of both the US and the UK that the system should not prevent our Forces from getting access to the equipment they need to fight effectively alongside their US allies in current and future operations.

Will the Treaty make a difference?

19. The Treaty will remove the requirement for certain categories of defence export to be processed through the US export control system. These categories will be set out in the Implementing Arrangements. When we took evidence from the Government, the Implementing Arrangements were still under negotiation with two key areas still undecided: the criteria for membership of the Approved Community; and the technologies that would be excluded from the scope of the Treaty.[28]

THE UK APPROVED COMMUNITY

20. Under the Treaty, goods and technology covered by the Treaty will be able to transfer without further authorisation from the US to the UK Government or to companies and other bodies, forming part of an Approved Community.[29] UK companies or other bodies wishing to use the Treaty will need to apply to join the Approved Community and will be assessed against several criteria. According to the UK Government, these criteria will include:

current membership of the UK "List X" group, the group of establishments that have been cleared by the UK Government as being able to handle classified material;
an appropriate level of Foreign Ownership, Control or Influence (FOCI), as decided by the UK and US Governments;
past performance on export controls, judged against UK and US records of violations; and
any potential national security risks for the US, due to interactions with countries proscribed in US law and regulation.[30]

21. The ambition of industry was that the UK Approved Community should be "as inclusive a list as possible".[31] Industry's concerns focused on the position of two groups: small and medium-sized enterprises (SMEs); and companies under FOCI.

22. Dr Wilson believed that it was important that SMEs were allowed into the Approved Community "because otherwise the supply chain [of goods and technologies from the US] will suddenly stop at the top level" when for full implementation the Treaty arrangements needed "to apply right down through the supply chain to the SME level".[32]

23. On foreign-owned companies, Dr Wilson considered that "it is essential that foreign-owned companies get onto the approved list because we cannot imagine working without them in the UK".[33] It was the SBAC's ambition that companies such as Thales, Finmeccanica and MBDA became members of the Approved Community.[34] Mr Hayes, Chairman of EGAD, pointed out that where a US company had FOCI then arrangements were agreed with the Defense Security Service in the US to mitigate that foreign interest. He envisaged a similar sort of system operating under the Treaty "whereby if there are concerns over foreign ownership, control and interest of a company in the UK, then a means is found to address those concerns which would satisfy both Governments and enable the company to participate within the constraints of that agreement".[35]

24. In written evidence Finmeccanica UK put the case for inclusion of FOCI companies in the Approved Community:

It would not be in the spirit of the Treaty, and would be irrational, to exclude from the Implementation Arrangements companies in the UK's domestic defence capability landscape simply because of third-country ownership. This is exemplified by Finmeccanica's sales in the UK of £1.7 billion exclusively in support of the UK's armed forces and those of allies. Finmeccanica could not accept, given its place in major UK equipment programmes such as Typhoon, Tornado, Merlin and Apache, that we might be treated as some special case, amounting to being labelled as a second class citizen. […] Finmeccanica has made significant inward investment decisions based on the principle that, because of our position in key UK domestic programmes, we would be afforded the same treatment as other companies in this community, regardless of ownership. It was on this basis that Finmeccanica has invested £1.5 billion in high technology facilities in the UK and maintains a high-skill workforce of some 9,000 or 12,000 if our interest in MBDA is included. The creation of a two-tier industrial landscape would undermine the rationale for this very significant investment and high level of activity.[36]

25. The List X procedure is "well-known and understood"[37] by the UK defence industry. List X includes SMEs[38] and university facilities.[39] The Government explained that eligibility for List X status already took "account of a level of FOCI within companies, including the percentage of UK nationals at board levels overseeing the security-cleared facilities".[40] There is, however, a difference of approach between the UK and US: on access to third-party nationals, for example, the UK approach is for risk management at the individual level whereas the US "tends to […] a more blanket level of denying access".[41] The Minister for Defence Equipment and Support was confident, however, that in the outstanding negotiations "we can convince those who are making decisions in the United States that the protections that we have on security and our vetting classification are very strong and very significant".[42]

26. We share the ambition of industry that the Approved Community should be as inclusive as possible. The current List X, the group of establishments that have been cleared by the UK Government as being able to handle classified material, is tried and tested and forms a solid foundation on which to build eligibility for inclusion in the UK Approved Community. In our view a UK Approved Community which was drawn more tightly—by excluding SMEs or major foreign-owned defence companies—would seriously blunt the effectiveness of the Treaty. UK defence companies owned by overseas companies form a significant part of the UK defence industry and have a large footprint in the UK economy: they are in practice regarded by the MoD as UK defence companies. If European-owned UK defence companies were barred from membership of the Approved Community, it would create a two-tier industry and would risk discouraging European collaboration.

EXCLUDED TECHNOLOGIES

27. Article 3 provides that the Treaty shall not apply to those goods and technologies that are identified in the Implementing Arrangements. The Government expects a small number of sensitive technologies to be excluded from the Treaty,[43] principally stealth and sensitive communications technology.[44] The Government's intention is that the "list of exclusions would be as small as possible, such that the benefits which can be derived from both Governments' Armed Forces on operations and industry, both on the UK and US side, can be maximised as far as possible".[45] The Minister was confident that agreement with the US could be reached on this issue.[46] Industry supported the Government's approach.[47] We endorse the Government's approach that the list of technologies excluded by the Implementing Arrangements should be as short as possible. Given the reliance that today's Armed Forces place on technology, an extensive list of exclusions emerging from the negotiations on the Implementing Arrangements would undermine the purpose of the Treaty. In our view, the longer the list of exclusions, the less effective the Treaty will be.

JOINT STRIKE FIGHTER

28. We have repeatedly raised concerns about technology transfer from the US to the UK on the Joint Strike Fighter (JSF) programme.[48] In December 2006, the then Minister for Defence Procurement, Lord Drayson, assured us that the UK would get all the technology transfer it required to operate the JSF independently.[49] We asked his successor whether the Treaty would cover technological transfer for the JSF. She replied:

The Joint Strike Fighter is a multinational programme and, therefore, as such, as a whole, it is not covered by this Treaty. However, aspects of the Joint Strike Fighter are actually where we have bilateral projects with the Americans. If it is a UK/US aspect of the Joint Strike Fighter programme, in terms of any development, then it can come in with this Treaty—it does not have to but there is potential for that—but it is not, as a multilateral project, one that automatically all comes within this Treaty.[50]

29. We note that the Treaty does not cover multi-national programmes and therefore does not provide the key to ensuring a comprehensive transfer of technology for the Joint Strike Fighter programme. The Treaty has, however, the potential to assist those parts of the JSF programme which are exclusively joint US/UK collaborative projects. We welcome this benefit. We will continue to monitor the JSF programme closely.

Consultation

30. The Implementing Arrangements are fundamental to the scope and effectiveness of the Treaty. Until they are agreed, it is hard to judge to what extent the Treaty will reduce the barriers to US/UK defence exports. But the consensus of our industry witnesses was that the outcome was likely to be an improvement on the current arrangements. As Ian Godden, Secretary of the DIC and Chief Executive Officer of the SBAC, said, "there is nothing that is going to be worse than today".[51]

31. In its written evidence, the DIC expressed the wish that, "to safeguard against any unintended consequences", the Government should "look to share with Industry the emerging draft implementation arrangements at the earliest possible opportunity, so that we can offer considered advice".[52] We asked our witnesses from industry whether they had been satisfied with the consultation that the Government had carried out on the Treaty. Mr Godden believed that the Government had shared as much as it could, given the confidential nature of the Treaty negotiations. He was satisfied, from contact with his 260 members, that "they feel consulted and they feel they understand what is going on, but clearly they have not seen sight of implementation issues".[53]

32. The Government envisaged that, once the negotiations on the Implementing Arrangements had been completed, there would be a Memorandum of Understanding between the two Governments which would not require further ratification. The Government drew a distinction between the Memorandum of Understanding entered by the two Governments (which might have to be kept confidential) and the requirements placed on industry as a result of this Treaty (to which industry would have public access).[54] In its oral evidence the Government explained that it was:

still in discussion with the US on exactly the form in which we will place those implementing arrangements to either the Senate or to the Committee here. Clearly, we are prepared to share that. Of course, the difference is—and there will be concerns by industry on whether or not we need to share those as well—the implementing arrangements set out the commitments between the two governments are not necessarily the commitments which we place directly to industry. We will, of course, share and work up in detail with industry the exact requirements which need to be put in place with them. So, clearly, those will be done in detail with those who will be affected by this.[55]

33. The Minister indicated that she was keen to keep us "fully in the picture" on the progress of the negotiations on the Implementing Arrangements and would be content for us to receive an informal briefing from officials on the latest negotiating session in Washington.[56] We expect the Government to keep us fully informed of the content of the Implementing Arrangements and of the progress of implementation of the Treaty, once it is brought into force.

34. We take assurance from the comments that industry made in oral evidence that it has, within the limitations of the process, been kept informed by the Government of negotiations on the Treaty and on the Implementing Arrangements. We recommend that the Government continue to keep industry as informed as it is able within the constraints of the negotiating process on the Treaty, and that, once the Implementing Arrangements are agreed, the Government ensure that industry is fully involved in discussions on the practical implementation of the Treaty.

10 Explanatory Memorandum, para 5 Back

11 See paras 19 and 27 Back

12 Explanatory Memorandum, para 7 Back

13 Cm 7213 Back

14 Q 2 Back

15 Q 3 Back

16 Qq 2 (Mr Godden), 4 and see also Q 124 Back

17 Q 4 Back

18 Q 7 Back

19 Ibid. Back

20 Q 9 Back

21 Q8 (Dr McGinn) Back