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An Australian Perspective on the Australia-U.S. Treaty on Defence Trade Cooperation

An Australian Perspective on the Australia-U.S. Treaty on Defence Trade Cooperation

By Eva Galfi, International Trade Advisors (Sydney, Australia)

Published in the journal of the Association of Women In International Trade May 2012 (Washington D.C.)

 

The implementation of the Australia-U.S. Treaty on Defence Trade Cooperation and the Obama administration’s export reforms will change the export compliance landscape in both countries forever. However, there is uncertainty in the Australian defence industry as to the costs, benefits and potential long-term consequences these reforms will bring. Australian defence companies are closely watching U.S. export reforms as changes to the U.S. regulations and processes directly affect the way in which the Australian defence industry operates. Furthermore, whether or not there will be significant uptake of the soon to be implemented Defence Trade Cooperation Treaty, and whether Treaty benefits will be affected by U.S. export reform, is a big concern for the Australian defence industry. This article offers an Australian perspective on the implementation of the Treaty and the impact of U.S. export reforms.

 

Anticipating the implementation of the Defence Trade Treaty

In 2007, the U.S. and Australian governments signed the Australia-U.S. Treaty on Defence Trade Cooperation amid much buzz in the defence industry about the potential benefits the Treaty would bring to both countries. The Treaty is intended to create an “Approved Community” of government entities and companies in the U.S. and Australia among whom controlled articles can be traded without the need to obtain a license from the government. At the time of drafting, the creation of this Community was seen as a large benefit by Treaty proponents as it was presumed by many that it would naturally lead to reduced lead times and increased market access for defence companies in both countries. However, now that the proposed changes to the ITAR have been released for industry comment in the U.S., and the draft legislation(1) and Regulations(2) required to implement the Treaty have been released for industry consultation in Australia, some of the defence industry’s initial excitement has turned to apprehension.

 

Some of the apprehension by Australian companies stems from the fact that the cost of becoming an Approved Community Member is difficult to quantify. The return on investment is also very difficult to calculate as it is currently unclear how much Australian defence companies, particularly SMEs, will gain from Community membership. Furthermore, it is unclear what they may loose from not becoming Community members, or from not applying for membership soon after implementation. There is also the perception that export reforms in the U.S. could potentially remove the benefits of trading certain articles under the Treaty. This leaves some defence industry members wondering if going through the process of becoming an Approved Community Member makes good financial sense.

 

How much will it cost to join the Community?

Becoming an Approved Australian Community Member is voluntary, but it is not without its costs. While all companies in the U.S. that are registered with the DDTC will automatically be Approved Community Members, there is no simple mechanism for membership available to companies in Australia. Australian companies wanting to become Approved Community Members will need to apply to the Minister of Defence. Preparing to make an application will necessitate creating a comprehensive compliance program that will effectively be ‘approved’ by both the Australian and U.S. governments.

 

The success of an application will depend largely on the applicant’s compliance history and their ability to demonstrate that they have controls in place to safeguard defence articles. While larger companies have the budgets and resources to become Approved Community Members, some SMEs may find membership too costly. Furthermore, guidance has not yet been issued as to what the elements of an application are, what an acceptable compliance program looks like or how long the Community membership approval process will take.

 

Will it be easy to retain Approved Community Member status?

There is also uncertainty in Australia around how easy it will be to retain Community membership status. Industry mood is similar to when ISA was announced in the U.S. and U.S. companies were debating the benefits of participation before investing heavily in becoming C-TPAT members and ISA eligible. As with ISA, the draft Australian Regulations stipulate that Approved Community Members must file a mandatory annual compliance report to retain their membership status. However, the Regulations do not contain any provisions for industry to make voluntary disclosures to Defence of violations, with a potential outcome of mitigated penalties and the ability to maintain their Approved Community status.

 

Currently, the only provisions to make a voluntary disclosure of an import or export violation are found in Australia’s Customs Act(3) and disclosures of Australian export violations are made to Customs. Industry’s concern is that despite making a disclosure to Customs, an Approved Community Member may face suspension or cancellation of their Approved Community status by Defence, should they admit to committing a violation.

 

It is unclear what factors will trigger a cancellation or suspension, or how the Australian Defence and Customs agencies will work together with respect to voluntary disclosures. The current draft of the Australian Regulations do not contain any provisions similar to ITAR 127.12 to encourage the making of disclosures and promotion of a culture of export compliance in Australia.

 

Will it be worth the investment?

The Treaty has stringent limitations on what can and cannot be traded under its terms. Some SMEs will find it difficult to justify the cost of maintaining Community membership in order to be able to trade a limited number of controlled articles with a few parties under the Treaty.

 

For other SMEs, a major concern is that they will not be considered for projects in Australia by the prime defence companies unless they become Community members. It is also unclear as to whether government contracts will require Community Membership for future projects. Some SMEs may find it prohibitively costly to become Community Members or may be put in the difficult situation of financing Community membership in order to stay in business. The primes could also be negatively affected.

 

In a submission to the Australian government, one prime defence company expressed concern that they may not be able to utilize sub-contractors with whom they have a strong working relationship if these sub-contractors do not become Community members themselves. Unless SMEs have financial and technical support from the Australian government to assist them in becoming Community members, the defence industry may experience some serious disruptions.

 

Lack of certainty over what will ultimately be required

Legislators in both countries have reviewed comments from industry and no doubt recognize the concerns of commercial organizations. Australian defence companies have expressed concern over the more onerous requirements of the Treaty, including special marking requirements, the additional complexities related to re-exports and re-transfers, more stringent classification of goods, and additional recordkeeping requirements. Any of these requirements alone could act as commercial deterrents to Australian SMEs interested in becoming Community members as the cost of compliance may not be recouped from additional business.

Other concerns include:

  • Lack of clarity as to how the lists of Treaty eligible articles will be harmonized between the U.S. and Australia, as each country intends to maintain its own list(4).
  • Lack of information as to how a harmonised list of Approved Community Members will be maintained, especially as suspension or cancellation has ‘immediate effect’.
  • Lack of guidance regarding the process of discontinuing Community membership should a company either wish to do so for commercial reasons or has their membership cancelled or suspended.
  • Lack of guidance regarding removing articles from the control of the Treaty.

 

These are just a few examples of why Australian companies may be hesitant to take significant steps towards readiness for Community membership until these concerns are addressed by legislators.

 

Lack of certainty over what will ultimately be required of defence companies to take advantage of the Treaty will lead to slow uptake of Community membership in Australia. American companies looking to trade under the Treaty should keep a close eye on the developments in Australia and whether the Australian government is able to work with industry to ensure the reforms brought by the Treaty protect controlled articles while being commercially viable for industry. If there is limited uptake by Australian Industry of Community membership, the defence industries of both countries will have little to gain from the implementation of the Treaty.

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Footnotes

(1)    Defence Trade Controls Bill 2011

(2)    Defence Trade Controls Regulation 2012

(3)    The Customs Act 1901

(4)    The Australian government will create a Defence Trade Cooperation Munitions List (DTCML) to enumerate Treaty eligible articles and excluded articles. The DTCML will consist of two Parts. Part 1 will be a positive list of DSGL and U.S.ML goods that are within the scope of the Treaty, while Part 2 will be a list of goods that are exempt from the Treaty.
Link to print article.

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