Between April 1997 and December 2000, a series of bilateral and multilateral agreements between European Union member states pushed the process of European defence industry integration several steps forward. After slow and hesitant movement following the Maastricht Summit in 1991, a quickened pace of formal and informal intergovernmental accord appeared to signal a real commitment to at last create a single European defence industrial and technology base as part of the European Union’s development of a common European security and defence identity. Such a defence market would, its advocates argued, be comparable in scale to””and thus more competitive with””the massive domestic American defence market. Should this vision come to pass, both Ottawa and the defence industry in this country should watch developments carefully and consider their implications for Canadian defence production and defence trade policies.

I want to argue, however, that for Ottawa and the Canadian defence industry, events in Europe are of secondary and indirect importance. Compared with other sets of pressing concerns, even relatively dramatic changes in the European defence industry will influence Canadian defence/industrial and defence/trade policies only peripherally. The Canadian defence industry is dominated by its dependence upon and integration within the American defence industry. This bilateral relationship remains the primary concern of Ottawa and of Canadian defence manufacturers; and it is through this relationship that any changes in Europe filter into Canadian policy debates. Even when looking beyond North America, Europe is secondary. Canadian defence industry and trade policy may be shaped more by trends and decisions occurring in the wider global regulatory context, especially the World Trade Organisation, and by dramatic events such as the September 11 terrorist attacks.

None of this caution is intended to dampen Canadian interest in European progress in security and defence integration. The defence-industrial landscape of Europe certainly has changed in the ten years since Maastricht, both because of government initiatives and as a consequence of industry-driven responses to the post-Cold War European and global defence markets. American policy-makers and corporate leaders have made similar adjustments and now are considering what may be new demands resulting from September 11 and the war on terrorism.

At the Bonn summit meeting in December 1992, one year after Maastricht, the member governments of the Independent European Programme Group (IEPG)””which five years earlier had issued the “Vredeling Report” calling for the creation of a single European armaments market””agreed in principle to transfer the IEPG’s responsibilities to the Western European Union (WEU). IEPG hadn’t been part of either NATO or the EU, but the transfer of its activities to the WEU and the newly created Western European Armaments Group placed its work on armaments procurement and defence industry coordination more clearly under the auspices of the European Union. This transfer of responsibilities also brought with it the politically inspired notion of juste retour, the belief that states should benefit economically (in particular, through jobs in R&D and production) in proportion to the money they invested in defence procurement programs. This principle is a source of division between Britain, which prefers “market efficiency,” and France, which adheres rigidly to juste retour and also favours a strong “European preference” in defence procurement.

Frustration over these internal disputes, and the subsequent indefinite postponement of WEUled talks on a European Armaments Agency, led in December 1993 to France and Germany’s announcement that they intended to establish the Joint Armaments Cooperation Structure (JACS). Concerned that any progress on the JACS might cede to France and Germany the leadership of European defence procurement planning, Britain and Italy pressed to be part of the new group. Negotiations continued for almost three more years and in November 1996 they did join the JACS team. Two months later the JACS itself was formally established. In deference to France, it was agreed that JACS members would exercise a general preference in defence procurement for “those products in whose development they have participated.” In return, Britain and Italy obtained the concession that such a preference would be observed “on a multi-year and multi-project basis” rather than a narrower program-specific basis. Juste retour and the European preference were diluted, but remained as political limitations on any wider transatlantic or NATO free market in defence goods.

These internal differences led one British observer of the EU’s Amsterdam Summit in June 1997 to suggest that the lack of progress might show that “the integrationist model of the EU is approaching the limits of what is politically acceptable to the nation-states.” But despite this unpromising outlook, 1998 proved something of a watershed year. The Persian Gulf War in 199091 had demonstrated the dominance of American high technology on the battlefield and the gap between American and Western European military forces. The Bosnian campaign, which was conducted in Europe itself, made painfully clear to the major European powers just how wide the gap was. In air power, most notably, European forces were being left behind by U.S. technology.

It was against this background that on April 20, 1998 six states (France, Britain, Germany, Italy, Spain and Sweden) issued a joint declaration that led, three months later, to the signing of a Letter of Intent (LoI) setting out their goals for restructuring the industrial base of European defence. The LoI dealt with topics such as: coordination of research and technology programs and financing; harmonization of military requirements; and simplifying procedures for export controls. In October 1998, British Prime Minister Tony Blair called for “fresh thinking” on European defence institutions as part of his general goal to place Britain at the decision-making core of the EU on defence issues. Then, in December in St. Malo, with the blessing of German Chancellor Gerhard Schroeder, Blair and French President Jacques Chirac agreed on a proposal for a new European framework for EUdirected military initiatives.

The European Council meetings of 1999 in Cologne and Helsinki and the November 1999 Anglo-French Joint Declaration on European Defence pushed forward the issues raised in the preceding year. The “Common European Policy on Security and Defence” called for EU members to establish a credible military force of 60,000 troops by 2003, one which could be mobilised within 60 days and maintained in the field for up to one year in support of the “Petersberg tasks”of humanitarian, peacekeeping and peace-enforcement operations. By the end of the year the EU had set itself a timeline and an apparently concrete set of targets: it was to develop an independent European military structure and force of credible size, which member countries would be ready to deploy and support. It would also develop a new management infrastructure to oversee these tasks, including a “Political and Security Committee,” a “Military Committee” and a “Military Staff.” Within this framework the governments also declared their determination to improve European defence production capabilities, to enhance planning and procurement coordination and to reduce duplication of major equipment development programs.

On the surface at least, this process of intergovernmental agreement on the need for and mechanisms for achieving cooperation and consolidation in defence might be seen as lagging behind existing defence industry strategies. Industrial consolidation and rationalization have been widespread in Europe since at least the 1980s, with the trend toward “national champion” manufacturers””such as BAE in Britain, DASA in Germany, Aerospatiale in France, and Casa in Spain””emerging in the firstand secondtier European markets. Closer examination suggests, however, there is not just a time lag between industry and government approaches, but also a significant difference in motives and objectives. European governments seek cooperation for political purposes; defence companies seek either cooperation or at times””as shown in the case of DASA and BAE Systems””competition, depending upon which path their executive officers believe will best help them to meet shortterm financial goals. In 1998, speculation was widespread about a possible merger between DASA and BAE Systems, which would have given massive new impetus to European defence industry rationalization. In January 1999, however, John Weston of BAE announced that the British firm was acquiring GEC’s Marconi defence electronics business. The subsequent acquisition of Tracor””which GEC had only recently purchased””and of Lockheed Martin’s Sanders subsidiary established BAE Systems as the world’s largest electronic warfare supplier, ahead of Northrop-Grumman in the United States (even after the latter purchased Litton Industries), and indeed the largest defence company in the world. The company’s business clearly was being built on a transatlantic, not a European, axis, and fully 20 per cent of its sales now were generated in the huge U.S. defence market.

In response to this surprise move, DASA’s Manfred Bischoff negotiated a new partnership with Aerospatiale Matra of France in October 1999, and acquired the Spanish aerospace manufacturer Casa. From this process emerged EADS, the European Aeronautics, Defence and Space Company. With an 80 per cent share of Airbus and 100 per cent ownership of the Eurocopter group, EADS has since purchased CAC Systems of France, and Cogent (UK), a secure telecommunications systems supplier, and it has pursued its own transatlantic ties through a Memorandum of Understanding with Northrop-Grumman. Finally, and separately from this wrangle between Weston and Bischoff, Thomson-CSF of France (renamed Thales) bought defence electronics supplier Racal of the UK, and set about using Racal’s position in the U.S. market along with its own relationship with Raytheon in the United States to help establish Thales Raytheon Systems.

This flurry of activity suggests the new defence manufacturing entities have divided up the European market between three major and competing groups. In fact, these groups appear to be organizing, not for any pan-European cooperation emerging, but for intra-European and even, potentially, transatlantic competition. The rivalry between BAE Systems and EADS is heightened by the fact that BAE is privately owned while 15 per cent of EADS is held by the French government. At least part of the reasoning behind BAE’s decision to pursue a North American rather than European direction for growth lies in the fundamentally different logics behind privately owned defence industries and national governments (or at least industries with significant government ownership stakes).

The assumption that defence suppliers and governments in Europe are driven by similar imperatives is simply false. Governments’ concerns are the provision of national defence security as part of foreign policy, the maintenance of national autonomy in some form and the provision of high-technology jobs in this industrial sector. Defence and security have also become negotiating chips in the continuing process of EU integration. For defence manufacturers, however, the principal consideration is always the generation of significant shareholder returns””maintaining or increasing share value and giving a strong return on investments. The chief task of the CEO of a privately owned company such as BAE Systems is to demonstrate a desirable growth rate and profit margin. The timeline driving BAE is not that of European governments’ plans for the role of the EU in the European security architecture, but the quarterly or annual reports read by the shareholders of the firm. This is not to say that wider issues are not considered important, but for a business they do””they must””come second to profitability. For BAE Systems, this logic has led to the pursuit of greater access to the U.S. defence market rather than the greater overhead costs and political and budgetary uncertainties of a new alliance with European partners.

What does all this mean for North America, and Canada in particular? The process of Canada-U.S. defence industrial cooperation and integration has been reasonably consistent since August 18, 1940, when Prime Minister Mackenzie King and President Franklin Roosevelt signed the Ogdensburg Declaration establishing the Permanent Joint Board on Defence. World War Two and the Korean War alike gave a powerful impetus to the bilateral relationship, but the greatly expanded Canadian defence industry found itself unable to maintain its existing capacity, and by 1958 it faced a structural crisis.

The cancellation of the CF-105 Avro Arrow aircraft program by the Diefenbaker government was followed by the signing of a series of agreements in 1959 that together formed the Defence Production Sharing Arrangements (DPSA). In 1963, came the Defence Development Sharing Arrangements. These agreements, which are not formal treaties but merely executive and interbureaucratic accords, established that for the purpose of competing for U.S. defence contracts Canadian defence manufacturers would be treated as if they were American firms. Under the U.S. Defence Production Act, Canadian suppliers would be considered as “planned producers” for the U.S. Armed Forces, and as part of a single defence manufacturing and mobilization base. U.S. defence manufacturers would be allowed to contract with Canadian firms and to share research and development costs with the Canadian government (through the now-defunct Defence Industry Productivity Program), and Canadian companies would be permitted to bid on U.S. military R&D contracts. Despite some new initiatives in the late 1980s and early 1990s””notably the effort to establish the North American Defence Industrial Base Organization””the DPSA and DDSA have remained the cornerstone of bilateral defence economic relations.

In 1997, as Republicans in the U.S. Senate criticised the authorization of sales to China of American high-performance computers and machine tools, pressure for a review of the International Traffic in Arms Regulations (ITARs) began to emerge. These sales allegedly helped the Chinese military to modernize its missile launch and guidance capabilities. Modest Congressional pressure turned into loud demands for change when it was discovered that Chinese espionage had been active and successful at U.S. nuclear weapons research laboratories at Lawrence Livermore and Los Alamos. The Cox Report in January 1999 recommended the transfer of jurisdiction over satellite technology and other hightechnology sales from the Department of Commerce to the State Department, which administers the ITARs.

Soon afterward, four separate investigations took place into alleged attempts to divert surplus American military helicopters, missile components and other high technology through Canada, using American and Canadian front companies established for that purpose. Then, in December 1999, Ahmed Ressam, an Algerian national believed to be linked to Osama bin Laden’s terrorist network, was arrested while attempting to cross the border into the United States equipped with explosives and detonators. To the U.S. Congress and State Department, Canada appeared as a possible weak link. On April 12, 1999, despite an earlier compromise apparently reached between Canada’s Foreign Minister Lloyd Axworthy and U.S. Secretary of State Madeleine Albright, the State Department issued a series of amendments to the ITARs which expanded restrictions on Canada-U.S. defence and hightechnology trade to: a broad range of firearms, components, other parts and ammunition; launch vehicles, guided missiles and rockets; military information security systems and cryptographic devices, plus related software; spacecraft, remote sensing satellites, and military communications satellites, as well as all items on the U.S. Munitions list and the Missile Technology Control List””which could include commercial satellite systems and software designated as being of significance to U.S. national security.

The restrictions created potentially lengthy delays and much greater uncertainty and expense in licensing and in bid preparations. The amendments required that U.S. companies seeking to export defence or dual-use goods and services, including the information needed for Canadian firms to make new contract bids, had to obtain an export license from the State Department, which could take up to 100 days to be approved””or rejected. The amendments also restricted the nationality of any personnel in Canadian firms who would have access to the U.S. technology or equipment, excluding any dual citizenship or landed immigrant employees, a restriction which under the Charter of Rights and Freedoms Canadian firms could not enforce. As a practical matter, the new regulations threatened to cut off much of the bilateral defence trade, and the effects soon were felt by Canadian manufacturers. One report had the Department of Foreign Affairs and International Trade dealing with upwards of 50 ITARS-related cases. Canadian firms’ privileged access to the United States defence market under the terms of the DPSA and DDSA appeared to be in danger of collapsing.

Fortunately for Canadian defence manufacturers, the crisis did not last. Between October 1999 and June 2000, State and DFAIT negotiated a settlement in principle, in the form of the Joint Statement on Defence Export Controls. The Joint Statement agreed to reinstate “most” of the previous Canadian exemptions and to remove the nationality restrictions, providing that the Canadian government revised its Defence Production Act and Export Control List to meet American demands for harsher penalties and stronger enforcement against violators. This ended the crisis””and for Canadian manufacturers especially, it was a “clear and present” crisis”” although some provisions still remain to be settled. The lesson to be taken from this episode, however, must be, as one observer put it, that any belief that Canadian firms and Ottawa held regarding their assured position of privilege in accessing the U.S. defence market ”was, and continues to be, rather myopic.”

The United States has not been the only problem for the Canadian defence industry in recent years. Global commercial trade regulations””and global regulatory bodies””have begun to intrude into the considerations of Canadian defence manufacturers and government policy-makers, in at least two forms. First, commercially developed technologies and products have become increasingly important, even vital, elements of defence equipment, especially in aerospace, avionics, electronics and space technology applications. C4ISR (command, control, computers and communications, intelligence, surveillance and reconnaissance), new materials manufacturing and processing technologies and satellite systems all involve considerable input from commercially developed technology and, as the campaigns in Kosovo and most recently in Afghanistan have shown so clearly, are vital to military effectiveness. This reliance on commercial and dual-use technology has become especially great in the American military, which is the prime user of the new technologies in the so-called “revolution in military affairs” and also the principal market for Canadian defence manufacturers.

The second form of intrusion is more immediately important to Canadian manufacturers and policy-makers. In 1996 Ottawa replaced the Defence Industry Productivity Program (DIPP) with Technology Partnerships Canada (TPC). The recasting of this program was intended to recognize the largely civilian composition of high technology industry in Canada, but it also meant that the new program no longer would benefit from national security exemptions under the terms of NAFTA or the World Trade Organization. The WTO’s involvement in a dispute between rival aerospace manufacturers Bombardier of Canada and Embraer of Brazil has already had direct consequences for Canadian government policy and carries potentially indirect implications for Canada-U.S. defence industry relations. Details of the dispute need not detain us here. What is important to note is that a WTO Appellate Body decision reached in August 1999 found that both the TPC and Canada Account programs constituted illegal subsidies and had to be withdrawn or amended to meet WTO rules. This decision had obvious implications for Ottawa’s ability to support Canadian subsidiaries of U.S. manufacturers such as Pratt & Whitney Canada, the single largest recipient of such assistance under the DIPP and TPC. Without such funding these subsidiaries might come under pressure to close or cut back in scale, while the ability of smaller Canadian firms to compete for contracts in the U.S. market might be severely curtailed.

Following the WTO ruling, the Canadian government made relatively minor changes to bring its support programs into compliance. The general lesson from this case, however, must be that these programs now are open to challenges from foreign firms and governments, with ultimate decisions about legality being made by a body not concerned with the financial health of defence manufacturers in Canada, and hence not amenable to “good neighbour” appeals like those which settled the ITARs dispute. The dispute between Bombardier and Embraer may be a sign of things to come as the boundaries between civilian and defence technologies, and industries, blur or even vanish.

The political, economic, social, legal and other dimensions of European integration and enlargement are fascinating topics for anyone interested in international affairs. Through history, of course, events in Europe have had very real effects on North America. Two world wars, the Cold War, and the decade of crises in the Balkans all have deeply engaged both the United States and Canada. Even so, the direct, real and practical importance for the Canadian defence industry, and for Canada-U.S. defence industry relations, of proposals and initiatives for European defence industry integration simply is not that great. The concern typically cited is that a “fortress Europe” mentality might create a transatlantic defence trade rift that could see Canada either hurt indirectly as a result of retaliatory U.S. measures or simply left irrelevant and voiceless in such a dispute. An EU market that went protectionist, whether deliberately or by default, would also hurt Canadian firms’ access to European defence contracts.

It is certainly true that some Canadian manufacturers do a reasonable business in Europe, but these firms are competitive in specialized niche markets, such as simulators or ship-borne helicopter recovery systems, that most likely would remain open. In other areas there has been an informal but obvious “European preference” in major defence procurement projects for the past several decades, and there is no obvious sign that this is about to change. For the majority of Canadian defence and aerospace companies, the European market is distant not just in geographic location but in economic priority, as the U.S. market remains by far the pre-eminent export destination and partner in defence trade.

The potential for transatlantic friction is not zero, of course, but this has been true since the inception of NATO and the recovery of the European defence industrial base to a reasonably competitive position. Today there are debates about whether a more unified European security “actor” might be emerging, and whether the European allies might exercise an independence that would cause resentment in Congress or the White House. So far, however, the steps that have been taken toward establishing an institutionalized European Security and Defence Identity (ESDI) and a single European defence equipment and technology market have met with only limited success. As recently as the December 2001 EU summit in Laeken, Belgium, the divergent interests and priorities of the European governments over the proposed European peacekeeping force for Afghanistan were clear for all to see. The single European currency did become a reality on January 1, 2002, but a united ESDI remains a distant goal. Giving military and political substance to the EU’s “headline goals” military force is a task as yet unfulfilled: it is an aspiration, certainly, and the achievements thus far should not be discounted, but a coherent European security and defence actor and a single defence market still are far from a reality at the level of governmental policy and also corporate strategy.

If the Kosovo and Afghan campaigns are any yardstick, an American-British partnership in security affairs is much more a reality than either a U.S.-EU partnership or U.S.-EU rivalry. The U.S.-UK Declaration of Principles, agreed in February 2000, addressed the bilateral management of military requirements, export procedures, information and technology security, and joint research. The Defense Trade Security Initiative, signed in May of the same year, offers the prospect of American licensing exemptions for some qualified UK defence manufacturers”” granting them a position much closer to Canadian firms’ privileged access to the U.S. market. Canadian defence companies and policy-makers may wish to keep a close watch on this growing U.S.-British cooperation, rather than any wider EU program, especially given the corporate activities of BAE Systems in building a larger presence in the U.S. market.

For both Canadian defence companies and the Canada-United States defence trade relationship, therefore, present realities and future prospects continue to be dominated in the first instance by domestic and bilateral concerns. The intrusion of global considerations may continue and even increase: the WTO has been prominent in Canadian policy issues in a way that the EU has not been and is unlikely ever to become. The path toward a “North American defence industrial base” has not been smooth or uneventful, and the ITARs dispute, which went further than any bilateral dispute had gone before in damaging the defence trade relationship, has been only one of several disagreements. The U.S. Department of Commerce continues to be troubled by what it sees as “double-dipping” by Canadians: we enjoy special access to the U.S. defence market but require domestic production offsets from U.S. companies competing for major Canadian defence equipment contracts. The saving grace in that regard””ironically””may have been the paltry defence budgets offered to DND by the Chrétien government. In the absence of any substantial commitment of funds to new capital equipment procurement projects, there is nothing new for Commerce to complain about.

The future of Canada-U.S. defence industrial and defence trade relations can run six possible courses, two of which are more likely than any others. The likely alternatives are informal continentalism””essentially what exists today”” or formal continentalism, which would involve negotiating a full bilateral defence trade treaty.

The less likely, and less feasible, alternatives are:

• a defence industry “third option”””that is, greater access to the European defence market

• national retrenchment through a greatly increased defence budget, thereby providing the wherewithal for a self-sufficient domestic industrial base

• abandonment of the domestic industry, either through complete off-the-shelf purchasing of U.S. equipment and supplies, or by leaving the defence field altogether; or finally,

• an even more minimalist, civil defence and international police action posture that would not require a Canadian Forces capable of collective security, collective defence or even robust peace enforcement action.

Between the two most likely alternatives, Ottawa appears to be following the option of “more of the same,” relying on the informal integration and access provided by the DPSA and DDSA. Negotiations on the ITARs dispute were not aimed at a formal treaty arrangement, but merely at regaining lost ground. In many ways, this might be the reasonable option: It has worked well enough for Canadian companies in the past in providing access to U.S. defence contract opportunities, and it also avoids the potential difficulties of negotiating a treaty with a critical Department of Commerce and an inevitably parochial Congress. This being the case, the ITARs dispute should at the very minimum highlight the need for careful and consistent attention by DFAIT and others to sustaining American interest””and will to support””this relationship, and also to monitoring other states, most notably Britain, that might be moving toward comparable levels of access to U.S. contracts. It is worth at least raising the question, however, whether one effect of the September 11 terrorist attacks might be that the U.S. government, including Congress, may be more willing to welcome closer ties with its allies and friends. Canadian regulations already have been amended to reflect U.S. concerns, and border management cooperation after September has been stepped up. If ever there was to be an opportune moment to raise the issue of a formal continental defence trade treaty to guarantee Canadian companies’ place within an integrated North American defence market, this is the time.