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The U.S. Department of State’s recent regulatory reform of U.S. export controls on the United Kingdom and Australia will be a linchpin for the success of AUKUS, a technology sharing and security partnership between these three nations. The reform will also bolster the National Technology and Industrial Base (NTIB) arrangement, which includes Australia, Canada, New Zealand, the United Kingdom, and the United States. The Department of State reform and the Department of Commerce’s parallel effort should be commended for their speed, rigor, and thoroughness in proposing a robust implementation of Section 1343 of the 2024 National Defense Authorization Act (NDAA). The following observations draw on preliminary findings from the Defense-Industrial Initiatives Group’s ongoing project on bilateral U.S.-Australian cooperation, which includes interviews with around 30 Australian and U.S. vendors as well as a conference in Canberra in March 2024 and a regulatory comment written for the State Department’s reform effort.
The United States has an asymmetric advantage over its authoritarian adversaries due to its ability to engage in defense cooperation with other democracies that share a commitment to human rights and the rule of law. The United States’ long-running challenges of production and innovation have been made more pressing by the difficulties it and its allies and partners have faced in producing munitions in response to Russia’s industrial-scale warfare against Ukraine and by the burgeoning scale of the production of military equipment by China. In seeking to counter these threats, the U.S. National Defense Industrial Strategy (NDIS) issued this past December highlights the industrial base challenges specifically facing AUKUS and seeks to strengthen “web-like production” with U.S. allies and partners to address a range of defense manufacturing and acquisition problems.
The Department of State has been issued a range of critical, congressionally mandated missions to pursue greater integration and mutual benefits in cooperating with allies. However, these are daunting challenges which have frustrated the efforts of past reformers. The proposed reforms already take important steps, but regulators should focus on three central topics to ensure the reform’s long-term success: (1) achieving a cultural change, (2) facilitating a network of production and innovation, and (3) easing the adoption of shared standards.
The clarity of the proposed AUKUS export controls rule, which includes a straightforward criterion limiting the application of the rule to the territories of Australia, the United Kingdom, and the United States, has the potential to lead to revolutionary positive shifts in cooperation. This does not solve all problems; for example, transfers involving remote operational forces, including joint U.S.-U.K. and U.S.-Australia exercises, may still require licenses. However, the territorial exemption is still a critical step. Industry has expressed substantial uncertainty regarding which programs fit in AUKUS Pillar II and how to participate in that pillar. As a result, the technology-oriented approach rather than the project approach adopted in the exemptions in Supplement 2 of the Department of State’s rule also provides greater clarity than would an approach grounded in a list of codevelopment and coproduction efforts.
It is equally important that the Department of State provide proper education to industry and government officials to ensure smooth implementation and institutional adoption of the new regulations. Industry views sharing examples of the successful application of new regulations as a pivotal step toward achieving widespread use. Other important challenges, such as the application of “No Foreign” restrictions by government or industry, have posed perennial difficulties that may be eased by the Department of State’s education and cultural change efforts but are beyond the immediate scope of the export control regulation.
Industry is often conservative in its willingness to use granted authorities, sometimes even being unwilling to discuss information on company websites without a license in hand. This behavior is not entirely driven by uncertainty about regulations. Sometimes, the International Traffic in Arms Regulations (ITAR) is an easy scapegoat to blame when a business-to-business relationship does not look appealing to a U.S. vendor. Even so, clarity and confidence, combined with a lowering of transaction costs in effort and time, will be critical for this regulatory change to achieve a reduction in the political, bureaucratic, and cultural barriers to defense cooperation.
The Department of State’s rule does not exempt all transfers of defense products and technology within the NTIB, and the complexity of the relationships between the United States, Australia, and NTIB partners makes efforts to expedite these nonexempt NTIB transfers critical. Even relatively small delays can add up and make innovation and capacity-building economic relationships unattractive. The web-of-production approach sought by the NDIS is highly relevant to the expedited transfers described in the Department of State’s proposed rule, especially when licensing is still needed between NTIB nations. The expedited process may benefit from open licensing approaches, which would entail unlocking other potentially relevant transfers to and from trusted entities when license requests are first considered.
Complexity in defense industry cooperation arises from both the interlinked nature of international trade and convoluted defense supply chains. NTIB partners trade with each other and not just the United States, as can be seen in the chart below, which uses data from the Stockholm International Peace Research Institute. This web of connections is also seen in bilateral industrial base cooperation when vendors work through elaborate and winding supply chain pathways—which can cross national lines multiple times and operate through many corporate entities—to support both their government and allied governments.
The Department of State’s proposed rule has both limitations and great potential for networked production and innovation. The rule could help alleviate the difficult problems of coordinating bulk buys across multiple governments and bringing together innovators across national borders. The Department of Defense (DOD)’s other transaction authority agreements have the potential to address both challenges and may be worth mentioning alongside contracts in the provision relating to source code exclusions. However, the proposed Department of State rule is hampered by the U.S. and Canada ITAR exemptions operating separately from AUKUS. An Australian firm doing work that falls within the allowed exemptions for both AUKUS and the Canadian exemption may still need a license to do work within Canadian territory. U.S. allies are often most concerned with their own bilateral relationships with the United States, but this is an area where Canada may greatly benefit itself and the larger alliance by seeking to ensure compatibility with this new AUKUS exemption.
In defense cooperation, standardization can serve as both a barrier and a catalyst. Prior research has shown that standard setting in a defense context within just one nation can generate capability evolution and innovation, or it can inhibit innovation if applied incorrectly. On the other hand, varying standards for defense products between the United States and Australia could prevent each nation’s defense industry from selling otherwise perfectly acceptable systems, subsystems, or basic inputs to each other, thereby curbing some of the potential for business-to-business cooperation implicit in AUKUS and other U.S.-Australian agreements.
The NDIS’s emphasis on the benefits of achieving commonality and open systems approaches is worth considering when reviewing what should be exempted from ITAR licensing. Open system approaches are used in the commercial sector in familiar approach architectures such as Android phones and USB connections. They are a congressionally mandated approach proven in the defense sector as a means of accelerating the adoption of faster processes for U.S. submarines. U.S. military departments sometimes have chosen to classify or apply ITAR protection to their open standards, which hampers interoperability in the field and the possibilities of defense industry cooperation. However, the Future Airborne Capability Environment standard is explicitly open to all NTIB members, and U.S. acquisition officials have discussed their intention to further expand international participation in standards and government reference architectures. Regulatory exemptions could greatly facilitate the process of adopting and using shared standards when the DOD chooses to encourage allied adoption of these standards.
The Department of State’s proposed rule is soon to come into effect, and it is well positioned to catalyze further cooperation between the United States, Australia, and the United Kingdom. However, there is much more that can be done to continue fostering both industry-to-government and industry-to-industry cross-border cooperation in defense. Regulators should capitalize on the current reforming momentum, in part by ensuring the compatibility of parallel reform efforts, to make the most of the changes in the 2024 NDAA. By focusing on ensuring proper uptake of cultural change within the U.S. government, expediting the nonexempt NTIB transfer to reduce transaction costs, and promoting international shared standards where possible, the United States can capitalize on the potential of its hard-won international cooperation agreements like AUKUS.
Gregory Sanders is deputy director and fellow with the Defense-Industrial Initiatives Group at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Henry H. Carroll is a research assistant with the Defense-Industrial Initiatives Group at CSIS.
This commentary adapts observations made in response to a State Department request for comment. The authors speak solely for themselves and not CSIS nor our research partners on this or past projects. No research sponsors have been consulted in the preparation of this document.
