By: Roland Stein, BLOMSTEIN

In this article, Roland Stein of Blomstein discusses International Traffic in Arms Regulations (ITAR), a US regulatory framework intended to control the manufacturing, export and proliferation of arms, related goods, services and technologies.

Are European contracting authorities turning the tables on strict US arms control regulations? ITAR, short for “International Traffic in Arms Regulations”, is a US regulatory framework intended to control the manufacturing, export and proliferation of arms, related goods, services and technologies. Its primary aims are twofold: protecting the interests of U.S. national security and serving the objectives of U.S. foreign policy. ITAR is based on the Arms Export Control Act (AECA) (22 U. S. C. 2778-2780) and available in the Code of Federal Regulations under 22 CFR Parts 120-130. An ITAR-listing effectively permits U.S. authorities to control the export and whereabouts of regulated products. Generally, ITAR regulations do not only specify reporting obligations for contractors, but also contain strict restrictions on use, import, export and end-use of regulated products.

As an effective instrument of US state control, many market observers have long considered ITAR provisions to be a vital tool of US power projection abroad. However, an evolving opposing trend is becoming apparent: Fuelled by current shifts in the landscape of European defence procurement, ITAR restrictions are increasingly exploited as an instrument by European contracting authorities. While no state can afford to essentially “blacklist” US products or arms manufacturers altogether, European nations appear to leverage ITAR restrictions to favour European contractors over those with US involvement in specific cases.

At a time when there are indications that European defence spending is set to rise significantly in the near future due to a variety of initiatives for joint European procurement of military equipment such as the EU Permanent Structured Cooperation (PESCO) and the European Defence Fund, as well as established projects such and the Organisation for Joint Armament Co-operation (OCCAR), contractors with ties to the US will likely encounter legal and strategic challenges when attempting to obtain European defence contracts. The increasing use of ITAR-free restrictions will thus likely contribute to an already challenging market environment for non-European contractors.

Exclusion of products with ITAR restrictions

Lately, government agencies of various EU member states have attempted to exclude products with ITAR restrictions from defence procurements. A notable current case in which such a restriction was employed is the ongoing tender for around 120.000 new standard assault rifles for the German armed forces. The new design is supposed to succeed the current “G36” standard rifle produced by German manufacturer Heckler & Koch. The new rifle must meet a comprehensive catalogue of performance requirements and is intended for use in all branches of the armed forces. The contract for the acquisition of 120.000 firearms and “accessories in different quantities” has an estimated net value of approximately EUR 250 million. Its conclusion is scheduled for 2019, with a planned delivery of the rifles starting 2020. While the Europe-wide call for competition issued on 21 April 2017 did not specify any requirements in this respect, the subsequent invitation to tender by the German Ministry of Defence stipulated that any proposal for a successor rifle may not rely on components subject to ITAR regulations. In the case of the German rifle procurement, the ITAR-free exclusion criterion even applied to supplies and weapons produced entirely in Germany. A related tender regarding the manufacture and supply of a main battle sight and reflex visor for the new assault rifle includes a similar clause: according to the contract notice, both items may not be subject to the ITAR regulations.

According to press reports, SIG Sauer, a German-American bidding consortium, initially took part in the preceding competition with its existing MCX rifle. Besides SIG Sauer and the incumbent Heckler & Koch, the German Rheinmetall group participated in the competition in a joint venture with Austrian manufacturer Steyr Mannlicher. Whereas Heckler & Koch presented a newly developed rifle design, the HK433, Rheinmetall and Steyr Mannlicher proposed an existing design, the RS556 assault rifle. Surprising many observers, both SIG Sauer and Rheinmetall/Steyr Mannlicher eventually decided not to submit an offer before the close of the bidding period on 8 February. While the reasons for the eventual non-participation of Rheinmetall and Steyr Mannlicher remain unclear, SIG Sauer was very vocal about its decision to pull out of the procurement process, publically naming discriminatory design requirements as a motivation for its pull out of the competition. The company cited “blanket discrimination against U.S. products and bidders” and a disadvantageous wording of the invitation to tender as the main reasons for revoking its initial offer.

So far, the German Ministry of Defence has not specifically addressed the allegations, as it did not want to comment on the issue due to the ongoing tendering phase. SIG Sauer’s offer included a production based in Germany and a design lacking U.S. patent reservations. However, this was apparently insufficient to fully comply with tender requirements. The manufacturer’s proposal was still subject to ITAR restrictions, as SIG Sauer’s proposed design employed US technology, in particular the design of the magazine and several interfaces for accessories. According to SIG Sauer, an ITAR-free requirement was neither imposed in the earlier invitation to tender for an assault rifle for the German Army’s special forces, nor stipulated in the preceding call for competition. Therefore, contractors were not aware of any ITAR restrictions before participating in the preliminary competition.

SIG Sauer alleged that had it stayed in the competition, it would not have had a realistic chance of winning the tender, as the technical requirements were clearly and unambiguously tailored to the incumbent competitor Heckler & Koch. Furthermore, the company accuses the German Ministry of Defence of discriminating against U.S. bidders through excessive procurement requirements. The company criticises that the exclusion of ITAR controlled products constitutes a preliminary decision in favour of its EU-based competitors, as the criterion de facto renders most products by manufacturers with minor links to the U.S. ineligible.

Analysis

How does this case tie in with the current landscape of European defence procurement? Germany has previously exported up-to-date and used equipment to political and military allies if deemed appropriate and necessary, including assault rifles. For instance, the country has equipped Kurdish Peshmerga fighters in northern Iraq with approximately 16.000 assault rifles from 2014 onwards. ITAR restrictions might severely limit Germany’s ability to distribute weapons and equipment in such a way. Moreover, even the use of ITAR rifles by Germany’s own forces in countries such as Afghanistan might be complicated significantly by ITAR restrictions. Thus, political concerns may partly explain the exclusion of ITAR regulated offers in this case.

Still, this particular use of an ITAR-free clause is not an isolated case, but representative of a growing practice that is becoming more and more frequent in European procurement projects. ITAR-related exclusionary requirements signal a new trend, as the Ministry of Defence had in the past regularly accepted U.S. reservations and ITAR restrictions for various defence projects. As the delays resulting from U.S. approval and extensive disclosure requirements have been cause for criticism in the past, both timing and context of the depicted case suggest an inclination to ask for “ITAR-free” products in future procurements.

This practice is not just a German development, but indicative of a Europe-wide trend. ITAR-free clauses are becoming increasingly common as exclusion criteria in international invitations to tender. A corresponding widespread, albeit not concerted, effort to avoid the purchase of products subject to ITAR regulation is observable throughout the entire landscape of European defence procurement. For instance, large parts of the French arms industry tend to avoid using or sourcing ITAR-regulated items, provided an adequate substitute is available. Many manufacturers attempt to circumvent ITAR restrictions, as well. Products are regularly marketed as being “ITAR-free”. Notable French contractors and manufacturers such as Dassault Aviation avoid using key U.S. technologies altogether in order to strategically advertise and commercialise its fighter aircrafts as being exempt from ITAR restrictions.

The increased use of ITAR-free clauses in EU procurements is certainly not exclusively attributable to protectionist intentions. ITAR restrictions do in fact frequently tend to complicate and delay international procurements. In addition, the U.S. has shown a tendency to apply them strictly and strategically in the past. For instance, in 2014 a French contract for the sale of “Falcon Eye” reconnaissance satellites to the United Arab Emirates worth EUR 700 million was stalled for more than a year, as the satellites in question included ITAR-regulated electronic components. Even though these components were of no particular sensitivity, their inclusion still enabled the U.S. government to cause significant delays due to approval requirements.

Likewise, defence contractors may have a legitimate interest to protect confidential trade secrets, which they might be obliged to disclose under ITAR. ITAR-free clauses may thus in many cases reflect justified political and trade related concerns. The recent paradigm shift toward ITAR-free clauses may in part be explained by these and similar past negative experiences with ITAR-regulated items. However, the German depicted above case clearly demonstrates how ITAR-free clauses might be employed in the future to de facto exclude U.S. competitors and products from European procurements.

Outlook

While it is too soon to presume a concerted EU-wide effort to obstruct or even exclude U.S. defence contractors from EU government procurement procedures, two emerging trends are evident: On the one hand, systematic cooperation on procurement projects at the EU-level is increasing, accompanied by de jure benefits for EU-based companies. On the other hand, there has been a notable rise in national preferences of EU bidders through selective procurement requirements. These developments pose significant challenges for European and US contractors alike. It remains to be seen if this trend on the European defence sector continues and similar strategies are adopted towards other markets, in particular targeting dual use items. Legal challenges to such practices under European Procurement Law and International Trade Law are likely.

It should be added that the aforementioned developments do not appear to be temporary. The landscape of European defence procurement is adjusting rapidly, fuelled by significant recent geopolitical developments. On one hand, with the US shifting its strategic focus to other regions of the world and the UK set to leave the EU, continental European defence spending will presumably see a significant rise. Simultaneously, new mechanisms of EU defence procurement promise significant market changes. At a time when a variety of initiatives at the EU-level aim at promoting EU defence procurement, not least the recent introduction of a Permanent, Structured Cooperation (PESCO) in defence matters, the future effects of ITAR-free procurement on international trade and competition will need to be monitored closely.

Article: http://whoswholegal.com/news/analysis/article/34786/rise-itar-free-procurement-europe/