Shake-up of Australia’s defence export regime offers opportunities for AUKUS and beyond

The Australian government’s proposed amendments to the Defence Trade Controls Act 2012 have provoked strong reactions. Debate on this issue has been simmering for some time, mostly remaining under the mainstream radar. The short window for feedback on the proposal risks pushing the debate to the point of hyperventilation.

Critics denounce any attempt to tighten the rules. Some are worried that Australia is unwittingly relinquishing its sovereignty and caving to the demands of an overbearing partner (which has, not without irony, the dubious honour of running one of the most outdated, onerous and poorly implemented export-control regimes in the Western world).

But a closer look at the details of the amendments reveals that they present an unprecedented opportunity. Capitalising on that opportunity means getting the rules right and ensuring that the Department of Defence has the capacity and the capability to implement them skilfully.

The amendments intend two primary effects. First, they would expand the scope of export-control regulation to include foreign persons within Australia, re-exports to third countries of previously transferred technologies, and services related to technologies included on part 1 of the defence and strategic goods list. Second, they would provide an exemption on permits for exports to the US and UK of certain technologies.

Without doubt, Australia shouldn’t mimic the US’s International Traffic in Arms Regulations. A Cold War relic, ITAR has for decades been a great wet blanket thrown over the Western defence innovation enterprise. Approval timelines are lengthy, to the point of being prohibitive for many small and medium-sized companies that are highly sensitive to cashflow fluctuations. Incentives are misaligned, with administrative responsibility assigned to an organisation without a dog in the fight and an actor-agnostic mindset. Effective risk management is stifled by the worst characteristics of bureaucracy.

The proposed changes to Australia’s rules would indeed make them look a bit more like ITAR. Greater alignment is necessary to realising the aims of the AUKUS pact. But they wouldn’t increase the degree to which Australian businesses are subject to US dysfunction (except in terms of sales volume, a mooted benefit of the new regime). In fact, the amendments can change the terms of the debate. If properly designed and administered, they can create a new source of competitive advantage for Australia.

The problem with ITAR is not its underlying principles. Defence technology must be tightly controlled. Defence innovation is useless—indeed, actively harmful—if its output is readily available to geopolitical competitors. Private companies may not like heavy-handed regulation, but it is a cost of doing business in defence markets.

The effect of Australia being exempted from ITAR without tightening its own defence export controls would be to open the drain on the massive bathtub that is the US defence industry. Loopholes would be obvious and easily exploitable by opportunistic and malign actors alike. That the administration of the US rules has often been ham-fisted doesn’t change this basic fact.

But there’s more to the proposed legislation than tightening the rules. Examine the underlying economic incentives, and it becomes apparent that alignment of AUKUS export-control regimes could have significant positive long-term effects. The US has voiced commitments to open reciprocal exemptions for AUKUS partners meeting a standard of protection. Expanding the size of the yard to include alternative regulatory environments fundamentally changes the incentives for ITAR administrators. It sets a price on dysfunction.

Should the amendments be enacted, barriers to trade would decrease for Australians wishing to sell controlled technologies to the US and the UK. This would also apply to US and UK businesses that decide to move their research and development activities to Australia. They would maintain unfettered access to home markets. Intellectual property created in Australia would be subject not to ITAR, but to the Australian export-control system.

Competition changes everything. The price of sclerosis in the US system will be businesses choosing to move their R&D elsewhere. Until now, there has been nowhere to move without sacrificing the largest defence market in the world. Under the AUKUS partnership, that will no longer be the case.

All this, of course, is not a free pass for Australia. Entering the competition doesn’t mean we’ll win. The design and management of the export-control system will be vitally important. Australian regulators must provide an unimpeachable level of protection for defence-related technologies while avoiding the pitfalls that tripped up our longstanding ally.

How do the proposed changes stack up in this regard?

First, the amendments don’t account for the disruption they will cause to existing partnerships. Ongoing work must be grandfathered under the new regime. Those affected should be asked to submit commitments to align their practices with the new rules over a reasonable period.

Under the proposal as currently written, a companies could incur criminal penalties for breaking the new rules when they become active in 12 months. That could slam the brakes on the Australian defence industry. The small and medium-sized enterprises on which it depends don’t have armies of lawyers standing ready to facilitate the transition. The amendments must apply a phased approach, introducing an intermediate period in which civil rather than criminal penalties apply.

The administrative burden of compliance is manageable for larger companies and prime contractors. It is absorbed as a cost of doing business. But that is often beyond the capability of smaller firms. A grant program should be established to assist small and medium enterprises with compliance paperwork and legal advice. This is a small cost for significant industry-wide potential gains. An application process should be set up to enable Defence to direct assistance where it is most needed.

Expanding the scope of the export-control regime will also increase the workload on administrators. The amendment takes no account of this, postponing an analysis of the financial impact until the next budget cycle. Winning in the new competitive environment will demand smooth functioning of administrative processes. Permit-processing delays resulting from an understaffed administration will set Australia on a path to assuming all the worst aspects of ITAR. We need immediate investment in administrative capacity and technical expertise. A permanent body must evaluate and monitor performance, including all associated governance, audit and resourcing functions.

Risk-management standards must deliberately account for varying levels of trust in export-control regimes beyond the AUKUS partnership. The rules should acknowledge third-party arrangements and adjust the stringency of export-control reviews based on the regulatory environment of the recipient.

The legislation must include a sunset mechanism for future application of Australian law to exported and re-exported articles. The period over which such a sunset clause applies will vary depending on the technology in question and should be assessed at the time of export approval.

Finally, the innovation ecosystem depends not just on defence-related hardware, but on collaborative relationships between Australian innovators and their foreign partners. Innovative activities incorporate dynamic networks of experts. These networks can’t be fully specified in advance. Export-control legislation must include expedited approval processes for bringing additional partners into previously approved technology-transfer relationships.

AUKUS presents an unprecedented opportunity for Australia. It has the potential to shake up a legacy export-control system that has become an impediment to defence innovation the world over. Previous attempts have failed due to the lack of a compelling political imperative and strategic drivers. AUKUS has the potential to introduce a new source of Australian competitive advantage that will draw in innovative activities and all the economic spillovers that come with them.

The devil is in the details.