US Imposes Improvements to Canadian Export Controls

Author
Kenneth Epps

The Ploughshares Monitor Spring 2002 Volume 23 Issue 1

In April 2001 the federal government quietly put in place regulations which raised the standard of controls on Canadian arms production and export. The motivation was to retain the United States as Canada’s largest military export customer.

When Bill S-25, “an Act to amend the Defence Production Act,” received royal assent in October 2000, the government introduced – with little fanfare – important changes to the manner in which Canadian military contractors do business. In an effort to win back unique military trade arrangements with the US, unilaterally dropped by the Clinton administration the previous year, the Bill established improved regulations for access to and export of Canadian military goods. In particular, the Bill introduced a registration program sufficiently agreeable to US export control officials that Canadian companies regained most of their preferential access to the US military market.

Bill S-25 established the new regime via amendments to the Export and Import Permits Act and the Defence Production Act, changes to both of which came into effect in April 2001. The revised Export and Import Permits Act added a new category of strategic goods to the Export Control List, the list of products requiring prior government approval to export. The new category, which includes satellite systems, payloads for spacecraft, ground control stations, radiation-hardened microelectronic circuits, nuclear weapons design and test equipment, and other goods of US strategic interest, joined the list of goods for which companies must seek export permits. New regulations also defined the “United States export authorization” necessary for Canadian companies to re-export US “controlled goods.” (Controlled goods are a subcategory of the Export Control List and include the additional strategic goods above.) Proof of US export authorization was required for Canadian export permit applications for controlled goods of US origin.

Bill S-25 amended the Defence Production Act by establishing a Controlled Goods Registration Program (CGRP) under which all persons or businesses wishing access to controlled goods must be registered with the Canadian government. The CGRP is the central feature of a set of measures which Ottawa expects to be a “more stringent security regime governing the examination, possession or transfer of controlled goods” (Canadian and International Security Directorate). Applicants must be registered with the CGRP to obtain export permits involving controlled goods.

The new regime requires Canadian contractors seeking access to controlled goods to register with Public Works Canada. They must also “agree to implement certain security processes such as the appointment of a Designated Official who will have responsibility for ensuring only authorized employees gain access to such technologies and for obtaining approval and documenting any further transfers to other entities” (Aerospace Industries Association of Canada 2001b).

According to government information,

Each individual who must access Controlled Goods must undergo a security assessment, done by either the Designated Official or the Minister [of Public Works] in accordance with the Regulations. The Controlled Goods Registration Program deals with security issues such as the honesty, reliability and trustworthiness of a person, not citizenship and whether that person poses a risk of transferring the Controlled Goods to an unauthorized person (Canadian and International Security Directorate).

Under the CGRP, each registered firm must assign a designated official responsible to the government and responsible under law. The designated official in turn vets other employees who view, handle, or produce controlled goods. The government is responsible for program verification by spot security checks and occasional audits. In addition, there are plans “to beef up the country’s counter-intelligence and customs functions to better monitor the U.S.-Canadian frontier” (Defense News 2000).

The CGRP applies to controlled goods which Canadian manufacturers seek to export to the US or elsewhere. The program also applies to contracts awarded to domestic suppliers by Public Works Canada or the Canadian Department of National Defence. To receive Canadian armed forces’ “requests for proposals” or to bid on contracts involving controlled goods, Canadian suppliers must be registered with CGRP. As a result, the program will become an important gauge of the size of the Canadian military industry. As of June 1, 2001 more than 700 applicants had applied to be registered under the program, according to the Aerospace Industries Association of Canada.

Canada loses its exemption

The addition of new defence production and arms export regulations did not arise from government concern that Canadian control standards were slipping. Indeed, for years government officials have maintained that Canadian export controls are among the most, if not the most, rigorous in the world.1 Rather, the legislated changes were in direct response to a single US government action which unilaterally removed special access to the enormous Pentagon procurement market which Canadian military industries had enjoyed for over half a century.

Canada’s military industry has been dependent on exports to the US for more than 60 years. In the later years of the Second World War, the 1941 Hyde Park agreement formed the basis for cooperation in military production and trade between the United States and Canada. By 1956 the two countries had established the Defence Production Sharing Arrangement (DPSA), reinforced by the Defence Development Sharing Arrangement of 1963, whereby Canadian military industry was allowed to compete with US firms for Pentagon contracts on a commercial and competitive basis. Long before the Free Trade Agreement or the North American Free Trade Agreement, the DPSA created open trade in military goods between Canada and the US.

Through the DPSA Canadian industry gained access to a much larger US military market. At the same time, the joint military trade regime provoked structural changes in Canada’s military industrial sector. Canadian military industries were integrated into a “North American defence industrial base” with Canadian-built components shipped south for assembly in US weapon systems and completed US weapons exported north to Canada’s Department of National Defence (DND). Canadian military production became highly dependent on the US market. Sales to the Pentagon regularly exceeded those to DND and were greater than export sales to all other countries combined.

The DPSA required ongoing exemptions in Canadian and US laws to allow cross-border military trade free from the licencing (export permit) requirements of both countries. In the United States, among other measures, the International Trade in Arms Regulations (ITAR) were amended to include unique exemptions for Canadian trade. Under the ITAR exemptions, US companies could supply their Canadian counterparts (or the Canadian government) with US military goods or data without seeking export permits. However, the exemptions did not preclude US end-use controls. Canadian recipients of US-made military goods still were bound by regulations requiring US government permission for the re-export of the goods to other countries, including re-export of US-built components in Canadian military systems.

In April 1999 the US State Department removed most of the preferential items contained in Canadian exemptions to the ITAR and imposed licensing requirements on a broad range of goods and technology which had been free of the export permit process. In addition, the amendments narrowed the definition of a Canadian citizen and ruled that Canadians with dual citizenship could no longer take advantage of the Canadian exemptions. The ITAR changes effectively cancelled the special status enjoyed by Canadian companies and placed them in the same category as all other non-US suppliers.

The changes to the military trade regulations arose from US concerns that US-built technology was being exported for military use by countries identified by the US as “rogue states” or “countries of concern.” The action closely followed the Cox Report on Chinese Espionage, a special Congressional report produced in the wake of accusations of sensitive technology transfers from the US to China, which was issued to the US government in January 1999 and to the public in May 1999 in an unclassified form. The report recommended that the United States should work “to improve the sharing of information by nations that are major exporters of technology so that the United States can track movements of technology and enforce technology control and re-export requirements” (US House of Representatives 1999).

At the time of the ITAR amendments, government and media reports noted several specific US concerns which allegedly fostered the US action. These included:

• US obligations under the 1997 Organization of American States convention to implement controls on the transfers of firearms, ammunition and related materials;

• Canada’s dual-citizenship allowance (especially in instances where the second citizenship was with a “country of concern”);

• foreign ownership of some Canadian companies;

• Canada’s refusal to ban defence exports to Iran and other countries of concern to the US;

• less effective Canadian export controls and technology security practices. Concerns included differences between the two states’ munitions lists and the lack of Canadian control of “deemed exports,” that is, knowledge of military utility, such as how to construct a weapon;

• irritation with Canada for its role in the treaty to ban landmines;

• Canada’s ambivalence about its participation in the ballistic missile defence program; and

• “other laxities,” including border controls and immigration policy.

Canadian officials came to acknowledge deficiencies in Canada’s internal and export control of military goods. Government documents noted, “while the reinstatement of the ITAR Canadian Exemptions was initially the primary motivation for undertaking certain legislative and regulatory changes, it was recognised that these changes would also address a particular weakness in Canadian domestic controls” (Canada Gazette 2001, p. 132).

The April 1999 removal of the Canadian exemptions to the ITAR was perceived as a major blow to a Canadian military industry integrated with US industry and dependent on US procurement. The industry complained long and hard to the Canadian government about the new licensing procedure for transfer of military data and equipment from the US to Canada. The industry viewed the procedure to be complicated, costly, and time consuming and, because it added to the effort of bidding on Pentagon contracts, the industry felt it was placed at a disadvantage with US competitors. One Canadian industry spokesperson noted, “Depending on what it is the Americans are putting out to tender, it could require Canadian companies to secure a licence from the State Department before DoD [Department of Defense] can export the request for proposals.” US competitors thus would “have a three- or four-month head start” (Jane’s Defence Weekly 1999, p. 9).

With the dropping of Canadian ITAR exemptions, US companies were obliged to obtain export permits to transfer controlled goods to Canada, again adding to time and costs. This was considered both a disincentive for US industry to work with Canadian partners and an extra hurdle for Canadian industry wishing to acquire components from the US in a timely manner. There were claims of a widespread impact on Canadian arms manufacturers. “I know of no company that hasn’t been impacted,” one industry spokesperson was quoted as saying; “I think everyone has an experience where they’ve missed an opportunity to bid”(Globe and Mail 1999, p. A2). As government negotiations drew on, Canadian industry became more vociferous about losing money and bids. “The deadlock is costing the defence and aerospace companies in Canada millions,” another industry spokesperson stated in February 2000 (Globe and Mail 2000, p. B15).

Meanwhile, the Canadian government protested the challenges to Canadian sovereignty implicit in the new ITAR regulations which prevented US firms from dealing with people at Canadian companies who were dual nationals. The federal government argued that barring these legitimate Canadian citizens from handling sensitive technology would violate the Charter of Rights and Freedoms (The Ottawa Citizen 2000).

Following an intense period of negotiation, extending well past a result prematurely announced in October 1999, the US and Canadian governments agreed in December 2000 to introduce measures to restore the military trade arrangements which had been in place for four decades. The measures were intended to bring Canadian controls on military goods in line with US procedures and standards. In the United States, revisions to Section 126.5 of the International Traffic in Arms Regulations, which reinstated Canadian exemptions, became effective on May 30, 2001.

As the Aerospace Industries Association of Canada noted,

The revised Canadian ITAR Exemption broadens the scope of U.S.-origin technologies and goods that can enter Canada licence free and allows access to such technologies by Canadian nationals, Canadian dual-nationals and Permanent Residents (Aerospace Industries Association of Canada 2001a).

Improved controls

Although arising from US concerns about the security of controlled goods transferred to Canada, the Canadian legislative changes prompted by the removal of the ITAR exemptions represent real improvements to the domestic and export control of Canadian military goods and technical data. The Canadian adoption of US definitions and control standards has raised the bar on Canadian controls, as the Canadian government itself has noted in explanatory material. Moreover, the commonality in US-Canada licencing requirements marks an advance in harmonization of export controls between the two countries at a time when common international standards for arms transfers are scarce.

Nevertheless, the changes to Canadian controls on military goods and data fall short of the overhaul needed to adhere to standards aimed at advancing the human security concerns at the centre of Canadian foreign policy. To begin with, despite stricter controls on the people involved in cross-border military trade, there is no commitment by either government to reveal details of the equipment or data transferred. In other words, the opacity of US-Canada military trade remains intact, with very limited opportunities for public scrutiny or assessment of one of the world’s largest military trading relationships. Canada must address this large gap in the transparency of Canadian military exports.

Elsewhere, the Controlled Goods Regulations included in Canada’s Defence Production Act codify US jurisdiction regarding the export from Canada of controlled goods of US origin. The US government does not accept sole Canadian control in these cases, and Canadian companies must apply to both the US and Canadian governments for authorization to export. In contrast, the Canadian government makes no equivalent demands on US companies intending to re-export controlled goods of Canadian origin. Yet, the entrenchment of the US requirement in Canadian law suggests Canada should put in place the same standards for Canadian military transfers to the US. Canadian control of US company export of military goods of Canadian origin should not be viewed to be “extraterritorial,” as the Canadian government has argued, but as a legitimate requirement of controlling the final end-use of military products. By extending such controls, Canada would contribute to improved export controls on both sides of the border.

1 “Canada has one the world’s strictest systems for screening potential exports of military equipment” (Department of Foreign Affairs and International Trade 1999).

 

References

Aerospace Industries Association of Canada 2001a, “What’s New,” June 1.

—– 2001b, “What’s New,” February 2.

Canada Gazette 2001, “Regulatory Impact Analysis Statement,” Part II, Vol 135, No.2.

Canadian and International Security Directorate, “Frequently asked questions.”

Defense News 2000, May 8.

Department of Foreign Affairs and International Trade 1999, News Release, December 15.

Globe and Mail, 2000, February 3.

—– 1999, July 28.

Jane’s Defence Weekly 1999, 28 April.

The Ottawa Citizen 2000, April 5.

United States House of Representatives 1999, Report by the Select Committee on U.S. National Security and Military Commercial Concerns with the People’s Republic of China (The Cox Report).