La Chair in Defence Economics - IHEDN is pleased to present the summary its latest annual conference, devoted to the France's defence export policy
Introduction
Defence exports are an important lever in national defence and security policy. They are a diplomatic tool of prime importance because of their ability to strengthen ties between states. But, from an industrial perspective, they also help to supplement national orders, which are insufficient to maintain critical skills and hence national sovereignty. As a result, the objective of strategic autonomy is closely linked to the arms export policy and its effective implementation.
However, for several years now we have been witnessing changes in the environment that are likely to have an impact on defence exports: the signing of the Arms Trade Treaty, increased competitive pressure with the emergence of new players, the growing importance of ethical issues, and difficulties in financing defence exports. The aim of this annual conference organised by the Economics of Defence Chair was to clarify the issues involved in defence exports for all the players concerned (government, industry, public opinion) and to discuss the possible adjustments to be made to defence export policy in the context of the strategic autonomy advocated by the French and European authorities and the development of armaments programmes in European cooperation.
Summary
by Olivier Martin
Chairman of the Chair Steering Committee
The preamble to the conference was as follows some basic facts about arms exports :
- The main arms importing regions remain Asia-Oceania (42%) and the Middle East (33 %), while the hierarchy of exporting countries remains stable overall, with defence exports dominated by the United States (37%) followed by Russia (20%);
- France is now in 3rd place (8%) thanks to strong growth in its exports over the last 10 years, driven in particular by recent major Rafale contracts (Egypt, India, Qatar and more recently Croatia, Greece and soon UAE) and naval contracts (Egypt, Greece, Belgium/Netherlands, etc.);
- The arrival of new entrants such as China, whose defence budget has been growing steadily for over 30 years (a unique event in history), was highlighted, as was the more recent entry of South Korea and Turkey, now in the top 10 exporting countries, which have also been investing in their defence industry for several decades with a view to developing their strategic autonomy;
- From an economic point of view, arms exports benefit the seller country in a number of ways: by maintaining the skills of the defence industrial and technological base that cannot be provided by national orders alone, by lowering costs through longer production runs, by increasing the self-financing capacity of manufacturers thanks to export margins, by improving equipment through the financing of export contracts, by paying royalties, and so on.
It was then made clear that arms exports were certainly a commercial act between a customer and a supplier (industry or even the State), but were above all the expression of a foreign and security policy, on the part of both the seller and the buyer country. Generally speaking, it represents strategic cooperation between the two countries, with the supply of equipment most often associated with long-term cooperation covering many operational aspects (doctrine and conditions of use of equipment, training of personnel, long-term support of equipment, etc.) but also a system of reinsurance granted by the seller country and desired by the buyer country (e.g. exports from France to Greece, from the United States to Poland, etc.).
The political role of arms exports was illustrated by a parallel between French and German policies in this area, particularly in terms of the role of arms exports and defence industries in each country.
Medium-sized power developing a global strategy, France must have forces capable of carrying out the operational missions defined by its government authorities, have the equipment needed to accomplish these missions and participate in military coalitions (NATO, EU, etc.) decided by these authorities. Arms exports therefore represent a unique opportunity to strengthen alliances with allied countries in areas where France can make a useful contribution to regional stability, while optimising the acquisition of equipment for its forces. Provided, of course, that France complies with its international commitments under arms export treaties (Arms Trade Treaty, etc.) and that Parliament exercises increasingly precise control over arms exports[1], France's export policy, a key element of its defence strategy, remains an eminently sovereign matter that should not be transferred to a supranational level.
Arms exports are therefore actively supported by the French authorities (government and parliament) for strategic, economic and industrial reasons. In some cases, they have even been taken into account in the implementation of military programming laws. While this situation may seem dangerous from a budgetary point of view and could lead to fears that the defence industry is becoming dependent on exports, it was pointed out that this «dependence» is far preferable to the political dependence that would result from a foreign state supplying our critical equipment.
The French defence industry is built around major groups, often with a significant State presence. Its mission is to reinforce the operational superiority of the armed forces, but also to guarantee the autonomous use of our military equipment and avoid any dependence on foreign countries that has not been rationally, politically and freely chosen. It is therefore also the result of our country's foreign and security policy. We are therefore a long way from a market approach.
For its part, the’Germany considers arms exports to be a «normal» activity, with commercial, economic and industrial aspects that it supports, but without pursuing a policy of national sovereignty. Generally speaking, exports are often criticised and highly politicised in public debate in Germany, particularly from an ethical point of view. Germany is therefore endeavouring to limit its arms exports strictly, both legally and politically. This policy is governed by two key laws: the Arms Control Act, which imposes a blanket ban on exports, and the Foreign Payments Act. More specifically, Germany has defined strict criteria for its export licence decisions, leading to a distinction between two groups of possible customers:
- Partners«, comprising NATO countries, the European Union and neighbouring countries such as Switzerland, New Zealand, Australia and Japan. For these countries, there is no need to justify an export: exports are considered to be in the interests of Germany and the European Union and therefore do not need to be restricted. On the contrary, export refusals for these countries are an exception and must be justified;
- In other countries, however, arms exports are prohibited in principle. Any exception (authorisation) must then be justified and decided on a case-by-case basis according to Germany's political interests.[2].
However, the biggest criticism of Berlin from Germany's partners concerns the unpredictability and inconsistency of its export decisions.[3].
Finally, an even more restrictive and above all legally binding approach to these issues is currently expected with the new coalition in power since October 2021. The aim would now be, at national level, to further freeze export rules and limit derogations with a clear objective of further reducing exports, and at European level, to support the adoption of a regulation on exports in cooperation with its European partners.
The German defence industry Since the 1970s, the industry has been predominantly privately owned, and is made up mainly of small and medium-sized enterprises (SMEs). It is not crucial or structuring for Germany's economic power and is still considered as a «normal» activity, with its commercial, economic and industrial aspects, but without pursuing a policy of sovereignty. The German defence industry does not therefore play a significant role in strategic terms. Finally, the industry enjoys an ambivalent reputation among many politicians, with whom many prefer to keep their distance.
To sum up, in France, the state plays a considerable role in armaments policy, its industry remains economically important and is seen as a key element in preserving the country's national sovereignty: it therefore deserves protection and support. In Germany, the federal state plays little part in arms policy and is rather wary of exports. Its industry is not involved in national defence strategy and its economic weight remains limited: while it may be supported at Länder level, it is not really supported at federal level.
Finally, the conference provided an opportunity to address two major issues linked to the changing environment surrounding arms exports and, more broadly, defence activities: the sustainable development with the implementation of ESG criteria and, more specifically, the issues of financial support for defence activities.
Like all economic players, defence companies have no difficulty in committing themselves to the sustainable development approach. For the record, the UN has defined seventeen sustainable development objectives, including peace. Indeed, peace and security are the first of the major requirements for ensuring sustainable development that is more respectful of the environment, more inclusive and more equitable. And for a democratic society like ours, there can be no security without a defence industry that provides the means to maintain that peace. The defence industry is therefore a key player in sustainable development. With this in mind, the defence industry is ready to work collectively with the public authorities to remind the public of the fundamental values of defence, namely that the first duty of a State is to defend its citizens.
On the environmental front, it was pointed out that defence companies have for many years adopted an approach similar to that of the industrial sector as a whole, even if it is clear that their environmental and energy footprint will remain low, given the limited volume of their own industrial activities.
Finally, it is in the defence industry's own interests to adopt an effective approach to sustainable development, in particular to maintain its attractiveness to employees and future employees.
In terms of financial support, the conference highlighted the fact that some of the world's investors are now turning their backs on the defence sector. First of all, it should be noted that this trend is mainly affecting European defence companies, as defence companies in other major countries (ASU, Russia, China, India, etc.) are not affected in the same way by this phenomenon, for a variety of reasons. To reassure these investors, defence companies have for many years considerably strengthened their modes of governance and their internal ethical processes.
More specifically, difficulties with bank financing are currently having the greatest impact on SMEs, not only in terms of their export activities, but also in terms of their own development. This situation is part of a general context of much tighter banking regulations and growing risk aversion on the part of these institutions. This has sometimes led to export operations seeking bank loans from subsidiaries of foreign banks rather than from French banks, which has been considered regrettable for sensitive operations. In order to remedy this situation, a dialogue was recently initiated between the defence industries, via their industrial groupings, and the Association Française des Banques, with a view to simplifying the procedures for setting up loans and developing mutual education aimed at a better understanding of the problems of the defence industry by the compliance divisions of the banks and of those of the banks by the contractors.
Finally, at European level, the European Commission has for several years been committed to an agenda of making financial investments more accountable, which could affect the defence industrial sector, while it has also recently created a Directorate General (DG DEFIS) responsible for supporting the European defence industry with a view to strategic autonomy. It was therefore stressed that it was important to ensure consistency at EU level between this policy of supporting the EU defence industry and, at the same time, a policy that could lead the banking sector to stop financing the defence industry.
In conclusion, I said at the opening of this conference that the subject of «What defence export policy for France? was a major issue for our country, but also for Europe, and that it was at the heart of current events. I think it's fair to say that recent events in Europe over the last few months have had a major impact on this issue in a way that I certainly didn't expect, and have in a way »set the record straight«. Indeed, the situation in Ukraine very quickly led several European countries to completely review their arms export policy, including lethal products. Many of them have announced significant increases in their defence investment. Finally, the European Union now seems to have fully understood the importance of having a defence industry capable of contributing to its security. It is to be hoped that this lesson will be taken on board when the situation in Ukraine becomes less critical and the major risks facing the European defence industry do not re-emerge.
[1] These controls have recently been extended to the export of dual-use goods.
[2] These are highly political decisions, such as the sale of submarines to Israel or battle tanks to Saudi Arabia, and now missiles to Ukraine.
[3] To reassure its French partner, Germany and France signed the Aachen Treaty in 2019, which sets out common export rules in the event of state or industrial cooperation between the two countries.
