Canada’s defence and security sector are innovative and export intensive. However, while Canadian offerings are competitive worldwide, the United States will undoubtedly remain our largest defence market well into the future.
Over 70% of all Canadian defence exports are destined for the U.S. market. If you are one of the hundreds of Canadian companies that currently exports, or is considering exporting to the U.S., you should pay attention to a recently proposed amendment to the Fiscal Year 2017 National Defence Authorization Act (NDAA). Buried within this monstrous piece of U.S. legislation lies a proposed change to the definition of what constitutes America’s defence industrial base. This seemingly innocuous. change may increase the level of competition that Canadian firms face in the near term.
Canada’s defence and security industry currently enjoy privileged access to America’s defence marketplace. This unique arrangement has evolved out of our multitude of shared interests including our obligations to NATO and our shared responsibility for the defence of North America. This reality is reflected in a number of bilateral agreements, some dating back to the middle of the twentieth century.
Among the most important are the Defence Production Sharing Agreement (DPSA), Defence Development Sharing Agreement (DDSA) and the North American Free Trade Agreement (NAFTA). Due to these arrangements defence materiel that is produced in Canada can be regarded by the Pentagon as “American” and in many cases, Canadian companies can compete on the same terms as American companies for DOD programs, subcontracts, or access to the supply chains of major prime contractors. This unique position is born out of the fact that Canada is considered an integral part of the North American Defence Industrial Base.
Proposed changes to NDAA
While the U.K. and Australia already have defence trade agreements with the U.S., they are not as comprehensive as Canada’s. However, a proposed amendment introduced into the NDAA this past spring may change all of that.
The Senate version of the NDAA contains an amendment in section 872 that will expand the definition of national technology and industrial base to include the United Kingdom of Great Britain and Northern Ireland and Australia.
We are unlikely to know whether this amendment will go through until the fall; But if the amendment succeeds, the landscape will undoubtedly shift. While the U.K. and Australia already have defence trade agreements with the U.S., they are not as comprehensive as Canada’s. By bringing the allies closer, the decision to proceed with the amendment may have some positive benefits and enhance security cooperation, but there will likely be negative consequences for Canadian industry.
First, competition in some industries will be fierce. In 2014 the UK exported US$13.2B of defence materiel and their industrial base employs more than 165K employees.
Canadian firms will want to pay particular attention to defence electronics and cyber security as the UK has excellent and well-respected capabilities in these areas. While Australia may have less defence industrial capacity, they have a growing industry that employs around 25K people and boasts over 3000 SMEs that will be contending for access to the supply chains of major prime contractors. In addition, Australia has already demonstrated significant capabilities. For example, Austal is one of the primes on the U.S. Littoral Combat Ship (LCS) despite the Byrnes-Tollefson amendment which usually restricts sources of supply for naval vessels to U.S. sources only.
Whether or not these legislative changes occur, Canadian industry should be continuously improving its access and sale into the world’s largest defence market. While Canadian firms do have particular institutions that provide unique sales channels, these institutions and organizations can only help so much.
That’s why it’s necessary for Canadian companies to make additional efforts to stay competitive. Canadian firms that are currently exporting or are seeking to export to the U.S. must continue to innovate, and explore ways to enhance their productivity and competitiveness. They must also invest time and effort into understanding the broader marketplace, supply chains and industry trends in their target markets.
While Canada has a history of integration with the U.S. defence industrial base and has an excellent reputation there, it is not easy to enter a new market or remain an incumbent. That’s why Canadian firms shouldn’t hesitate to reach out to the experts.
Michael Petric is an associate at Avascent, a global management consulting firm that specializes in the government-driven market. Michael has extensive experience in the defense and security sector as a civilian political advisor to two Canadian Ministers of National Defense and as a uniformed member of the Canadian Armed Forces.