Project: International Security Department

Associate Fellow, International Security

This paper analyses the role that the defence industry and international investors financing the production and trade of military goods can have in the implementation of the UN Arms Trade Treaty (ATT), and makes a case for why it is beneficial for countries across the world to join it.

Photo: J2R / iStockphoto.comPhoto: J2R / iStockphoto.com

With near-to-global functions and supply chains, the activities of the defence industry touch a wide variety of actors working in different regulatory frameworks across the world. Formerly quite secretive and functioning in a relatively closed environment, defence businesses and the governments that support and regulate them have in the past decade come under increasing policy pressure by regulators, investors and the society at large demanding more transparency and less corruption, as well as social responsibility and sustainability.

The landscape of defence procurement and business is in constant transformation, and the global defence market in 10 years’ time will look considerably different from today’s, as many of the countries that now are large importers will become tomorrow’s exporters. Furthermore, given an increasingly competitive market and the drive to reduce costs and to engage in emerging markets, the lower end of the supply chain could expand into emerging economies.

Despite a range of instruments developed at national, regional and now also at international levels, legally traded arms still too often end up in the hands of terrorists and criminals and in places where they are used to fuel insecurity, armed violence and conflict or for the purposes of internal suppression, inhuman and degrading treatment and other major violations of human rights and fundamental freedoms. These serious potential consequences of the trade, unintended or deliberate, are also quick to make headlines, posing reputational and even operational risks to defence companies.

The new legally binding rules introduced to regulate the international trade in conventional arms by the Arms Trade Treaty (ATT) – adopted by the UN in 2013 and in force from December 2014 – establish common criteria and international minimum standards to govern the trade in conventional arms that are likely to have a significant impact on the defence industry and the industry actors will be one of the key stakeholders in bringing the ATT into effective reality.

Currently, national practices and required procedures vary widely, posing challenges to ever-globalizing industrial actors who, in many cases, must simultaneously comply with different national regulations and apply different criteria even during a single trade transaction. Most defence companies operate in a heavily regulated and controlled national environment. However, the business environment is in danger of becoming ever more divided between actors striving to be responsible, accountable and transparent, and those who utilize regulatory loopholes to gain market advantage by being lenient on issues such as transparency or end-use controls. This is an unsustainable situation, and one that only a truly global treaty such as the ATT can address.

Many large financial actors – including those involved in banking, investment, insurance, mergers, acquisitions, lending, bonds, consulting and equity capital market activities – today follow some form of ethical investment criteria to assess an acquisition target and have policies regarding financing of industries related to armament and defence.

This paper analyses the role that both the defence industry and international investors financing the production and trade of military goods can have in the implementation of the ATT, and makes a case for why it is beneficial for countries across the world to abide by its requirements and start implementing the treaty. It suggests some actions that could be considered in the coming years when implementing the ATT to further enhance its effectiveness and positive impacts on commercial actors and states representing both developed and developing economies.

As global supply chains continue to spread and evolve, the ATT is an opportunity for the new emerging powers and future exporters and importers of defence material to develop their control systems so that they are ATT-compatible, reliable and effective. The responsibility does not only lie with governments: companies of ATT states parties might find it reassuring that their governments and national regulatory bodies will be required to have explicitly considered several ethical and risk factors in the light of internationally agreed standards before allowing the transfer to go ahead; but in addition they need to present their ideas to governments and outline positions and questions that governments implementing the ATT will have to consider. To do this, the global defence and aerospace industry needs to develop its understanding of the ATT, the nature of the debate, the risks and opportunities, and the ways in which it can make a positive impact on its implementation.

Those considering acceding to the ATT should consider the following points.

  • States should weight up the comparative advantage that joining the global treaty would bring to their national defence sectors: adopting a globally emerging norm is in the interest of the treaty actors in the UN and national governments, who therefore have to reach out more to the private sector to ensure optimal cooperation and build on one another’s experience to ensure the full and comprehensive implementation of the treaty. They have to make the case to their industries that it is in their long-term interest to join global initiatives that otherwise might prove detrimental to their development. The ATT can prove crucially important to international cooperative agreements and joint ventures involving both the increasing ATT participation base and current non-members.
  • As good practice, governments should incorporate an open-government approach to their aspirations regarding joining and implementing the ATT: their national defence industries should be kept in the loop on all necessary regulatory changes and be invited to contribute to their formation. As a practical measure, representatives from industry should be invited to participate as partners or advisers in all processes that will have an impact on that specific industry’s business in the future, especially as the practice is already widespread among the NGO and research communities. There should always be a numerical balance in terms of external participation in national/governmental processes.
  • To work more effectively with the private sector, the UN and national governments should continue developing their technical expertise and understanding of the functioning of the global defence industry to ensure that the ATT will stay on top of technical developments and will be able to respond to the future requirements of the defence sector.

The ATT could bring a definite comparative advantage to the defence industry as well. Therefore, defence actors and investors should:

  • Develop a more active, structured and integrated approach to the treaty’s implementation by more active involvement in national, regional and international decision-making. More active industry involvement should become a natural part of their corporate social responsibility schemes; but it would also prove beneficial in order for businesses to take responsibility to protect their industry from new rules and regulations with which they might find it impossible to comply.
  • Incorporate the new international norm established by the ATT in their day-to-day management and investment approaches to ensure that all actions conform with the treaty and can be marketed to both foreign governments and investors as added value and a potential enhancement of the business.