Elephants in the EU’s War Room: Towards a Coherent Policy on Third Countries in Defence and Security Procurement

Executive Summary

• There is longstanding uncertainty in policy design, regulation and practice regarding participation of third countries in EU defence and security procurement
• This is brought into sharp resolution by the latest EU defence financing instruments, proposed reform of Directive 2009/81/EC and experience of third country issues in the context of public (and utilities) procurement
• Decade-old calls for a more coherent EU policy on third countries should be renewed

Table of Contents

1. A “True” European Defence Union without Third Countries?
2. Third Countries and Directive 2009/81/EC
3. Third Countries and Financial Instruments
4. A “Third Way”?
5. Roadmap

A “True” European Defence Union without Third Countries?

The European Commission wants to build a “true European Defence Union”.

The walls of the EU’s newly decorated War Room are plastered with acronyms – e.g., ASPA, EDF, EDIS, EDIP, EDIRPA, SAFE – on access to funding and common procurement and designed to create strategic autonomy. This architecture is fortified by “Made in EU” initiatives such as the proposed Industrial Accelerator Act.

The EU’s defence posturing is understandable. America First means no longer propping up a free-riding Europe through NATO, and the EU must continue to safeguard against threats and risks posed by new kids on the block, the BRICS.

However, a herd of war elephants – “third countries” –  sit in the corner waiting impatiently to see where they fit. To some, a “true EDU” should probably mean no third country involvement at all. However, this would be to miss the point. The EU could only ever create an EUDU; whilst it often refers to creating a European defence equipment market (EDEM) and defence technological industrial base (EDTIB), the EU cannot speak for European third countries. Further, various third-country aspects bearing on EU defence and security cooperation cannot be easily sidelined:

• The EU can acknowledge that it complements rather than competes with NATO; however, this defensive alliance comes first for now (even if it is diminished). There are seven European members of NATO who are not EU Member States, some of which are larger defence actors than many EU Member States (e.g., Norway, Turkiye, and the UK).
• An EU internal market for defence and security does not truly exist, and any nascent foundations would not exist but for third countries. Buying from the US was integral to post- World War European defence industrialisation. That legacy remains.
• It is probably too late to reverse various dependencies on some third country elements (e.g., critical raw materials).
• There are EU (e.g., the European Defence Agency, EDA) and European (e.g., the Organisation for Joint Procurement, OCCAR) collaborative organisations that facilitate third country participation.
• Much bi- and mini-lateral European defence and security cooperation, including with third countries, is conducted outside the EU altogether. This is often led by those Member States most ideologically opposed to third country inclusion in EU initiatives; take France, for example, architect of the “European Political Community”.
• Certain European third countries that are increasingly seen as important defence powers are aiming for EU accession, e.g., Ukraine and Turkiye.
• Threats in the Indo-Pacific are necessitating new third country partnerships, e.g., with Australia, Japan, and South Korea (also NATO partners).
• There is a pressing need to address third country supply chain risks (e.g., given cyber threats and other risks to critical national infrastructure).

The EU faces a difficult balancing exercise. It must be seen to reduce dependence on third countries; whilst the US may object to EU protectionism, can reduced dependence (which the US says it wants) credibly be achieved without it? Further, the EU needs to prove its “value added,” that is, that its initiatives achieve what Member States cannot do outside the EU. Can it accomplish this if it does not have the full set of competences to do so?

This raises largely neglected questions about how the EU should formulate policies and laws to address third country relations in the context of defence and security.

This blog offers just a couple of illustrations of how the EU has done this so far in the procurement context and calls for this to become a greater priority. Starkly, this was called for a decade ago. The impetus is now surely even greater as old alliances are tested and new alliances are forged. It would also seem incongruous not to address it, given the lessons being learnt in the context of third country relations in public (and utilities) procurement, as exemplified by the Kolin and Qingdao judgments and initiatives such as the International Procurement Instrument.

Third Countries and Directive 2009/81/EC

One aspect largely unanalysed to date concerns third country participation under Directive 2009/81/EC. In the context of civil sector procurement, Member States are signatories to free trade agreements – such as the World Trade Organisation Government Procurement Agreement – which provide broadly reciprocal guarantees of equal access and treatment for third country signatories in the EU and Member States in third countries. Further, the EU exercises its external relations competence under the Common Commercial Policy to coordinate such obligations regarding the application of Directive 2014/24/EU. That said, the recent Kolin and Qingdao judgments have revealed the limits of national freedom to set terms of access and treatment, particularly for third countries without trade agreements.

By contrast, there are no major international free trade agreements in the context of defence and security procurement, which are also largely excluded from the WTO GPA. The EU has limited competence to coordinate an approach to external relations. For balance, it should be added that at least certain third countries do not appear willing to incorporate defence and security procurement in trade agreements with the EU (see the EU–UK Trade and Cooperation Agreement, for example).

Such limitations manifest in Directive 2009/81/EC. Thus, Recital 18 acknowledges that Member States retain power over third country participation, stating that they should determine it based on value for money (not an EU objective?) and third country openness based on internationally agreed rules (what rules?). There do not appear to have been any comprehensive studies of each Member State’s approach to third countries. This now matters more than ever; it has been suggested that the Kolin jurisprudence can be applied to Directive 2009/81/EC: a position that remains unclear. Various provisions have also exposed the difficulties of reconciling the EU internal market imperative with the realities of third country dependence. For instance, Article 13(f) excludes Government-to-Government contracts, the principal means by which certain Member States prefer US Foreign Military Sales. This led the Commission to publish (without concrete legal authority) a Notice mandating a prior market analysis before using this route. Directive 2009/81/EC also refers to the risk of awarding contracts to EU-based suppliers relying on third country sources through provisions enabling exclusion of suppliers that pose a security-of-supply or information risk  (Articles 22 and 23), but such provisions are limited. This is not to mention the overriding role that the Article 346 TFEU essential security interest derogation may play in excluding contracts which may result in awards to third countries.

Whilst Member States will have a wealth of experience on how third countries have been addressed applying Directive 2009/81/EC (or not), the evaluations of Directive 2009/81/EC have been largely silent on third countries. Even the latest proposal for reform is silent. It merely refers to the introduction of provision on innovation partnerships (barely used in defence), which states that contractors must not be subject to control or restriction by a third country entity and have executive management structures within the EU (Article 27(a)).

Inevitably, the use of such stock “boilerplate” provisions on third countries in EU instruments (including those on financing discussed below) is not going unnoticed by third countries. The US has forcefully reminded the EU that 19/27 Member States have signed “legally binding” Reciprocal Defence Procurement Agreements and that a European preference directly contravenes such “obligations”. In the absence of a US–EU RDPA, the EU’s formal right of response to these political Memoranda of Understanding is necessarily limited!

Third Countries and Financial Instruments

Another more recent example concerns the EU’s financing instruments, where there has been noticeably more analysis of third country provisions

SAFE, for example, requires that components produced outside the EU must constitute no more than 35% of the end product’s total cost. Additionally, the “design authority” must reside in or be transferred to the EU. Legal analysis of the provisions aside, fundamentally, it is not clear the evidence base on which the 35% limitation was set but risks seeming arbitrary. It is unlikely that such rules are practically enforceable. In any event, are such instruments an appropriate policy tool through which to address third countries?

Access to such initiatives has also become overtly political, even by the standards of a field dominated by high politics. Four countries (Canada, South Korea, Turkiye, and the UK) have expressed interest in joining SAFE, but negotiations were only conducted with Canada and the UK. The potential EU accession candidate was successful – and no, it was not the UK! Issues included, inter alia, a prohibitive participation fee for the UK with no guaranteed return (which might have been used to subsidise other similarly exclusionary initiatives) and the percentage of permitted third country components. The UK, the Netherlands, and Finland have since issued a joint statement on exploring possibilities for joint financing and procurement.

A “Third Way”

The current EU approach to third countries is ad hoc and, perhaps, unsurprisingly ambivalent. There have always been nudges to Member States to seek reciprocity and oblique references to third country risks. Now there are provisions enabling certain third country participation, but only conditionally. More evidence-based and responsive policy-making will be necessary; however, there are many hurdles, including:

• Politics continues to overrule pragmatism. Russia’s invasion of Ukraine indicated that a ground war in Europe is not improbable. Whatever the responsibility of certain third countries for failing to secure cooperation with the EU, the EU has clearly not made cooperation attractive for all allied third countries.
• There is an ideological fallacy: the EU and its Member States purport to foster exclusive defence and security cooperation, but various Member States do many important deals with third countries outside the EU institutional framework (despite wishing to exclude third countries from participating in EU initiatives). Whilst some may argue that Member States can do both, the coherence of the EU’s position is fundamentally compromised as a result.
• There are no international trade agreements on which to legally ground multilateral reciprocity.
• The EU does not have the competences it often asserts to act, as we are reminded when initiatives fail.
• Not all third countries are created equal with differential status, from the “associated” to the “disassociated”(?). Certain Member States are more open to third countries (allied or not) than others, including Russia.
• Experience of third country initiatives in public sector procurement has thrown up problems that are likely to be exacerbated in the defence and security context.
• It is no longer possible to silo “civil” and defence given the “dual-use” and spillover effects. This suggests that the development of a holistic approach to third countries across various sectors of procurement (tailored accordingly) would be necessary.

Roadmap

This blog cannot set out a comprehensive policy agenda for tackling the myriad issues. As a start, it would be useful to:

• Map individual Member State defence and security cooperative relationships with third countries to discern the scope for EU coordinated action;
• Systematically examine every Member State’s laws, policies, and practices on third country participation in defence and security procurement from bidding arrangements (subsidiaries/consortia) to origin of goods;
• Examine reciprocal access and treatment in third countries;
• Review collaborative organisation approaches to third countries through collaborative organisations such as EDA and OCCAR.

This should enable more evidence-based policymaking that could shape strategic political dialogue with third countries and inform the most appropriate policy and regulatory interventions by the EU.