26 September 2018

Brexit and Defence

The UK is currently the strongest defence sector in Europe, with one of the largest defence budgets and a long and proud military history.

However as Brexit looms, the sector that is crucial to our international standing, national security and domestic economy may be threatened. Concerns are mounting regarding access to the market, export and funding for research. Fiscal matters aside, it is uncertain what the effect will be on cohesion between supranational organisations, such as the EU and NATO which may degrade our ability to draw on external support during national crises. Such strategic alliances are also essential to defence planning, including standardisation policy and crucially, spending. Furthermore, Brexit has heightened fears over national security with tensions rising regarding EU intelligence sharing and Northern Ireland. This article seeks to provide insight into the merit of those concerns and any area of opportunity for those in the UK defence sector.

The UK Defence Industry

The defence sector generated in excess of £43bn in annual spending and exports in 2016, with less than 4% attributed to European markets. The Middle-East, North America and Asia-Pacific Regions continue to prove major importers for defence related goods, of which the UK, USA and France are the primary suppliers. In the UK, the sector employs more than 142,000 people and provides 4,300 apprenticeships with employment growth across the skills spectrum from data scientists to production line workers. The economic environ for small to medium sized enterprises (SMEs) is particularly strong given the MoD’s pledge to commit 25% of defence spending to such firms by 2020.

Yet Industry giants, most notably Jaguar Land Rover, have issued warnings including a hold on £80bn of investment or relocation of key sites out of the UK. Airbus mirrored the sentiment, warning that some 140,000 jobs would be threatened if the UK failed to reach agreement with the EU. Yet, competitors have capitalised on “Project Fear” to display commitment to the UK market with firms such as Boeing pledging a further £40m in investment post-Brexit. Brexit may spur those with an appetite for risk to take advantage of the uncertainty to annex a larger place in the market post-2019. However, the depreciation of sterling which has fluctuated as negotiations progress or regress, is an issue for all.

Despite polarised opinion, statistically the sector continued to enjoy growth in spite of the 2016 referendum as exports increase year on year. In no small part, because the UK is a world leader in specialist defence technologies. In fact, up to 50% of the EU’s specialist aircraft carriers and nuclear submarines are constructed in the UK, placing us at the fore of highly specialised technologies. As a market leader of innovation in cyber, aerospace and maritime technologies, our firms are likely to be less vulnerable to Brexit than in other sectors.

EU Competition Law

EU competition law requires the MoD to consider tenders from across the EU, with very limited exceptions. The requirement has faced significant criticism amidst the Brexit debate, most recently when the MoD announced it would open the contract to build 3 support ships to international competition as part of a £6bn project to launch new aircraft carriers. Recently, the MoD commissioned a report outlining that it should be free to exclude companies from the EU when tendering for defence contracts, allowing domestic businesses the maximum opportunity to supply to the economic powerhouse. With spending projected to total £178bn in the next decade, this is good news for UK businesses and in particular SMEs. However, with the MoD set to suffer a £20bn funding deficit in the next decade, it is essential that the need to ensure value for money is balanced against the need to support the domestic defence industry, a burden borne by MoD Procurement agencies such as DSTL and DE&S. If we prioritise British suppliers and manufacturers, we risk alienating innovation and value for money from international markets. Let us be clear, EU competition law is not the sole reason for international procurement.

Access to Funding

The Defence Budget is only one source of revenue for the industry, off-budget funding is a key contributor such as EU funding for research. The UK has benefited from £8bn in EU funding for R&D since 2007. The EU intends to increase such funding likely to benefit cyber security innovations in the coming decade, which the UK may be excluded from. The MoD may lose membership to the European Defence Agency (EDA), an EU organisation aimed at supporting research through funding and shared policy making. Compounding the effects of Brexit, the EU is taking major steps towards increasing defence ties between member states under the Permanent Defence Co-operation (PESCO) programme. PESCO aims to agree shared capability and training programmes between Member States, meaning the UK once excluded could lose out on funding and also export opportunities in support of this programme. Furthermore, the EU recently launched the European Defence Fund (EDF), the UK already faces restrictions in bidding for access to the estimated £13bn in funds during the transition phase, reportedly capped at €1.5bn beyond 2020.

It is clear the UK stands to lose a great deal in funding from the EU. The UK must improve the cohesion and outward communication of key funding and innovation organisations such as the Defence and Security Accelerator, UK Defence Solutions Centre and InnovateUK among others to ensure any shortfall in funding is minimised at a national level and support to enduring projects continues. In 2017, the total UK contribution to defence research was £1.7bn which is almost double the average input from EU funding but will likely be under increasing pressure financially and administratively.

National Security

The UK and Europe face a challenging security landscape at present, with the re-emergence of the Russian threat, the global export of terror including Islamic State, the migrant crises and an unparalleled threat from cyber-attack. Yet, the armed forces have been subject to unprecedented cuts, reducing numbers to the smallest since the Napoleonic Wars. Post 2019, the EU is no longer obligated to act in response to UK security issues but does that result in tangible assistance? When we consider the Salisbury nerve agent attack, the EU acted in a relatively reserved manner in comparison with strategic allies such as the US. NATO and the EU both condemned the attack but declined from further action, while the US expelled 60 Russian representatives. Furthermore, internationally the UK will lose significant influence in EU led missions which indirectly impact on national security such as EU Navfor, the anti-piracy task force in the Horn of Africa, which is currently headquartered in Northwood, London but with plans to transition to Spain and France post-Brexit.

The EU has reiterated it will continue support for the UK in non-financial areas such as counter-terrorism and international crime, but practically intelligence sharing may become tricky in post-Brexit legal and regulatory frameworks. We currently rely on EU organisations such as the Counter Terrorism Group (incorporating all 28 member states across secure intelligence sharing platforms), EUROPOL and the European Arrest Warrant to feed our ongoing border security intelligence picture but it is unclear how much data will be released to the UK following Brexit. The intelligence flow between the UK and EU has often been underestimated but according to the Head of MI5, Andrew Parker, intelligence sharing has “never been more important.” Conversely, given the rise of Russian state interference, the EU would likely benefit from the UK’s unique strength in Cyber innovation. The UK’s main intelligence organisations, including SIS and GCHQ are keen to maintain strong intelligence links with our near neighbours and it is likely the EU also views the relationship as operationally vital, the challenge will be in maintaining interoperability within changing infrastructure. The UK holds a trump card in that it maintains a developed intelligence sharing relationship with the US outside of NATO that the EU will want to capitalise on.

Uniquely, Northern Ireland presents a particular security challenge, with the contentious border issue currently left unanswered. While the Chequers White Paper deals confidently with the movement of goods across the border, it does not address the issue of the local economies which rely on a fluid border in Ireland. The EU has adopted a rigid stance on access to the free market for Northern Ireland, placing the UK Government in an impossible predicament deciding between a hard Brexit or a “back-stop” option allowing special arrangements for Northern Ireland which may be perceived as creating a border between the UK and Northern Ireland. It is feared that political instability, the threat of economic hardship and the border issue could inflame conflict in the country already suffering from the effects of a currently defunct devolved administration. Focusing on a border that is by in large notional to the younger generations of Northern Ireland is a small part of the wider Brexit issue, the peace framework agreed in 1998 under the Good Friday Agreement which makes reference to the Human Rights Law is guaranteed under the European Convention of Human Rights. Brexit may negatively impact on the stability of Northern Ireland, a key concern for national security but an issue more suited to a political solution as opposed to purely economic.

NATO: Post-Brexit Opportunity

Some have urged a renewed focus on NATO while others contest that NATO is merely a consortium of Europe with a few additions, sharing 22 joined members and common values. Since 2001 NATO and the EU have increasingly solidified their partnership, as recently as 2018 focusing on joint development in military mobility, counter terrorism and a host of other defence priorities. It would be prudent s we leave the EU, to focus on our relationship with NATO in order to maintain international strategic influence. Given the reduced size and budget of our domestic armed forces, the possibility of the UK engaging in unilateral military action are slim. The need to ensure strategic military allies to underpin foreign policy ambitions will increase post-Brexit, raising the importance of NATO. The former head of the British Army, General Sir Mike Jackson who commented that the UK’s “military dimension is provided by NATO” a sentiment strengthened by Brexit.
At present the UK represents one of the largest European defence budgets in NATO ensuring that despite our departure from the EU we will remain a European power. However, with 22 EU members likely to be irked by Brexit NATO cannot be considered an entirely remote organisation. Furthermore, the effectiveness of NATO has been questioned with US President Donald Trump labelling the organisation “obsolete” and “too expensive.” The UK could play a key role moving forward within NATO by capitalising on its special relationship with the US and bilateral relations with EU nations such as France and Germany to encourage more to embrace the 2% minimum budget contribution to defence.

The UK is mostly likely to capitalise on NATO standardisation agreements (STANAGs) which determine standards for everything from satellite communications through to lubricants. Commentators note this may be an area for opportunity, allowing the UK to input into STANAGs through UK Defence Standardisation (DStan) which are likely to be replicated within the EU’s key defence programmes such as PESCO. The net result is that the UK maintains input into EU standards indirectly and remains ahead of the curve in terms of interoperability requirements likely to improve the through-life standardisation of UK defence products.

Conclusion

Brexit presents a challenge in terms of regulatory and legal infrastructure surrounding borders and free movement of goods and services, but could provide unique opportunity. Strategically, the UK maintains a powerful position within NATO retaining its position as an outwardly projecting full-spectrum military nation and influence over widely distributed STANAGS. The solidarity between the UK, US and major European powers such as France and Germany in the wake of the Salisbury attack is indicative of possible bilateral alignments post-Brexit. The UK is however, likely to lose significant influence in European missions such as anti-piracy in the Horn of Africa. One of the greatest concerns centres around national security as intelligence sharing is likely to be hindered by changing legal and regulatory red tape as we transition out of the EU. It is likely the EU will adopt a more insular approach to defence spending, particularly in light of PESCO and the EDF but the UK will not be isolated completely due to the reliance on UK innovation in aerospace, cyber and maritime technologies. It is possible that the UK will develop a greater number of bilateral trade arrangements with strategic allies such as France in the coming years. The UK holds several trump cards in its industry arsenal including; shipbuilding, nuclear technology and cyber innovation, that will likely ensure this sector is less vulnerable post-Brexit.

Crucially, national agencies charged with encouraging research within defence must improve how they communicate with industry to maximise access to the £1.7bn pot. Brexit may allow the MoD more freedom to direct procurement to the domestic market without EU competition law, undoubtedly bolstering the defence industry to drive growth in high-skilled jobs and spread wealth across many related sectors from manufacturing through to research. The ripple effect of just one lucrative MoD contract is encouraging, with wealth trickling down the supply chain and hundreds of thousands of jobs directly or indirectly created.

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About the Author
Richard Morgan, Partner, Head of Dispute Resolution, Defence, Security and the Forces Sector & London Office
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