Canada's unrecorded military trade: export controls loophole.

The 1994 sale of Quebec-built Bell 212 helicopters to the Colombian armed forces drew attention to a major loophole in the Canadian export control system. In spite of concerns that Colombian troops would use the transport helicopters in counter-insurgency operations and put civilian lives at risk - concerns raised by both human-rights organizations and Parliament - the government saw no obligation to intervene. According to government officials, although the helicopters, nicknamed "Twin-Hueys," were originally developed for the military, the Bell 212s would be exported as commercial aircraft because they had received civilian certification. The helicopters could be bought by military customers, and they could be used for military operations, but they were not military goods as found on Ottawa's Export Control List (ECL).

The Colombian helicopters dodged military classification because goods on the ECL are there by virtue of their technical characteristics, not their end-use. As explained in the government's annual report on arms exports, " `military goods' are defined as goods specifically designed or adapted for military use and controlled under Group 2 (Munitions) of the Export Control List (ECL)." Like all other classes of ECL goods, military goods are specified without reference to export customer.

If a supplier wishes to export an ECL-defined product, it must apply for an export permit, a process that subjects the proposed sale to government scrutiny and regulation. If, like the commercial Bell 212 helicopter, a product is not on the ECL, no export permit is required and an export deal may proceed without export regulation, regardless of the destination. (1) Also, because only the export value of goods from Group 2 of the ECL are included in the government's annual tally of the export of military goods, exports to military customers that do not require export permits are omitted.

Bell helicopters are perhaps the most prominent of a range of Canadian-built commercial equipment that is exported to military customers for military use. Table 1 displays details of reported Canadian overseas exports of similar equipment for which there has been no match in government military export information. (See below for the methodology used to compile table data. (2)) The table, drawn from Project Ploughshares' Canadian Military Industry Database, contains data reported by press and other non-official data sources for exports to non-US military end-users. Because not all such exports are reported, with smaller equipment sales less likely to get press attention than the "big ticket" items that dominate the table, the tabulation is unavoidably incomplete.

Even with data limited to existing reports, it is apparent that the value of unregulated Canadian military exports is equivalent to a large fraction of the value of official sales. During the eight-year period 1988-1995 the estimated value of unregulated overseas exports was at least $900-million, equivalent to more than one-third of total military exports to non-US states as reported by the government for the period. This suggests that the Canadian government reports less than three-quarters of the total Canadian equipment sales to overseas military customers.

Many of the table's exports are aircraft or aircraft-related products. In view of Canada's longstanding parallel production of civilian and military aerospace products, the predominance of sales of these goods is unsurprising. A multi-market approach is now a common sectoral feature in most nations with an advanced aerospace industry. A visit to any international aerospace exhibition will confirm the overlapping of current aerospace markets, with many companies advertising military aircraft, commercial passenger jets, and "multimission" aircraft (for both civilian and military customers) at the same exhibition. (See "Canada's Pacific arms show" in the June 1996 Monitor.)

Promoting "dual-purpose" goods

The federal government recently has encouraged a shift in Canadian military production from more specialized, and expensive, military goods towards the production and export of "dual-use" (or "dual-purpose") products, products that can be sold to both civilian and military customers. (3) During a 1994 House of Commons debate on the conversion of Canada's military manufacturers, Industry Minister John Manley referred to a greater focus on "dual use technologies" as one government objective to "reduce the dependence of Canadian firms on defence sales." (4) The objective arose from a combination of government interest in cutting the costs of domestic military procurement and recognition that a tighter international market would require some less-costly supply approaches. As explained by the Minister in the same speech, "there is no room for the one-off, one of a kind military products of the past. No one can afford them."

[Part 1 of 2]

                                 Table 1:

Reported Canadian commercial exports to non-US military end-users since

1988

F/Y   Military recipient


1988  Botswana
1988  Bermuda
1989  Brazil
1989  Peru
1989  China
1989  France
1990  Spain
1990  Nepal
1991  South Korea
1992  Algeria
1992  United Arab Emirates
1992  United Arab Emirates
1993  Saudi Arabia
1993  Turkey (2)
1993  United Arab Emirates
1993  United Kingdom
1994  Chile
1994  Thailand
1994  Slovenia
1995  Chile
1995  Venezuela
1995  Colombia
1995  Iran
1995  Russia

[Part 2 of 2]

                                 Table 1:

Reported Canadian commercial exports to non-US military end-users since

1988

F/Y   Canadian equipment                                          Value


1988  5 Bell 412 utility helicopters                       $ 17,500,000
1988  Services (1)                                             $ 35,142
1989  Engine conversion for 12 Tracker aircraft            $ 40,000,000
1989  4 Bo-105 LS helicopters                               $ 8,000,000
1989  2 Challenger 601-3A aircraft                         $ 46,600,000
1989  Antennas & channel amplifiers for Telecom 2          $ 15,000,000
1990  10 CL-215 aircraft & 15 CL-215T retrofit kits        $200,000,000
1990  DHC-6 Twin Otter aircraft                             $ 3,000,000
1991  50 Tiger Eye thermal observation devices             $ 10,000,000
1992  PABX telephone equipment, parts & services            $ 5,100,000
1992  Software & hardware material                          $ 1,500,000
1992  Services (1)                                         $ 57,228,945
1993  Repair aeroengines of E-3 EW & KE-3 tanker aircraft  $ 60,000,000
1993  10 Bell 206L helicopters (& licenced production)     $ 35,000,000
1993  Services (1)                                          $ 3,211,589
1993  Systems integration of computing infrastructure      $ 47,000,000
1994  Bell 230 helicopter for maritime patrol               $ 4,500,000
1994  20 Bell 212 utility helicopters                      $147,000,000
1994  2 Bell 206B & 5 Bell 412 helicopters                 $ 42,000,000
1995  6320-ton former Coast Guard ice-breaker                       N/A
1995  5 Bell 412 helicopters for National Guard            $ 50,000,000
1995  12 Bell 212 helicopters                              $ 65,000,000
1995  4 Bell 212 helicopters & 1 Bell 206-4 helicopter     $ 42,000,000
1995  Mi-17 multi-purpose helicopter avionics equipment             N/A

(1) Brokered by the crown corporation, Canadian Commercial Corporation.
"Services" are unspecified.

(2) Reported contract but deliveries unconfirmed

Ottawa has championed the dual-purpose approach in tandem with rising US government attention to procurement and promotion of dual-use technologies. (Most recently, the Clinton administration announced two initiatives, the "Dual-Use Applications Program" and the "Commercial Technology Insertion" program, designed respectively to develop joint technologies and to extract commercial technology for military use. (5)) In "Canada's Export Strategy for 1995/96," the government stated it would, "through participation in the North American Defence Industrial Base Organization, encourage Canadian industrial participation in activities that promote the integration of the defence and commercial industrial sectors and the greater use of dual-use products and technologies." A later export strategy document argued this approach was needed because "defence procurement worldwide is expected to shift from specialized defence-only products to dual-use ones, including commercial off-the-shelf products." (6)

In principle, the dual-use procurement strategy is compelling. Not only does the strategy offer potential cost savings in an era of government spending cuts, but it could also assist with redefining and reducing arms production in Canada. Dual-use production allows procurement for military use to be on an "as needed" basis, with production for civilian customers understood to be the norm to which there is swift return after a military order is filled. As commercial markets expand, dependency on military sales would decline and justification for pursuing military export sales would disappear.

A dual-purpose capacity also would be more suited to the peacekeeping, and other non-combat roles of Canadian forces in the post-Cold War environment. Unlike lethal combat equipment, usually built to exclusive, and expensive, military specifications, military equipment required for such roles as patrolling and surveillance overlaps more readily with civilian requirements and is more likely to be serviced by dual-purpose production.

Unless, however, the strategy is accompanied by closure of the commercial sales loophole illustrated by Table 1, a shift towards dual-purpose production could result in more military exports that are neither regulated nor recorded as official military exports. Indeed, in the absence of appropriate end-use regulations, a dual-purpose capacity could encourage additional commercial deals with the Colombian military and other customers involved in war or human rights violations. It also would mask the true volume of Canadian arms exports - official military exports could even decline at the same time that unregulated commercial sales to military customers rose. Canada then would be phasing itself out of the arms trade by redefinition - a kind of virtual arms control.

The dual-nature of the dual-purpose strategy is illustrated by government support for, and procurement from, Bell Helicopter Textron Canada's manufacturing plant at Mirabel near Montreal. With millions of dollars in subsidies from the Canadian and Quebec governments, Bell Helicopter of Fort Worth, Texas agreed to transfer production of the Bell 212 and Bell 412 helicopters (among other models) to the new facility in Quebec in the late 1980s. Although both models were originally built for military use, the helicopters received civilian certification by Transport Canada and commercial customers now make up the bulk of the market for the Canadian-built helicopters. In 1992, the Canadian Department of National Defence took advantage of domestic production of the Bell 412 model by ordering 100 aircraft built to the commercial standard for its "Utility Tactical Transport Helicopter" programme.

Although the DND order generated political controversy (the contract awarded to the Quebec-based company was untendered), a more significant contract feature escaped most media attention. As one military industry periodical reported, "the programme [was] notable most for its uniquely commercial nature." With a contract that called for "a commercially certified helicopter which is fully provisioned for its military roles," the government was using a domestic supplier to obtain equipment at commercial prices for military use. This was clearly the upside of the dual-purpose capacity.

The downside appeared in the realm of arms control, even though it was touted as an export advantage at the time. One Bell Helicopter official, noting the interest that the Canadian military programme was generating outside Canada, enthused that "the fully provisioned helicopter is completely exportable, as any sensitive equipment is installed by the customer." (7) The Bell 412 thus became a commercially-classified helicopter with an identifiable military export market, a market that Bell Helicopter Textron has since targeted with regular Bell 412HP ads in military industry magazines. Under existing Canadian export controls, this is a commercial market that does not require export permits.

Closing the loophole

With the Canadian government encouraging a production shift from more specialized military goods towards more dual-purpose equipment, the case for closer scrutiny and control of commercial trade with military customers is growing. Even at current trade levels, the absence of government oversight of such trade represents a major abdication of export control responsibility. In the future, if the shift develops, monitoring and regulating equipment trade based on end-use will be crucial.

As shown by the table, aerospace products, especially aircraft, tend to be both the most valuable and the most common Canadian equipment with both commercial and military customers. Greater attention to aerospace exports would cover many commercial exports that are intended for military use. Appropriate scrutiny of helicopter exports in particular could alleviate concern about potential use of Canadian-built helicopters for internal suppression. However, to ensure that all commercial equipment is adequately regulated by Canada's export controls, the definition of military commodity must take into account not only the characteristics of the equipment, but also the end-user. Any equipment sold to foreign military forces should be regarded as military equipment subject to military export regulations.

The extension of the definition of military commodities to cover commercial products sold to the military would close a significant loophole in Canada's export control regulations. At a time when boundaries between commercial and military production are eroding, it would also offer Canada the opportunity to demonstrate some leadership in international arms trade control by establishing a standard for control of all equipment exported to the military.

(1) A small number of countries (four according to a recent government listing) are on the "Area Control List." All exports to these countries require export permits.

(2) Table Methodology: The table documents reported sales of commercial equipment to overseas military end-users. To verify commercial classification, table items have been included only if the type and value of the sale cannot be accounted for by the official figures of government military export reports. It must be noted that in most cases definitive conclusions are not possible because official data is not sufficiently detailed to allow exact analysis. (Among other problems, the government discloses neither the description nor the manufacturer of military equipment exported.) However, by matching reported commercial equipment sales to specified countries with the official value and commodity classification of arms exports to those countries over the likely delivery period, it is possible to make judgments with reasonable confidence. Wherever possible, equipment deliveries were verified by comparison with inventory details in the International Institute for Strategic Studies publication The Military Balance.

Where sales values are rounded, they are usually as provided in the original reports. In some cases, the value has been estimated by extrapolation from similar sales for which the value was reported. N/A (not available) signifies that it was not possible to estimate a value.

The exports are dated as of the time of their reports. Most reports detail contracts awarded, while deliveries, which generally correspond to the official figures, may be in later years or may occur over more than one year.

(3) The term is used here in its broadest and most common sense. There is a narrow definition that applies to the specific "dual-purpose" goods defined by Group 1 of the ECL. Export permits (and concomitant regulation) are required for the export of these goods. However, here "dual-purpose" is understood to be all equipment of interest to both commercial and military users. This includes commercially-defined equipment sold to military end-users.

(4) House of Commons Debates, May 5, 1994, p. 3923. The Minister spoke during the debate on "Conversion of Military Industries," an allotted day of the Bloc Quebecois.

(5) "One on One," Defense News, August 19-25, 1996, p. 22.

(6) "Canada's International Business Strategy: 1996-1997 - Aerospace and Defence," Supply and Services Canada, 1996, p.6.

(7) "CFUTTH spells commercial," Flight International, 28 July - 3 August 1993.