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US Defense Industry: The Impact of ITAR for the Business

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International Traffic in Arms Regulations (ITAR) is one of the key components of the United States' export regime regulating the defense related items and the items that have dual use features. The main purpose of ITAR is to implement the provisions of the Arms Export Control Act which was specifically designed to prevent the transfer of key military technology to the hands of the groups of countries that might jeopardize the American national security. ITAR, by enumerating a list of items inside the U.S munitions list that should be subject to such controls serves as the pinnacle of this export regime. It ensures that any information pertaining such material not to be shared by a non U.S citizen.

The Recent State of the Industry

After a surge by two substantial wars in Iraq and Afghanistan the growth of the US Defense Industry has now started to slow down as a natural consequence of the subsiding of these two wars. USD$ 37 billion reduction by the Senate for the year 2013 and the expected further reduction of USD$ 52 billion for the year 2014 are clear indicators for the political decision for defense budget cuts. Even though the defense spending in some other parts of the world like China, Russia and Japan is on the rise, the sheer weight of the U.S defense budget makes it the single most important player in the global defense industry. The United States alone accounts 39% of global defense spending. Hence a slowdown in U.S spending would have negative implications for the industry as a whole.

ITAR and the Industry

The implications of ITAR and its stringent regulations for the American defense industry have recently come to the fore following India's decision to exclude two major U.S companies from the bid for its new fighter jets in 2011. Even though no information had been disclosed about why these two American companies were excluded from the bid by the Indian officials, the pundits who are well acquainted with the dynamics of the industry points out the negative effect that the ITAR had played on the decision.

Following the Indian decision to exclude these two American firms, there is a growing unrest in the American defense companies that considerations related with U.S export policies might be behind the decision. Usually the American technology is considered the best in the field and given the American companies' expertise and reputation developing such cutting edge technologies, ITAR remains as the only plausible alternative to explain the Indian decision. For this business sector, technology transfer is one of the most critical things that the buyers are seeking for. Stringent regulations for the export of defense items such as unmanned aerial vehicles (UAV) had provided an advantage for other UAV producing countries such as Israel, which positioned itself as the number one UAV supplier in the world. The main purpose of the ITAR is clear. It is designed to ensure that key technologies that the American defense industry has been producing are not to be transferred to the players that do not necessarily have good relations with the United States. However in a world where global defense spending is mainly accounted by the United States and where the American national defense spending is increasingly being subject to Congressional cuts, the American defense industry is naturally expected to shift its focus on overseas for new markets which are increasingly to be found in emerging countries. However as the Indian case demonstrates the American export regime of the defense related items of which ITAR is one of the main components might have some negative effects for such a shift of focus. In order to provide the American companies which are seeking to operate in defense industry and to penetrate in to the new markets around the world, the U.S regulations, especially the U.S export regime that is regulating the defense industry items should be restructured along more flexible lines that can respond to the needs of the defense industry.


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