Canada’s defence industry: exports and partnerships

With the long distances involved in reaching the Canadian market, describing the defence sector is a challenging undertaking when it comes to designing a unique marketing strategy. This article examines the commercial prospects that exist in Canada today, given the country’s growing interest in the Arctic region, an area where Canada has a lot to offer.

Overall, the Canadian defence industry employs more than 60,000 Canadians and generates over CAD 10 billion in annual revenues, roughly 60% of which come from exports. To provide a closer look at the inner workings of this industry, we will first briefly examine its key facets.

Key players

The following are notable key stakeholders in Canada’s defence industry:

• The Standing Committee on National Defence: mandated to review all matters pertaining to Canadian national defence and Canadian Armed Forces;
• The Senate Standing Committee on National Security and Defence: mandated to study issues related to national security, defence and veteran’s affairs;
• Global Affairs Canada: responsible for promoting international trade;
• Public Services and Procurement Canada: supports federal departments and agencies in their daily operations as their central purchasing agent;
• Canadian Association of Defence and Security Industries (CADSI): represents over 900 Canadian defence and security companies, also hosts CANSEC;
• Atlantic Canada Aerospace and Defence Association (ACADA): represents the interests of the aerospace, defence, and security industries in the Atlantic Canada regions (New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island);
• The Conference of Defence Associations: represents active and retired members of the Canadian Armed Forces.

Key business segments

Key business segments covered by Canada’s major defence industries include: shipbuilding; aerospace; the automotive sector; munitions; electronics; simulation and training; information and communication technologies; textiles; in-service support; satellite and space technologies. On the whole these segments encompass a wide variety of equipment and services, providing a broad industrial capability base.

To help with further growth, the Canadian Government has launched a Key Industrial Capabilities (KICs) initiative, which will help to guide the country’s Industrial and Technology Benefits (ITB) offset programme, which is replacing the Industrial Regional Benefits launched in 2009. Initial investigations have helped to define several key areas, including: Arctic and maritime security; protecting the soldier; command and support; cyber security; training systems; and in-service support. According to the ITB offset programme, this means that businesses engaged in the manufacture and delivery of products and services for use in government defence and security applications will be considered.

Obstacles and opportunities

In 2016, the Canadian Chamber of Commerce presented a list of the ‘Top 10 Barriers to Competitiveness’ for that year. When presenting the list, it was highlighted that in a fiercely competitive world, business needs more than its own skills to win – it also needs supportive public policies. This is not only true for Canada, but other countries face the same issue, and it is not until recently that the situation has changed because of new threats facing the countries. In this context, it might be important to describe the characteristics of the defence market and industries in general.

Governments are essentially the sole clients for companies connected to defence, and are allowed under international trade agreements to give preference to local providers; this makes these industries special. The production and trade in military equipment and services are therefore strongly influenced by governments, usually in ways that strongly encourage the expansion of the home country’s defence industry. Many of the most highly industrialised countries have therefore developed, explicitly or implicitly, strategies that promote their defence-related industries, recognising that such innovations will contribute both to sovereignty and to growth.

In short, a nation’s defence industrial capability is inextricably linked to government policies and practices. This is also related to security of supply, as even NATO member countries have experienced problems obtaining spare parts or ammunition for a system bought from another NATO member if the country in question disagreed on foreign policy. Lately, this has been quite apparent in terms of equipment support to Ukraine.

Canada’s defence industry is integrated with US industry, and reinforced by longstanding bilateral defence production-sharing agreements. Although this special relationship improves access to US defence markets, it also complicates business strategies for Canadian companies considering International Traffic in Arms Regulations (ITAR), which control the trade in goods, services and data related to sensitive military technology.

ITAR is a set of US government regulations applying to export and import of defence-related goods and services on a control list. The control list is meant to safeguard US national security and further foreign policy objectives. Items on the control list may only be shared with US persons or organisations (including their non-US subsidiaries), unless the US Department of State authorises an exemption. Canada has an exemption under ITAR, but must follow the same requirements, including the need to obtain prior approval on retransfer of items on the list to third countries. A recent example of this is the Dutch, Danish, and Norwegian donation of F-16s to Ukraine, all of which required US approval before they could be transferred.

Heavy fines are imposed if the regulations are broken. ITAR can be particularly problematic for dual-use technologies, given that a single ITAR-restricted component automatically leads to any product containing that component also being ITAR-restricted. Moreover, ITAR restrictions have increased cumulatively, with relatively few components de-listed even if the rationale for inclusion no longer applies. ITAR restrictions can even prove a headache for defence planners in NATO member procurement programmes.

Procurement strategy

The Canadian defence procurement strategy has the following three key objectives:

• Delivering the right equipment to the Canadian Armed Forces and Canadian Coast Guard in a timely manner;
• Leveraging purchases of defence equipment to create jobs and economic growth in Canada;
• Streamlining defence procurement processes.

Although these goals set out to streamline procurement and provide economic opportunities for the country, the procurement process in Canada is rather strict, according to discussions with Canadian officers. When the Canadian Armed Forces (CAF) issues a statement of work for a specific piece of equipment, this will form the baseline for the procurement – no more, no less. This means that if a company proposes an addition, or maybe even an improved solution, the company will be declared non-compliant. In some cases, this may mean going with a solution which is not necessarily optimal, but the CAF must live with it.

Exports

Under the Export and Import Permits Act (EIPA), the Canadian Minister of Foreign Affairs can deny exports and brokering permit applications for military goods and technology. This applies if there is a substantial risk that the items would undermine peace and security or could be used to commit or facilitate serious violations of international humanitarian and human rights laws and international conventions.

Canada supports and participates in a range of arms control, export control, and non-proliferation activities, working closely with partners who share Canadian objectives. Canada also participates in the following export control bodies and initiatives: the Arms Trade Treaty; the United Nations Register of Conventional Arms; the Wassenaar Arrangement; the Nuclear Suppliers Group; the Missile Technology Control Regime; the Australia Group; and the Organisation for the Prohibition of Chemical Weapons.

Export controls apply to all foreign destinations. However, due to Canada’s close and long-standing military cooperation with the United States, including the 1956 Defence Production Sharing Agreement that underpins the integrated nature of North America’s defence industry, Canada and the United States have reciprocal arrangements to ensure permit-free/licence-free movement of most military items between the two countries. Under this agreement the wider North American defence industry is able to cope with almost all demands related to military equipment, and difficult to compete with.

Partnerships

International partnerships involving Defence Research and Development Canada (DRDC) are anchored in two multilateral arrangements: the Technical Cooperation Program (TTCP) and the NATO Science and Technology Organization (NATO STO). Through these arrangements, DRDC gains an understanding of the Allies’ science and technology programmes and cooperates on a broad range of defence activities to augment defence and security knowledge and resources, avoid unnecessary duplication and jointly identify and close important gaps in technology and knowledge bases.

DRDC also collaborates with Allied countries under several bilateral and multi-lateral arrangements which facilitate information exchange, collaborative projects and exchange of personnel and equipment. In this regard, Canada has privileged relationships with Australia, Germany, France, The Netherlands, Norway, Sweden, the United Kingdom and the United States. Through these relationships, complementary science and technology activities are conducted, and national programmes are harmonised in defence, as well as in public security.

The following areas have been identified where some sort of partnership might be feasible:

• Development programmes/study groups in the NATO Industrial Advisory Group (NIAG);
• NATO programmes like the Airborne Warning and Control System (AWACS) programme and the Alliance Future Surveillance and Control (AFSC) programme;
• The Arctic Area;
• EU-funded programmes;
• National funding;
• The European Space Agency (ESA).

The Canadian Trade Commissioner Service is offering to help Canadian companies by providing financial support, matching them with potential foreign partners, and helping them pursue partnerships and commercialisation opportunities in new markets. One avenue for this has been through the Brussels-based Eureka network, which, among other things, aims to encourage international R&D cooperation. Canada also has a programme called ‘Going Global Innovation’, which offers funding to support innovators from Canadian organisations seeking foreign partners for the purpose of establishing a collaborative R&D agreement.

Domestic spending looking up

In early 2024, the Canadian Government’s spending estimates projected around CAD 1.7 billion (USD 1.3 billion) in defence spending cuts. However, more recently this downward trend in spending appears to have been reversed. On 8 April 2024, the Canadian Government unveiled its new defence policy titled: ‘Our North, Strong and Free’, in which they pledged CAD 8.1 billion over the next five years, and CAD 73 billion over the next twenty years.

Under these spending plans, the country aims to increase its defence spending as a percentage of GDP from the 2023 level of around 1.29% of GDP, to around 1.76% by 2029/2030. This raft of measures is aimed at moving Canada toward reaching the NATO target of 2% of GDP on defence, which Canada pledged at the 2023 NATO Vilnius Summit. The plan envisions a range of new equipment and capabilities to be procured across multiple domains. In sum, there will no doubt be ample opportunities for the country’s industry and their partners to meet many of these requirements.

Bo Leimand