Finally, it’s happening.

Nearly three years after it was announced, the three countries that comprise the AUKUS agreement - the US, the UK and Australia - are loosening their export controls to allow greater sharing of sensitive technology.

Pillar I of the AUKUS agreement, you’ll recall, is about the acquisition of nuclear-powered submarines for Australia.

Pillar II is about the sharing of advanced capabilities like AI, quantum, ML and autonomous vehicles.

Until relatively recently Pillar II was fuzzy and hard to define. Precisely what capabilities would be selected for collaboration or transfer? How would it work? How would those of us in the defence and dual-use tech industry service our customers in government and still navigate the maze of international export controls governing the transfer of this stuff?

In the last six months, things have become clearer.

Firstly, the AUKUS defence ministers provided some much-needed visibility on Pillar II earlier this year when they published Pillar II work-streams.

As I previously explained in my analysis of the December 2023 AUKUS joint statement, the focus is overwhelmingly on maritime capabilities.

The AUKUS partner countries will develop common algorithms to operate various systems like P-8A Maritime Patrol Aircraft, to process data from each nation’s sonobuoys, and to cooperate on underwater autonomous platforms.

All of this was good news for industry. Previously, one of the maddening things about AUKUS has been the absence of any real market signals. How do you service a customer who won’t tell you what they want?

But the really big challenge with operationalizing AUKUS was always going to be in harmonizing the various export regulations that govern the global trade in arms and sensitive technology.

Now things on that front are starting to move.

In May, the US State Department’s Directorate of Defense Trade Controls (DDTC) published a proposed rule that would create an AUKUS exemption to the US’s International Traffic in Arms Regulation (ITAR) regime. The exemption would apply to companies or entities included on a list of AUKUS Authorized Users.

The AUKUS exemption is by no means blanket. There’s a long list of capabilities to which it does not apply, including command and control systems, sensitive source codes, and cryptographic materials. For those products not captured by the AUKUS exemption, but which might still have an application in AUKUS-related projects, an expedited approval process will apply. How effective that is remains to be seen.

Another restriction will be the size of the contract. Where the value of the deal exceeds Congressional notification standards, the exemption cannot be invoked. Again, it’s unclear how much AUKUS-related industry will be captured by this restriction, although some reports say around 70 percent of all goods currently covered under ITAR would be exempt.

All of this is well and good, but my concern is the system is still too cumbersome and complex. I’ve long been of the view that some of the most promising capabilities to be nurtured under Pillar II, won’t come from the big defence primes. Rather, they’ll come from SMEs and start-ups across Australia, the UK and the US. Engaging these guys - whoever they are - will not be easy if export and trade restrictions are too onerous. BAE and Lockheed have got an army of lawyers to negotiate whatever ITAR restrictions are ultimately set in place. They’ll quickly figure out how to navigate the maze of exemptions. The two coders working from the proverbial basement won’t. And if those two coders are the guys who come up with the algorithm for identifying aberrant sonar signatures in the South China Sea, there’s a chance we’ll miss out on their tech.

This worries me. Defence is notoriously bad at identifying promising technology still in its infancy. Nor is it particularly good at nurturing the technology it has identified as being of value. In order to get the most out of Pillar II it’s going to have to get much better at it. That means getting closer to industry, particularly the smaller players.

There’s a final point to consider: trade competitiveness.

AUKUS is (rightly) billed as a quasi-military alliance in which the member states share a common set of strategic objectives and assumptions about the kind of world we want to live in.

But AUKUS - particularly Pillar 2 - is also a marketplace in which dozens, if not hundreds of firms will vie for a large, but still limited, scope of work. The firms that win the plum contracts are more likely to be ones which enjoy the fulsome support of their governments. Here, the playing field is anything but level. The US government dwarfs the Australian and UK defence departments on R&D spending and other innovations grants.

Neither the UK or Australia can ever match the US on defence innovation spending. But there’s a lot more they could be doing to make their SMEs more dynamic and competitive. If they’re serious about using AUKUS as a means of growing their defence industry, they’d better start doing it.

AUKUS was a history-making announcement. But Australia was the only country that turned up with a checkbook.

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