The murky world of Canada’s arms manufacturing

The $15-billion Saudi deal may be Canada’s biggest but it is certainly not the first. As Canada’s long history as an arms exporter shows, many deals are not on the books and fly in the face of the country’s peacekeeper reputation.

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January 15, 2016
A U.S. Army base in n Afghanistan's Kunar Province. Canada supplies the U.S. military with components, however deals do not need government authorization. REUTERS/Tim Wimborne

Recent criticism of Saudi Arabia’s human rights record, following a mass execution of 47 people on Jan. 2, has put Canada’s business with the Middle Eastern country back under the microscope. Specifically, a 2014 deal worth nearly $15-billion to supply Saudi Arabia with light armoured vehicles has been scrutinized for its secrecy and the fact that Canada’s largest arms contract has been made with a problematic recipient. 

As Cesar Jaramillo wrote in a piece for OpenCanada in September, “if a country with Saudi Arabia’s dire human rights record is deemed eligible to receive Canadian-made military goods, it is hard to comprehend what sort of record a country must have to actually trigger the pertinent human rights safeguards.”

Canada’s Foreign Minister Stéphane Dion has since stated that the deal, orchestrated under the previous government, would not be revisited and its details would not be made public. (See our infographic on the size of the deal.)  

In late December, we spoke with Ken Epps, policy advisor at Project Ploughshares, the only non-governmental organization in Canada keeping extensive records of Canada’s military exports. Our conversation reveals contradictions between Canada’s defence industry and its approach to international affairs long before the Saudi deal made headlines.  

How does Canada compare to other countries manufacturing military goods? 

Canada is certainly almost always ranked in the top 15 by volume of sales but that [ranking] is actually problematic for a number of reasons. One reason is that a number of groups that measure these things only count complete weapons systems, for example the Stockholm International Peace Research Institute, or SIPRI. A lot of what Canada produces is in the form of components or subsystems.

Also, there tends to be an undervaluing of Canada's involvement in the trade because nobody has any idea of the volume of our trade with the United States. There is a free-trade situation between Canada and the U.S. under the Defence Production Sharing Agreement. It has been in place since the late 1950s, and it sets up a special arrangement where military goods shipped between the U.S. and Canada are not required to go through the same system as everything else exported by the U.S. and do not require export permits by the Canadian government. So although the government itself mentions that the U.S. is by far and away the largest trade partner in military goods, it doesn't have an exact figure. 

So Canada is in the top 15 arms exporters but it almost certainly should be higher. 

Which countries are at the top? 

The U.S. is almost always number one, then Russia, France, the UK, China and Germany. An easy way to remember is that the permanent members of the UN Security Council plus Germany are typically the top six. 

How are military products defined? 

There is growing agreement on what military goods are. One source is the United Nations Register of Conventional Arms. That is, for example, the basis for what is in the scope of the Arms Trade Treaty, which came into force at the end of 2014. But there are special agreements that a number of suppliers use, one in particular, called the Wassenaar Arrangement, of which Canada is a member and most of the leading suppliers are members. Wassenaar includes a munitions list and it has many categories in it, far beyond what's in the UN register. Canada tends to use that list.

Is it complicated to record the trading of parts or those that have dual commercial and military use?

In the case of parts, most of those are included when Canada reports exports of military goods. Where it gets difficult is that most of what Canada produces in the way of military components and parts goes to the U.S. The bulk of Canada's military subcomponents are for U.S. systems, therefore if those are not reported then the bulk of Canada's subsystems are not reported.

The other issue is, as you mentioned, dual use, which is a separate category under the export control list. There are lots of goods that can be used by the military for military end use that aren’t included in that dual use category — the best example is aircraft engines.

There is one company in Montreal, Pratt & Whitney Canada, that produces hundreds of aircraft engines every year, a significant percentage of which are for military end use. We don't know the exact number because those are not reported. And the issue there is once an aircraft engine receives Transport Canada certification as a civilian engine, it doesn't matter what the end use is. Even if it’s sold directly for military end use, if it’s viewed as a civilian engine it doesn't require an export permit. 

That sounds like a big loophole.

It is. It is a loophole that we have pointed out on a number of occasions.

"Places like Burma, where there was not supposed to be any military equipment going, we know Canadian engines are there."

What about the challenge of tracking exports to their final destination?

We have known for some time, in large part because Canada does produce many components, that regularly we have equipment being sent from Canada to an interim country where that equipment is incorporated into a full weapons system. Aircraft engines are one example but there are many others — avionics, that is [electronic] equipment used in aircraft, landing gear, etc.

Quite commonly, once that equipment goes to the interim country it doesn't stay there, it's in turn sold on. But as far as Canada is concerned, when it is issuing export permits for military equipment, it views the point of manufacture as the end user, so it is only authorizing the equipment at the point of manufacture. It literally takes no responsibility for the equipment after that. 

At Ploughshares, we managed to get many examples of equipment that has gone on from Canada to an end use country where, if the equipment had been sent directly from Canada, it would likely have been illegal.

There's also the issue of dual use, which can go through interim countries as well. A lot of Pratt & Whitney engines are going into American aircraft, or Swiss or Italian aircraft that are then sold onto another country for military end use. We know that Pratt & Whitney has a network of servicing operations, literally around the world, and even though it is only officially exporting that equipment to the manufacturing country, it is servicing that equipment in the final destination. So Pratt & Whitney Canada knows where its engines are; they could report them if they were required by the government to do so. Places like Burma [Myanmar], which for the longest time was on list that Canada had where there was not supposed to be any military equipment going — we know Canadian engines are there. If Pratt & Whitney did report them as a direct sale, they would have been in an illegal situation under national legislation.  

There are thousands of companies producing military goods in Canada, how many jobs do they provide and does that play a factor in why this issue is sensitive politically?  

Oh very much. And this is true not just of Canada of course, but of France, the UK, the U.S., Russia. Jobs in the defence industry for the most part are relatively sophisticated engineering and technical jobs that pay well, that earn good foreign exchange, so there is a lot of support for these jobs in any affected community.

And certainly there is the recent example of the sale to Saudi Arabia — when the government announced the deal, the entire emphasis was on jobs and the impact on the Canadian economy and how important it was and so on. And with some justification, for the people in London, Ontario, the work in the plants that will be building those vehicles — they are good jobs.  And there are many companies around London that get subcontracts from that work so there's a multiplier effect.  

Just how many jobs might be we talking about? 

The press release issued for the Saudi sale made reference to 500 companies across Canada, so if we assume just 20 per company, you've got 10,000 jobs. They made reference to 3,000 jobs but I suspect it probably is higher than that. One of the issues that makes a number difficult is that in Canada the aerospace and defence industries tend to be seen as overlapping and industry statistics often are reported together. So a regular figure that comes out of the aerospace/defence industry is 80,000 to 100,000 jobs across Canada. 

How long has this industry existed in Canada?

The way the industry exists now has its origins in the Second World War, when there was cooperation between the Canadian industry and the U.S., particularly when the U.S. joined the war, much of it based on Canadian resources being used in American plants…So the idea was that Canada would buy full systems from the U.S. — the F18 aircraft for example — and Canada would supply subsystems and there would be a balance in trade, not unlike the auto industry. And that was more or less the case for a long time. 

It changed at different times — the Vietnam War, the Iraq War — when more sales were going from Canada to the U.S. because the Pentagon was losing equipment. In general, it was recognized as a North American defence industrial base, that was the official term used for explaining how these two industries interacted. 

Did that contradict Canada’s foreign policy approach during that era at all — the Pearsonian era, for instance, when Canada was seen as developing a different foreign policy than the U.S.?

There were times when there were apparent contradictions — the Vietnam War [for example]. Officially, Canada was not involved in the war but the reality was Canada was a big supplier to the war. A local example was here in Elmira, Ontario, where a company was producing Agent Orange. We didn’t know it at the time but the Agent Orange was actually being shipped on the train tracks that go right through the middle of Waterloo. Companies in Toronto and Montreal and other parts of Canada were all involved in the Vietnam War effort and made money from it, and that was going on at a time when officially Canada was staying out and even making some statements opposed to the war. For example, [then-Prime Minister] Lester Pearson was given a famous talking-to by [then-U.S. President] Lyndon Johnson.

Even when Jean Chrétien made the decision that Canada wouldn't be involved in the [2003] invasion of Iraq, that didn't prevent Canadian companies from selling equipment to the U.S. for use in Iraq.

So there have been times when there have been significant differences. I think one could argue because there has been this tight interrelationship, it has confined what Canada can do, politically, without upsetting the U.S. significantly. In the period of the Cold War of course Canada was on the same side, so there were fewer areas of tension, but it did become problematic in areas like Star Wars [the U.S. Strategic Defense Initiative], and the cruise missile. While Canada was winding down its testing of the cruise missile, industries in Toronto were still producing guidance systems for the cruise missiles the Americans were using. 

The recent Saudi deal is the largest yet. Are we seeing a recent change in the size or nature of the deals or have they gone through waves?

There have been waves and I think that’s a universal phenomenon — we can see it in Canada's own procurement. Every once in a while we have a really big deal like the ships that are being purchased now through Canada’s national shipbuilding programs. 

But one of the challenges in how figures are reported in the arms trade is the difference between agreements and deliveries. Almost always the agreement values are bigger than the deliveries. And in fact sometimes the agreements fall away or get reduced. What it means is you get countries like the UK that tend to report agreements, reporting an amount that portrays them as having a much bigger share of the global market than may be true.

The last government under Stephen Harper put an emphasis on trade, especially bilateral free trade agreements. Was there growth in the number or size of military contracts during that time? 

Was there something different recently? I would say yes in as much as the Conservative government really did make an effort to push defence trade and they knew trade with the U.S. was going down because Pentagon budgets are declining, and the same was happening in Europe, with NATO-member contracts. So two traditional markets were in decline, spending was down, and so looking for emerging markets became the focus. Emerging markets are in the geographical South for the most part. India's spending on defence is up, in Saudi Arabia and many other countries in the Middle East, spending on defence is up. Latin American defence spending is up. So there are reasons why Canada was looking there, as was the UK and France and the U.S. and so on.

Arms manufacturing

When are these sales problematic? 

 If you're creating dependency of jobs on sales to a country like Saudi Arabia — and it could be Thailand or Colombia or any place where there are concerns about stability, or potential or ongoing conflict, or where there are human rights concerns — then you are going to be in a situation where that job dependency is going to limit what you can say about those concerns about human rights and other situations. This is for fear that the government involved might say, ‘OK, if you're going to take this attitude toward this, we are going to cut this contract and leave all these people out of work.’

That is a real issue and that should be part of the thinking when Canada enters into these kinds of deals, which as far as we see doesn't happen. And of course the same thing could be said about [our deals with] the U.S., that we are confined politically by the economic ties we have to the U.S. and specifically with the ties we have through the defence industry. 

Questions remain about the Saudi contract for armoured vehicles, but we do know there is a near-$15 billion price tag. That money takes time to get on the books, but who does it go to?

The Canadian Commercial Corporation (a crown corporation) will likely receive all payments from the Saudis and then make payments to General Dynamics Land Systems in London. So in that sense the Canadian government will receive all the $15 billion. The money retained by CCC will be in the form of a fee (I think a small percentage of the overall deal). GDLS in turn will subcontract a significant portion of the work to other suppliers so it will also only retain some (unknown) percentage of the total contract.

What has the Trudeau government said about it? 

My understanding was the biggest criticism that the Liberals had of the deal during the election was that it wasn't transparent. So an immediate ask we would have is what can the Liberal government do to make this particular contract more transparent. There are lots of unknowns still about what equipment exactly is being built, how much, when is it going to be delivered, what is it going to be used for, and even if there is something in the contract that allows Canada to withdraw from the deal if there are human rights abuses from the use of the equipment.

So we don't know if it could possibly be cancelled? 

We don't know that. It seems unlikely because we don't know of any precedents where that has been written into a contract but we're told it's at least a 10-year — probably a 15-year — deal. A lot can happen in that period of time. And it would only be prudent in our view that Canada would make allowances for changing circumstances in a place like Saudi Arabia.

The other thing is that this deal coincided with a time when Canada refused to sign the Arms Trade Treaty. And the new government has very explicitly said — its written into the mandate of the foreign minister — that Canada would accede to the treaty.

That's going to be a bit more complicated than if it was already signatory — it could have very easily signed, but it can't do that anymore because the treaty has entered into force. So Canada has to go straight to the ratification process. And the way that Canada undertakes ratification of treaties is that it makes sure all required legislation and procedures and policies are in place to conform to the requirements of the treaty before it ratifies. There should be a process for reviewing what Canada needs to do to come up to the standards of the treaty. We've done work on that and there are a number of areas to consider, not the least of which is establishing an arrangement with the U.S. so that all transactions are authorized. That's a fundamental requirement of the treaty.  

"There are lots of unknowns — is there something in the contract that allows Canada to withdraw from the deal if there are human rights abuses from the use of the equipment?"

Is recording all U.S. transactions a big undertaking?

It doesn't have to be because the relevant companies know where all the equipment is going. It's unlikely that Canada is not going to authorize long-standing arrangements. There doesn't have to be a huge risk assessment process for most of the sales, but it does need to be documented. And of course it would add significantly toward transparency, another requirement of the treaty. Canada is supposed to report on all exports on all the goods in the scope of the treaty. One example is armoured vehicles. We know that Canada has been shipping armoured vehicles to the U.S. for decades and once it did report those to the UN register — in 2004 — and then stopped. So we know they can do it. 

How difficult has it been coming up with this data overall? 

Basically it requires the commitment of a group like Project Ploughshares to have on staff somebody who looks at this virtually every day in some form. It's a bit like putting a jigsaw puzzle together. You get to know where to look for things and what are the triggers that give you an indication that you should look more deeply into a press release, for example.

At the moment there is nobody in government going that. There are people responsible for export controls and the process of authorizing export permits, and the RCMP and CSIS and others — they are supposed to be following any potential illegal activity around sales of strategic equipment to countries that aren't supposed to get it — but nobody is putting it all together in one place. So it's an ongoing challenge. 

What is the best-case scenario — when is it ever OK to sell military goods and what are the ideal regulations? 

There are two parts here — what do we see as permissible equipment and what's the best case for regulating all equipment?

Unless every country had its own defence industry, which we wouldn't promote, there is going to be a certain amount of trade. Even the Canadian government recognizes that military equipment needs to be controlled, you can’t view it as an ordinary product and you don’t want it getting in the wrong hands. 

Most of the government's thinking is strategic, ‘we don’t want it getting into the hands of countries that would threaten Canada,’ for instance. There’s a little bit of thinking about human rights that has emerged over the years, but the humanitarian perspective is still not as significant as we think it should be. Our view of the Arms Trade Treaty is that it is an important step towards recognizing the impact of weapons on human beings and the conditions of authorization should be weighted much more toward assessing the risk of the human impact.

As for regulations, our argument is that the standards of the treaty, although they could be improved, are an important first step toward a universal system that all countries use for authorizing arms exports, so we aren't in a situation where after one country says ‘we can’t do that,’ another country quickly comes in and says ‘well, we can.’ So it has to be a universal system and it has to be monitored, by governments, through the UN or some system where governments are holding themselves to account. But in the short term that won’t happen so the role goes to civil society to press governments to do the right thing. And the right thing meaning the obligations that they have already agreed to. 

In pushing for accountability we have the tools now that we didn't have even 20 years ago, through the Internet. We have people going into conflict zones and being able to trace, by picking up shells from the ground and by examining captured equipment and so on, where equipment has come from. This evidence can be used to hold governments to account.

In the context of the new Canadian government, I also think there should be a parliamentary process included in the ratification of the Arms Trade Treaty. There could be a set of committee hearings on Canada and the treaty that could give rise to an ongoing process of reporting to parliament or to a parliamentary committee. That system exists in the UK already, for example. It’s an important way of regularly and publicly reviewing and raising any concerns about weapons contracts, like the one with Saudi Arabia.