Defence export changes are a disaster for local deep tech companies

James Riley
Editorial Director

Changes to export controls on defence products and services are a disaster for local deep-tech companies making dual-use products that have applications in both the defence and civilian commercial markets.

Having been blindsided by the proposed changes to export controls, these companies have been given one week to respond to the draft legislation. Local deep-tech companies that spoke to on Monday say the changes include draconian measures that could ultimately force some to move to the US, while others will simply be squeezed out of business.

Nothing good comes of anything put out by a government late on a Friday. And so it is with the Defence Trade Controls Export Bill 2023, which was quietly put up on the Defence department website on Friday, but with no accompanying ‘announcement’ heralding its arrival. In a world of announceables, there was not a whisper.

You can read about the Defence Trade Controls Export Bill 2023 here.

The proposed changes seek to harmonise export controls between the AUKUS partners. Its explanatory notes say the changes will streamline defence trade between the partners.

But it seems to have done this by taking the worst parts of the US government’s International Traffic in Arms Regulations (ITAR) and applied it not just to weapons but to a far broader set of technologies known as the Defence and Strategic Goods List (DSGL).

As it has been written, the new bill creates three new criminal offences – and each one takes some explaining.

The first makes it a criminal offence to “supply DSGL technology to a foreign person within Australia”.

What this actually means is that if you are a local deep tech, dual-use company and you have hired or are looking to world-class, specialised engineers you are limited to where these people can hired from.

Europeans look to be exempted if they are on a list of exempted countries. But its not an extensive list, South Korea is missing, so is Israel. And India, with whom Australia has a $20 million space collaboration, is not on the list of countries where deep tech’s can hire.

The second criminal offence is for the “supply of DSGL goods and technology, that were previously exported or supplied from Australia, from one foreign country to another foreign country, or to a foreign person within the same foreign country.”

What this means is that local company is now responsible for the supply chain – including whether a ‘foreign person’ has access to the technology in that foreign country (except where the export goes to an AUKUS partner).

This is basically ITAR, but as copied and pasted by our own Defence people and applied to a far broader set of dual-use technology.

This will make sales to international markets other than the US and UK much more difficult – not just for defence sales, but for the technology captured by the DSGL but that is being put to civilian commercial use.

The third criminal offence is for the supply of DSGL services.

The immediate concern for a dual-use tech company in Australia – it could be from anything from quantum to satellites to launch to robotics or remote automation – is whether or not they would need to get rid of non-AUKUS citizens or permanent residents who work on the technology.

Because the proposed defence control regime turns the treatment of a ‘foreign person’ on its head.

Up until this new draft legislation was posted, effectively anyone who was eligible for an Australian government-issued work visa was considered ‘Australian’ for the purposes of export controls.

And so, if you are a deep tech company and you have recruited leading talent in your world-class startup from some EU countries, or South Korea, or India – you may now be obliged to gain an ‘export’ clearance to keep that expert in your company.

There have historically been carveouts to exempt transfers to employees, but how or whether these will persist with the new definition of foreign transfers remains to be determined.

University researchers and university collaborations may also be caught up by this legislation. This is potentially a genuine problem.

The immediate reaction from Australian deep tech companies has been horror. This is especially the case where a dual-use company produces world-leading technology that currently sits outside of ITAR restrictions (that is, the tech has been developed completely independent of the US defence tech and is therefore not captured by US ITAR regulation).

Now that our own Defence establishment has cut and pasted US ITAR-like regulation and applied it to our own defence exports, there is no advantage anymore to having a product or service that is not ITAR-tainted. And now there is a disadvantage that Australia has uniquely applied this regime not just to weapons, but to every item on a 380+ page list of dual-use tech.

The genuine concern is that the draft legislation means they may have to start sacking the world class engineers that have come to work with their company in Australia. And if nothing else, they are suddenly trying to export under a more onerous regime than any of their ‘competitor’ nations.

For the company, this would effective be an end-of-life decision. They need those engineers to be successful.

An alternative for at least one of these companies would be to shift its domicile to the United States – to become a US company.

This would immediately give that company access to the US talent pool, but also better access to US government contracts (and quite likely better access to potential Australian defence contracts also). It would mean that standard dual-use tech is no longer subject to the same onerous ITAR-like controls.

The shocking thing about this draft legislation – I mean in addition to the one-week consultation period – is that we have been here before.

Who is looking after the interests of the Australian industry in this proposal?

The Department of Defence has previously sought to impose criminal penalties in a US-centric regulatory framework in legislation in 2012, which also sought to extend coverage of export controls from tangibles to intangibles, which swept up research work in areas that had both defence and non-defence use-cases.

There was huge push-back from the research community to these Defence proposals and from emerging dual use tech interests. And while the legislation was passed, it came with amendments and a parliamentary inquiry.

The amendment led to a review conducted in 2018 by Dr Vivienne Thom, who was critical at the time of Defence regulatory overreach, and also for not adequately consulting with industry on its regulatory impact statement.

And so here we are again with an export control regime that appears stricter across a broader range of technologies than the US controls, and with just days allowed for industry feedback.

Arriving unannounced, it does not include the kind of explanatory notes that would signal that Defence has engaged with and recognised the concerns of Australia’s dual-use deep tech companies.

Australian industry is rightly worried.

Do you know more? Contact James Riley via Email.

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