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CHINA: An Arms Cornucopia? Europe Will Probably Lift its Embargo

The prospect of supplying the nation with the world's fifth-largest military budget is enough to make any European defense contractor take notice. Beijing's defense outlay has been growing by 10% to 12% a year for the past decade, to an estimated $151 billion.

by John Rossant with Dexter RobertsBusinessWeek
February 15th, 2005

When it comes to the balance of power in East Asia, American strategic planners have had one particular nightmare: If the Chinese military could acquire sophisticated defense hardware and military systems from the European Union, Beijing could get a substantial assist in a possible confrontation with Taiwan. So last December, when European leaders announced they would seek to end a 15-year ban on weapons sales to China, Washington was quick to voice its displeasure. Pentagon officials talked darkly about restricting European access to sensitive U.S. technology and slapping sanctions on European companies that sell weapons to China. ');  

The topic came up for discussion again during U.S. Secretary of State Condoleezza Rice's recent visit to Europe. Yet despite American entreaties, it is all but certain that the EU will lift the arms embargo on China, most likely at the European summit in Brussels in June. While Paris and Berlin are eager to repair frayed transatlantic relations, the Europeans do not want to be dictated to by Washington.

So are we about to witness an era in which billions of dollars' worth of European weapons flow into China's vast arsenals? The reality is more complex. Sure, the prospect of supplying the nation with the world's fifth-largest military budget is enough to make any European defense contractor take notice. Beijing's defense outlay has been growing by 10% to 12% a year for the past decade, to an estimated $151 billion, according to the Stockholm International Peace Research Institute, a defense industry think tank. "It's a big market, and it's getting bigger," says a senior executive of Italian aerospace group Finmeccanica. The door-knocking has already started. Charles Edelstenne, chief executive of French aerospace group Dassault, has been traveling to China again after spending 12 years on a blacklist for selling Mirage 2000s to Taiwan in the early '90s.

China has a substantial shopping list, from Mirage fighter jets to electronic warfare systems. Because of the embargo the country has been buying most of its weapons from Russia, with Israel winning deals on such items as highly sophisticated drones. Now, says Shi Yinhong, professor of international relations at Beijing's People's University, "China really wants to have another source for modernizing its military, especially [in preparation] for the possibility of military confrontation with Taiwan."

But are big European arms groups such as Franco-German EADS, French electronic-defense giant Thales Group, and Britain's BAE Systems willing to jeopardize their access to the biggest defense market of them all, the U.S, to drum up sales in China? Not likely. All of the European defense contractors want more business in the U.S., and they are starting to get it. Finmeccanica, for example, owns a big stake in copter maker AgustaWestland, which teamed up with Lockheed Martin (
LMT ) to land a $6.1 billion contract in late January to supply helicopters for the fleet that ferries the U.S. president. EADS is still angling for a major U.S. Air Force contract.

Europe's defense contractors have another reason to tread carefully -- they are leery of losing control of key technologies to China. "It's the technology they're after," says a Dassault director. To prevent sensitive items, such as communications systems, from falling into Chinese hands, the EU is working on a legally binding "code of conduct" for arms sales.

Europe also probably will establish some export controls on sensitive technology, which could mollify Washington. "We are trying to explain to the [U.S.] that this doesn't automatically mean we start selling as many weapons as we can to the Chinese," says a senior EU foreign policy official in Brussels. For the sake of U.S.-Europe relations, he'd better be right.

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