Chapter 2Key issues
2.1Australia needs a robust protective security system able to keep pace with a deteriorating global strategic environment.
2.2Australia’s export control system is a central facet of ensuring this security. At the same time, it is ‘a permissive system designed to permit the responsible transfer of controlled goods and technology’. The reforms introduced by the Defence Trade Controls Amendment Bill 2023 would not alter this underlying principle. Their intent is to implement Australia’s commitments under the AUKUS agreement and realise the potential for greater collaboration. The bill would achieve this in two ways:
It [the bill] further strengthens Australia’s already robust export control framework by enhancing the protections around the supply of controlled goods and technology within and outside of Australia. It also supports the creation of an export licence-free environment between AUKUS partners, unlocking defence trade, innovation and collaboration. Achieving these objectives through the DTC Bill will benefit the Australian economy and deliver regulatory relief for Australian industry, higher education and research sectors.
2.3There are two main themes which capture concerns raised in submissions: shortness in time to consider the implications of what is a complex bill and that certain proposed measures have the potential to restrict international research collaboration.
2.4While concerns were articulated, the committee also noted considerable support for the bill in principle and recognition of the benefits amendments to the Defence Trade Controls Act (DTC Act) would bring:
The removal of licensing timeframes and barriers will provide the Australian Defence Force with expedited access to US technical data and services, resulting in greater access to advanced technologies, better data to assess US-based technology options, and potentially shortened program delivery schedules.
Reduced barriers for technical and services exchange to existing programs for upgrades or adjacent products traditionally requiring additional licensing.
Greater opportunities for technical solution sharing across the AUKUS industrial base.
Increased opportunities for Australian industry involvement in the AUKUS supply chain.
Increased access to technical data for Australian citizen employees who hold citizenship(s) or permanent residency in non-AUKUS countries, enabling access to AUKUS data for a larger workforce to support Defence work in Australia.
2.5The test for the bill is whether it strikes the optimal balance between national security and international trade and research collaboration. Viewed in this light, concerns voiced by stakeholders are largely centred on perceived unintended consequences, such as low-risk research and industry disciplines being captured by the proposed measures.
Exemptions
2.6The bill sets out a number of exemptions which would apply to new permit requirements, including for:
supplies which are covered by ‘the AUKUS exception’ and meet the relevant supply rules;
supplies by an entity to its employee/officer who is a citizen or permanent resident of a state listed in the Foreign Country List;
supplies made in compliance with terms set out by the Australia-United States Defence Trade Cooperation Treaty; and
supplies to a person who holds an appropriate security clearance.
2.7The Committee noted calls for key exemptions safeguarding global collaborations and research capability to be enshrined in legislation, instead of being relegated to supplementary regulations. Stakeholders added that regulations should reflect the need to safeguard national security without stymying Australia’s research ability and should be developed in consultation with research and industry sectors.
2.8The definition of fundamental research was brought up as a key example by many stakeholders. Their position is set out below.
Definition of fundamental research
2.9The Committee noted some concern among the research sector about the current definition of ‘basic scientific research’ being replaced by ‘fundamental research’ in the DSGL with a much narrower disciplinary scope. This, it was argued, runs the risk of exposing researchers who are not in science and engineering fields to penalties if not covered by listed exemptions.
2.10The Australian Academy of Technological Sciences and Engineering (ATSE) warned that the bill could have a detrimental effect on collaborative research:
Where researchers and institutions are concerned about criminal sanctions, they are likely to steer clear altogether rather than take the risk, and this will leave Australia out of crucial international research efforts.
2.11The Queensland University of Technology (QUT) cited the example of artificial intelligence (AI) as an interdisciplinary field which could potentially face problems under the proposed legislation:
While Artificial Intelligence (AI) is not currently on the DSGL, the rise of large language models of AI – dependent to a significant extent on the research of linguists and other scholars from the humanities, arts and social sciences (HASS) – provides a topical example of an emerging technology that utilises fundamental research from outside science and engineering.
2.12In this example, linguists involved in the development of AI technology would not be covered by the exception because fundamental research is defined only for science and engineering.
2.13Other submitters sought more clarity around the definition too. The Group of Eight Australia, representing leading research-intensive universities, highlighted the need for more information on how the definition would be applied in practice and called the exemption for ‘fundamental research’:
[T]he single most important factor that will impact the ongoing effectiveness and operation of Australia’s research and higher education sector, and, in turn, our capacity to advance the outcomes of the AUKUS partnership.
2.14A submission from the University of Melbourne noted that the United States experience suggests that successful export control regulation is dependent on applying a broadly defined fundamental research exemption in order to ‘remove unnecessary regulation on activities that do not present significant national security risks.’
2.15The Committee noted broad acknowledgement that Defence is consulting with the sector, and that the ‘fundamental research’ definition is likely to be simplified so that it applies to a broader range of research:
There is a lot of goodwill from the department in recognising the views and legitimate needs of the research sector, and they've been expressed with a fair bit of clarity, and the department's been very responsive to that. I think we're going to land on a definition of fundamental research that, unlike the definition that is currently in the bill, does not specify that fundamental research is research within science and engineering.
2.16The Committee also noted the research sector’s strong preference for ‘fundamental research’ being defined in legislation, not by regulations or in the DSGL, in order to provide certainty and confidence for forward planning:
If it's defined in the act, it gives people certainty that they can embark on multiyear research programs knowing that, if there's an attempt to change the 'fundamental research' definition, it will come before the parliament and they will have an opportunity to say, 'Hang on a minute. I've been doing this in good faith, and now you're going to define me out of the exception,' rather than it being done at the stroke of a pen and coming into force as soon as a disallowable instrument is registered on the Federal Register of Legislation. The inclusion of the 'fundamental research' definition in the act will be read by the research community as an act of good faith by the parliament and by the Department of Defence, and will ensure that we all know where we stand when we are embarking on what are very frequently multiyear research programs that include, obviously, recruitment. You need to know where you stand before you begin these things.
2.17Ms Anna-Maria Arabia, Chief Executive of the Australian Academy of Science, stated that it was ‘critical that the research sector have clarity on what and when fundamental research is considered as such.’
2.18ATSE concurred, pointing out that leaving the fundamental research out of legislation, to be dealt with by regulation instead, risks creating instability for the research sector:
The fundamental research exemption must be put in place as part of the bill. Leaving this to be dealt with via regulation creates a risk of future governments unduly restricting the kinds of research that can be done. The definition must be both compatible with the US definition, obviously, to enable AUKUS implementation and suitable for the Australian research sector.
2.19ATSE added that the government should provide the science, technology, engineering and mathematics sectors with the resources and education required to understand and comply with the additional obligations the bill would place them under.
2.20The University of Melbourne noted that the current definition is open to interpretation and encouraged the application of a definition which leaves minimal room for different interpretations.
2.21The University of Sydney also stressed the importance of the wording of the definition being precise in the interest of clarity for the university sector.
Definition of ‘Australian person’
2.22The Committee heard evidence on potential sensitivities around dual-national workforces. Representatives of Leidos Australia, for example, identified some ambiguity about what the definition might be:
On the definition of 'Australian person' versus 'foreign person', there can be a couple of very broad ways that you'd read that, particularly when it comes to, for example, Australian permanent resident as part of the definition of an Australian person. How you read that is open to interpretation, but there is a potential big gap within that definition as any Australian permanent resident, as long as they fall into the other pieces, could fulfil the guidelines within provision of this.
2.23This may not align with the approach taken by the United States concerning its own defence trade controls and exemptions for foreign citizens of states subject to sanction regardless of their residency status. The Committee is of the view that this is worth further consideration by the Australian Government.
Foreign Country List
2.24Developing leading edge technology often requires international expertise and collaboration. This requirement for international collaboration interacts with policy driven by realising the potential of AUKUS.
2.25As succinctly put by the Australian Technology Network of Universities:
There are also some important practical implications to the Bill in realising the goals of AUKUS. The goals are heavily reliant on STEM skills and research, but our ability to do this kind of work is currently highly dependent on a talent pipeline outside of the AUKUS nations.
2.26Such collaboration is in the national interest:
[O]ne of the things that we have to recognise is that Australians are excellent international collaborators, and we need to be. We are a small country. We have 0.3 per cent of the world's population, as we constantly remind ourselves. But we produce four per cent of the global science, and a lot of that is with international collaborators around the world—not just the ones on the list but around the world. Too often I think we forget that Australia needs to be internationally engaged. In the national interest, it has to be internationally engaged, and we need to collaborate to get access to knowledge that we need to solve unique Australian problems. Most of the knowledge is generated elsewhere. The only way we get to use it, to see it and to do it is to participate in it and to help make the decisions that take us in the directions we want to go.
2.27While submitters for the most part noted that the bill would benefit industry collaboration with the United States and the United Kingdom, the Foreign Country List as specified limits access to collaboration with countries not on that list. As put by Professor Ian Chubb:
While the proposed new legislation does result in some lightening of the red tape regarding science conducted with colleagues in the US and the UK, potentially, it also raises the bar for the rest of the world, including long-term collaborators in Europe, Southeast Asia, Oceania and the Americas.
2.28The University of Melbourne stated:
The current iteration of the Bill would perversely make it harder for a non-FCL [Foreign Country List] individual to collaborate with an Australian research organisation if the individual is in Australia than if they are in the US or UK. In the research sector where global mobility is essential, such a disadvantage could discourage global talent from working in Australia and create a push factor for them to leave. As a hypothetical example, when an Australian university seeks collaboration with a research team comprising a South Korean (non-FCL) national, the current Bill may result in a disincentive to collaborate with an Australian research team compared with a US research team.
2.29The Group of Eight urged the Government to ensure that:
Australia’s new export controls framework – in seeking to ensure an export-licence free environment for the three AUKUS countries – is not more restrictive of international collaborations outside the AUKUS partnership than those that apply to counterpart organisations and researchers in the US and UK.
2.30The Group of Eight also called on the Government to urgently review the Foreign Country List with a view to recognising additional states which serve Australia’s strategic interests.
2.31The University of Sydney was similarly concerned with the comprehensiveness of the list and encouraged review of whether the list could be expanded to include other states of strategic importance, such as India, Singapore, South Korea, Indonesia and Malaysia.
2.32Industry representatives echoed calls for the list to be expanded.
2.33Defence noted that the bill is not intended to stand in the way of international collaboration:
The DTC Bill is not intended to prevent foreign nationals from working with Australia on DSGL goods or technologies. It is also not intended to prevent foreign students or academics from engaging with Australian academic institutions.
2.34The Committee further notes acknowledgement from the research sector, as a result of engagement with Defence, that it has agreed to review the Foreign Country List, a decision welcomed by the Committee.
Commencement of penalties for non-compliance
2.35There is potential for the bill to increase the administrative burden on captured entities to ensure compliance, particularly in the transition phase. The Committee noted calls for clarity on the commencement date for penalties for non-compliance to be included in legislation. Raytheon Australia asked for a clear timeline and transition period allowing companies to ensure they are compliant:
Any changes to the definition of controlled goods and technology should be communicated clearly and in a timely manner to allow companies to adjust their business practices accordingly. This could include a 12-month period to allow existing programs to become compliant.
2.36The Committee agrees that entities soon to be captured by the new legislation require clarification on the date of commencement of criminal penalties for non-compliance.
Transition assistance
2.37Feedback from industry suggests concerns about the potential impact on trade and innovation as companies may adopt an increasingly risk-averse approach.
2.38The Australian Strategic Policy Institute (ASPI) stated that the opportunities presented by the bill and related reforms may lead to a dramatic increase in the number of licences required, including by small enterprises which have never dealt with the defence network but will now require licences. This could place a burden on businesses as they seek ongoing compliance with the new legislative environment.
2.39While ASPI supports the reforms and views them as necessary, the institute stressed the importance of understanding and preparing for consequences in order to protect Australian industry interests:
We need to make sure that we are really thinking through the consequences of what we're signing up to in some of these things. It is important to protect technology. We are really behind the reforms. We think they're incredibly important, and much greater alignment between our systems is important, but our industry is at a very delicate point. It is not as mature or experienced as its UK and, definitely, US counterparts. I think that, if we get some of these things wrong, we are going to risk having our industry steamrolled by those far more experienced, bigger and better resourced players in the US and UK markets. So it's really important.
2.40Submitters from other sectors, such as the University of Sydney, highlighted the need for transition arrangements and potential grandfathering to be put in place for staff and higher degree research students who work in areas involving DSGL technology but are not covered by exemptions.
2.41Ms Kylie Walker, Chief Executive Officer of the Australian Academy of Technological Sciences and Engineering, agreed that transitional arrangements should be put in place in order to ensure that research underway doesn’t grind to a halt, suggesting that a two-year grandfathering system would be an appropriate starting point.
2.42A grandfathering mechanism would work to permit ongoing exports in place under existing contractual arrangements until they are complete. Electro Optic Systems Holdings Limited suggested:
EOS also recommends adopting grandfathering provisions that exempt from the DTC tenders the Industry has provided to potential customers since 1 January 2023 and transactions resulting from joint ventures or teaming agreements with suppliers and customers that are in place as at the commencement of the DTCA.
2.43The Committee understands that putting in place clear transition arrangements and guidance would provide stakeholders with the certainty required for current projects to be completed without ‘reputational or legal damages’.
2.44It is important to note, however, that communication will be key for both the research and industry sectors to understand exactly what the proposed legislation means and the effects it may have. As noted by representatives of ASPI, a considerable degree of confusion and potentially misunderstanding currently exist:
[W]hat we've actually come up against is great levels of confusion and a lack of knowledge, which doesn't align necessarily with the conversations we've had with Defence itself. But it seems quite clear about some of this in the communication. So, again, my point would be that there is a huge need for a communication push to clarify for academia what this means and for industry what this means, because there are currently inaccurate misperceptions around important elements of it. It is critical that we don't have a conversation around concerns that don't exist and that we do have an important conversation around legitimate concerns that do exist. It's important that we get this right. …I'm not 100 per cent convinced that many of the actors that think they come under some of the more serious implications and more serious restrictions or requirements of this actually do. I think they need to test whether or not they are going to be subject to it in the way that they are. I think in some cases they are wrong.
2.45This situation, the Committee heard, may benefit from direct engagement between concerned stakeholders and Defence:
I think there are some particular actors or institutions that believe they come under some of the more restrictive elements of this legislation, and, particularly in universities, they are probably academics who don't quite understand how this actually applies to them in practice. It's not for me to advise them; it's for them to try and apply that and for Defence to help them.
2.46The Committee was reassured by evidence provided by Defence about how stakeholder feedback is being incorporated into the policy process:
Essentially, our engagement with industry on this started about the middle of last year. We've had multiple engagements since then prior to the legislation being introduced into the parliament, and then obviously there was the two-week period prior to that. Mrs Wright and her team led that. I can't remember the exact number off the top of my head, but it was in the dozens and dozens of organisations, both peak bodies and individual companies that we engage with. With some of those, we were able to go quite deep into suggestions around what the legislation would look like
2.47The Department also described two working groups, one with a focus on industry and investment, the other with a focus on research and the academic community. The stakeholder engagement process through these groups is still ongoing:
Those working groups are designed to do two things. One is to engage now and help us co-design and shape legislation and regulations. Importantly, whenever you're looking at a regulatory system, not everything can be in the legislation. So we need to co-design, with industry and academia research organisations, what those regulations will mean. We do not want to create unintended consequences by omitting or including something that is just unworkable in the context of industry or academia. So those working groups have been set up to do that.
2.48Defence explained that expansion of the outreach programme is currently underway and designed to ‘educate and upskill’ stakeholders about new controls and exemptions before these come into effect. Work currently underway includes:
working with the Working Groups to co-design online learning modules that stakeholders can use to support decision making in relation to permit requirements and education and guidance materials;
an increase in outreach events each year, including workshops and roadshows – including in remote locations; and
the development of case studies to support stakeholders to self-assess the requirement for a permit.
2.49This suite of education and guidance materials, the Committee understands, will support stakeholders with decision-making in relation to permits and compliance.
DSGL definitions
2.50The Committee noted evidence on dual use definitions being potentially unclear. ASPI pointed out that United States export control regulations contain a clear distinction between goods and services which are military-specific, and goods and services which are dual-use:
Australian export control law contains no such distinction. Items controlled in Part 1 and Part 2 of the DSGL require businesses to engage in similar assessment and approval processes with only minor Part 2 exceptions for transfer of information and services. Substantial efforts at reform in the US have focused on moving goods and services requiring lower levels of scrutiny from ITAR to EAR and loosening the latter set of rules to align more closely with national security requirements. Australian businesses currently working with EAR-controlled items risk being abruptly drawn back into an ITAR-like environment. One example is the EAR de minimis rules. Australian law as proposed contains no such exception. The proposed DTC amendments should therefore distinguish more clearly between military-specific and dual-use goods and contain explicit mechanisms for treating the latter in a manner comparable to the US’s EAR.
2.51Submissions from industry, such as AiGroup, warned of a potential impact the proposed measures could have on non-traditional defence companies, which may not be aware that their products or technologies could be considered dual use under definitions in new legislation. AiGroup called for additional support for small and medium enterprises, including better guidance, resources and processes:
(a)Clear and Comprehensive Guidelines: The government should provide clear and comprehensive guidelines explaining the specific changes introduced by the amendment.
(b)Accessible and Timely Information: Regular and timely updates regarding the implementation of the changes, including any amendments or additional clarifications.
(c)Training and Educational Programs: The government could offer training and educational programs to assist businesses in understanding the nuances of the new regulations. These should be specifically targeted at businesses in the broader defence supply chain.
(d)Online Resources and Tools: Providing online resources and tools, such as interactive compliance checklists, FAQs, and decision trees, would assist members in self-assessment and compliance planning.
2.52With respect to this concern, the Committee notes evidence supplied by Defence on the net effect of the proposed and related measures:
In support of establishing a licence-free environment, the DTC Bill also provides a national exemption to the UK and the US from Australia’s export control permit requirements under the DTC Act. Defence assesses over 3,000 applications each year to export or supply DSGL goods and technology, with around 900 of these related to an export or supply to the UK or US. The national exemptions would mean almost a third of the total applications received would no longer be required. This is a practical step towards a seamless trilateral export environment among and between Australia, the UK and the US, which will revolutionise opportunities for Australian defence industry, and the broader economy. Prior to introduction of the DTC Bill, Defence undertook an Impact Analysis to ensure that the Australian Government had the necessary evidence to understand the costs and benefits of new policy from all angles. The Office of Impact Analysis assessed the Impact Analysis and rated it as ‘Good Practice’. The Impact Analysis demonstrated these reforms would deliver $614 million in value over 10 years, discounted to today’s dollar terms. This includes a net decrease in regulatory compliance costs for the Australian industry, higher education and research sectors dealing in DSGL controlled goods and technology.
2.53This flags a potential reduction in applications for permits. Nonetheless, the Government needs to ensure that Defence Export Controls (DEC), which regulates the export and supply of military and dual-use goods and technologies, is adequately resourced to meet demand. The Committee notes that Defence recognises that the required support will need to be provided:
Defence recognises the need to support Defence Export Controls so it is prepared to administer the new regulations efficiently and effectively, including communicating assessment and compliance requirements associated with the new offence provisions and an increase in outreach.
Committee view
2.54It is critical for Australia’s defence control system to protect national security interests against the backdrop of unprecedentedly complex global challenges, while at the same time supporting the international collaboration that underpins trade and research. While concerns about the unintended consequences this bill might have in practice exist, there is also, broadly, a pragmatic acceptance of the principles behind the proposed reforms.
2.55It is the Committee’s view that the proposed changes herald significant benefits for Australia through better alignment with the United States and the United Kingdom under the auspices of AUKUS. These include greater industry agility and opportunities for industry and individuals exchanging regulated articles and services with two of our closest strategic partners through a seamless industrial base.
2.56That notwithstanding, the Committee accepts that there is a degree of anxiety among some regarding the potential effects of the bill, anxiety that is likely to be relieved through improved communication by the Government about its own legislative and regulatory intent. The Committee is similarly of the view that greater clarity concerning dual use definitions is required by industry and encourages Defence to ensure that the necessary guidance on the breadth of what will be covered is provided.
2.57The Committee concurs that certainty about the definition of ‘fundamental research’ is important and is persuaded by arguments for the exemption to be defined in legislation rather than by subsequent regulations. The latter are subject to change more readily, which is a less than ideal circumstance for stakeholders whose work often benefits from being supported by long term legislative and regulatory certainty. The Committee notes that the definition itself is still being explored and that Defence is in the process of consulting with the sector. The Committee welcomes this ongoing collaborative approach.
2.58The Committee recognises that Defence is committed to a process of ongoing engagement with industry and research sector stakeholders in order to address the range of issues identified. The Committee is satisfied that the working groups established for dialogue are serving their intended purpose and will contribute to settling remaining points of confusion or contention.
2.59The Committee further recognises that while the intention of the legislation is to enhance our defence export control framework and align it with that of the United States, Australia’s regime should, to the greatest extent possible within this aim, remain fit for and tailored to Australia’s unique circumstances. The Committee is reassured by Defence evidence in this regard.
2.60Overall, the Committee is satisfied that the proposed legislation enjoys broad in-principle support. The Committee is also satisfied that stakeholders in government, industry and academia are working together productively. This pragmatic approach from all parties will help secure an optimal balance between protecting Australia’s national security and fostering international collaboration.
2.61Finally, the Committee notes the evidence by Defence regarding the timing of the bill as it relates to the certification requirements under the United States NDAA passed in December 2023 (which occurred after the bill was referred to the Committee by the Senate). Specifically, the Committee acknowledges the comments by Mr Jeffrey and Ms Wright that, while there is no dictated timeline by the United States to pass this bill, the first deadline for certification to the United States Congress under the NDAA is rapidly approaching on 20 April 2024—making expeditious passage by the Parliament desirable.
2.62As this report acknowledges, the Committee understands the criticality of this bill for progressing the AUKUS partnership and the significant benefits that will bring to Australia. The Committee has therefore sought to complete its work well ahead of its scheduled reporting date of 30 April 2024 to ensure due consideration by Senate can be given to the issues canvassed in this report and the Committee’s recommendations ahead of this date.
2.63The Committee recommends that the definition of ‘fundamental research’, whatever that might be, be placed in the bill itself, rather than in subsequent regulatory instruments and that further consideration be given to including other exemptions in the primary legislation where appropriate.
2.64The Committee recommends that further consideration be given to the definition of ‘Australian persons’ in the legislation and its consistency with the United States’ own defence trade controls concerning exemptions for foreign citizens of states subject to sanction regardless of their residency status.
2.65The Committee recommends that the Department of Defence increase the communication with, and education provided to, those who may be subject to the new legislative environment so as to allay their concerns about its impact upon them.
2.66The Committee recommends that the Government provide further assurances of its commitment to a genuine co-design process with industry concerning the bill and subsequent regulatory instruments through the Department of Defence’s established working groups.
2.67The Committee agrees that the working groups established by the Department of Defence for consultation with industry would benefit from expansion to include additional representation from relevant Australian defence small and medium enterprises and recommends that such expansion occur.
2.68The Committee recommends a review of the implementation of the legislation to be conducted by a relevant committee of the Parliament within three years of its commencement.
2.69The Committee recommends that the ‘one stop shop for advice’ mentioned by the Department of Defence in their evidence be adequately resourced and appropriately publicised to those who may be concerned about the applicability of this bill to their organisation.
2.70Noting that the Department of Defence stated that they anticipate a net reduction in applications for permits as a result of the passage of this bill, the Committee nonetheless recommends that Defence Export Controls be adequately resourced to undertake its work as efficiently as possible.
2.71The Committee recommends that, following due consideration of the above recommendations by the Government, the bill be passed by the Senate without delay.
Senator Raff Ciccone
Chair
Labor Senator for Victoria