Three things to note in the UK’s new Defence Industrial Strategy
Summer is usually quiet for members of the United Kingdom’s defense and national security community, but it is clear that no one has been relaxing this year, with one bumper policy announcement followed by another. In May, the British government secured a partnership with the European Union that creates a framework for a new era of security cooperation, filling a gap left by Brexit. Then the long-awaited Strategic Defence Review was published in early June, followed by a new National Security Strategy, which pulled together other big pieces of work including a Strategic Security Review, AUKUS Review, and Resilience Action Plan—to name a few. While all this has been going on, the Ministry of Defence (MOD) quietly undertook its biggest structural reform program in at least two decades. Earlier this month, the United Kingdom published its new Defence Industrial Strategy subtitled “Defence is an Engine for Growth.”
The strategy is a wide-ranging document covering everything from developing the skills needed to build and maintain nuclear submarines to reforming the way government supports defense exports. Three elements should be of particular interest to the transatlantic defense industrial base.
Recognition of defense as a key industrial sector
The modern history of industrial strategy in the United Kingdom has seen active state intervention in the economy come in and out of political favor. In recent years, successive governments have been more comfortable with the need to nurture the domestic defense industrial base, including through the 2021 Defence and Security Industrial Strategy (DSIS). This strategy broke with several long-held principles of British defense procurement, most notably the commitment to “international competition by default,” which had stood for more than a decade. However, it is difficult to point to specific outcomes of the changes, perhaps in part because while DSIS recognized the defense industrial base as a critical enabler of defense and national security, it was much less clear about the value of the defense industrial base to the wider economy.
That is certainly not the case for the new Defence Industrial Strategy, which is effectively a sector-specific subcomponent of the broader national Industrial Strategy. Defense is now listed as a growth sector, and the national security strategy even talks of a “defense dividend.” By situating the defense industry firmly within the wider industrial base, the British government has elevated the profile of a sector that employs 272,000 people across the country. In practical terms, it will give access to—and, perhaps more importantly, influence over—whole-of-government initiatives such as skills development programs, infrastructure investment, and regulatory reform. Additionally, almost 70 percent of those 272,000 jobs are based outside of the relatively affluent areas of southeast England, making the industry an obvious candidate to benefit from programs to incentivize regional investment. For example, the Defence Growth Deals promised in the strategy, if implemented well, could allow the industry to leverage hundreds of millions of pounds of government funding, take advantage of favorable tax and customs duties in certain Freeport locations, and perhaps even reduce the burden of the United Kingdom’s famously unpredictable planning process.
There are benefits too for those more interested in cold, hard cash, with promises that the National Wealth Fund will soon support capital-intensive projects (subject to the necessary legislation clearing Parliament) and that the British Business Bank will provide more support for defense companies looking to scale up. Finally, the British government is using its financial muscle to help the defense industry export. Unlike its American and Canadian cousins, the United Kingdom’s export credit agency (UKEF) can already support defense projects. Under new rules, UKEF will see its lending capacity increased to ten billion pounds, with three billion pounds of that specifically ring-fenced for defense, providing a significant new source of low-cost debt financing to help soften the overall cost of investment in the sector.
Focus on UK-based businesses
Naturally, any interventionist industrial strategy runs the risk of encouraging narrow, national protectionism. But, in this case, the repeated references in the Defence Industrial Strategy to “UK-based industry” rather than the simpler “UK industry” formulation is telling. Yes, there are clearly defense technology areas where the United Kingdom intends to compete on the global stage, but the strategy takes a pragmatic approach that recognizes the inherently global nature of the industry.
This is especially important in the context of the long and mutually beneficial history of collaboration between British and US defense industries. Of the 272,000 jobs mentioned above, more than 20,000 are directly working for US-owned companies, with another 94,000 jobs indirectly supported in the supply chain. That constitutes a significant contribution to the UK economy by any standard, even before considering the technological advances achieved through collaborative research and development, the security benefits of increased supply chain resilience, and increased export opportunities through reciprocal market access.
Despite this, some US-owned defense contractors have privately expressed concern that the strategy’s commitment to developing an offset policy could roll back that record of collaboration. Many countries require foreign companies to invest directly or indirectly in their economies as a necessary component of competing for government defense contracts. The United Kingdom currently has no formal offset policy or enforcement mechanism, but the geopolitical climate has driven increased concern about the reliability of its defense supply chains. Last year, for example, the British government even purchased a semiconductor factory, the first such direct purchase of a private company by the MOD since it acquired Sheffield Forgemasters in 2021. Therefore, it is not surprising that a formal offset policy is being considered.
US-owned companies are right to be concerned that an overly prescriptive and inflexible offset strategy could be counterproductive. The US government regards offsets as market distorting, and critics of the approach argue that offsets encourage inflation and inefficiency. There is, however, little reason to believe that the United Kingdom will go down that road. By calling out Australia’s relatively flexible and pragmatic approach as the inspiration, and by openly acknowledging the risks involved, the United Kingdom has signaled that it intends to move carefully. Past evidence of previous UK offset-like policies also supports this conclusion, with some analysts suggesting that the current prevalence of US-owned defense companies in the UK market is, at least in part, a result of previous offset strategies.
Commitment to acquisition reform
Longtime followers of British defense acquisition reform will have good reason to be skeptical on this front, having seen multiple attempts try and fail in the past, but there is reason to believe this time will be different.
First, the government has committed itself to a segmented approach with ambitious timelines, with the period from initiation to contracting as short as three months for commercially available products. In doing so, the government has made an easy metric by which outsiders can measure success.
Second, the newly empowered national armaments director will take responsibility for all non-nuclear procurement in an end-to-end acquisition system running from investments in scientific research all the way up to end of lifecycle disposals of capital assets like aircraft carriers and jets. This new system reduces eight separate procurement budgets down to one, and it streamlines decision making, which will be essential to meet those speedy timelines noted above.
Third, and perhaps most important, the British people will demand it. Critics of British defense spending have long pointed to a relative lack of funding compared to domestic priorities like the National Health Service and other social benefit programs. Making defense a truly national endeavor, as the Strategic Defense Review aspires to, requires a clear and public argument for reprioritizing government spending. More than three and a half years on, polling shows that the Russian invasion of Ukraine still sharpens the mind in the United Kingdom much more acutely than in the United States. Given the clear and present threat on the continent, the British people might be willing to accept a reduction in social benefit programs to redirect resources to defense, but not if those resources are wasted on overly complicated and underperforming procurements.
Deborah Cheverton is a nonresident senior fellow in the Atlantic Council’s Forward Defense program within the Scowcroft Center for Strategy and Security and is a senior trade and investment adviser with the UK embassy. Before working in trade, she worked for the United Kingdom’s Ministry of Defence for fifteen years, working across a range of policy and delivery areas with a particular focus on science and technology policy, industrial strategy, capability development, and international collaboration.
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