PARIS ― Britain’s planned departure from the European Union could put pressure on missile-maker MBDA and will bar London from EU funds for weapons research and development, raising doubts over defense industrial cooperation with the U.K., according to a report from Ares, a network of European think tanks.

Ares published the report on Britain’s exit, titled “The Impact of Brexit on the European Armament Industry,” in the same week that Britain and the European Commission held a third round of high-level talks to negotiate London’s exodus.

The European Commission is due to fund arms research with a launch of the European Defence Research Programme and the demonstration stage of weapons with the European Defence Industrial Development Programme.

These two funds “could be more problematic for MBDA,” the report said. “British companies will in principle no longer benefit from Community credits outside the EU.”

MBDA in France and Italy could apply for EU funds, but the British unit would be excluded. “This would have a negative effect on the company’s integration process and could also cause strain within it,” the report said.

“This issue is particularly acute with regards to MBDA,” the report said, adding that exclusion would be extended to any future British cooperation in weapons, both at research and development stages.

That could lead potential industrial partners to “think twice” before working with Britain if that led to being rejected from EU funding, the report said.

The report highlighted the strong cross-English Channel ties in MBDA, with London and Paris ratifying the One Complex Weapons strategy in 2016 even after the U.K. referendum returned a vote in favor of leaving the EU.

The missile maker is “paradoxically … a convincing model of industrial consolidation in the field of European armament, designed to develop European industrial and defense capabilities ― but is primarily moved forward by France and the U.K.,” the report said.

“The U.K. is a major partner in several cooperative defense programs in Europe,” an MBDA spokesperson told Defense News. “It is in no one’s interest to rule out future cooperation.

“The aim is to maintain critical mass for the European defense industry, and Britain is a major contributor.

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“It is our view that when the time comes in the Brexit negotiations, the convergence mechanisms will be found and the suitable institutional framework will be adopted to allow defense companies of the future EU of 27 member states not only to work effectively with Britain but also set up new cooperative programs in the context of the EU’s defense initiatives.”

The European Commission, the executive arm of the EU, is keen to boost its involvement in defense and security.

Staying in the EU customs union is a major issue for the supply chain of MBDA and other companies working with partners on the European continent, said Nick Witney, senior research fellow at the think tank European Council for Foreign Relations.

“Britain has to stay in the customs union indefinitely, otherwise it will be impossible,” he said. “Otherwise the lorries will be at the customs office at Dover queuing all the way to London.”

“A climate of mutual trust” underpins the cooperation in weapons research and technology between Britain and France, which have a high-level working group meeting since 2006 and which have a project for an unmanned combat air system, the report said. French officials view “bilateral dialog” helped their drafting of the work program of the European Development Research Program.

“If Brexit is carried through, it will be missed,” the report said.

However, working with France should not be overrated, as the U.K. also pursues bilateral cooperation with other EU states, including Germany, Italy and Sweden, the report said.

Italy’s Leonardo Helicopter Division as well as its Airborne & Space Systems Division will encounter similar problems, with many of the activities of the latter based in Britain.

The U.K.’s cooperation in Europe, however, should not be overestimated compared to its research and technology cooperation with the U.S., which has always been favored over European partners, the report said.

The outlook for Britain is poor.

“In the medium term, Brexit has the potential significantly to disrupt and weaken U.K. defense,” the report said. The British government has accepted that the cost of import of defense equipment will sharply rise if the pound sterling stays weak in the long term. That will hit the Defence Ministry’s spending power and budget. Brexit will hurt British growth and weaken industrial output.

Much of the British defense industry, along with its manufacturing industry, is foreign-owned, the report said. Leonardo, Thales and Airbus invested heavily in the U.K. in the context of Britain’s EU membership.

The British government is drawing up a defense industrial strategy in the light of Brexit, a reversal of policy which has previously favored a market-led approach. The previous approach included buying U.S. weapons, which “led to some concern about the degree of dependence on the U.S. supply base,” the report said.

Devising a defense industrial strategy will be tough but Britain will be keen to maintain and, if possible, increase the level of foreign defense investment and employment, the report said. There will also be sharper appetite for cooperative projects to support the British defense industrial base. The U.K. is looking for partners in Japan, Australia and Turkey to cut reliance on the EU.

London is also looking for projects to boost ties with Berlin.

Defense cooperation for the U.K. is likely to be a way of keeping a key link to EU governments and also cuts the risk of other member states following the British path, the report said.

“We are leaving the EU but we are not turning our backs on Europe,” said British Prime Minister Theresa May, the report noted. The defense sector is a critical factor in underlining this point. Britain’s Ministry of Defence was in the “remain” camp, and British defense analysts see little benefit in Brexit, the report said.

“A year after the referendum, that is still the case, but it is now clearer that the defense sector overall, including the industrial part, will have a significant role in containing the damage from what voters chose on 23 June 2016,” the report said.

The authors of the Ares report came from the think tanks International Institute for Strategic Studies, Istituto Affari Internazionali, Institute for International and Strategic Affairs, and Royal United Services Institute.

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