The incoming European Commission president, Ursula von der Leyen, will need to work with Washington to defuse a quietly simmering trans-Atlantic defense cooperation issue that, if left unsettled, could do more long-term damage to the NATO alliance than U.S. President Donald Trump’s divisive tweets.

The United States for years has sought to stimulate increased European defense spending while minimizing wasteful duplication caused by Europe’s fragmented defense industry. Europe has finally begun to deliver: Defense spending is up significantly, and the European Union has created several programs to strengthen its defense industries. But in the process, the EU has created a trans-Atlantic problem. These advances in Europe could come at the expense of non-EU defense industries, especially in the U.S.

The European Defence Fund, or EDF, established in 2017, is designed to support the cooperative research and development efforts of European defense industries, especially small and mid-sized firms. Three eligible companies from at least three EU countries need to apply in a coordinated fashion to receive project research and development funding, which can be up to a 100 percent grant for the research phase. Plans call for spending about $15 billion between 2021 and 2027 to strengthen Europe’s defense R&D and stimulate innovation. Model projects include the Eurodrone and ground-based precision strike weapons.

A second related EU program, Permanent Structured Cooperation, or PESCO, also inaugurated in 2017, focuses more on efforts to foster defense cooperation among subsets of European states. Initially envisioned in the 2009 Lisbon Treaty, PESCO is an effort to develop a more comprehensive European defense consistent with EU’s common foreign and security policy needs. Thus far, 25 of 28 EU nations have signed up, with 34 modest cooperative projects agreed to by the European Council.

The EU estimates that the inefficiency caused by the lack of adequate defense cooperation costs its members between $25 billion and $100 billion annually. These new EU programs, designed to pool and share scarce defense resources, are intended to help address that problem. But the exclusivity of these approaches favor the defense industries of EU members, and the hostile Trump administration rhetoric toward the EU is only supercharging this controversy.

President Trump’s negative attitude toward NATO and European leaders has undercut European confidence in American trans-Atlantic leadership and strengthened a call in some European capitals for European “strategic autonomy.” Part of this autonomy is developing a more capable and independent European military supported by a stronger European defense industry. A stronger European military capability is a goal shared on both sides of the Atlantic, but not at the expense of defense cooperation. While European leaders understand that they are probably decades away from real, strategic autonomy and military independence, they are shaping the EDF and PESCO approaches to protect European defense industry by being fairly exclusive of U.S. or other non-EU defense industries.

This has U.S. defense officials worried. A May 2020 letter to the EU from two senior U.S. officials stated their “deep concern” about the programs’ regulations. While current EDF and PESCO programs are small, U.S. officials are worried they will set precedents and will be a model for more ambitious European defense cooperation in the future. They fear not only that U.S. industry will be cut out, but that two separate defense industry tracks will be established that will undercut NATO interoperability and promote further duplication. Some U.S. officials have threatened U.S. retaliation unless changes are made.

EU officials respond that these criticisms are excessive. They note that some American defense firms established in European countries will be eligible, that there is nothing comparable to the “Buy American Act” in Europe, that plenty of trans-Atlantic cooperative projects can take place outside of these two EU programs, that the PESCO projects will be guided by both EU and NATO requirements, and that over 80 percent of European international defense contracts go to U.S. firms anyway. They also note that a deterrent to U.S.-EU defense cooperation is that U.S. arms transfer control regulations create potential American restrictions on the sale to third countries of any U.S.-EU cooperative weapons systems that contain U.S. technology.

NATO Secretary General Jens Stoltenberg, who seems caught in the middle, has supported both EDF and PESCO, so long as the results fill NATO capability gaps and do not lead to further duplication.

Flexibility will be needed on both sides of the Atlantic to defuse this issue before it becomes too difficult to manage. Some opportunities for third-country participation will be needed.

Possible approaches to level the playing field include focusing on modifying PESCO, which is still under development in the EU. One suggestion is to create a “white list” of NATO nations not in the EU (such as the U.S., Canada, Norway, post-Brexit United Kingdom and Turkey) that might be invited to participate in selected PESCO projects on a case-by-case basis. This would at least set a precedent that PESCO does not completely exclude third countries. And it would strengthen EU-NATO defense links.

Additionally, formal procedures might be established for closer cooperation between the PESCO project selection process and NATO’s defense planning process. This will help avoid duplication and identify at NATO those areas where NATO nations outside the EU could cooperate on PESCO projects,

The U.S. might also consider amending its arms export control legislation to waive the third-country transfer review requirement for the export of U.S.-PESCO joint projects if the sale would be made to a country to which the U.S. would have made a similar sale.

EU internal negotiations on EDF are finished, and changes will be hard to make. Plus, EDF provides R&D funding grants that use European financial resources. While some $118 million in U.S. Defense Advanced Research Projects Agency funds go to European firms, that is about 3 percent of DARPA’s budget. So the U.S. might ask for some modest reciprocity from the EDF. But more constructively, DARPA and the EDF might co-fund R&D for joint U.S.-EU projects.

The United States has much to gain from a strong European defense industry. Europe has much to gain from cooperation with the U.S. defense industry. All NATO allies need to stimulate defense innovation to compete effectively with Russia and China. Both sides of the Atlantic have much to lose if this issue further disrupts NATO’s already shaky political equilibrium. Hopefully von der Leyen’s experience as a former German defense minister will help her to understand the urgency and to find a solution to this problem.

Hans Binnendijk is a distinguished fellow at the Atlantic Council and formerly served as the senior director for defense policy on the U.S. National Security Council. Jim Townsend is a senior fellow at the Center for a New American Security and formerly served as deputy assistant secretary of defense for European and NATO policy.

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