The 1987 missile treaty holding back America’s drone industry

September 30, 2013, 8:59 PM UTC

FORTUNE — The unmanned aerial systems space remains the fastest-growing segment of the global $700 billion aerospace and defense industry, but the potential high-tech job growth and $82 billion in economic impact associated with the burgeoning American UAS industry is already being somewhat blunted by a 1987 missile export ban created to stem the flow of nuclear missile technologies.

The Missile Technology Control Regime (MTCR) was designed to prevent the proliferation of technologies that could be used to deliver a long-range nuclear or chemical/biological strike, but its specific language also ensnares many large unmanned aerial systems in its prohibitive clauses — after all, what’s an aerial “drone” if not a cruise missile that comes back? That language, now largely codified in the U.S.’s own export regulations, makes it difficult for makers of large UAS — even those vehicles designed for civilian or scientific missions — to do business in with foreign customers while giving non-signatories like Israel and China an upper hand in the global marketplace for UAS technology.

“When the MTCR was first put together, the concept was to come up with an agreement to restrict the proliferation of missile technology,” says Remy Nathan, vice president for international affairs at the Aerospace Industries Association. It was a product of its time, he says, penned at a point in history when the Cold War was ending, the Soviet Union (and its nuclear stockpile) was dispersing, and the proliferation of weapons of mass destruction was a tangible threat. “But the language never considered the development and potential use for UAS going forward, or for lighter-than-air vehicles as well,” he says. “It’s really an inelegant means of controlling delivery mechanisms for weapons of mass destruction through range and payload.”

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These key criteria contained within the MTCR have now become a sticking point for large UAS manufacturers who wish to shop their wares internationally, where there is a huge demand for the capabilities that unmanned aerial systems can provide to militaries as well as civilian authorities and scientific missions. The broad language of the MTCR designates any unmanned vehicle that can carry a 500-kilogram (or roughly 1,100-pound) payload and travel 300 kilometers (186 miles) as a “Category I” system. Under the agreement, export of such systems and their supporting technologies is prohibited unless the exporting state can make a strong case for why it should be exempted — a case that governments rarely make on behalf of industry.

Where missile technology is concerned, the MTCR has done an admirable job of containing long-range missile technology and the WMD threat it enables. But its broad text also places large UAS like Northop Grumman’s (NOC) non-weaponized Global Hawk (which is used by the U.S. Air Force for aerial surveillance but also by NASA for hurricane tracking and the like), civilian long-endurance UAS like Titan Aerospace’s upcoming Solara, or even the now infamous Predator and Reaper drones built by General Atomics, which can certainly be weaponized but have a much longer and more established record in more benign activities like aerial surveillance, border security, and even wildfire monitoring.

That has some in the aerospace industry worried that export agreements like the MTCR could hurt the long-term prospects of the nascent “drone industry,” which is poised for serious growth as restrictions on civilian UAS both in the U.S. and abroad are relaxed over the next several years. And while its true that much of the American UAS industry’s growth is expected to come from domestic and foreign sales of small UAS that don’t meet the MTCR’s Category I criteria, as the skies become increasingly unmanned, large UAS are going to be big business, especially for an aerospace industry that can rely less and less on the U.S. Department of Defense for contracts.

“When the commercial marketplace does come to fruition, it’s going to dwarf anything that’s being done on the military side,” Nathan says. “However, just because we’re talking about commercial applications doesn’t mean we’re changing the application of the MTCR.”

While there’s certainly a national security interest in restricting the flow of American aerospace companies’ bleeding-edge unmanned systems technology across the globe, there’s a competing interest in not stifling a world-leading technology sector, says Eric McClafferty, a partner at law firm Kelley, Drye & Warren who advises companies on the nuances of export law. McClafferty draws an analogy to what happened in the satellite industry through the 1970s and 1980s, when concerns about the proliferation of satellite and satellite launch technology (which isn’t so far removed from intercontinental ballistic missile technology) led to Congressional hearings and an eventual restriction on satellite technology exports.

“It hurt the business opportunities for U.S. manufacturers, and some say it led to the demise of the U.S. satellite industry,” McClafferty says, illustrating the ongoing tension between economic and national security interests. “I think you’ve got the same thing playing out in the UAS industry now.”

But absent U.S. technology imports, countries like China, Japan, India, and others developed their own satellite technology or purchased it elsewhere, leading to another thorny question for industry and the national security apparatus: Do aging agreements like the MTCR still make sense when the pace of technological innovation both at home and abroad is accelerating so rapidly?

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By denying access to these security-related technologies even to America’s closest allies, some argue that the U.S. not only weakens its international partners but also drives them to shop elsewhere or to develop the technology themselves, creating or bolstering economic competitors abroad.

“The idea of the regime was to make it so that this technology did not spread from the folks that already had it to other locations, and it’s functioned very effectively in that broad sense,” McClafferty says. “At the same time, there’s a belief in the community that folks are going to develop these technologies internally using their own resources, and it’s tough to slow this development that a lot of these technology control regimes are designed to slow. So as the rest of the world catches up, the export control rules definitely hurt U.S. manufacturers, and there are a lot of people who would love to see the rules change.”

How would industry change the rules? For one, many in the aerospace business don’t see the Category I criteria as effective as currently written. Rather than range and payload, security analysts are more concerned with the speed, maneuverability, and detectability of warhead delivery vehicles. Right now, the MTCR criteria prohibits the export of lumbering, highly visible, and decidedly un-speedy unmanned blimps while a small, short-range, lightweight missile could technically slip right through the Category I criteria.

But changing the language of a major international agreement on WMD delivery technology would be a hard sell to the global community. “In this kind of climate where Syrian chemical weapons are on the front page of the paper every single day — you’d have to expend some serious political capital to get this changed,” Nathan says. (Or there’s McClafferty’s take: “Imagine going to the international community and saying, ‘Hey, let’s reduce the controls on weapons of mass destruction.’”)

But changing or withdrawing from the MTCR — both politically toxic solutions — are not the only ways around the language in question. The MTCR itself is non-binding and not enforced by any international body — it’s up to each of the 34 signatory nations to implement the spirit of the MTCR into its own export regulations and to make a strong case as to why any exemption to the spirit of the MTCR should be granted. Right now the U.S. government’s interpretation of the spirit of the MTCR is still roughly the same strict interpretation it developed in 1987, before UAS matured into their own industry and a technology with myriad non-military applications. That interpretation that could change enough to give the UAS industry some room to maneuver.

“We’ve set out a position on this matter that doesn’t jibe very well with where the technology is going,” Nathan says. “The trend line is going to a point where we have to address this and make a distinction between missiles and these other types of applications.” Somebody will, he says, Both China and Israel — two fairly advanced nations in terms of UAS technology — are non-signatories to the MTCR. And there’s nothing stopping other signatory nations from coming up with their own defensible interpretations of the MTCR exempting their UAS industries, giving them a head start in the international marketplace.

Somebody’s going to figure out something that makes sense to them and is defensible, and arguably we should be doing that ourselves,” Nathan says. “And I like to believe there is a way of doing this consistent with the nonproliferation goals fundamentally underlying the MTCR. That’s the challenge we have.”