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Australia's Defense Minister David Johnston (L) and Australia's Foreign Minister Julie Bishop attend a news conference at the Japan National Press Club in Tokyo June 12, 2014. Australia and Japan will create a framework pact to cooperate on military technology, the two countries said on Wednesday, a move that could pave the way for Japan to supply stealth submarine designs and components to Australia. REUTERS/Yuya Shino

(reuters_tickers)

By Matt Siegel

SYDNEY (Reuters) - Australia should discuss building its next-generation fleet of submarines overseas, the Department of Defence said on Monday, a shift that could open the door to a partnership deal with Japan that carries political risk at home and abroad.

Australia is looking for partners to help it build about a dozen diesel-electric submarines to replace its aging Collins Class fleet and help to extend its maritime surveillance deep into the Indian Ocean.

The proposed A$40 billion fleet of submarines is at the core of the nation's maritime defence strategy over the next two decades. Successive governments have pledged to build the vessels in Australia, creating much-needed manufacturing jobs.

The Department of Defence's 50-page Defence Issues Paper 2014, issued on Monday, is part of a public consultation process on a major strategic forces assessment due out next year.

In it, the department echoed previous concerns about cost raised by Defence Minister David Johnston.

"There is significant debate emerging about the future submarine and whether it should be built in Australia. This debate must consider the cost, risk and schedule as well as the benefits of the different options," the department said in the paper.

"What other military capability might be forgone if monies are committed to industries that do not meet international benchmarks?”

Prime Minister Tony Abbott has struck a tough stance towards struggling industries, declining to bail out anaemic auto manufacturers in a move that deepened acrimony between his government and trade unions.

Any decision to move construction of the submarine fleet overseas would likely cause a further backlash from working class voters.

MADE IN JAPAN?

Japan is considered one of the most likely beneficiaries if Australia does change its stance.

This month, Abbott and Japanese Prime Minister Shinzo Abe signed an agreement on military equipment and technology transfers.

Mirroring a partnership concluded with Britain a year ago, it establish a framework for industrial cooperation that could pave the way for a submarine deal with Australia.

Abe has been forging a more assertive defence posture in his year-and-a-half in office. In April, he eased a four-decade ban on military exports, which could allow Japan to ship submarine components or even completed vessels to Australia.

A deal would also help connect Japanese arms-makers like Mitsubishi Heavy Industries and Kawasaki Heavy Industries to the world market for big, sophisticated weaponry.

It is also possible that Australia could purchase submarine hulls from Germany or Sweden and then opt to buy Japanese drive trains for the vessels.

Participants in a joint-development deal could include Britain's BAE Systems and state-owned Australian Submarine Corp, which maintains the nation's current fleet.

Experts say a Japan-Australia deal would send a signal to China of Japan's willingness to export arms to a region wary of Beijing's growing naval strength, especially its pursuit of territorial claims in the East and South China seas.

They warn, however, that the deal may not be viewed favourably in China, Australia's biggest trading partner and the region's emerging superpower, adding a layer to the political considerations for Australia.

(Editing by Robert Birsel)

Reuters