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Offsets: The Industrial, Employment and Security Costs of Arms Exports


  Background.
  Legislation
  Project Publications
  Other Suggested Reading


Background

One of the most politically powerful claims supporting U.S. arms trading today is that weapons exports sustain American jobs. But the employment benefits of arms exports are diluted, and may be negated, by seldom-discussed side deals known as "offsets." These agreements require a supplier to direct some benefits. -usually work or technology. -back to the purchaser as a condition of the sale.

Shrinking military budgets have reduced the demand for military equipment, creating a buyer's market.  This increased international competition allows customers to extract very favorable deals from suppliers. Former Assistant Secretary of Commerce for Export Administration R. Roger Majak testified before Congress in 1999, "It is a buyer's market for defense systems, and weapon sellers in France, Britain, and the United States are confronted with ever-increasing offset demands."

Offsets come in two forms. Through "direct" offsets, the purchaser receives work or technology directly related to the weapons sale, typically by producing the weapon system or its components under license. "Indirect" offsets involve barter and countertrade deals, investment in the buying country, or the transfer of technology unrelated to the weapons being sold. Both types of offsets send work overseas, but direct offsets also raise serious security concerns, as they assist the development of foreign arms industries.

The 2001 report produced by the Presidential Commission on Offsets in International Trade (created by the Defense Offsets Disclosure Act of 1999 ) concluded that the average offset requirement for 1998 was 57.9% of the value of the contract; this rate represented a slight increase over the figures from the previous five years. The quantifiable effect of direct offset transactions for 1993-1998 "supplanted $2.3 billion in U.S. work or 25,300 work-years."  The report concluded that while quantitative levels of offsets have remained relatively steady, there has been a qualitative increase in the negotiated transactions. These qualitative increases refer to the transfer of often sensitive technologies to foreign defense industries, which improve the competitiveness of foreign firms and rarely (only in 4% of the cases) result in the transfer of technology back to the U.S. Furthermore, Ann Markusen, a member of the Presidential Commission on Offsets, concluded that although "the United States has one of the strongest licensing regimes in the world, ...enforcement is inadequate."  Thus these qualitatively high demands for offsets and the resulting technology transfer increase potential threats to U.S. national security, and pose real threats to U.S. jobs.

The report claims that theoretically if offsets were not offered, there would be a net loss of profits which would have a detrimental impact on U.S. jobs. However actual figures speak volumes. William Hartung in his report "Welfare for Arms Dealers" reported that "Today, thanks to these offsets, there are twice as many workers employed building the F-16 in Ankara, Turkey (2,000), as there are at Lockheed Martin's principle F-16 plant in Fort Worth, Texas (1,155)." Sending jobs abroad reduce labor costs for manufacturers, but it translates into the loss of American jobs.

Why aren't American workers protesting this practice? Some are. Workers for Boeing and Lockheed Martin have rallied against licensed production of weaponry and technology transfers that result from direct offsets. In October 1995, one-third of Boeing's workforce went on strike, largely to protest the use of foreign subcontractors. In other cases, though, workers and firms may not realize that they are being negatively affected by military offsets. If an American furniture company loses a bid for a contract to a Swedish or South Korean firm, for example, it doesn't know that an American arms corporation may have helped the foreign firm secure the furniture sale as part of a military offset obligation.

There are other disturbing trends in offset agreements.  There is an increasing percentage of countries requiring offsets valued at more than 100% of the negotiated contract. Furthermore, in several recent transactions, the purchasing country has demanded and successfully negotiated a "pre-offset" from each of the firms competing for the contract.  Pre-offsets are often valued at 10% of the value of the contract and accompany each bidder's offer. The proceeds of these pre-offsets remain with the purchaser, regardless of whether or not the bid is successful.

Offsets even occur on arms sales financed by U.S. taxpayers. Such deals cost Americans thrice. first when they pay for researching and developing the weapons, secondly when they pay for the sale, and again when their jobs are shipped overseas. Rep. Cardiss Collins, former Chair of the Energy and Commerce subcommittee on Commerce, Consumer Protection, and Competitiveness, challenged the practice at a June 1994 hearing. The Government Accounting Office came out with the same recommendation in a report released at the hearing.

If the public realized that U.S. arms corporations were jeopardizing American jobs and security by assisting foreign competitors, opposition to arms sales would increase. The arms industry knows this, and it has worked hard to keep offsets safely out of view. Although the government has examined offsets three times in the past (1985, 1988, and 2001), and some new oversight measures have recently been enacted (see below), it is still very difficult to point to specific firms that have been hurt by military offsets or to ascertain how much offsets are costing U.S. industries and workers. 

Legislation

Various laws have attempted to increase the amount of public information and congressional oversight on offsets.  None have actually restricted the use of offsets, although the detrimental effects of these arrangements on both national security and the economy have been repeatedly identified. A summary of offset-related legislation is listed below.

  • The Defense Offsets Disclosure Act of 1999  (PL 106-113) called for heightened monitoring of offsets and to this end created a Presidential Commission tasked with studying the impact of offsets and proposing "unilateral, bilateral, and multilateral measures aimed at reducing any detrimental impacts of offsets."  

  • The "Feingold amendment" to the fiscal year 1995 State Department Authorization Act. sponsored by Sen. Russell Feingold (D-WI). requires "real time" notification to Congress of offsets being considered in connection with an arms sale subject to Congressional approval. This provision helps Members of Congress develop a truer picture of the employment impact of potential arms sales. However, this information is not available to the public.

  • A 1992 amendment to the 1950 Defense Production Act reduced the reporting burden on offsets to once a year for defense contracts exceeding $5 million. This annual report produced by the Department of Commerce covers the employment, trade, industrial competitiveness and military preparedness implications of offsets. These reports present only highly aggregated generalizations; they will not provide information about firms and workers displaced by offset commitments. Executive summaries are available for the reports below.

  • Both the Presidential Policy on Offsets of 1990 and in the house committee report (H. Rept. 102-208) on the Defense Production Act Amendments of 1991 (P.L. 102-99) recognized that "certain offsets for military exports are economically inefficient and market distorting" and legislated that "no agency of the United States Government shall encourage, enter directly into, or commit United States firms to any offset arrangement in connection with the sale of defense goods or services to foreign governments."

  • In 1968, Congress passed the Arms Export Control Act (PL 90-629). Section 39A of this law prohibits making incentive payments to any U.S. supplier of defense articles or services, (including any employee, agent or subcontractor of the supplier) "for the purpose of satisfying, in whole or in part, any offset agreement...".

  • In 1950 Congress passed the Defense Production Act which originally called for the semi-annual reporting of offset agreements.

Project Publications

"Unbalanced Offsets," segment on NPR's Marketplace featuring ASMP Director Tamar Gabelnick, March 7, 2003.

"GAO Highlights Broad Range of Offsets: Arms Exporters Must Cater to Overseas Economic Interests," Press Release, Federation of American Scientists, 28 January 1999.

"Commerce Finds U.S. Firms Hurt by Arms Sales Offsets," Press Release, Federation of American Scientists, 23 May 1996.

"GAO Finds Foreign Competitors Use Arms Purchases to Promote Local Industry," Press Release, Federation of American Scientists, 13 April 1996.

"Workers Protest Offsets," Arms Sales Monitor No.31 (5 December 1995).

"Economic Costs of Arms Exports: Subsidies and Offsets," Testimony of Lora Lumpe before the U.S. Senate Appropriations Committee, Subcommittee on Foreign Operations, 23 May 1995.

"Commerce Implements 1992 Offset Reporting Requirement," Arms Sales Monitor No. 28 (15 February 1995)

"Sweet Deals, Stolen Jobs" The Bulletin of the Atomic Scientists, September/October 1994

"GAO Urges Banning Offsets on FMF-financed Arms Sales" and "Offsets `Outed'" Arms Sales Monitor No. 26 (30 July 1994)

"FAS Urges Reform of Offset Policies," Public Interest Report, January/February 1994, pp. 1-3; ";Sweet Deals and Low Politics: Offsets in the Arms Market," pp. 1, 4-9.

"Arms Sales Offsets Cost Jobs," Arms Sales Monitor No. 23 (30 November 1993)

"The Link of Jobs to Foreign Arms Sales," Baltimore Sun, 28 November 1993

"New Reporting Requirements on Offsets," Arms Sales Monitor No. 22 (30 September 1993)

Other Suggested Reading

Offsets in Defense Trade: Tenth Report to Congress. Bureau of Industry and Security, U.S. Department of Commerce, December 2005.

Defense Trade: Report and Recommendations of the Defense Offsets Commission Still Pending. U.S. General Accounting Office, GAO-03-649, May 30, 2003.

Offsets in Defense Trade 2001 , May, 2001. Executive summary of the annual report prepared by the U.S. Department of Commerce, Bureau of Export Administration mandated under Section 309 of the Defense Production Act of 1950. This report covers the six-year period from 1993 through 1998.

The Presidential Offset Commission Status Report , January, 2001. The findings of the commission established by Public Law 106-113 on the impact of offsets on the U.S. economy and national security.

Randy Barber, Offsets, Industrial Participation and Countertrade. A Compendium of Developments in the Military and Civilian Sectors 1995-2000.

Offsets Definitions, U.S. Department of Commerce, Bureau of Export Administration

Offsets in Defense Trade: Fifth Annual Report to Congress. Executive Summary. U.S. Department of Commerce, Bureau of Export Administration, May 2001. 

Defense Offsets Disclosure Act of 1999.pdf format.

Defense Trade: Data Collection and Coordination on Offsets.  U.S. General Accounting Office, GAO-01-83R, October 26, 2000.

Offsets in Defense Trade: Fourth Annual Report to Congress. Executive Summary. U.S. Department of Commerce, Bureau of Export Administration, December 1999. 

Defense Trade: U.S. Contractors Employ Diverse Activities to Meet Offset Obligations. (Washington, D.C.: US General Accounting Office, December 1998) NSIAD-99-35. .pdf version.

Offsets in Defense Trade: Third Annual Report to Congress. Executive Summary. U.S. Department of Commerce, Bureau of Export Administration, August 1998. 

Policy Issues in Aerospace Offsets: Report of a Workshop. Charles Wessner and Alan Wolff, eds. (Washington, D.C.: National Academy Press, 1997).

Offsets in Defense Trade: Second Report to Congress. Executive Summary. U.S. Department of Commerce, Bureau of Export Administration, August 1997.

Military Offsets: Regulations Needed to Implement Prohibition on Incentive Payments (Washington, D.C.: US General Accounting Office, August 1997) NSIAD-97-189 html version * pdf version

Military Exports: Offset Demands Continue to Grow (Washington, D.C.: US General Accounting Office, 1996) NSIAD-96-65

Offsets in Defense Trade: First Report to Congress. Executive Summary. U.S. Department of Commerce, Bureau of Export Administration,  May 1996.

Charles W. Wessner and Alan Wm. Wolff, (eds.), Policy Issues in Aerospace Offsets: Report of a Workshop (National Research Council, 1997). http://www.nap.edu/books/0309058406/html/index.html

Stephen Martin (ed.), The Economics of Offsets: Defence Procurement and Countertrade (Amsterdam: Harwood Academic Publishers, 1996).

Randy Barber and Robert E. Scott, Jobs on the Wing: Trading Away the Future of the U.S. Aerospace Industry (Washington, D.C.: Economic Policy Institute, 1995).

Military Exports: Concerns Over Offsets Generated With U.S. Foreign Military Financing Program Funds (Washington, D.C.: U.S. General Accounting Office, 1994). NSIAD-94-127

"Asian Aeronautics: Technology Acquisition Drives Industry Development" (Washington, D.C.: U.S. General Accounting Office, 1994). NSIAD-94-140

Michael T. Klare, License to Kill, In These Times (Chicago, IL: Institute for Public Affairs, 1994), 10-23 January 1994, pp. 14-19.

Defense Production Act: Offsets in Military Exports and Proposed Amendments to the Act (Washington, D.C.: U.S. General Accounting Office, 1990).

Offsets in Military Exports (Washington, D.C.: Office of Management and Budget, 1990).

 

Last updated: November 2001

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