OFFSETS IN DEFENSE TRADE 1996
(003-009-00683-0) May 1996 - Price $9.50
The costs and benefits of offsets in defense trade have been
long debated within the U.S. Government. At issue is the adverse impact that
offsets may have on the U.S. employment, industrial, and technology base versus
the benefits of increased export levels in a competitive buyers-market business
climate, the creation of export-related jobs, and additional sales of U.S.
spares and services over the life time of the exported hardware.
Because of the superiority of U.S. technology and weapon
systems, U.S. defense companies usually have an advantage over foreign
companies in terms of the types of direct and indirect offsets they can
provide. However, this superiority presents a double-edged sword. As the worlds
preeminent supplier of weapons (over 45 percent market share) and
high-cost/high-technology hardware, U.S. corporations are also highly
vulnerable to offset demands. Their traditional consent to such impositions is
a sign of competitive pressures.
The Administration, based on previous studies as well as the
current study, continues to be concerned that defense offset practices may be
detrimental to the nations defense industrial base, particularly to small- and
medium-sized defense subcontractors. Defense offsets may create or enhance
foreign competitors, exacerbate already excessive defense production capacity,
displace U.S. firms, and reduce U.S. employment. In fact, the great majority of
offset demands are from economies with major commercial competitors of U.S.
firms, including Canada, Japan, and most Western European nations. Further, the
use of offsets in defense trade has expanded in recent years to additional
countries. Moreover, with the apparent increase in the use of indirect offsets,
more industries, many not related to defense, may be affected.
In the post-Cold War environment, defense offsets are being used
primarily as a tool to achieve economic policy goals. Developed countries with
established defense industries are using offsets to channel work or technology
to their domestic defense or aerospace companies. Countries with newly
industrialized economies are utilizing both military and commercial related
offsets that involve the transfer of technology and know-how. The developing
countries with less industrialized economies generally pursue indirect offsets
to help create profitable commercial businesses and build their infrastructure.
All Organization for Economic Cooperation and Development (OECD) countries
engage in military offsets. Many emerging markets have offset programs linked
to government procurement which either affect designated sectors (e.g., Brazil,
South Korea, and Taiwan) or are triggered by the size of the procurement (e.g.,
Indonesia and the United Arab Emirates).
Based on BXA 1993-1994 data collection, the following findings
1. The average level of offsets in defense trade required by
most countries appears to be about the same between the 1980-1987 OMB data and
the 1993-1994 BXA data. The average for all countries represented in the OMB
data was about 57.2 percent. The average for the BXA data was 54.8 percent
(excluding two unusually large sales). The BXA data indicates that several
countries (Taiwan, Malaysia, Kuwait, and UAE) have developed new offset
policies and now require offsets as a condition of sales contracts. According
to BXA and original OMB data as well as the recently released General
Accounting Office report (AMilitary
Exports: Offset Demands Continue to Grow@), the level of offsets countries apply
tend to increase with time and experience.
2. Indirect defense offsets relative to direct defense offsets
are substantially higher than they were in the 1980s. This is based on a
comparison of OMB=s new agreements
data for 1980-1987, which reported indirect at about 53 percent (excluding
unknown), and BXA=s transactions data
which indicates indirect are about 67 percent (excluding unknown). The fact
that worldwide defense exports are down may underlie the shift toward indirect,
and may further reduce demands for direct offsets in the future. About
three-fourths of the offsets were comprised of purchases, subcontracting
activity, and technology transfer, all of which provide support for local
business. It was also noted that the Pacific Rim countries were highly focused
in indirect aerospace offsets.
3. With the rise of indirect defense offsets, a broader band of
industries is now affected by offsets. Based on OMB billings data (Table 4),
over 68 percent of offsets were aerospace related (SIC 372 & 376) compared
to just over 45 percent (within SIC 37) for the BXA data. There also appears to
be a noticeable increase in non-manufacturing offsets, which were negligible
for the OMB data, but are nearly 14 percent in the BXA data.
4. European new offset agreements and offset transactions with
the United States as a partner have declined, tracking the decline in defense
trade. This is probably closely related to the collapse of the Soviet Union,
lowered defense budgets, the European recession, national budget constraints,
and more intra-European offset partnering. However, upcoming European and NATO
procurements indicate a significant offset requirement and could reverse this