Offsets Definitions

Listed below are offset definitions as outlined in the Federal Register (Vol. 59, No. 231) dated December 2, 1994, prepared by BXA (codified at 15 CFR Part 701); and Offsets in Military Exports, OMB, dated December 1988.

Offsets: Industrial compensation practices required as a condition of purchase in either government-to-government or commercial sales of defense articles and/or defense services as defined by the Arms Export Control Act and the International Traffic in Arms Regulations.

Military Export Sales: Exports that are either Foreign Military Sales (FMS) or commercial (direct) sales of defense articles and/or defense services as defined by the Arms Export Control Act and International Traffic in Arms Regulations.

Direct Offsets: Contractual arrangements that involve defense articles and services referenced in the sales agreement for military exports.

Indirect Offsets: Contractual arrangements that involve goods and services unrelated to the exports referenced in the sales agreement.

Co-production: Overseas production based upon government-to-government agreement that permits a foreign government(s) or producer(s) to acquire the technical information to manufacture all or part of a U.S. origin defense article. It includes government-to-government licensed production. It excludes licensed production based upon direct commercial arrangements by U.S. manufacturers.

Licensed Production: Overseas production of a U.S. origin defense article based upon transfer of technical information under direct commercial arrangements between a U.S. manufacturer and a foreign government or producer.

Subcontractor Production: Overseas production of a part or component of a U.S. origin defense article. The subcontract does not necessarily involve license of technical information and is usually a direct commercial arrangement between the U.S. manufacturer and a foreign producer.

Overseas Investment: Investment arising from the offset agreement, taking the form of capital invested to establish or expand a subsidiary or joint venture in the foreign country.

Technology Transfer: Transfer of technology that occurs as a result of an offset agreement and that may take the form of: research and development conducted abroad; technical assistance provided to the subsidiary or joint venture of overseas investment; or other activities under direct commercial arrangement between the U.S. manufacturer and a foreign entity.

Countertrade: In addition to the types of offsets defined above, various types of commercial countertrade arrangements may be required. A contract may include one or more of the following mechanisms:

Barter: A one-time transaction only, bound under a single contract that specifies the exchange of selected goods or services for another of equivalent value.

Counter-purchase: An agreement by the initial exporter to buy (or to find a buyer for) a specific value of goods (often stated as a percentage of the value of the original export) from the original importer during a specified time period.

Compensation (or Buy-Back): An agreement by the original exporter to accept as full or partial repayment products derived from the original exported product.

Additional Definitions used in this report:

Offset Agreement: A counter contract to a military export sale negotiated separately between the foreign purchaser, usually a foreign government, and the U.S. exporter as a condition of the export sale. The offset agreement requires the U.S. exporter to compensate the foreign purchaser with various types of offsets. The statutory reporting threshold for an offset agreement is $5 million.

Offset Transaction: An offset transaction is an actual delivery of an offset against the outstanding balance of an existing offset agreement. The regulatory reporting threshold for offset transactions is $250,000.

Actual Value of an Offset: An offset transaction measured in terms of dollars.

Credit Value of an Offset: The offset transaction value applied against the offset agreement, which may be greater than the actual value of the offset. Extra credit (i.e., defined through multipliers) is sometimes earned as an incentive to perform some specific offset, such as investment or technology transfer of particular interest to the foreign government.