Offsets in defense trade eleventh report to Congress, January 2007

DISAM Journal, July, 2007

U.S. Department of Commerce's Bureau of Industry and Security Office of Strategic Industries and Economic Security

[The following are extracts of the eleventh annual report released January 2007. Some of the footnotes and tables have been omitted from this excerpt; however, the footnotes and table numbers remain the same as in the original document. The complete report is available at the following web site: http://www.bis.doc.gov/DefenseIndustrialBasePrograms/OSIES/ offsets/FinalOffsetsElevenReport.pdf.

Introduction

This is the eleventh annual report on the impact of offsets in defense trade prepared by the U.S. Department of Commerce's Bureau of Industry and Security (BIS), Office of Strategic Industries and Economic Security pursuant to Section 309 of the Defense Production Act of 1950, (1) as amended (DPA). The report analyzes the impact of offsets on the defense preparedness, industrial competitiveness, employment, and trade of the United States.

Offsets in defense trade encompass a range of industrial compensation arrangements required by a foreign government as a condition of purchase of U.S. defense articles and services. This mandatory compensation can take many forms; it can be directly related to the purchased defense system and related services, or it can involve activities or goods unrelated to the defense system. The compensation can be further classified as a subcontract, purchase, co-production, technology transfer, licensed production, credit assistance, overseas investment, or training.

Some have raised concerns about the effects of offsets on the U.S. industrial base, since most offset arrangements involve purchasing, subcontracting, and co-production opportunities for U.S. competitors, as well as transferring technology and know-how. The official U.S. government policy on offsets in defense trade states that the government considers offsets to be "economically inefficient and trade distorting," and forbids government agencies from helping U.S. contractors to fulfill their offset obligations. (2) U.S. prime contractors generally see offsets as a reality of the marketplace for companies competing for international defense sales. Several U.S. prime contractors have informed BIS that offsets are usually necessary in order to make a defense sale.

In order to assess the impact of offsets in defense trade, BIS obtained data from U.S. defense firms involved in defense exports and offsets. These firms report their offset activities to BIS annually, (3) This report covers offset agreements entered into and the offset transactions carried out to fulfill these offset obligations from 1993 through 2005.

Statutes and Regulations

In 1984, the Congress enacted amendments to the Defense Production Act (DPA), which included the addition of Section 309 addressing offsets in defense trade. (8) Section 309 requires the President to submit an annual report on the impact of offsets on the U.S. defense industrial base to the Congress's then-Committee on Banking, Finance, and Urban Affairs of the House of Representatives (9) and the Committee on Banking, Housing, and Urban Affairs of the Senate. Section 309 authorized the Secretary of Commerce to develop and administer the regulations necessary to collect offset data from U.S. defense exporters. The Secretary of Commerce delegated this authority to the Bureau of Industry and Security (BIS). BIS published its first offset regulations in 1994. (11)

Every year, U.S. companies report offset agreement and transaction data for the previous calendar year to BIS. The 1992 amendments to Section 309 of the DPA reduced the offset agreement reporting threshold from $50 million to $5 million for U.S. firms entering into foreign defense sales contracts subject to offset agreements. Firms are also required to report all offset transactions for which they receive offset credits of $250,000 or more.

United States Government Policy

The U.S. government policy on offsets in defense trade was developed by an interagency offset team. On April 16, 1990, the President announced a policy on offsets in military exports. (12) In 1992, Congress passed the following provision, which closely reflects the policy announced by the President: (13)

(a) In General. Recognizing that certain offsets for military exports are economically inefficient and market distorting, and mindful of the need to minimize the adverse effects of offsets in military exports while ensuring that the ability of United States firms to compete for military export sales is not undermined, it is the policy of the Congress that:

(1) 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

(2) United States government funds shall not be used to finance offsets in security assistance transactions, except in accordance with policies and procedures that were in existence on March 1, 1992