Where Industry and Security Intersect
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Washington -- According to the latest study of concessions granted to foreign governments in their purchase of defense items -- known as offsets -- European governments demanded and received 86 percent of the value of the offsets associated with new defense contracts in 1995. The offsets received by European countries are valued at $5.2 billion of the total new offsets of $6 billion. There were 26 new offset agreements entered into with Europe; 21 of the 26 were valued at 100 percent or more of the value of the export contract. The average new offset agreement with Europe was 104.3 percent of the value of the contract.
"In spite of the perception that offsets are being used primarily by developing nations to boost foreign investment and gain access to U.S. technology, this report demonstrates that the most significant use of offsets is among our largest trading partners seeking to increase their share of the world's defense market and boost their own trade balances," said William A. Reinsch, Under Secretary of Commerce for Export Administration.
The study, Offsets in Defense Trade, was released today by the Commerce Department. It analyzes the offsets by defense contracts signed during 1995 as well as 1995 transactions in fulfillment of contracts signed in prior years. To assist in putting these findings in perspective, the report also provides data from 1993 and 1994.
In addition to examining the agreements reached by U.S. defense contractors, this year's study examined the impact offsets had on three non-defense industries: machine tools, commercial shipbuilding and gears. The immediate, direct impact on these industrial sectors was small in absolute dollar amounts. However, the indirect impact on individual subcontractors may be significant. Foreign suppliers are strengthened and provided new customer contacts; purchasing decisions by U.S. and foreign firms are based on offset driven demands; and, efficient U.S. firms can lose work to foreign companies based on offset criteria. In general, offsets were found to contribute to our trade deficit by increasing imports or reducing opportunities for U.S. companies to export.
The report acknowledges that prime contractors must provide offsets in order to compete in the worldwide defense market. The report also states that foreign governments typically use direct offsets involving co-production to justify expensive arms purchases, claiming that the purchase will boost local employment and national security by helping to maintain domestic defense industries. To assist U.S. exporters, Commerce has initiated a series of meetings with other government agencies, prime contractors, subcontractors and labor to build a consensus position on the offset issue.
The offsetting goods and services include mandatory co-production, licensed production, subcontractor agreements, technology transfer, countertrade and foreign investment. Offsets may be directly related to the particular U.S. defense item being purchased. Direct offsets include co-production or sub-contracting of parts and/or technology used in that system. Indirect offsets are not tied to a particular product but instead may require such things as investment in that nation, agreements to accept increased imports from the purchaser (countertrade), or technology transfers.
The report was issued pursuant to section 309 of the Defense Production Act of 1950 as amended, and data in the report was gathered from U.S. prime contractors involved in offset trade agreements in connection with defense-related sales to foreign countries in 1993 - 1995. The impact of offsets on the subcontractor base was ascertained through a separate BXA defense diversification assessment.
The executive summary of the report is available by fax. Please call 202/482-2721 or fax your request to 202/482-2421. The executive summary is posted on this website. Bound copies of the report will be available for purchase through NTIS by calling 703/487-4650 and requesting publication number PB97-193015.
In April of 2002 the Bureau of Export Administration (BXA) changed its name to the Bureau of Industry and Security(BIS). For historical purposes we have not changed the references to BXA in the legacy documents found in the Archived Press and Public Information.