Impact of Offsets in Defense Trade: An Annual Report to Congress
An annual report to Congress on the impact of offsets in defense trade is prepared under the direction of the Department of Commerce as authorized under the 1992 amendments to Section 309 of the Defense Production Act of 1950, as amended. Offsets are the practice by which the award of contracts by foreign governments or companies is exchanged for commitments to provide industrial compensation. In defense trade, offsets include mandatory co-production, licensed production, subcontractor production, technology transfer, and foreign investment.
The Bureau of Industry and Security (BIS) has been delegated authority to compile these required reports. To assist in the report preparation, BIS was given authority to collect data from U.S. firms involved in offset agreements in connection with the sales of weapon systems to foreign entities. The Fifteenth annual report to Congress was completed in January 2011. The data collected for the latest report covers offset transactions and agreements entered into during the time period 1993-2009.
Historically, offsets have served important foreign policy and national security objectives of the United States, such as increasing the industrial capabilities of allied countries, standardizing military equipment, and modernizing allied forces. The use of offsets is now commonplace. Today, virtually all of the defense trading partners of the United States impose some type of offset requirement. Countries require offsets for a variety of reasons: to ease the burden of large defense purchases on their economy, to increase or preserve domestic employment, to obtain desired technology, and to promote targeted industrial sectors.
Offsets may be direct, indirect, or a combination of both. Direct offsets refer to compensation, such as co-production or subcontracting, directly related to the system being exported. Indirect offsets apply to compensation unrelated to the exported item, such as foreign investment or purchases of goods or services.
Developed countries with established defense industries use offsets to channel work or technology to their domestic defense 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. Overall, offsets continue to be an important and necessary factor in a climate of increased competition for a declining number of international sales contracts.
However, offsets may be detrimental to the strength of the U.S. defense industrial base, particularly small and medium-sized defense subcontractors. Offsets can displace U.S. subcontractors, enhance foreign competitors and create excess defense capacity overseas. The U.S. Government policy on Offsets in Military Exports views certain offsets to be economically inefficient and market distorting. See the 1990 Presidential Policy on Offsets and the Defense Offsets Disclosure Act of 1999 for more detailed policy information.
See links in the right hand column for further information on offsets documentation and report summaries.
Seventeenth Report to Congress
Sixteenth Report to Congress
Fifteenth Report to Congress
Fourteenth Report to Congress
Thirteenth Report to Congress
Twelfth Report to Congress
Eleventh Report to Congress