Where Industry and Security Intersect
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In 1984, the Congress enacted amendments to the DPA, which included the addition of Section 309 addressing offsets in defense trade. 3 Section 309 of the DPA required 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 Representatives4 and the Committee on Banking, Housing, and Urban Affairs of the Senate.
Initially, the Office of Management and Budget coordinated the interagency process of preparing the report for the Congress. Other agencies involved in the process included the Departments of Commerce, Defense, Labor, State, and Treasury, and the Office of the
U.S. Trade Representative. In 1992, Section 309 of the DPA was amended, and the Secretary of Commerce was given the responsibility of preparing the report for the Congress, on the President's behalf, and was directed to function as the President's Executive Agent for carrying out responsibilities under Section 309 of the DPA.5
Under section 309, the Secretary of Commerce is authorized to develop and administer the regulations necessary to collect offsets data from U.S. defense exporters. The Secretary of Commerce delegated this authority to the Bureau of Industry and Security, which published its first offsets regulations in the Federal Register in 1994.6 See Appendix B for a copy of the regulations as published.
The 1992 amendments to Section 309 of the DPA made other changes to the offset data collection process. The amendments lowered 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. Under the regulations, firms report all offset transactions for which they receive offset credits of $250,000 or more. Every year, U.S. companies report offset agreement and transaction data for the previous calendar year to BIS. The data elements collected each year from industry are listed in Section 701.4 of the Department's offset regulations and are shown in Appendix B.
The official U.S. Government policy on offsets in defense trade was developed by an interagency offset team. The policy was announced by the President in April 1990, in a statement issued by the White House Press Secretary.7 In 1992, it was set forth as a Policy of Congress as follows:
(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 ;
(3) nothing in this section shall prevent agencies of the United States Government from fulfilling obligations incurred through international agreements entered into before March 1, 1992; and
(4) the decision whether to engage in offsets, and the responsibility for negotiating and implementing offset arrangements, reside with the companies involved.
(b) Presidential Approval of Exceptions. It is the policy of the Congress that the President may approve an exception to the policy stated in subsection (a) after receiving the recommendation of the National Security Council.
(c) Consultation. It is the policy of the Congress that the President shall designate the Secretary of Defense to lead, in coordination with the Secretary of State, an interagency team to consult with foreign nations on limiting the adverse effects of offsets in defense procurement. The President shall transmit an annual report on the results of these consultations to the Congress as part of the report required under section 309(a) of the DPA.
In 1999, the offset policy was supplemented by provisions contained in the Defense Offsets Disclosure Act of 1999.8 Specifically, Congress made the following findings:
The Defense Offsets Disclosure Act of 1999 continues with the following declaration of policy:
It is the policy of the United States to monitor the use of offsets in international defense trade, to promote fairness in such trade, and to ensure that foreign participation in the production of United States weapons systems does not harm the economy of the United States .
There are several basic terms used in discussions of offsets in defense trade. For more definitions and an illustrative example of an offset arrangement, please see the Glossary in Appendix F.
Offsets: 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 (22 U.S.C. § 2751, et seq . ) and the International Traffic in Arms Regulations (22 C.F.R. §§ 120-130).
Direct Offsets: Contractual arrangements that involve defense articles and services referenced in the sales agreement for military exports. These transactions are directly related to the defense items or services exported by the defense firm and are usually in the form of co-production, subcontracting, technology transfer, training, production, licensed production, or financing activities.
Indirect Offsets: Contractual arrangements that involve defense goods and services unrelated to the exports referenced in the sales agreement. These transactions are not directly related to the defense items or services exported by the defense firm. The kinds of offsets that are considered "indirect" include purchases, investment, training, financing activities, marketing/exporting assistance, and technology transfer.
Co-production: Overseas production based upon government-to-government agreement that permits a foreign government or producer(s) to acquire the technical information to manufacture all or part of a U.S. origin defense article. Co-production includes government-to-government licensed production, but 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 defense prime contractor and a foreign producer.
Overseas Investment: Investment arising from an offset agreement, often taking the form of capital dedicated to establishing or expanding 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 defense prime contractor and a foreign entity.
For ease of analysis, and in some cases to protect company confidentiality, countries and country groups actively requiring offsets in connection with purchases of U.S. defense systems during the 1993-2000 period were divided into four geographic regions: Europe , the Middle East and Africa , North and South America , and Asia . The countries found in each region are listed in Table 1-1.
This is the seventh report on Offsets in Defense Trade prepared by the Department of Commerce's Bureau of Industry and Security. This report is prepared after analyzing offset data reported to the Department of Commerce by U.S. defense firms, in compliance with regulations established under Section 309 of the DPA.
The seventh report reviews offsets data for the eight-year period from 1993 to 2000. This report was prepared in consultation with the Departments of Defense, Labor, and State; the Office of the U.S. Trade Representative; and the Central Intelligence Agency. The initial offsets report, issued in 1996, covered the time period from 1993 to 1994. Each of the six subsequent offset reports added an additional year to the reporting period.
Table 1-1:
Purchasing Countries and Groups Requiring |
|
Europe |
Middle East and Africa |
Austria |
Egypt |
Belgium |
Israel |
Czech Republic |
Kuwait |
Denmark |
Saudi Arabia |
EPG - The European Participating Group (Belgium , The Netherlands , Norway ) |
South Africa |
Turkey |
United Arab Emirates |
Finland |
|
France |
|
Germany |
North and South America |
Greece |
Brazil |
Italy |
Canada |
Luxembourg |
|
NATO |
Asia |
The Netherlands |
Australia |
Norway |
Indonesia |
Portugal |
Malaysia |
Slovenia |
New Zealand |
Spain |
Singapore |
Sweden |
South Korea |
Switzerland |
Taiwan |
United Kingdom |
Thailand |
Source: U.S. Department of Commerce/BIS Offsets Database |
|
This report begins with an overview of the data collected from U.S. industry for 1993-2000, followed by an analysis of the effects of offsets on the U.S. defense industrial base. Next, the report presents a statistical analysis of offset agreements entered into from 1993 through 2000, including consideration of the high level of concentration of offsets among a relatively few firms, countries, and weapon systems. The regional distribution of offset agreements is also reviewed, and a detailed comparison made of offset activity in European countries with the countries in the rest of the world. This chapter is followed by a similar analysis of offset transactions, by type of offset and by the nine categories, and in terms of the offset recipients. Next, the report presents a review of aerospace issues - specifically, the importance of exports to this sector along with recent offset trends in the U.S. aerospace industry. The next chapter provides a brief summary of other U.S. Government offset monitoring activities and is followed by the conclusions.
Some companies submitted data for 1999 offset agreements and transactions after the sixth report was drafted. Therefore, 1999 data on agreements and transactions were revised upward in this report.
3 See Pub. L. 98-265, April 17, 1984 , 98 Stat. 149.
4 Section 309 of the DPA was amended in 2001 to change the name of the House committee to the "Committee on Financial Services of the House of Representatives." The annual report must be provided to the Committee on Banking, Finance, and Urban Affairs of the Senate as well. See 50 U.S.C. app. § 2099(a)(1).
5 See Pub. L. 102-558, Oct. 28, 1992 , 106 Stat. 4198; see also Part IV of Exec. Order No. 12919, 59 Fed. Reg . 29525 ( June 3, 1994 ).
6 See 59 Fed. Reg . 61796, Dec. 2, 1994 , codified at 15 C.F.R. § 701.
7 Congress incorporated this policy statement into law with the Defense Production Act Amendments of 1992 (Pub. L. 102-558, Title I, Part C, § 123, 106 Stat. 4198).
8 See Pub. L. No. 106-113, Div. B, § 1000(a)(7) 113 Stat. 1536, 1510A-500 to 1501A-505 (1999) (enacting into law Subtitle D of Title XII of Division B of H.R. 3427 (113 Stat. 1501A-500) as introduced on Nov. 17, 1999 ) (found at 50 U.S.C. Appx. Sec. 2099, History; Ancillary Laws and Directives).