Offsets enhance the defense preparedness of the United States in several ways. Exports and the revenue generated by export sales are crucial to producers of U.S. defense systems and, by extension, to U.S. foreign policy and economic interests; almost all purchasers of U.S. defense systems require offset agreements as a condition of the sale. Exports of major defense systems help defray high overhead costs for the U.S. producer and help maintain production facilities and expertise, should they be needed to respond to a national emergency. Exports also provide additional business to many U.S. subcontractors and lower-tier suppliers, promote interoperability of weapon systems between the United States and allied countries, and add positively to U.S. international account balances. An offset package - particularly one with a high proportion of subcontracting or purchases - can undo or reduce many of these benefits.
However, offsets also can have negative effects on the nation's defense preparedness and the broader U.S. economy. Viewed in isolation, offsets often reduce spending in the United States and increase spending and investment in foreign countries. U.S. subcontractors displaced through direct offsets by foreign suppliers are among the groups most directly affected by offsets. Such direct offsets create foreign competitors for U.S. industry and run the risk of increasing the proliferation of technology to third countries. Moreover, with indirect offsets outpacing direct offsets 60 to 40 percent, the defense industrial base may not bear the full impact of offsets.
Offsets also affect employment levels in the defense sector. Although it is difficult to precisely determine the impact of offset agreements and transactions on employment in the U.S. defense sector, BIS has developed a reliable estimate by using employment data collected by the Bureau of the Census. Given that sales of aerospace weapon systems account for nearly 90 percent of the value of defense exports connected with offset agreements, this method appears to provide a reliable estimate.
For the period from1993 to 2000, industry reported approximately $48.6 billion in defense export contracts with an offset agreement attached. According to the Annual Survey of Manufactures,9 the value added per employee for the aerospace product and parts manufacturing industry in 2000 was $145,802. Dividing this figure into the defense export sales total results in a total of 333,329 work-years that were supported over the eight-year period by defense exports associated with offset agreements, or approximately 41,666 work-years annually.
However, by their very nature, subcontracting and purchasing offset transactions are most likely to shift sales from U.S. suppliers to overseas firms. Other categories of offset transactions, in the short or long run, can shift sales from U.S. suppliers as well. To be conservative, BIS bases its estimate of employment impacts only on subcontracting and purchasing transactions. Between 1993 and 2000, subcontracting transactions were valued at $5 billion and purchasing transactions were valued at $6.3 billion, for a total of $11.3 billion for the period, or an average of $1.41 billion per year in displaced sales. Dividing $1.41 billion by $145,802 (the value added by each worker in the aerospace industry in 2000) results in the loss of approximately 77,502 work-years over the eight-year period, or 9,688 work-years annually.
Based on these calculations, it appears that offset agreements and transactions had a net positive effect on employment in the defense sector during the period from 1993 to 2000.
9 See the U.S. Census Bureau Web site at http://www.census.gov/prod/www/abs/industry.html