The U.S. Department of Commerce coordinates the use of U.S. Government resources and authority in order to level the playing field by advocating on behalf of U.S. business interests as they compete against foreign firms for specific international contracts or other U.S. export opportunities.

The International Trade Administration’s Advocacy Center is the defense industry’s point of contact for requesting defense trade advocacy.  All requests for U.S. Government advocacy assistance for defense-related projects should be submitted to the Advocacy Center.

The Bureau of Industry and Security’s Office of Strategic Industries and Economic Security reviews all defense advocacy requests submitted to the Advocacy Center to determine whether the request is consistent with U.S. foreign policy and national security objectives.

Further information on the Advocacy Center’s activities and procedures can be obtained from its website.

Offsets: Compensation practices required as a condition of purchase in either government-to-government or commercial sales of: (1) Defense articles and/or defense services as defined by the Arms Export Control Act (22 U.S.C. § 2778) and the International Traffic in Arms Regulations (22 C.F.R. §§ 120-130); or (2) Items controlled under an Export Control Classification Number (ECCN) that has the numeral ‘‘6’’ as its third character in the Commerce Control List found in Supplement No. 1 to part 774 of this chapter other than semisubmersible and submersible vessels specially designed for cargo transport and parts, components, accessories and attachments specially designed therefor controlled under ECCN 8A620.b; test, inspection and production equipment controlled in ECCN 8B620.b, software controlled in ECCN 8D620.b and technology controlled in ECCN 8E620.b.

Military Export Sales: Exports that are either Foreign Military Sales (FMS) or commercial (direct) sales of defense articles and/or defense services as defined by the Arms Export Control Act and International Traffic Arms Regulations.

Offset Agreement: Any offset as defined above that the U.S. firm agrees to in order to conclude a military export sales contract. This includes all offsets, whether they are “best effort” agreements or are subject to penalty clauses.  The agreement is normally reflected in a contract that specifies the percentage of the total defense-related export sale to be offset, the forms of industrial compensation required, the duration of the offset agreement, and penalty clauses, if any.

Offset Transaction: Any activity for which the U.S. firm claims credit for full or partial fulfillment of an offset agreement. For the purpose of analysis, BIS divides offset transactions into nine different categories, which are defined in the “Types of Transaction” section below.

Direct Offsets: Offset transactions that are directly related to the article(s) or service(s) exported or to be exported pursuant to the military export sales agreement. Direct offsets are usually in the form of co-production, subcontracting, training, licensed production, or possibly technology transfer, investment, or credit assistance.

Indirect Offsets: Offset transactions that are unrelated to the article(s) or service(s) exported or to be exported pursuant to the military export sales agreement. The kinds of offsets that may be considered “indirect” include purchases, investment, training, credit assistance, and technology transfer.

Actual Value of Offset Transactions: The U.S. dollar value of the offset transaction in U.S. dollars without taking into account multipliers or intangible factors.

Credit Value of Offset Transactions: The U.S. dollar value credited for the offset transaction by application of a multiplier, any intangible factors, or other method. The credit value may be greater than, equal to, or less than the actual value of the offset.

Multiplier: A factor applied to the actual value of certain offset transactions to calculate the credit value earned. Foreign purchasers use multipliers to provide firms with incentives to offer offsets that benefit targeted areas of economic growth. When a (positive) multiplier is applied to the price of a service or product offered as an offset, the defense firm receives a higher credit value toward fulfillment of an offset obligation than would be the case without application of a multiplier. Conversely, foreign purchasers may apply “negative” multipliers to discourage certain types of transactions not considered to be in the best economic interest of the receiving entity.

Example: A foreign government interested in a specific technology may offer a multiplier of “six” for offset transactions providing access to that technology. A U.S. defense company with a 120 percent offset obligation from a $1 million sale of defense systems ordinarily would be required to provide technology transfer through an offset equaling $1.2 million. With a multiplier of six, however, the U.S. Company could offer only $200,000 (actual value) in technology transfer and earn $1.2 million in credit value, fulfilling its entire offset obligation under the agreement.

Types of Transactions:
Co-production: Transactions that are based upon government-to-government agreements authorizing the transfer of technology to permit foreign companies to manufacture all or part of U.S.-origin defense articles. Such transactions are based upon an agreement specifically referenced in Foreign Military Sales (FMS) Letters of Offer and Acceptance (LOA) and a government-to-government Memorandums of Understanding (MOU). Co-production is always classified as a direct offset.

Credit Assistance: Credit assistance includes direct loans, brokered loans, loan guarantees, assistance in achieving favorable payment terms, credit extensions, and lower interest rates. Credit assistance specifically excludes the use of “banked” offset credits (credits that exceed the requirement of the offset agreement and are permitted, by the terms of the agreement, to be applied to future offset obligation). Credit assistance is nearly always classified as an indirect offset transaction but can also be direct.

Investment: Investment arising from an offset agreement, often taking the form of capital dedicated to the establishment of a foreign entity unrelated to the defense sale or to expanding the U.S. firm’s subsidiary or joint venture in the foreign country.  Investment can be either direct or indirect.

Licensed Production: Overseas production of a U.S.-origin defense article based upon the transfer of technical information under direct commercial arrangements between the U.S. manufacturer and the foreign government or producer. Licensed production is not pursuant to a co-production government-to-government MOU.  In addition, licensed production almost always involves a part or component for a defense system, rather than a complete defense system.  Licensed production transactions can be either direct or indirect offsets.   

Other: An offset transaction other than co-production, credit assistance, licensed production, investment, purchasing, subcontracting, technology transfer, or training. If a U.S. firm reports “other” as a type of transaction, please describe the transaction.
Purchases: Purchases involve the procurement of off-the-shelf items from the offset recipient. They are indirect transactions.

Subcontracting: In the offset context, subcontracting is the overseas production of a part or component of a U.S.-origin defense article. The subcontract does not necessarily involve the licensing of technical information. Instead, it is usually a direct commercial arrangement between the defense prime contractor and a foreign producer.

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.

Training: Generally includes training related to the production or maintenance of the exported defense item. Training, which can be either direct or indirect, may be required in unrelated areas, such as computer training, foreign language skills or engineering capabilities.

Background
Who must report?
Reporting on Export Sale and Related Offset Agreements and Transactions
Updated Offset Reporting Regulation
Do you need additional help?

Background

Offsets are the practice by which the award of defense contracts by foreign governments or companies is conditioned upon commitments from the defense contractor to provide some form of compensation to the purchaser.  In defense trade, offsets can include activities such as mandatory co-production, credit assistance, licensed production, subcontractor production, technology transfer, purchases, training, and foreign investment.

The use of offsets is commonplace in global defense trade.  Today, virtually all of United States’ defense trading partners impose some type of offset requirement.  Countries require offsets for a variety of reasons including easing the burden of large defense purchases on their economy, increasing or preserving domestic employment, obtaining desired technology or promoting industrial sectors.

In 1984, the U.S. Congress added Section 309 on offsets in defense trade to the Defense Production Act (DPA) (50 U.S.C. app § 2099), requiring the President to submit a report to Congress on the impact of offsets on the defense preparedness, industrial competitiveness, employment, and trade of the United States.  This provision has subsequently been amended, most recently in 2009 as Section 723 (U.S.C. App. § 2172, but the purpose of the report remains the same.  Since 1992, the Secretary of Commerce has been the President’s Executive Agent for carrying out Section 723 responsibilities.  Section 723 authorizes the Secretary of Commerce to develop and administer the regulations necessary to collect offset data from U.S. firms.  The Secretary of Commerce has delegated this authority to the Bureau of Industry and Security (BIS), which implements Section 723 through the Offset Reporting Regulation, 15 CFR Part 701.

Who must report?

Any U.S. firm that enters into a contract to provide defense articles or defense services to a foreign country or foreign firm pursuant to an offset agreement exceeding $5 million in value must report that agreement.  In addition, U.S. firms must also report each offset transaction completed in performance of existing offset commitments for which offset credit of $250,000 or more has been claimed from a foreign representative.

As noted in § 701.4(b) of BIS’s Offset Reporting Regulation, U.S. firms must only report to BIS on offset agreements that they are directly responsible for reporting to the foreign customer, regardless of who performs the transaction.  In other words, prime contractors must report for their subcontractors if the subcontractors are not direct parties to the offset agreement.

In addition, U.S. firms should not report to BIS on offset agreements that their foreign subsidiaries or affiliates enter into with foreign countries if the U.S. firm is not a party to the offset agreement.  However, if a foreign subsidiary or affiliate of a U.S. firm performs an offset transaction that is credited toward an offset agreement to which the U.S. firm is a party, the U.S. firm must report that transaction to BIS.

The deadline for reporting all new contracts and transactions signed or executed as described above is June 15th of the subsequent year in which they occurred.

Firms must submit their data in hardcopy to the Offset Program Manager, U.S. Department of Commerce, Bureau of Industry and Security, Room 3876, 14th Street and Constitution Avenue, N.W., Washington, DC 20230, and as an email attachment to This email address is being protected from spambots. You need JavaScript enabled to view it.. Email attachments must include the information in a computerized spreadsheet or database format.  All submissions must include a point of contact (name and telephone number).

   Reporting on Export Sale and Related Offset Agreements and Transactions

Reports must include the information described in § 701.4(c)(1) of BIS’s Offset Reporting Regulation. 

Reports on offset transactions must include the information described in § 701.4(c)(2) of BIS’s Offset Report Regulation. U.S. firms are required to provide an itemized list of offset transactions completed during the reporting period. The list should include the elements listed below for each such transaction (numerical estimates are acceptable when actual figures are unavailable; estimated figures shall be followed by the letter “E”).

A table format is provided to assist with the reporting of export sales and related offset agreements and offset transactions.  Firms may add comments or explanations relating to the information as footnotes attached to the reports.  To access this table format, click on the link below.

Format for Reporting on Export Sale and Related Offset Agreement and Transactions

   Updated Offset Reporting Regulation

On December 23, 2009, BIS published a final rule in the Federal Register updating its Offset Reporting Regulations. The December 23, 2009 rule clarifies the information BIS is seeking to receive from industry and requires that industry provide more precise information on the industry sectors in which offset activity occurs. Firms reporting pursuant to the Offset Reporting Regulation must use the requirements in the final rule.

The Bureau of Industry and Security (BIS) prepares an annual report to Congress on the impact of offsets in defense trade pursuant to Section 723 of the Defense Production Act of 1950, as amended.

Offsets in defense trade encompass a range of industrial compensation arrangements required by foreign governments as a condition of the purchase of defense articles and services from a non-domestic source.

BIS collects data annually from U.S. firms involved in defense exports with associated offset agreements in order to assess the impact of offsets in defense trade. BIS updated the Reporting of Offsets Agreements in Sales of Weapon Systems or Defense-Related Items to Foreign Countries or Foreign Firms regulation (15 CFR Part 701) in 2009.

BIS also participates in an interagency team established to consult with foreign nations on limiting the adverse effects of offsets in defense procurement.

Items offered as part of an offset transaction may require an export license from the relevant U.S. Government agency. For items that require an export license, such as items controlled for Missile Technology (MT) reasons, exporters are advised to consult with the Departments of Commerce, Defense, and State to obtain export control policy guidance prior to offering such items as part of an offset transaction.

This Website includes a wide range of offsets in defense trade resources, including the Offset Reporting regulations, guidance and recommended format for reporting offset activities, frequently asked questions on offsets, and copies of recent reports to Congress and the Presidential Policy on Offsets.