Offsets: The Industrial, Employment and Security Costs of Arms Exports
of the most politically powerful claims supporting U.S.
arms trading today is that weapons exports sustain American jobs.
But the employment benefits of arms exports are diluted, and
may be negated, by seldom-discussed side deals known as "offsets."
These agreements require a supplier to direct some
benefits. -usually work or technology. -back
to the purchaser as a condition of the sale.
Shrinking military budgets have reduced the demand for military equipment, creating a buyer's market. This increased international competition allows customers to extract very favorable deals from suppliers. Former Assistant Secretary of Commerce for Export Administration R. Roger Majak testified before Congress in 1999, "It is a buyer's market for defense systems, and weapon sellers in France, Britain, and the United States are confronted with ever-increasing offset demands."
Offsets come in two forms. Through "direct"
offsets, the purchaser receives work or technology directly related
to the weapons sale, typically by producing the weapon system
or its components under license. "Indirect" offsets
involve barter and countertrade deals, investment in the buying
country, or the transfer of technology unrelated to the weapons
being sold. Both types of offsets send work overseas, but direct
offsets also raise serious security concerns, as they assist
the development of foreign arms industries.
report produced by the Presidential
Commission on Offsets in International Trade (created by the Defense Offsets Disclosure Act of 1999
) concluded that the average offset requirement for 1998 was
57.9% of the value of the contract; this rate represented a slight increase over the
figures from the previous five
years. The quantifiable effect of direct offset transactions for 1993-1998
"supplanted $2.3 billion in U.S. work or 25,300 work-years."
The report concluded that while quantitative levels of
offsets have remained relatively steady, there has been a qualitative increase in the
negotiated transactions. These qualitative increases refer to the
transfer of often sensitive technologies to foreign defense industries,
which improve the competitiveness of foreign firms and rarely (only in 4%
of the cases) result in the transfer of technology back to the U.S.
Furthermore, Ann Markusen, a member of the Presidential Commission on
Offsets, concluded that although "the United States has one of the strongest
licensing regimes in the world, ...enforcement is inadequate." Thus these qualitatively high demands for offsets and the resulting
technology transfer increase potential threats to U.S. national security,
and pose real threats to U.S. jobs.
The report claims that theoretically if offsets were
not offered, there would be a net loss of profits which would have a detrimental impact on
U.S. jobs. However actual figures speak volumes. William Hartung in his report "Welfare
for Arms Dealers" reported that "Today, thanks to these offsets, there are twice as many workers employed building the F-16 in Ankara, Turkey (2,000), as there are at Lockheed Martin's principle F-16 plant in Fort Worth, Texas
(1,155)." Sending jobs abroad reduce labor costs for manufacturers, but
it translates into the loss of American jobs.
Why aren't American workers protesting
this practice? Some are. Workers for Boeing and Lockheed Martin
have rallied against licensed production of weaponry and technology
transfers that result from direct offsets. In October 1995, one-third
of Boeing's workforce went on strike, largely to protest the
use of foreign subcontractors. In other cases, though, workers
and firms may not realize that they are being negatively affected
by military offsets. If an American furniture company loses a
bid for a contract to a Swedish or South Korean firm, for example,
it doesn't know that an American arms corporation may have helped the
foreign firm secure the furniture sale as part of a military
There are other disturbing trends in offset
agreements. There is an increasing
percentage of countries requiring offsets valued at more than 100% of the
negotiated contract. Furthermore, in several recent transactions, the purchasing country
has demanded and successfully negotiated a "pre-offset" from each of the firms competing for
the contract. Pre-offsets are often valued at 10% of the value of the
contract and accompany each bidder's offer. The proceeds of these
pre-offsets remain with the purchaser, regardless
of whether or not the bid is successful.
Offsets even occur on arms sales financed by U.S.
taxpayers. Such deals cost Americans thrice. first when they pay for
researching and developing the weapons, secondly when they pay for the
sale, and again when their jobs are shipped overseas. Rep. Cardiss
Collins, former Chair of the Energy and Commerce subcommittee on Commerce,
Consumer Protection, and Competitiveness, challenged the practice at a
June 1994 hearing. The Government Accounting Office came out with the same
recommendation in a report released at the hearing.
If the public realized that U.S. arms corporations
were jeopardizing American jobs and security by assisting foreign competitors,
opposition to arms sales would increase. The arms industry knows
this, and it has worked hard to keep offsets safely out of view.
Although the government has examined offsets three times in the past
(1985, 1988, and 2001), and some new oversight measures have recently
been enacted (see below), it is still very difficult to point
to specific firms that have been hurt by military offsets or
to ascertain how much offsets are costing U.S. industries and
Various laws have attempted to increase the amount of public information and congressional oversight on offsets. None have actually restricted the use of offsets, although the detrimental effects of these arrangements on both national security and the economy have been repeatedly identified. A summary of offset-related legislation is listed below.
"GAO Highlights Broad Range of Offsets: Arms Exporters Must Cater to Overseas Economic Interests," Press Release, Federation of American Scientists, 28 January 1999.
"Commerce Finds U.S. Firms Hurt by Arms Sales Offsets," Press Release, Federation of American Scientists, 23 May 1996.
"GAO Finds Foreign Competitors Use Arms Purchases to Promote Local Industry," Press Release, Federation of American Scientists, 13 April 1996.
"Workers Protest Offsets," Arms Sales Monitor No.31 (5 December 1995).
"Economic Costs of Arms Exports: Subsidies and Offsets," Testimony of Lora Lumpe before the U.S. Senate Appropriations Committee, Subcommittee on Foreign Operations, 23 May 1995.
"Commerce Implements 1992 Offset Reporting Requirement," Arms Sales Monitor No. 28 (15 February 1995)
"Sweet Deals, Stolen Jobs" The Bulletin of the Atomic Scientists, September/October 1994
"GAO Urges Banning Offsets on FMF-financed Arms Sales" and "Offsets `Outed'" Arms Sales Monitor No. 26 (30 July 1994)
"FAS Urges Reform of Offset Policies," Public Interest Report, January/February 1994, pp. 1-3; ";Sweet Deals and Low Politics: Offsets in the Arms Market," pp. 1, 4-9.
"Arms Sales Offsets Cost Jobs," Arms Sales Monitor No. 23 (30 November 1993)
"The Link of Jobs to Foreign Arms Sales," Baltimore Sun, 28 November 1993
"New Reporting Requirements on Offsets," Arms Sales Monitor No. 22 (30 September 1993)
Offsets in Defense Trade: Tenth Report to Congress. Bureau of Industry and Security, U.S. Department of Commerce, December 2005.
Defense Trade: Report and Recommendations of the Defense Offsets Commission Still Pending. U.S. General Accounting Office, GAO-03-649, May 30, 2003.
Offsets in Defense Trade 2001 , May, 2001. Executive summary of the annual report prepared by the U.S. Department of Commerce, Bureau of Export Administration mandated under Section 309 of the Defense Production Act of 1950. This report covers the six-year period from 1993 through 1998.
The Presidential Offset Commission Status Report , January, 2001. The findings of the commission established by Public Law 106-113 on the impact of offsets on the U.S. economy and national security.
Randy Barber, Offsets, Industrial Participation and Countertrade. A Compendium of Developments in the Military and Civilian Sectors 1995-2000.
Offsets Definitions, U.S. Department of Commerce, Bureau of Export Administration
Offsets in Defense Trade: Fifth Annual Report to Congress. Executive Summary. U.S. Department of Commerce, Bureau of Export Administration, May 2001.
Defense Offsets Disclosure Act of 1999.pdf format.
Defense Trade: Data Collection and Coordination on Offsets. U.S. General Accounting Office, GAO-01-83R, October 26, 2000.
Offsets in Defense Trade: Fourth Annual Report to Congress. Executive Summary. U.S. Department of Commerce, Bureau of Export Administration, December 1999.
Defense Trade: U.S. Contractors Employ Diverse Activities to Meet Offset Obligations. (Washington, D.C.: US General Accounting Office, December 1998) NSIAD-99-35. .pdf version.
Offsets in Defense Trade: Third Annual Report to Congress. Executive Summary. U.S. Department of Commerce, Bureau of Export Administration, August 1998.
Policy Issues in Aerospace Offsets: Report of a Workshop. Charles Wessner and Alan Wolff, eds. (Washington, D.C.: National Academy Press, 1997).
Offsets in Defense Trade: Second Report to Congress. Executive Summary. U.S. Department of Commerce, Bureau of Export Administration, August 1997.
Military Exports: Offset Demands Continue to Grow (Washington, D.C.: US General Accounting Office, 1996) NSIAD-96-65
Offsets in Defense Trade: First Report to Congress. Executive Summary. U.S. Department of Commerce, Bureau of Export Administration, May 1996.
Charles W. Wessner and Alan Wm. Wolff, (eds.), Policy Issues in Aerospace Offsets: Report of a Workshop (National Research Council, 1997). http://www.nap.edu/books/0309058406/html/index.html
Stephen Martin (ed.), The Economics of Offsets: Defence Procurement and Countertrade (Amsterdam: Harwood Academic Publishers, 1996).
Randy Barber and Robert E. Scott, Jobs on the Wing: Trading Away the Future of the U.S. Aerospace Industry (Washington, D.C.: Economic Policy Institute, 1995).
Military Exports: Concerns Over Offsets Generated With U.S. Foreign Military Financing Program Funds (Washington, D.C.: U.S. General Accounting Office, 1994). NSIAD-94-127
"Asian Aeronautics: Technology Acquisition Drives Industry Development" (Washington, D.C.: U.S. General Accounting Office, 1994). NSIAD-94-140
Michael T. Klare, License to Kill, In These Times (Chicago, IL: Institute for Public Affairs, 1994), 10-23 January 1994, pp. 14-19.
Defense Production Act: Offsets in Military Exports and Proposed Amendments to the Act (Washington, D.C.: U.S. General Accounting Office, 1990).
Offsets in Military Exports (Washington, D.C.: Office of Management and Budget, 1990).