Offsets: The Industrial, Employment and Security Costs of Arms Exports

  Background.
  Legislation
  Project Publications
  Other Suggested Reading

Background

One 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.

The 2001 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 offset obligation.

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.