Commerce Finds U.S. Firms Hurt by Arms Sales Offsets

Federation of American Scientists
Arms Sales Monitoring Project
Contact: Jeff Donarski
Phone: (202) 675-1016

WASHINGTON, D.C.-According to a just-released Commerce Dept. report, U.S. aerospace and defense subcontractors today face increased overseas competition as a result of "offset agreements" tied to U.S. arms exports. One U.S. aerospace firm quoted in the report called offsets are "our number one problem."

Offsets are trade concessions required by foreign buyers as a condition of the sale in today's highly competitive arms market. Through these secret side deals, buyers seek economic benefits to "offset" the cost of an arms purchase. Typical offsets include licensed or joint production of a weapon or its components; counter-trade, in which the seller agrees to purchase or market some of the buyer's goods; or capital investment in the purchasing country.

The Commerce Dept.'s survey of 204 firms impacted by military offsets found that the overwhelming majority-83 percent-were negatively impacted. One aerospace subcontractor estimated that "our company has lost more than 50 percent of our business due to offset agreements." Another firm said "New competitors were created or strengthened due to an offset program, hence, we lost the contracts." Conversely, 17 percent of the affected companies reported positive effects from offsets, including access to new markets and joint projects with foreign firms.

The report found that offset obligations undertaken by American arms corporations fell from $4.8 billion 1993 to $2 billion in 1994. However, offsets as a percentage of contract value grew during this time from 35 percent to 42 percent.

"Weapons sales are usually presented as being good for the American economy-both in terms of employment and balance of trade. Offsets belie these claims," said Paul Pineo, research Associate at the Federation of American Scientists.

The report, "Offsets in Defense Trade," was mandated by a 1992 amendment to the Defense Production Act. The annual report, which was expected last December, was delivered to Congress on Monday.

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