GAO Highlights Broad Range of Offsets

Arms Exporters Must Cater to Overseas Economic Interests

Federation of American Scientists
Arms Sales Monitoring Project
Contact: Tamar Gabelnick
Phone: (202) 675-1018

Washington, D.C.- A December 18, 1998 GAO report, released to the public this week, surveyed the broad range of activities carried out by U.S. defense contractors in order to fulfill "offset" agreements related to military sales. These offsets pose a little-known threat to domestic employment and national security.

Offsets are trade concessions required by foreign buyers as conditions of sale in today's increasingly competitive arms market. Through these secretive side deals, buyers demand economic benefits to "offset" the costs of an arms purchase.

The GAO's survey of six major U.S. defense contractors and over 100 representative offset transactions found a seemingly limitless variety of offset requirements. The U.S. contractor may agree to buy foreign parts or use foreign labor, give the recipient country the training and know-how to become a producer of a particular defense item, or serve as a mini "economic development ministry" for customers by providing marketing and financial assistance or investment. The GAO could not divulge information about specific agreements, which are considered "proprietary" and can therefore be hidden from public view.

The GAO report complements a recent Commerce Department report, which provides aggregated quantitative data on offsets (Offsets in Defense Trade: Third Annual Report to Congress). Between 1993 and 1996 U.S. defense companies entered into new offset agreements valued at $15.1 billion, in support of $29.1 billion worth of defense contracts. In other words, for every dollar a U.S. company received due to an arms sale associated with offsets, it returned 52 cents worth of offset obligations to the purchasing country. That report concluded that offsets should be banned for all sales funded by Foreign Military Financing (FMF), a U.S. government military assistance program.

Offsets can jeopardize American jobs by assisting foreign defense and non-defense competitors, and can contribute to the proliferation of weapons production. Though it is difficult to measure the net impact of offsets on the U.S. economy, the GAO suggests that offsets "may result in reduced business opportunities for some U.S. firms" and increase foreign capacity to produce competitive armaments. In the long term, offsets represent a shift of jobs, investment, and technology abroad.

The variety and quantity of offsets call into question key justifications for increased U.S. arms exports, namely preserving American jobs and the defense industrial base. Congress and the public cannot judge the true effects of arms sales in terms of employment and balance of trade unless the impact of offsets is also taken into account. The Federation of American Scientists has repeatedly called for increased transparency about offsets, a ban on all offsets for sales financed by U.S. taxpayers, and long-term efforts toward multilateral cooperation to limit offsets.

The GAO report was written at the request of Senator Russell D. Feingold.

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