United States General Accounting Office Washington, D.C. 20548

Military Exports: Concerns Over Offsets Generated With U.S. Foreign Military Financing Program Funds (Letter Report, 06/22/94, GAO/NSIAD-94-127).

"Offsets" are industrial and commercial compensation practices provided to foreign governments and firms as inducements or conditions for the purchase of military goods and services. Israel, Egypt, Greece, and Turkey are the largest recipients of the U.S. Foreign Military Financing (FMF) Program, which provides offsets in conjunction with foreign military sales. Since fiscal year 1975, the United States has provided more than $60 billion in FMF grants and loans to these countries. The FMF Program has been justified to Congress on the basis of its role in (1) strengthening the security of friendly and allied countries and (2) benefiting the U.S. economy because the funds are generally spent on U.S. goods and services. U.S. laws and regulations, however, do not preclude offsets when recipients are making purchases with FMF funding.

Using FMF funds, Israel, Egypt, Greece, and Turkey benefitted in two ways--first with the U.S. government funding or underwriting their weapons purchase with grants or loans, and then by developing their industrial bases and other aspects of their economic through offset requirements from the U.S. government or contractors. Offsets reduce the employment, defense industrial base, and other economic benefits that normally accrue to the United States from weapons exports. Some offsets have caused U.S. contractors as well as companies in nondefense businesses to lose work. Pentagon officials said that no other arms supplier provides a combination of grant aid and offsets like the United States does. GAO summarized this report in testimony before Congress; see: Military Sales: Concerns Over Offsets Generated Using U.S. Foreign Military Financing Program Funds, by Frank C. Conahan, Assistant Comptroller General for National Security and Internal Affairs Programs, before the Subcommittee on Commerce, Consumer Protection, and Competitiveness, House Committee on Energy and Commerce.

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