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Offset Agreement - Wikipedia, The Free Encyclopedia
Offset Agreement - Wikipedia, The Free Encyclopedia
Offset Agreement - Wikipedia, The Free Encyclopedia
Offset agreement
Defense offset agreements are legal trade practices in Aerospace and Defense Industry. These commercial practices
do not need state regulations, but since the purchasers are mostly Defense Departments of sovereign nations, many
countries have offset laws, public regulations or alternatively, formal internal offset policies. The international names
for these commercial practices connected to weapons trade are various: industrial compensations, industrial
cooperation, offsets, balances, juste retour or equilibrium, to define mechanisms more complex than counter-trade.
Counter-trade can also be considered one of the many forms of defense offset, to compensate a Purchasing
Country;[1] the main difference between a generic offset and counter-trade - both common practices in the
international defense trade - is the involvement of money; in counter-trade goods are paid through barters or other
mechanisms without the exchange of money, while in other defense offsets money is the measure and the medium of
exchange.
Definition
An unbiased definition of these trade practices is arduous, but one may generally assume that offsets are additional
compensations given to a buyer by a seller. The word offset means something “set off against something else so as to
counterbalance it.” Offset is “anything that counterbalances, compensates, or makes up for something else: a set
off.”[2] In Romance languages, compensation derives from the act of weighing on a scale, where different things are
balanced on the two dishes. Balance and equilibrium have the same functional meaning of describing a scale (or a
Libra) in equi-librium. Libra is also the image of justice, balance, juste retour, contropartidas. Defense offsets are
forms of equilibrium that want to go beyond the exchange of money for defense materials, i. e., additional
com-pensations, “additional weight” on buyer's scale-dish. The usage of the word cooperation (industrial
cooperation) to speak about defense offsets is suggesting something more than balance, and precisely the notion of
profit sharing among the trade partners, a splitting of the benefits. In any case, the words and the definitions of
defense offsets that are used by countries or scholars, include almost always a pre-comprehension, i. e., economic
and political theories behind them. An offset agreement is an agreement between two parties whereby a supplier
agrees to buy products from the party to whom it is selling, in order to win the buyer's custom and offset the buyer's
outlay. Generally the seller is a foreign company and the buyer is a government that stipulates that the seller must
then agree to buy products from companies within their country.[3] Often, the aim of this process is to even-up a
country's balance of trade.[4] This is frequently an integral part of international defense contracts.[5]
The market size of the international offset business is related to the size of the international weapon export in the
world. According to SIPRI in 2007 there were 51 billion USD of weapons export, an approximate value because it is
open source, and not all weapons deals data are open source information. All included, one can very roughly
estimate the actual value of this world offset business between 5 and 10 billion USD per year. However, both the
“credit value” and the leverage effects of offsets (beneficial and/or adverse effects) is much higher and more
extensive.
Indirect Offsets (civilian and not related to the production of the weapons item, the tanks. They could be also
military or security related, but not directly connected with the main acquisition, i.e., the tanks)
Foreign Direct Investments: Company S makes investments in 5 (defense or non-defense)
companies in Nation P. The total value of the investments is 14.5 M, and the multiplier is 4, a high
multiplier, since Nation P suffers from a chronic lack of Foreign Direct Investments. This makes
an additional credit value for Company S of 58 M.
Technology Transfer: Company S provides water desalination technologies to one Nation P
company. This technology is particularly appreciated by Nation P. Its actual value is 20M , but
the “credit value” is 7 times the actual value, that is 140 M.
Export Assistance and Marketing: Company S provides commercial assistance to market
products and services of a Nation P's company in a difficult market, such as, for instance, the
Middle East. The assistance is offered for 8 years, at the value of 3 M per year. Nation P
considers this assistance to export as important to create new revenue streams and jobs for its
company, and sets a multiplier of 3. Credit Value 72 M. (Since Company S is not an expert on
marketing and export assistance it may hire a specialist company to subcontract the job. Such a
subcontractor is also known as an “offset fulfiller”).
Nation P controls not only the supply of the military systems or services, but also the implementation of the offsets
according to the offset agreement included or related to the main supply contract. This control is within the Minister
of Defense and/or Ministry of Economy or Finance, or Ministry of Industry and Trade. Often arms importing nations
establish special agencies for the supervision of the defense offsets.
Types of offset
There are two types of offset. Direct offset is when the compensation offered to the buyer is directly related to the
initial transaction. For example, a buyer of military equipment may be given the right to produce a component or
related technology in the buyer's country. The right is usually for a limited period. Indirect offset is when the
supplier is expected to purchase goods from the buyer, which are unrelated to the initial product being supplied.
These could include raw materials, agricultural commodities or other products.[5]
Offset agreement 5
One of the ways to legally compensate for the high-price purchase of military equipment or systems is to offer
services, investments, counter-trade and/or co-production as offsets. For instance, Greek companies produce part of
the Lockheed C-130 that they bought from U.S. The Greek co-production is a U.S. direct offset. Or, in a more
sophisticated form of offset involving three countries, Portugal is in charge of the maintenance of Kuwaiti Lockheed
Martin airplanes. This is a Portuguese “direct” offset, since Portugal bought the same planes, and it is partner in
charge for their maintenance.[15] An investment in a security software company of Romania, or in assisting the
export and marketing in difficult areas of a Belgian environmental company are other forms of actual indirect
offsets.
The most common distinction in offset proposals is between direct and indirect offset.[16] Direct offset is a side
agreement that has to do with the main product/service that is bought/sold, that is military equipment, systems, or
services. They may be also called military offsets. Indirect offsets are side agreements that are not directly related to
the product/service that is bought/sold. Most people refer to such category of offsets as civilian offsets, though there
are many indirect offsets that are not civilian offsets.
The most common types of direct/indirect offsets are:
The most complete and accurate list of form of actual offsets can be found in BIS Annual Reports to Congress,
where all forms of registered offset are codified, according to the old Standard Industrial Classification.[17]
renewable energy.
U.S.: Foreign Military and Direct Commercial Sales - "No Known Offsets" and FMF
For the U.S., the major world exporter of weapons by far, there are two main ways to sell weapons to a foreign
country. The first is referred to as Direct Commercial Sale and it is a “company to government” sale. The second
way is referred to as Foreign Military Sales, that is a “government to government” sale.
A Direct Commercial Sale is highly supervised by U.S. Government and even by the U.S. Congress, in spite
of its free market appearance. The arms trade because of its connection with national security is never free
from strict government supervision.[25] For a sale to a foreign Country's Defense Department, a U.S. defense
firm must be licensed, it is checked by the Defense Department and by the State Department, and, in the case
of relevant sales, even authorized or vetoed by U.S. Congress. Direct Commercial Sales are highly regulated
because of security, political, and commercial reasons. Even from the point of view of indirect and
non-military offset agreements, U.S. Defense companies and their subcontractors (offset fulfillers) must
present detailed report of their offset activities to the Commerce Department, Bureau of Industry and Security
(BIS).[26]
Foreign Military Sales[27] are indirect sales of weapons produced by one or more U.S. contractors through an
agency of the Department of Defense, the Defense Security Cooperation Agency, DSCA. [28] In a way, DSCA
acts as Prime Contractor's “agent” in promoting and selling U.S. made weapons to foreign Countries. The
known FMS disadvantage is that DSCA adds to the final sale price a small percentage for its own
administrative costs; the advantage is that some free training with U.S. Armed Forces for joint international
operations.[29] In this type of sale, however, there are two important aspects in regards to the offset business.
1) Since 1990, under a specific
directive by President George Bush, no
U.S. Federal Agency or U.S.
Government employee can be involved
in the offset business. To each press
release about an FMS (or of any
documents regarding a FMS), there is a
standard disclaimer: “There are no
known offset agreements proposed in
connection with this (potential) sale.”
[30]
However, while DSCA acts on
behalf of the prime contractor with a
foreign government - and refuses even
the mere knowledge about offsets -
under the FMS program prime
contractors are allowed to put all their
offset costs into the final price.[31] The
cost of the offset is not even itemized in the FMSoffer, and if the client wants to discuss or simply to know the cost
of the offset, the client must speak directly with the Contractor and not with DSCA. In other words, U.S.
Government cannot deal with offsets, U.S. Defense Prime Contractors can and do. DSCA has made available in its
complete manual details and analytical explanations for U.S. Defense companies on how to include the offset
various costs into their contract and invoices.[32] So prime contractors, even under FMS, are allowed to recover all
costs “of any offsets which are associated with those contracts.” To be sure, “U.S. Government agencies may not
enter into or commit U.S. companies to any offset agreement.” De facto during the cold war offsets had different
functions and often U.S. Government Agencies were directly involved. President Bush by ending the cold war with a
victory, likewise ended U.S. agencies’ liability in delicate practices like the offsets (1990), since they lost the
primary political value they had during the cold war.[33]
Offset agreement 8
2) U.S. funds assigned by United States Foreign Military Financing(FMF) that may be connected with Foreign
Military Sales (FMS) cannot be used for any type of offsets.
Canada: The offset program is called Industry Canada, and it is under the Ministry of Industry (1986 policy,
modified in 1994). The threshold is 100 million Canadian Dollars; The offset requested is100% of the contract value.
Maximum Multiplier is 5. [45].
Czech Republic: Offset regulations are set by Government Resolution 9 - 2005. The Ministry of Trade and
Industry is in charge of Industrial Cooperation (also through an Offset Commission). The minimum value of the
contract is CZK 500 million. The minimum offset percentage is 100 per cent. No multipliers are used. Offset focus is
on new technologies, co-operation and technology transfer. Minimum 20% of direct offset. The Offset Commission
issues Annual Reports on the status of the offsets.
Denmark: Ministry of Defense is in charge, but the Ministry of Economic Affairs is monitoring offset
implementations. The Industrial Cooperation policy was issued in 2005. The threshold is DKK 25 million. Minimum
offset requirement of 100%. Multipliers but can be considered for R&D and technology transfers. Denmark signed a
trilateral agreement with UK and The Netherlands on “best practice for the application of abatements in offset”
regarding swaps of offset obligations.
Estonia: No offset law. Estonia is particularly interested in counter-trade.
Finland: No law, only public guidelines on Industrial Participation. The Ministry of Defense is in charge,
Defense Materiel Industry and Industrial Participation, but with The Ministry of Trade and Industry. The minimum
contract value for offsets is EUR 10 million. 100% minimum of offset requirement. Multipliers are between 0.3 and
3.0 (for Finnish export). Technology transfer multipliers are negotiated. Finland's focus is on its domestic defense
industry.
France: No formal offset policy, but has counter-trade and offset departments in the Ministry of Economic
Affairs and in the Ministry of Defense. However, France like U.S., is almost completely independent on its own
military needs, and it has a minimal amount of weapon procurements from foreign countries.
Germany: German official position is that offset arrangements are economically counterproductive in defense
trade. However, Germany applies a policy of “industrial balances,” based on 100% of the contract value. German
Federal Ministry of Defense (BMVg), and The Federal Office of Defense Technology and Procurement (Das
Bundesamt für Wehrtechnik und Beschaffung - BWB, that is an Acquisition Agency)[46] are in charge of
procurement and cooperation. The Agency has a branch office for U.S. and Canada in Reston, Virginia [47]. It is
worth noticing that Germany, while being the third world exporter of weapons, does not have huge “defense
corporations”, that is, large companies whose core business is weapons production, but civilian companies that
produce weapons in addition to their main business. WT - Wehr Technik [48] is a source of information on BWB
activities.
Greece: – Offset regulation is in the official Procurement Law, 3433/2006. The Hellenic Ministry of National
Defense is in charge through the department of General Armaments Directorate (GAD), and the Division of Offsets
(DO). The threshold for offset request is EUR10 million. The minimum offset requirement is between 80 and 120%.
Multipliers are from 1 to 10. Greece does not accept indirect offsets, since it is focused on the strengthening of its
military capabilities. According to SIPRI open source data, Greece is the major EU importer of weapons.[49]
Hungary: – The offset legal base is a Government Decree 228/2004 and offset authority is the Ministry for
National Development and Economy - Directive No. 23/2008. The threshold is HUF1 billion (3.5 Mil Euro) with a
minimum offset requirement of 100%. Multipliers can go up to 15. The confidentiality clause on offsets is essentially
commercial, as a normal Non Disclosure Agreement.[50]
Japan: No formal offset policy. Japan Defense Agency (JDA) depended directly on the Prime Minister and was
in charge of defense procurement, thorough the Bureau of Equipment and the Bureau of Finance. However, since
2007 the Japan Defense Agency (JDA) has been transformed into a full Ministry of Defense, with a minister in
cabinet-level decisions. Most of the Japanese defense import is from U.S., and it is regulated by bilateral agreements.
The majority of defense bidding goes through the representation of Japanese trading companies, though direct
Offset agreement 10
bidding is theoretically possible. There is an unspoken policy for the largest Japanese companies that is a understood
as “Buy Japanese” products policy. Two remarks: Japan, Germany and Italy, in spite of evident cultural differences,
have similar political attitudes in “balancing” foreign weapons procurements. But Japan, in the name of political
principles and then of official laws, restrained itself on weapon exports, and since the 1970s Japanese defense
industry is self-confined to Japanese domestic market.[51]
India: Government issued a Defense Procurement Procedure in 2006, revised in 2008. The threshold is 3 billion
RS (65 mil USD), 30% of offset. Multipliers are not clear. Above 300 billion RS (697 mil USD), there is a
requirement of “indigenization,” that is a Buy Indian requirement for 30-50% of the contract value. For offset are
also accepted subcontract in outsourced services, such as engineering, design, and defense software.
Israel: Ministry of Industry, Trade and Labor is in charge of the offset policy and implementation. Threshold is
100,000 USD. Minimum offset request is 35%, multipliers are either 1 or 2. The main point about Israel and its
offset policy is the fact that Israel is by far the largest beneficiary of United States Foreign Military Financing
(FMF), getting more than 50% of the entire available U.S. FMF budget. This circumstance sets a strong limit to
offsets request by Israel to U.S., since FMF funds cannot be used for offsets.[52]
Italy: There is no public law on offsets. There is not even an official name for the offset policy. The public
position is that Italy has no general offset policy, just ad hoc (offset) policies. The National Armament Directorate of
Ministry of Defense is in charge of offsets. The threshold for offset is 5 million Euro. The minimum offset request is
70%, but generally goes up to 100%. The highest multiplier is 3. The focus is on export opportunities for Italian
defense companies. There is no website or web-page for a nameless offset program, the closest would be the
Minister of Defense website [53].
Lithuania: Resolution No. 918/03 of the Government of the Republic of Lithuania (15-7-03). The Ministry of
Economy is in charge of offsets. The threshold is LTL 5 million, about 1.5 million eur. Minimum offset requirement
of 100%. Multipliers are between 1 to 5.[54]
Netherlands: The Ministry of Economic Affairs - Commissariat for Military Production (CMP) is in charge of
offset policy and implementation (following to a protocol of agreement with the Ministry of Defense). The threshold
for offset is EUR 5 million. Minimum offset requirement of 100% . Multipliers are between 1 and 5. The focus is on
innovation and marketing support and it is directed by the Ministry of Economic Affairs [55]. Guidelines to an
Industrial Benefits and Offsets Program in the Netherlands are available at [56]
Norway:' Norwegian Ministry of Defense has the responsibility for Industrial Cooperation Agreements (ICA)
and the supervision of the agreements during their implementation. The offset threshold of contract value is usually
NOK 50 million, (about 5.5 Million Euro). The required offset quantity is 100% of the contract value and multipliers
are from 1 to 5. Note: Norway is not part of European Union, but has joined the European Defense Agency with no
voting rights. The guidelines of procurement and offsets can be found at: [57] and [58]
Kuwait: New Guidelines for Kuwait Offset Program were published in 2007, following to a Minister of
Finance directive, that regards all foreign procurements related to both military and non military contracts. The
National Offset Company (NOC) is a state-owned company, and its activities in the Kuwait Offset Program are on
behalf of the Ministry of Finance. The offset commitment is still at 35% of the monetary value of military contracts.
Threshold is KD 3m, (for civilian contracts is KD 10m.) After 2007 there were fundamental changes, making offsets
requirements more effective and complex, including the multipliers systems, with more attention on the tangible
benefits for Kuwait.[37]
Poland: Ministry of Economy is in charge of offset. Polish Offset Law was issued in 1999; Offset regulations
were approved in 1996 and revised in 2007. The threshold value for offsets is 5 million Euro and the request is for
100% of offset. The Multipliers are between 2.0 and 5.0. Direct offsets for country's defense industry, and opening of
new export markets are Polish priorities.[59]
Offset agreement 11
Portugal: Defense Minister's directive on Contrapartidas (offsets) has been issued in 2002. Decree-Law
153/2006 and 154/2006 regulates Portuguese Contrapartidas. The Permanent Commission on Offsets (CPC) is a
government agency, depending on the Ministry of Economy and the Ministry of Defense, and it is in charge of
negotiating and supervising offsets. The threshold is 10 million Euro, and the minimum offset request is 100 %.
Multiplier have been set in 2006 between 1 and 5. There is no preference with regard to direct or indirect offsets.
Qatar: Qatar has no official offset policy but foreign Defense Companies involved with the Qatar Ministry of
Defense are encouraged to invest and to build partnership in R&D and Education in Qatar.
Romania: Ministry of National Defense and an Agency for Special Offset Techniques are in charge, and Law
336/2007 regulates offsets. Romania requests offset for defense purchase above 3 million Eur, and the minimum
amount of offset proposals is 80% of the contract value. Multipliers can go to 5. Indirect offset are accepted,
especially in ecology and shipbuilding. Romania is the only EU country that did not sign the EU Code of Conduct on
Offsets (July 2009)[60]
Saudi Arabia: Saudi Economic Offset Program is under the Deputy Minister of Defense. Saudi offset request is
that 35% of their contract value is invested in Saudi jobs creation and training, economic diversification, technology
transfer and foreign direct investments in general. Threshold is 400 million Saudi Reals (107 million USD). UK and
France have established bilateral offset program with Saudi Arabia. UK Al YamamahEconomic Offset Program (I, II
and III) is the most complex and longest program, it began in 1987 and still alive. The French Offset is directed by
Societe Francaise d'Exportation de Systemes Avances (SOFRESA), a private company operating on behalf of the
French government. The U.S., in spite of the fact the most of its defense sales to the Kingdom are U.S. Defense
Department Foreign Military Sales, leaves offsets to the private contractors, such as Lockheed Martin, SAIC,
Boeing, and General Dynamics. Foreign Direct Investments are authorized and supervised by SAGIA [61], and they
receive high multipliers according to the most strategic sectors and the Kingdom's priorities (such as water,
electricity, communications, etc.).
Slovakia: Ministry of Economy is the governing body for offsets. The threshold (not established clearly) can go
down to 130,000 euro. The amount of offset proposal is negotiable, but usually is equivalent to 100% of the contract
value. Higher multipliers are for direct offsets.[62]
Slovenia: Ministry of Defense is in charge, and offset guidelines were issued in 2000. The threshold is around
500,000 Euro, and the offset request is of 100% of the contract value. Multipliers go up to 7. Foreign Direct
Investments and technology transfers have the highest multipliers [63]
South Korea: – DAPA, the Defense Acquisition Program Administration, is in charge of country offset policy,
that was published in 2008. Threshold is 10 million USD. Minimum offset is 30%. Multipliers are between 1 and 6.
The contractual Memorandum of Understanding on offsets is a substantial part of the main contract.
Spain: Ministry of Defense - General Direction of Armaments and Material (DGAM) - Industrial Cooperation
Agency of Spain (ICA) is responsible for the negotiation and the supervision of offsets. The guidelines for offset are
not public, but issued by the Minister of Defense through internal and confidential procedures. The general request is
100% of the contract value. Multipliers are between 2 and 5.[64]
Sweden: The offset policy was issued by the Government in 1999. The Industrial Participation program is
directed by Minister of Defense, Defence Material Administration (FMV), and offset guidelines were issued in 2002.
The contract value offset threshold is about 10 million Euro. The request for offset is 100%. Multipliers can be
applied only to 10% of the total offset value. Only defense related offsets (direct offsets) are accepted, since Sweden
applies art. 346 of the European Treaty of Lisbon [65].
Switzerland: The Federal Department of Defence, Civil Protection and Sport, division "armasuisse" is in charge
of offsets. The threshold for offset request is 15 million Swiss Francs. The offsets is minimum 100% and multipliers
are between 2 and 3.[66]
Offset agreement 12
Turkey: The Minister of Defense through an undersecretary for the Defense Industries is in charge of the
Industrial Participation / Offset Directive (2007). The threshold is about 5 million USD. The minimum required
offset is 50%. Multipliers are between 1 and 6. The offset fulfillment time is 2 years, that is unusually short. Mostly
interested in direct offsets to develop the Turkish defense industry.[67]
United Arab Emirates: The United Arab Emirates Offset Program Bureau (OFFSET) is in charge of offsets;
Chairman of the bureau is the Crown Prince of Abu Dhabi. The criteria are more sophisticated than most offset
policies. The request for offset is 60% of the contract value. The offset credit is not evaluated on the investments, but
through profit over time of an offset venture (a kind of multiplier ex post). Joint ventures in the UAE and partnership
with local companies are the most common offset proposal, as direct and indirect offset.[36]
United Kingdom: No official Policy. The Department of Defense is in charge, but offsets go through UKTI,
UK Trade & Investments,[wikipedia] under the Minister of State for Trade, Investment and Business. In 2007 the
Prime Minister announced a change, transferring responsibility for defense trade from the Defense Export Services
Organization (DESO) to UK Trade and Investment (UKTI). Since April 2008 UKTI DSO (Defense & Security
Organization) has responsibility for supporting both defense and security exports. The general threshold is 10 million
GBP, but through bilateral agreements with Germany and France, has been reciprocally set to 50 million GBP. The
offset is generally around 100%, no multipliers. [68].
United States: The U.S. is formally against offsets. To date, the U.S. is the only country that prohibits U.S.
government officials and employees, as well as Government agencies, to get involved in any offset business. It
depends on foreign defense “prime” contractors for less than 2% of its defense procurement. However, many
countries consider the Buy American Act an equivalent, for practical purposes, to offset policies of other countries.
Partners or defense subcontractors of U.S. prime contractors of U.S. Government are subjected to Buy American
Act.
To be sure, both of the above concerns are real and justified, but not very realistic. The U.S. is so far advanced
militarily when compared to the rest of the world that it is not reasonable thinking that direct offsets may create a
threat against U.S. security, or at least, a threat that is more dangerous than the very American made exported
weapons may pose to U.S. national security. Weapons export and connected military offsets are closely monitored
by the Defense Department (on the military side) and by the State Department (on the political side) and by U.S.
Congress. Methodologically speaking, it is an important point never to underestimate the enemy and relying on one's
one superiority, but it is not realistic thinking that transferring 20 years old technologies to allied countries as offsets
of a main U.S. defense sale is a threat to national security. As recent history teaches, most security threats come from
domestic breaches, not from authorized tech-transfers abroad. In other words, if a defense technology transfer
offset is a real defense security threats, it should not be authorized, if it is not, then using the “national security
principle” in all arguments is an abuse that is detrimental to the very ground of the principle.
The most delicate and convincing issue is U.S. “economic security.” Economy (Competition) and War (Defense) do
not follow the same principles and methods, in spite of many useful analogies and significant synergies, and this is
especially true in U.S., the greatest Commercial Republic of all times. Commerce Department, through BIS,
monitors U.S. offsets specifically from the point of view of the adverse effects on U.S. economy, and reporting
yearly to U.S. Congress. President Bush I and Clinton nominated special Commissions to examine the issue of
offsets on their unintended domestic adverse effects, focusing on their detrimental effects on U.S. and other
weapons exporting nations. To be sure, the most realistic concern is about the potential loss of jobs in U.S.[70] The
effects of almost all requested offsets by purchasing countries are the increase of turnover of the offset involved
activities and the creation more jobs. An exemplification: if the sales of Lockheed Martin planes requires the offset
financing of defense components manufacturing companies in Romania, these Romanian companies would subtract
a piece of the market from U.S. companies, and therefore indirectly would cause a loss of jobs in U.S.. The argument
follows the protectionist view that a factory in U.S. closes because another similar factory opened in Romania or
Japan. From the buyer's point of view, offsets are supposed to be a form of “economic policy” and state intervention.
However, from a strict free trade point of view the creation of wealth (production and turnovers as well jobs) in other
countries is not detrimental to commercial Republics like U.S., on the contrary, it increases their purchasing power to
buy U.S. defense products.[71]
The matter of indirect offsets, and specifically civilian offset, poses other types of problems and serious economic
concerns. Generally speaking indirect offsets do not affect U.S. national security. But if indirect offsets, such as
marketing or financing of foreign competitors of U.S. companies, help competitors to grow internationally, or even
in the U.S. domestic markets, the problem of the adverse effects of indirect offsets on U.S. economy becomes real.
The interaction of defense indirect offsets with non-military U.S. business is substantial, given the amount of offset
obligations of U.S. toward competing economies. BIS monitors these effects closely in all fields, but it is clear that if
a U.S. “marketing assistance” indirect offset, for instance, helps a European company to sell its products and services
in a third importing country, where a U.S. companies may sell their own equivalent products, this may constitute a
relevant adverse effects of U.S. defense industry offset practices. The most uncontrollable effects, however, is when
indirect offsets strike U.S. small and medium domestic companies with no information about it, and with a
protection of secrecy.[72] This point is also present in the internal/domestic European Union market, that expresses a
similar concern for the unfair distortion of normal competitive market caused by indirect non-military offsets,
protected by unjustified secrecy [see following section]
Offset agreement 14
Wisconsin (Beloit Corporation) got in trouble without understanding that the reason was an hidden cause, that is, an
indirect offset by Northrop (now Northrop Grumman) with the Finnish Ministry of Defense. Only a concerned
Wisconsin politician, Sen. Russell D. Feingold, discovered the real reasons in 1992, after being informed that a
tender for supply of machinery of the value about 50M USD was not awarded to the Wisconsin company, but to a
Finnish company (Valmet Corporation) as part of an offset deal with the Finnish Government. [78] This U.S. offset
story brought to light the issue of the impact of confidential agreements by defense companies on U.S. non military
business, in some instances with devastating effects. Feingold's discovery is enlightening for the EU common market
as well, where interferences and adverse impacts on EU companies are allowed by an unjustified national attitude for
confidentiality or secrecy on indirect, non military, offset deals. Art. 346 of Lisbon Treaty, written more than 50
years ago, is there to wisely avoid disruptive effects caused by unjustified military secrecy in civilian offsets in the
common European market. In EU market of Defense, approximately of the size of 250B USD, with 27 sovereign
state authorities that can claim secret of state -from Germany to Cyprus and Luxembourg-, there is a potential for
indirect non-military offsets of 60B USD, that is, more 1000 times the distorsion problem caused by Northrop (and
the Finnish Ministry of Defense) to Beloit.
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Udis, B and Maskus, KE (1991). Offsets as industrial policy: Lessons from aerospace, Defence Economics, 2,2,
151-164.
U.S. DoC (2007). Offsets in Defense Trade, Eleventh Report to Congress, U.S. Department of Commerce,
Washington, DC.
See also
• Counter trade
• European Union defence procurement
• Defense contractor
• European Defence Agency
• Defense Security Cooperation Agency
• Arms industry
• List of countries by military expenditures
• List of United States defense contractors
• Canadian Arms trade
• Offset loan
• Quid pro quo
• Trade pact
• Al Yamamah
References
[1] Counter-trade is an indirect offset. As a general introduction to the topic see J. Brauer -J. P. Dunne Arms Trade Offsets and Development,
2005 (Martin, 1996, Udis and Maskus, 1991).
[2] Oxford Dictionary, 2nd Editions, Clarendon Press, 1989
[3] http:/ / www. wisegeek. com/ what-is-an-offset-agreement. htm
[4] (http:/ / www. ndia. org/ Content/ NavigationMenu/ Advocacy/ Action_Items/ PDFs29/ Offset_Background_Paper. pdf)
[5] http:/ / www. acq. osd. mil/ dpap/ cpic/ ic/ offsets_of_foreign_military_sales. html
[6] BIS, Annual Report, 2006 p. 28. See also the definition: “Offset: Compensation practices required as a condition of purchase in either
government-to-government or commercial sales of “defense articles” and/or “defense services” as defined by the Arms Export Control Act (22
U.S.C. § 2751, et seq.) and the International Traffic in Arms Regulations (22 C.F.R. §§ 120-130). – BIS, 2007, page . For a Glossary on
Defense Offsets see (http:/ / www. bis. doc. gov/ defenseindustrialbaseprograms/ osies/ offsets/ 13th_report_to_congress. pdf) Appendix E, p.
30
[7] In 2002, U.S. companies had 49% of global defense industry export, EU % 35. Data from AECMA 2002 Facts and Figures. (http:/ / www.
aecma. org/ Publications/ AECMA_FactsnFigures_2002. pdf). See also Google Doc http:/ / spreadsheets. google. com/
pub?key=pfi17f7KhiCtd4zCv_PGDMA& gid=1. In 2007 according to SIPRI open source data the U.S. percentage of global export in arms
was 61%
[8] (http:/ / www. nowpublic. com/ world/ brazil-rebuild-its-weapons-industry); Roberto Mangabeira Unger, Brazilian Strategic Affairs Minister
up to June 2009, now Harvard University professor.
[9] Lloyd J. Dumas, Do offsets mitigate or magnify the military burden? in J. Brauer - J.P. Dunne, Arms Trade and Economic Development.
Theory, Policy, and Cases in Arms Trade Offset London-New York, 2004,
Offset agreement 17
[10] Markunsen describes (and opposes) defense offsets not as economy or politics, but as “political economy.” Most EU countries have indeed
their Ministries of Economy in charge, or at least heavily involved in the offset business, since they understand offsets precisely as “political
economy.”
[11] And the connected question: are defense offsets a benefit to the buyer greater than a negotiation for a weapons acquisition off-the-shelf? See
on this point J. Brauer and J.P. Dunne, Arms Trade and Economic Development. Theory, policy, and cases in arms trade offsets. Routledge,
Abingdon - New York 2004
[12] April 20, 2000 - Offset Requirements Of Defense Deals Often Have Little To Do With Purchaser -- By Daniel Pearl – Staff Reporter of the
Wall Street Journal
[13] April 20, 2000 -Offset Requirements Of Defense Deals Often Have Little To Do With Purchaser -- By Daniel Pearl – Staff Reporter of the
Wall Street Journal
[14] See also U.S. Bureau for Industry and Security's example to explain the offset BIS Annual Report 2007, p. 136.
[15] For the definition of semi-direct offset see Belgian Policy of Industrial Compensation (http:/ / economie. fgov. be/ )
[16] “Offset comes in different types, the most basic division being: Direct offsets: transactions that are directly related to the defense items or
services exported by a defense firm – the supplying prime of offset. Indirect offsets: Offset transactions that are not directly related to the
defense items or services exported by the supplying prime. These are further subdivided into: - Defense (related) indirect offsets - Non-defense
(related) indirect offsets.” Final Report of 06-DIM-022 Study on the effects of offsets on the Development of a European Defence Industry and
Market By E. Anders Eriksson with contributions by Mattias Axelson, Keith Hartley, Mike Mason, Ann-Sofie Stenérus and Martin Trybus, 12
July 2007. The study was financed by the European Defense Agency and contracted to FOI and SCS. (http:/ / www. eda. europa. eu/
studiesprojects. aspx?directorate=Industry and Market), p.3
[17] See for instance the Offsets in Defense Trade, Sixth Study.- BIS Annual Report to Congress, 2002. (http:/ / www. bis. doc. gov/
defenseindustrialbaseprograms/ osies/ offsets/ 01rept. pdf). Also Appendix D: Offsets Transactions by SIC based Economic Sectors
(spreadsheet) (http:/ / www. bis. doc. gov/ defenseindustrialbaseprograms/ osies/ offsets/ 2001rptexecsum. htm); Recently BID moved to
NAICS
[18] http:/ / www. dioa. org
[19] See Ann Markusen, Arms Trade as Illiberal Trade, 2004: Defense contractors as trading companies in J. Brauer - JP Donne, Arms Trade
and Economic Development, 2004
[20] (http:/ / www. oecd. org/ dataoecd/ 4/ 18/ 38028044. pdf)
[21] http:/ / www. devcorpint. com/
[22] Security Assistance Management Manual (SAMM) DoD 5105, Ch 5, pag 247, Figure C5.F14. Offset Certificate. (http:/ / www. dsca. mil/
samm/ Chapter 05 - FMS Case Development. pdf)
[23] “Defence companies often avoid significant spending on an offset project, prior to the award of the defence contract for an obvious reason;
the defence market is characterised by uncertainty - programme delays, budget overruns and economic problems at national and corporate
level are common. However, there are exceptions to the rule, such as in the case of Swedish defence aerospace group Saab.” Keri Smith JDIN
Reporter Offsets in Europe: A matter for debate Jane's Defence Weekly - November 28, 2007
[24] http:/ / www. defenceagainstcorruption. org/ images/ stories/ TI_Defence_Offset_Report_2010-webLR. pdf
[25] Ann Markusen, The Arms Trade as Illiberal Trade, Conference on Defense Offsets, Cape Town, South Africa, September 24-6, 2002. Ann
Markunsen, Senior Fellow at the Council on Foreign Relations, directed also a 2 years long “Study Group on the Arms Trade and the
Transnationalization of the Defense Industry: Economic versus Security Drivers” in 1998-2000 (http:/ / www. cfr. org/ project/ 207/
study_group_on_the_arms_trade_and_the_transnationalization_of_the_defense_industry. html)
[26] The most insidious damages to U.S. economy are unexpected problems and losses that may arise in all economic sectors (the area of U.S.
“indirect offsets”) to unaware U.S. companies and business. The unjustified secrecy of civilian offsets, supported by a strong defense
contractors's lobby: a) prohibits a definitive evaluation of the economic successes or, alternatively, of the economic adverse effects of indirect
offsets; b) creates unknown and hidden source of losses and problems for U.S. companies; c) establishes clandestine niches of business areas,
unnecessarily and unjustly protected by secrecy, where abuses, violations, frauds and corruption escape laws. d) damage the concept of “state
secret” by extending it to things that do not deserve such high, noble, and restricted protection.
[27] (http:/ / www. dsca. mil/ programs/ biz-ops/ factsbook/ FactsBook07. pdf)
[28] (http:/ / www. dsca. mil/ )
[29] U.S. Defense Department – Defense Security Cooperation Agency: “ Strength through Cooperation. The FMS Advantage: Frequently Asked
Questions About Foreign Military Sales” (http:/ / www. libertyparkusafd. org/ lp/ Hale/ Special Reports\Defense Security Cooperation
Agency\The FMS Advantage. pdf)
[30] (http:/ / www. dsca. mil/ PressReleases/ 36-b/ 2006/ Saudi Arabia_06-36. pdf) All New Releases by DSCA regarding FMS sales must
include this disclaimer.
[31] “Note 9. OFFSET COSTS. The Department of Defense is not a party to any offset agreements/arrangements that may be required by the
Purchaser in relation to the sales made in this LOA and assumes no obligation to administer or satisfy any offset requirements or bear any of
the associated costs. To the extent that the Purchaser requires offsets in conjunction with this sale, offset costs may be included in the price of
contracts negotiated under this LOA. If the Purchaser desires visibility into these costs, the Purchaser should raise this with the contractor
during negotiation of offset arrangements.” Security Assistance Management Manual (SAMM), DoD 5105, Ch.5, pag. 22 – (http:/ / www.
dsca. mil/ samm/ Chapter 05 - FMS Case Development. pdf)
[32] See above.
Offset agreement 18
[33] The Lockheed bribery scandals in Japan, Germany, The Netherlands and Italy is one of the most known for the political liabilities involved
in the side agreements of weapons sales. In this famous case, the involvement was of military officers and main politicians of U.S. allied
countries. A more recent affair is the Belgian Dassault Agusta scandal.
[34] http:/ / www. eda. europa. eu/ offsets/
[35] http:/ / economie. fgov. be/ organization_market/ compensations/ industrial_offset_en. htm
[36] http:/ / www. offset. ae
[37] http:/ / www. kuwaitnoc. com
[38] http:/ / www. janes. com
[39] http:/ / www. epicos. com
[40] http:/ / www. cto-offset. com
[41] http:/ / www. defence. gov. au/ dmo/
[42] http:/ / www. bmwfj. gv. at/ EN/
[43] http:/ / mineco. fgov. be/ organization_market/ index_en. htm
[44] http:/ / www. mee. government. bg/ eng/ offsetp/ offsetp/ docs. html?id=201014
[45] http:/ / strategis. ic. ca/ epic/ internet/ inadad. nsf/ en/ ad03662e/ html
[46] de:Bundesamt für Wehrtechnik und Beschaffung
[47] http:/ / www. bwb. org
[48] http:/ / www. monch. com
[49] http:/ / www. mod. mil. gr
[50] http:/ / www. nfgm. gov. hu/ feladataink/ kulgazd/ ellentetelezes
[51] http:/ / www. mod. go. jp/ e/ index. html
[52] http:/ / www. moital. gov. il/ CmsTamat/ search. aspx?w=offset
[53] http:/ / www. difesa. it
[54] http:/ / www. ukmin. lt/ en/ industry/ compensation/ doc/ c_resolution_compensation. pdf
[55] http:/ / www. cmp. ez. nl
[56] http:/ / www. ez. nl/ dsresource?objectid=163139& type=PDF
[57] http:/ / www. regjeringen. no/ en/ dep/ fd/ Documents/ Handbooks-and-brochures/ 2004/ norwegian-defence-procurement. html?id=419462
[58] http:/ / www. regjeringen. no/ upload/ FD/ Reglement/ Gjenkjoepsbestemmelser_14mars2008_engelsk. pdf
[59] http:/ / www. mg. gov. pl/ English/ ECONOMY/ Offset+ Programmes/ Basic+ information/
[60] http:/ / www. acats. gov. ro/ index_en
[61] http:/ / www. sagia. sa
[62] http:/ / www. economy. gov. sk
[63] http:/ / www. mors. si/ ?id=home& L=1
[64] http:/ / www. isdefe. es
[65] http:/ / www. sweden. gov. se/ sb/ d/ 2060
[66] http:/ / www. ar. admin. ch/ internet/ armasuisse/ en/ home. html
[67] http:/ / www. ssm. gov. tr
[68] http:/ / www. dso. uktradeinvest. gov. uk/ ip. htm
[69] (https:/ / www. bis. doc. gov/ defenseindustrialbaseprograms/ osies/ offsets/ 1990prespolicyoff. htm)
[70] “Defense Offsets: Are They Taking Away Our Jobs?” Hearing Before The Subcommittee On Criminal Justice, Drug Policy, And Human
Resources Of The Committee On Government Reform House Of Representatives - One Hundred Sixth Congress - First Session - June 29,
1999 - Serial No. 106–114. (http:/ / 127. 0. 0. 1:4664/ redir?url=file:/ / C:\Users\p\Downloads\Desktop\wik-off-2\offset-stealing-us-jobs.
pdf?event_id=19607& schema_id=8& q=JUNE+ 29%2C+ 1999+ %2D+ Serial+ No%2E+ 106%E2%80%93114%2E& src=1& schema=8&
s=9BxzYcs8WhbPRXktxjQadMnJgHc)
[71] From a arms buyer point of view the real issue is: Are offsets, of any type, successful economic policies fostering economic development and
growth in a nation? On this point see J. Brauer-JP Donne, Arms Trade..
[72] Sen. Russell D. Feingold's access to covered information in a specific case of damages to U.S. business provoked by an indirect offset
changed the attitude of U.S. Government toward offsets.
[73] Final Report of 06-DIM-022 Study on the effects of offsets on the Development of a European Defence Industry and Market By E. Anders
Eriksson with contributions by Mattias Axelson, Keith Hartley, Mike Mason, Ann-Sofie Stenérus and Martin Trybus, 12 July 2007. The study
was financed by the European Defence Agency and contracted to FOI and SCS. (http:/ / www. eda. europa. eu/ studiesprojects.
aspx?directorate=Industry and Market)
[74] Idem, p. 3-4.
[75] s:The Treaty establishing the European Economic Community (EEC)
[76] (http:/ / eur-lex. europa. eu/ en/ treaties/ dat/ 12002E/ pdf/ 12002E_EN. pdf)
[77] L. Sigal, The Changing Dynamics of U.S. Defense Spending, Praeger Publishers, Westport (CT), 1999, p. 200-1. See also Ann Markusen,
The Arms Trade as Illiberal Trade, Conference on Defense Offsets, Cape Town, South Africa, September 24-6, 2002, The Hidden Injuries of
Privileged Trade.
Offset agreement 19
[78] Today Velmet has a different name after a merging in 1999, and it is now Metso (http:/ / www. metso. com); In 2000 Metso bought Beloit for
160 M USD, hiring all Wisconsin workers and paying also for Beloit patents.
[79] http:/ / www. globaloffset. org/
[80] http:/ / www. the-dma. org. uk/
Article Sources and Contributors 20
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