Demand for Offsets in Selected Countries Has Increased

Over the last 10 years, the countries in our study have increased their demands for offsets, begun to emphasize longer term offset projects and commitments, or initiated offset requirements. More recently, buying countries have changed their offset strategies in an attempt to achieve lasting economic benefits. Types of Offsets Required by Countries Depend on Offset Goals and Economic Development

The types of offsets required by the countries in our review depend on their offset program goals and the country’s economy—whether it is developed, newly industrialized, or less industrialized. Companies undertake a broad array of activities to meet these offset obligations. These countries have well-established defense industries and are using offsets to channel work to their defense companies, thus supporting their defense industrial base. 12.) Some of the U.S. companies in our review expressed concern about the impact of defense-related offsets on the U.S. defense industry, particularly the loss of production to U.S. defense subcontractors and suppliers. Newly Industrialized Economies

Countries in our study with developing defense and commercial industries, such as South Korea, Singapore, and Taiwan, have pursued both defense-related and nondefense-related offsets. The agreements with Saudi Arabia were informal and did not require a specified offset percentage. 2-3.) 1.) It is difficult to accurately measure the impact of offsets on the overall U.S. economy and on specific industry sectors that are critical to defense. Similarly, the impact of offsets on specific sectors of the U.S. economy cannot be accurately measured because reliable data on the number and size of offset agreements and the transactions used to fulfill these offsets are not readily available. Commerce plans to issue its first report in 1996. Actions Taken to Address Offsets

In response to concerns raised about the impact of offsets, the President issued a policy statement in 1990 that reaffirmed DOD’s standing policy of not encouraging or participating directly in offset arrangements. This policy statement also recognized that certain offsets are economically inefficient and directed that an interagency team, led by DOD in coordination with the Department of State, consult with foreign nations on limiting the adverse effects of offsets in defense procurement. According to the Commerce Department, industry is not opposed to the initiation of consultations on offsets, but is concerned that the U.S. government might unilaterally limit the use of offsets. Military procurements exceeding $5 million are subject to offset. Range from 2 for local purchases to 10 for technology transfer. Indirect offsets.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed offset requirements associated with military exports, focusing on: (1) how the offset goals and strategies of major buying countries have changed; (2) the offset requirements of these countries and how they are being satisfied; and (3) the impact of offsets and any action taken by the U.S. government.

What GAO Found

GAO found that: (1) demands for offsets in foreign military procurement have increased in selected countries; (2) countries that previously pursued offsets are now demanding more; (3) countries are requiring more technology transfer, higher offset percentages, and higher local content requirements to offset their foreign military purchases; (4) further, countries that previously did not require offsets now require them as a matter of policy; (5) the offset strategies of many countries in GAO's study now focus on longer term offset deals and commitments; (6) this shift highlights these countries' use of offsets as a tool in pursuing their industrial policy goals; (7) the types of offset projects sought or required by buyer countries in GAO's review depend on their offset program goals, which in turn are driven by their industrial and economic development needs; (8) companies are undertaking a broad array of activities to satisfy offset requirements; (9) countries with established defense industries are using offsets to help channel work to their defense companies; (10) countries with developing defense and commercial industries pursue both defense- and nondefense-related offsets that emphasize the transfer of high technology; (11) countries with less industrialized economies often pursue indirect offsets as a way to encourage investment and create viable commercial businesses; (12) views on the impact of offsets on the U.S. economy and specific industries are divided; (13) measuring the impact of offsets on the economy as well as specific defense industries is difficult without reliable data; (14) the Department of Commerce is currently gathering additional information on the impact of offsets and is expected to issue a report in 1996; (15) to date, the executive branch agencies have consulted with other countries about certain offsets associated with individual defense procurements, but have not had an interagency team hold the broad-ranging discussions on the ways to limit the adverse impacts of offsets as called for in a 1990 presidential policy statement; (16) according to the Commerce Department, industry is not opposed to the initiation of consultations, but is concerned about unilateral U.S. government actions to limit the use of offsets; and (17) moreover, representatives from several defense companies expressed doubt about the government being able to enforce restrictions on offsets.