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Sixth Study
Conducted Under Section 309
of the Defense Production Act
of 1950, as Amended
This is the sixth report on offsets in defense trade prepared pursuant to Section 309 of the Defense Production Act of 1950, as amended. The Office of Strategic Industries and Economic Security within the U.S. Department of Commerce, Bureau of Industry and Security has been delegated responsibility to prepare the reports required under Section 309. In order to assess the impact of offsets in defense trade, the Department of Commerce obtained data from U.S. firms involved in defense offsets.
This report covers offset agreements and transactions entered into from 1993 through 1999. In addition, the report: (i) discusses the changes in the industrial base during the reporting period as a result of consolidations and mergers in the defense industry; (ii) reports on ongoing U.S. Government interagency activity and discussions with foreign government officials on offsets; (iii) presents summaries of offset agreements and transactions for the reporting period; and (iv) highlights other country practices utilizing offsets.
Total offset activity can be measured by the number and value of new offset agreements entered into between U.S. defense contractors and foreign governments, and the number and value of individual transactions related to the agreements that are carried out during the reporting period.
Offset Agreements, 1999: In 1999, U.S. defense contractors reported entering into 32 new offset agreements with 10 different countries. The total value of new offset agreements was $1.45 billion, representing 72 percent of the total value of related U.S. defense export contracts ($2.01 billion). Both the total value of defense exports and the total value of the offset agreements were at their lowest levels in 1999, compared to the rest of the reporting period (1993-1999).
Offset Agreements, 1993-1999: For the period 1993-1999, U.S. defense companies reported entering into 307 offset agreements with 34 countries. The companies identified 198 different weapon systems or subsystems with an export contract value of $40.2 billion; related offset agreements were $22.3 billion (55 percent of the export contract value). Sales of aerospace weapon systems made up nearly 90 percent of the dollar value of the reported defense export contracts ($35.9 billion).
The dollar values of both export contracts and offset agreements varied annually, as did the associated offset percentages. Although the data show a general drop in overall U.S. export contracts and related offset agreements from 1997 to 1999, the value of the offset agreements as a percent of the reported defense export contract value continues to increase.
Europe continues to be the major destination for U.S. defense exports. Although Europe accounted for 42 percent of total U.S. defense export contracts, new offset agreements with Europe accounted for two-thirds of all new agreements. The rest of the world (non-European countries) accounted for one-third of the offset agreements but 58 percent of the export contracts. Asia accounted for 18 percent of the value of new agreements, the Middle East 14 percent, and the Western Hemisphere just 2 percent.
While the non-European nations had higher export contract totals, Europe had a much greater offset impact because of the higher offset percentages required.
Likewise, in 1999, European nations received higher offset percentages per export contract. In Europe, offsets were equal to an average of 100 percent of the value of the export. In non-European nations, the average value of the new offset agreements was 64 percent of the total contract value.
Offset Transactions, 1999: In 1999, U.S. companies reported offset transactions with a total actual value of $1.81 billion, down 21 percent from the total in 1998 of $2.28 billion and lower than the transaction value for any of the previous six years. This decline is consistent with the drop in defense sales and the number of offset agreements.
Offset Transactions, 1993-1999: During the reporting period, companies cited 3,869 offset transactions executed in 33 countries. These transactions were linked to 238 weapon systems under various existing offset agreements. The total value of these transactions was $15.9 billion.
U.S. defense exports were negatively affected by both the retrenchment of global military expenditures and the increased enforcement of strict foreign offset policies. At the same time, offsets have become an increasingly important factor in determining contract awards, and thus have a direct bearing on U.S. defense contractors’ access to foreign markets. Offset agreements in excess of 100 percent of the contract value are occurring with increasing frequency, and in some cases have exceeded 300 percent. From the U.S. perspective, Europe is clearly the central focus of this trend, dominating offset agreements and transactions with U.S. companies. Because 90 percent of offset agreements are aerospace-related, concerns about the continued economic stability of U.S. prime contractors and the aerospace infrastructure have increased.
BIS calculates that export sales facilitated by offsets maintained 38,400 work-years annually between 1993 and 1999, while the offset transactions displaced about 9,500 work-years annually.
In the coming year, using authorities granted under the Defense Production
Act of 1950, as amended, the Department of Commerce is committed to work with
U.S. industry, the Department of Defense, and foreign governments to analyze
the impact of offsets on all parties and to seek ways to mitigate the effect
of offsets on competition, thus ensuring a robust and vibrant U.S. defense
industrial base.