For the purpose of its annual report on Offsets in Defense Trade, BIS classifies offset transactions into the following nine categories: co-production, credit assistance, investment, licensed production, purchases, subcontract, technology transfer, training, and other. These categories are defined as follows:
Co-production: Transactions that are based upon government-to-government agreements authorizing the transfer of technology to permit a foreign company to manufacture all or part of a U.S.-origin defense article. Such transactions are based upon agreements specifically referenced in Foreign Military Sales (FMS) Letters of Offer and Acceptance (LOA) and a government-to-government Memorandums of Understanding (MOU). Co-production is always classified as a direct offset.
Credit Assistance: Credit assistance includes direct loans, brokered loans, loan guarantees, assistance in achieving favorable payment terms, credit extensions, and lower interest rates. Credit assistance specifically excludes the use of “banked” offset credits (credits that exceed the requirement of the offset agreement and are permitted, by the terms of the agreement, to be applied to future offset obligation). Credit assistance is nearly always classified as an indirect offset transaction but can also be direct.
Investment: Investment arising from an offset agreement often takes the form of capital dedicated to the establishment of a foreign entity unrelated to the defense sale or to the expansion of the U.S. firm’s subsidiary or joint venture in the foreign country. [Investment can be either direct or indirect.]
Licensed Production: Licensed production consists of the overseas production of a defense article based upon transfer of technical information under direct commercial arrangements between a U.S. manufacturer and a foreign government or producer. It is not pursuant to a co-production agreement specifically referenced in a LOA and co-production MOU. In addition, licensed production almost always involves the manufacturing of a part or component for a defense system, not a complete defense system. Licensed production transactions can be either direct or indirect.
Purchases: Purchases are the procurement of off-the-shelf items from the offset recipient. Purchases are indirect transactions.
Subcontract: In the offset context, subcontracting is the overseas production of a part or component of a U.S.-origin defense article. The subcontract does not necessarily involve the license of technical information and is usually a direct commercial arrangement between the defense prime contractor and the foreign producer.
Technology Transfer: Transfer of technology that occurs as a result of an offset agreement and that may take the form of research and development conducted abroad, technical assistance provided to the subsidiary or joint venture of overseas investment, or other activities under direct commercial arrangement between the defense prime contractor and a foreign entity.
Training: Generally includes training related to the production or maintenance of the exported defense item. Training, which can be either direct or indirect, may be required in unrelated areas, such as computer training, foreign language skills, or engineering capabilities.
Other: An offset transaction other than co-production, credit assistance, licensed production, investment, purchase, subcontract, technology transfer, or training.