Quotes are from Impact of Offsets in Defense Trade: An Annual Report to Congress:
Offsets are the practice by which the award of contracts by foreign governments or companies is exchanged for commitments to provide industrial compensation. In defense trade, offsets include mandatory co-production, licensed production, subcontractor production, technology transfer, counter trade, and foreign investment.
Okay, this much we established in general terms in the previous post.
But, why do we do this?
Historically, offsets have served important foreign policy and national security objectives of the United States, such as increasing the industrial capabilities of allied countries, standardizing military equipment, and modernizing allied forces. The use of offsets is now commonplace. Today, virtually all of the defense trading partners of the United States impose some type of offset requirement. Countries require offsets for a variety of reasons: to ease the burden of large defense purchases on their economy, to increase or preserve domestic employment, to obtain desired technology, and to promote targeted industrial sectors.
These are not bad reasons to use offsets to make possible a sale of military equipment to European countries that have been devastated by World War II and have become an ally holding off the tide of the Red Army in the beginning of the Cold War. But, that's behind us now, and I wonder if using offsets to sell to Third World dictatorships with abysmal human rights records is wise?
Offsets may be direct, indirect, or a combination of both. Direct offsets refer to compensation, such as co-production or subcontracting, directly related to the system being exported. Indirect offsets apply to compensation unrelated to the exported item, such as foreign investment or counter trade.
Okay, that was a review.
Developed countries with established defense industries use offsets to channel work or technology to their domestic defense companies. Countries with newly industrialized economies are utilizing both military and commercial related offsets that involve the transfer of technology and know-how. The developing countries with less industrialized economies generally pursue indirect offsets to help create profitable commercial businesses and build their infrastructure. Overall, offsets continue to be an important and necessary factor in a climate of increased competition for a declining number of international sales contracts.
"Overall, offsets continue to be an important and necessary factor in a climate of increased competition for a declining number of international sales contracts."
I wonder about that last remark.
However, offsets may be detrimental to the strength of the U.S. defense industrial base, particularly small and medium-sized defense subcontractors. Offsets can displace U.S. subcontractors, enhance foreign competitors and create excess defense capacity overseas. The U.S. Government policy on Offsets in Military Exports views certain offsets to be economically inefficient and market distorting. See the 1990 Presidential Policy on Offsets and the Defense Offsets Disclosure Act of 1999 for more detailed policy information.
"However, offsets may be detrimental to the strength of the U.S. defense industrial base...."
The US had been exporting scrap steel to Japan prior to World War II. That scrap steel came back to haunt us as, reworked into ships, planes, shells and bombs, it was used to pummel American forces at Pearl Harbor and all across the Pacific and Asia. Brits, Dutch, Australians, New Zealanders, Chinese and others also suffered the consequences of Japanese military equipment that was essentially reincarnated refugee vehicles from America's automobile industry.
This goes far beyond that; World War III is going to be much worse.
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