**Offsets in Defense Trade**

Eighth Report to Congress

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**July 2004**

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**U.S. Department of Commerce**

**Bureau of Industry and Security**

**[Offsets in Defense Trade]{.smallcaps}**

**Eighth Study**

Conducted Under Section 309 of the Defense Production Act of 1950, as
Amended

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Prepared by

U.S. Department of Commerce

Bureau of Industry and Security

July 2004

For additional copies of this report, please contact the Office of

Strategic Industries and Economic Security at (202) 482-4506 or visit

[www.bis.doc.gov/defenseindustrialbaseprograms]{.underline}

**Table of Contents**

[Executive Summary v](#__RefHeading___Toc77650112)

[1. Background 1](#background)

[1.1 Legislation and Regulations 1](#legislation-and-regulations)

[1.2 U.S. Government Policy 2](#u.s.-government-policy)

[1.3 Offsets Terminology 3](#offsets-terminology)

[1.4 Countries and Regions 4](#countries-and-regions)

[1.5 Scope of Report 5](#scope-of-report)

[2. Statistical Overview 1](#statistical-overview)

[2.1 General Overview 1](#general-overview)

[2.2 Offset Transaction Types 2](#offset-transaction-types)

[2.3 Offset Transaction Categories 4](#offset-transaction-categories)

[2.4 Industry Classification -- SIC Codes
6](#industry-classification-sic-codes)

[2.5 Countries and Regions 9](#countries-and-regions-1)

[3. Impact of Offsets on the U.S. Defense Industrial Base
11](#impact-of-offsets-on-the-u.s.-defense-industrial-base)

[3.1 Defense Preparedness 11](#defense-preparedness)

[3.2 Employment 11](#employment)

[3.3 Domestic Defense Productive Capability
12](#domestic-defense-productive-capability)

[4. Offset Agreements Activity, 1993-2002
15](#offset-agreements-activity-1993-2002)

[4.1 Overview 15](#overview)

[4.2 Offsets Concentration 15](#offsets-concentration)

[4.3 Regional Distributions 17](#regional-distributions)

[4.4 Europe vs. All Other Countries 17](#europe-vs.-all-other-countries)

[4.5 Are Offset Demands Increasing? 20](#are-offset-demands-increasing)

[5. Offset Transaction Activity, 1993-2002
25](#offset-transaction-activity-1993-2002)

[5.1 Overview 25](#overview-1)

[5.2 Regional Distributions 27](#regional-distributions-1)

[5.3 Offset Transactions by Type 29](#offset-transactions-by-type)

[5.4 Offset Transactions by Category
31](#offset-transactions-by-category)

[5.5 Offset Transactions by Category and Type
33](#offset-transactions-by-category-and-type)

[5.6 Offset Transactions by Industrial Sector
35](#offset-transactions-by-industrial-sector)

[6. Aerospace Offset Issues 39](#aerospace-offset-issues)

[6.1 Trends in the Import and Export Markets
39](#trends-in-the-import-and-export-markets)

[6.2 Trends in Aerospace 42](#trends-in-aerospace)

[6.3 Defense Trade Offsets in Aerospace
45](#defense-trade-offsets-in-aerospace)

[7. Other Government Offset Activities
49](#other-government-offset-activities)

[8. Conclusions 51](#conclusions)

Appendix A: Section 309 of the Defense Production Act

Appendix B: Department of Commerce Rules Regarding Reporting of Offset
Activity

Appendix C: Defense Offsets Disclosure Act of 1999

Appendix D: Offset Transactions by Economic Sector

Appendix E: Country Offset Policies

Appendix F: Glossary and Offset Example

Appendix G: Publication List

**Tables**

[Table 1‑1: Purchasing Countries and Groups with Offset Agreements
5](#__RefHeading___Toc57014964)

[Table 2‑1: General Summary of Offset Activity, 1993-2002
2](#__RefHeading___Toc57014965)

[Table 2‑2: Offset Transactions by Type, 1993-2002
3](#__RefHeading___Toc57014966)

[Table 2‑3: Offset Transactions by Category and Type, 1993-2002
7](#__RefHeading___Toc57014967)

[Table 2‑4: Offset Transactions by Major Industrial Sector and Offset
Type, 1993-2002 8](#__RefHeading___Toc57014968)

[Table 2‑5: Countries with Offset Agreements and Transactions By Region,
1993-2002 10](#__RefHeading___Toc57014969)

[Table 5‑1: Offset Transactions Analysis
26](#__RefHeading___Toc57014974)

[Table 5‑2: Offset Transactions by Leading Countries
27](#__RefHeading___Toc57014975)

[Table 5‑3: Regional Offset Transactions and Agreements
29](#__RefHeading___Toc57014977)

[Table 5‑4: Offset Transactions by Major Industrial Sectors
35](#__RefHeading___Toc57014983)

[Table 6‑1: U.S. Imports of Aerospace Products by Major Countries of
Origin (in \$ millions) 40](#__RefHeading___Toc57014984)

[Table 6‑2: Aerospace and Non-Aerospace Defense Exports and Offsets,
1993-2002 46](#__RefHeading___Toc57014985)

**Charts**

[Chart 4‑1: Reported Export Contracts and Offset Agreements Annually,\
1993-2002 (in \$ billions) 16](#__RefHeading___Toc77650523)

[Chart 4‑2: Regional Totals of Export Contracts and Offset Agreements,\
1993-2002 (in \$ billions) 18](#__RefHeading___Toc77650524)

[Chart 4‑3: Percentage Offsets for Europe vs. Rest of World (Weighted
Moving Average, 1993-2002) 22](#__RefHeading___Toc77650525)

[Chart 5‑1: Regional Totals of Offset Transactions, 1993-2002 (in \$
billions) 28](#__RefHeading___Toc77650526)

[Chart 5‑2: Direct, Indirect, and Unspecified Offset Transactions,
1993-2002\
(in \$ millions) 30](#__RefHeading___Toc77650527)

[Chart 5‑3: Offset Transactions by Category, 1993-2002 (in \$ millions)
31](#__RefHeading___Toc77650528)

[Chart 5‑4: Percentage of Total Annual Offset Transactions Accounted\
for by Top Three Transaction Categories, 1993-2002
32](#__RefHeading___Toc77650529)

[Chart 5‑5: Direct Offset Transactions by Category, 1993-2002
34](#__RefHeading___Toc77650530)

[Chart 5‑6: Indirect Offset Transactions by Category, 1993-2002
34](#__RefHeading___Toc77650531)

[Chart 5‑7: Offset Transactions by Industry and Type for Top 12
Sectors,\
1993-2002 (in \$ billions) 37](#__RefHeading___Toc77650532)

Chart 6-1: International Trade in Aircraft, Aircraft Engines, and

[Parts, 1993-2000 (in \$ millions) 46]{.smallcaps}

[Chart 6-2: U.S. Civil and Military Aircraft Sales (\$ Millions)
and]{.smallcaps}

[Civil Aircraft Sales as percent of total Aerospace Sales
51]{.smallcaps}

[]{#__RefHeading___Toc77650112 .anchor}Executive Summary

This is the eighth annual report on the impact of offsets in defense
trade prepared pursuant to Section 309 of the Defense Production Act of
1950,[^1] as amended (DPA). The Department of Commerce's Bureau of
Industry and Security (BIS) has been delegated responsibility for
preparing the reports required under Section 309. The report analyzes
the impact of offsets on the defense preparedness, industrial
competitiveness, employment, and trade of the United States. To assess
the impact of offsets in defense trade, the Department of Commerce
obtained data from U.S. defense firms involved in defense exports and
related offsets and supplemented this information with statistics from
the Bureau of the Census and the National Science Foundation.

This report covers offset agreements and offset transactions entered
into from 1993 through 2002. This report (i) discusses the changes in
the industrial base during the reporting period; (ii) provides summaries
of offset agreements and transactions for the reporting period; and
(iii) analyzes the impact of defense-related offsets specifically on the
aerospace industry.

Offset Activity

[Agreements]{.underline}

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.

[Offset Agreements, 2001-2002]{.underline}: U.S. defense contractors
reported entering into 35 new offset agreements with 14 countries in
2001 and 41 new offset agreements with 17 countries in 2002. For 2001,
new U.S. offset-related defense export contract values totaled \$7.0
billion. New offset agreements attached to these exports had a total
value of \$5.5 billion, equaling a 78.1 percent offset requirement. For
2002, new U.S. offset-related defense export contract values climbed to
\$7.4 billion, with new offset agreements attached to these exports
having a total value of \$6.1 billion, or an 82.3 percent offset
requirement.

European nations received offsets equal to 95.8 percent of the total
export values in 2001 and 94.3 percent in 2002, down from 111.1 percent
in 2000. For non-European nations, though, the average offset
requirement was 55.1 percent in 2001 and 77.3 percent in 2002, up
significantly from 50.0 percent in 2000.

[Offset Agreements, 1993-2002]{.underline}: U.S. companies reported
entering into 434 offset agreements with 36 countries during the time
period from 1993 to 2002. U.S. companies reported export sales of 181
different defense systems or subsystems with a total value of \$63.6
billion. Offset agreements related to those export contracts were valued
at \$41.8 billion, or 65.7 percent of the export contract value. Sales
of aerospace defense systems (i.e., aircraft, engines, and missiles)
were valued at \$53.6 billion and accounted for nearly 82 percent of the
total export contracts.

Over the ten-year period, European countries alone accounted for nearly
two-thirds (65 percent) of the value of offset agreements but less than
half (46 percent) of the value of related export contracts. European
offset demands continued to increase over the ten year period, although
more slowly than the demands from other countries. Between 1993 and
2002, European offset demands as a percentage of exports increased by 16
percentage points, going from 78.3 percent to 94.3 percent; for the rest
of the world, the increase was almost 55 percentage points, rising from
22.5 percent to 77.3 percent.

Asian countries are capturing an increasing share of offset agreements
and export contracts as well as demanding higher offsets. In 2000, Asia
accounted for only 2.8 percent of the value of offset agreements; in
2002, Asian countries accounted for 64.8 percent of the total. In
contrast, European agreements secured 78 percent of the total value of
offset agreements in 2000, but only 34 percent of agreements in 2002.
Furthermore, Asian offset requirements reached 52.3 percent in 2001, and
grew to 78.4 percent in 2002. The region's 1993-2000 average offset
requirement was only 26.2 percent.

The data indicate that the level of the demands from non-European
nations as a group is rising as well. For 1993-2000, the average offset
requirement for non-European countries totaled only 33.9 percent; for
1993-2002, the average requirement rose to 42.4 percent.

In a country-by-country analysis, Austria led Europe and the rest of the
world in terms of its offset requirement percentage. On average, sales
of U.S. weapons systems to Austria were associated with offset
agreements worth 174.2 percent of the value of the weapon systems. Other
countries with offset percentages greater than the value of the weapon
systems exported were the Netherlands (120.5 percent), South Africa
(116.7 percent), Greece (110.5 percent), and Sweden (103.9 percent).

[Transactions]{.underline}

Offset activity can also be measured by the number and value of
individual offset transactions carried out in fulfillment of offset
agreements during the reporting period.

[Offset Transactions, 2001-2002]{.underline}: U.S. companies reported
offset transactions with a total actual value of \$2.6 billion in both
2001 and 2002. The 2001 figure represents a 53 percent increase from the
2000 total of \$1.7 billion, but is only slightly higher than the
average annual value of offset transactions (\$2.3 billion) during the
ten-year period from 1993 to 2002. The percentage of the value of offset
transactions classified as indirect rose during 2001 and 2002, reaching
63.8 percent in 2002, compared with 35.9 percent of the value in direct
transactions that year. The remaining 0.3 percent of the value was
unspecified.

[Offset Transactions, 1993-2002]{.underline}: For 1993-2002, U.S.
companies reported 5,903 offset transactions executed in 35 countries.
These offset transactions were related to 230 defense systems under
existing offset agreements. The actual value of the offset transactions
from 1993 to 2002 was \$23.5 billion. Indirect offsets accounted for
58.2 percent of the total value of transactions and direct offsets made
up 39.1 percent. The remaining 2.7 percent of the value was unspecified.

The multiplier for all transactions during 2001-2002 was 1.265; this
means that purchasing countries granted, on average, \$1.265 of offset
credit for each \$1 in actual offset transaction value for those two
years. For 1993-2002, the total multiplier was 1.224.

Findings

The Asian share of total export contracts and the region's level of
offset demands have experienced dramatic growth in recent years.
Individual countries in other non-European regions of the world are also
demanding and receiving increased levels of offsets; non-European
reached 77 percent of the value of the sales. At the same time,
increases in Western European offset demands are moderating, with
requirements in 2001 and 2002 remaining around 95 percent of the value
of the agreement, but still well above other regions of the world.

By combining BIS offsets data with aerospace industry data from the
Census Bureau's 2001 Annual Survey of Manufactures (ASM) (the most
recent data published), the impact on defense productive capacity can be
estimated. According to comparable BIS data for 2001, U.S. defense
exports with offset agreements attached totaled \$7.0 billion. Using ASM
information on value added per aerospace worker, BIS estimates that
(assuming 100 percent export content) these exports sustained 42,440
work-years in 2001.

In 2001, subcontracting, purchasing, co-production, and licensing
transactions (those most likely to shift sales from U.S. suppliers to
overseas firms) were valued at \$1.9 billion. Dividing \$1.9 billion by
\$165,858 (the value added by each worker in the aerospace industry in
2001) results in the loss of approximately 11,460 work-years in 2001.

Based on these calculations, it appears that defense export sales had a
net positive effect on employment in the defense sector during the
period from 1993 to 2001, although the net positive effect was
diminished by the offset agreements. This calculation assumes that
industry would not have received these defense export contracts if it
had not entered into the related offset agreements. It should also be
noted that the above analysis does not include an additional

\$9 billion of offsets in technology transfer, training, overseas
investment, and marketing transactions, because the impact of these
transactions on the U.S. defense industrial base is difficult to
calculate. Nor does this calculation include consideration of the
long-term effect of creating new or enhanced competitors.

**Purpose of Report**

The DPA Section 309(b)(1) requires BIS to identify the cumulative
effects of offset agreements on "the full range of domestic defense
productive capability with special attention paid to the firms serving
as lower-tier subcontractors or suppliers" and "the domestic defense
technology base as a consequence of the technology transfers associated
with such offset agreements." To address the effects of offsets on
defense productive capability, this analysis compares 2001 offset
transactions dealing with transportation equipment and electronic
equipment to 2001 value added from these two industries, as reported in
the Census Bureau's most recent Annual Survey of Manufactures. Over
time, the lost future opportunity of offset transactions can negatively
affect capacity utilization and ultimately, domestic productive
capability. Value added, in turn, is a measurement of the productive
capability of an entire industry, encompassing productivity of labor,
efficient capital use, and full production capacity. In sum, 2001 offset
transactions related to transportation equipment and electronic
equipment totaled 1.4 percent of the 2001 value added for both
industries. This value does not indicate that the domestic defense
productive capability declined by 1.4 percent, but it is instead a
measure of lost potential opportunity, with corresponding impacts on
capacity utilization and in the end, domestic productive capability.

To identify the effects on the domestic defense technology base, this
analysis compares total 2001 technology transfer transactions for
aerospace manufacturing and electronic component industries to total
2001 research and development (R&D) spending for aerospace manufacturing
industries. These two industries were chosen for their involvement in
the most frequent and the highest levels of offset transactions for
2001. Offset transactions that involved technology transfer for these
two industries in 2001 totaled \$421 million. This value is equivalent
to 1.9 percent of total R&D spending for those two industries in 2001.
For aerospace manufacturing alone, the value of technology transfer
offsets as a percentage of total R&D spending for the sector totaled 4.8
percent.

While there are no indications from other U.S. Government agencies that
domestic defense productive capability has decreased cumulatively
because of offsets, there is also no indication that offsets enhance
defense productive capability, especially for lower tier subcontractors.
The recent growth in new defense industrial subcontractors described and
foreseen by officials with the Department of Defense (DoD)[^2]
illustrate that the supplier base is improving. However, DoD officials
attribute much of that growth to new, high-tech defense subcontractors
that supply weapons systems almost exclusively marketed to the U.S.
government. These new suppliers do not contribute to those systems sold
abroad -- those systems with related offset agreements.

**Contents of Report**

Sec. 309(d)(1) of the DPA, as amended, requires this report to include
five specific analyses (Subparts A-E). The net assessment of the
elements of the industrial base and technology base covered by the
report, required in Subpart (A), is featured in Chapter 5. The six
sectors of the industrial base most commonly involved in offset
transactions are: Transportation equipment, electronic/electrical
equipment, industrial machinery, business services, technical services
and consultants, and measuring and analyzing instrumentation. These
industrial sectors comprise 85 percent of all offsets transactions. A
full listing of industrial sectors -- based on SIC (Standard Industrial
Classification) codes -- affected by offsets appears in Chapter 2 along
with a full discussion by SIC code in Chapter 5. Appendix D provides a
more specific breakout by SIC code.

As required by Subpart (D), a detailed summary of offset arrangements --
in the form of agreements and transactions -- concluded during 1993-2002
is provided in Chapter 2. Chapter 4 provides a more detailed analysis of
aggregated offset agreements for 1993-2002 as well as in 2001 and 2002
specifically. Included in this analysis are data that indicate a small
number of U.S. companies and weapon systems dominated offset agreements
during the reporting period. The top five companies (of 39 reporting
offset agreements) accounted for 79.5 percent of the value of defense
export contracts and 79.0 percent of the value of offset agreements
reported for 1993-2002.

Chapter 5 provides a similar more detailed analysis of offset
transactions aggregated from 1993 to 2002 as well as in 2001 and 2002,
specifically. For example, more than half (51.6 percent) of the total
value of offset transactions for the ten-year period fell into the
transportation equipment group (SIC 37) that includes aircraft, guided
missiles, ships, and motor vehicles.

Although the Department of Commerce is authorized in Subpart (B) to make
recommendations for appropriate remedial action, at this time, no
recommendations are provided. In addition, as described in Chapter 7, no
other government agencies or interagency groups have conducted offset
studies since the previous Annual Report on Offsets in Defense Trade. In
the past, the Department of Commerce, through the Bureau of Industry and
Security has participated in a Department of Defense-led Interagency
Offsets Steering Committee (the Committee), which includes
representatives from the Departments of Defense, State, Treasury, and
Labor, and the Office of the U.S. Trade Representative. However, the
Committee conducted no activities this year, and accordingly, there are
no findings or recommendations of any interagency studies to be
summarized, as required by Subpart (C). Furthermore, no bilateral or
multilateral negotiations relating to the use of offsets were conducted
during the past year. As such, the following report does not feature a
summary of those negotiations, as required by Subpart (E).

# Background

## Legislation and Regulations

In 1984, the Congress enacted amendments to the DPA, which included the
addition of Section 309 addressing offsets in defense trade.[^3] Section
309 required the President to submit an annual report on the impact of
offsets on the U.S. defense industrial base to the then-Committee on
Banking, Finance, and Urban Affairs of the House of Representatives[^4]
and the Committee on Banking, Housing, and Urban Affairs of the Senate.

Initially, the Office of Management and Budget coordinated the
interagency process of preparing the report for the Congress. Other
agencies involved in the process included the Departments of Commerce,
Defense, Labor, State, and Treasury, and the Office of the U.S. Trade
Representative. In 1992, Section 309 of the DPA was amended, and the
Secretary of Commerce was given the responsibility of preparing the
report for the Congress, on the President's behalf, and was directed to
function as the President's Executive Agent for carrying out
responsibilities under Section 309 of the DPA.[^5] See Appendix A for
the text of Section 309.

Under Section 309, the Secretary of Commerce is authorized to develop
and administer the regulations necessary to collect offset data from
U.S. defense exporters. The Secretary of Commerce delegated this
authority to the Bureau of Industry and Security, which published its
first offset regulations in the [Federal Register]{.underline} in
1994.[^6] See Appendix B for a copy of the regulations.

The 1992 amendments to Section 309 of the DPA made other changes to the
offset data collection process. The amendments lowered the offset
agreement reporting threshold from \$50 million to \$5 million for U.S.
firms entering into foreign defense sales contracts subject to offset
agreements. Under the regulations, firms report all offset transactions
for which they receive offset credits of \$250,000 or more. Every year,
U.S. companies report offset agreement and transaction data for the
previous calendar year to BIS. The data elements collected each year
from industry are listed in Section 701.4 of the Department's offset
regulations and are attached in Appendix B.

## U.S. Government Policy 

The U.S. Government policy on offsets in defense trade was developed by
an interagency offset team. On April 16, 1990, the President announced a
policy on offsets in military exports.[^7] In 1992, Congress passed the
following provision that reflected the substance of the policy announced
by the President:[^8]

\(a\) In General. Recognizing that certain offsets for military exports
are economically inefficient and market distorting, and mindful of the
need to minimize the adverse effects of offsets in military exports
while ensuring that the ability of United States firms to compete for
military export sales is not undermined, it is the policy of the
Congress that\--

   (1) no agency of the United States Government shall encourage, enter
directly into, or commit United States firms to any offset arrangement
in connection with the sale of defense goods or services to foreign
governments;

   (2) United States Government funds shall not be used to finance
offsets in security assistance transactions, except in accordance with
policies and procedures that were in existence on March 1, 1992;

   (3) nothing in this section shall prevent agencies of the United
States Government from fulfilling obligations incurred through
international agreements entered into before March 1, 1992; and

   (4) the decision whether to engage in offsets, and the responsibility
for negotiating and implementing offset arrangements, reside with the
companies involved.

\(b\) Presidential Approval of Exceptions. It is the policy of the
Congress that the President may approve an exception to the policy
stated in subsection (a) after receiving the recommendation of the
National Security Council.

\(c\) Consultation. It is the policy of the Congress that the President
shall designate the Secretary of Defense to lead, in coordination with
the Secretary of State, an interagency team to consult with foreign
nations on limiting the adverse effects of offsets in defense
procurement. The President shall transmit an annual report on the
results of these consultations to the Congress as part of the report
required under section 309(a) of the DPA.

In 1999, the offset policy was supplemented by provisions contained in
the Defense Offsets Disclosure Act of 1999.[^9] Specifically, Congress
made the following findings:

(1) A fair business environment is necessary to advance international
    trade, economic stability, and development worldwide, is beneficial
    for American workers and businesses, and is in the United States
    national interest.

(2) In some cases, mandated offset requirements can cause economic
    distortions in international defense trade and undermine fairness
    and competitiveness, and may cause particular harm to small- and
    medium-sized businesses.

(3) The use of offsets may lead to increasing dependence on foreign
    suppliers for the production of United States weapons systems.

(4) The offset demands required by some purchasing countries, including
    some close allies of the United States, equal or exceed the value of
    the base contract they are intended to offset, mitigating much of
    the potential economic benefit of the exports.

(5) Offset demands often unduly distort the prices of defense contracts.

(6) In some cases, United States contractors are required to provide
    indirect offsets which can negatively impact nondefense industrial
    sectors.

(7) Unilateral efforts by the United States to prohibit offsets may be
    impractical in the current era of globalization and would severely
    hinder the competitiveness of the United States defense industry in
    the global market.

The Defense Offsets Disclosure Act of 1999 continues with the following
declaration of policy:

It is the policy of the United States to monitor the use of offsets in
international defense trade, to promote fairness in such trade, and to
ensure that foreign participation in the production of United States
weapons systems does not harm the economy of the United States.

## Offsets Terminology

There are several basic terms used in discussions of offsets in defense
trade. For more definitions and an illustrative example of an offset
arrangement, please see the Glossary in Appendix F.

[Offsets]{.underline}: 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).

[Direct Offsets]{.underline}: Contractual arrangements that involve
defense articles and services referenced in the sales agreement for
military exports. These transactions are directly related to the defense
items or services exported by the defense firm and are usually in the
form of co-production, subcontracting, technology transfer, training,
production, licensed production, or financing activities.

[Indirect Offsets]{.underline}: Contractual arrangements that involve
defense goods and services unrelated to the exports referenced in the
sales agreement. These transactions are not directly related to the
defense items or services exported by the defense firm. The kinds of
offsets that are considered "indirect" include purchases, investment,
training, financing activities, marketing/exporting assistance, and
technology transfer.

[Co-production]{.underline}: Overseas production based upon a
government-to-government agreement that permits a foreign government or
producer(s) to acquire the technical information to manufacture all or
part of a U.S.-origin defense article. Co-production includes
government-to-government licensed production, but excludes licensed
production based upon direct commercial arrangements by U.S.
manufacturers.

[Licensed Production]{.underline}: Overseas production of a U.S.-origin
defense article based upon transfer of technical information under
direct commercial arrangements between a U.S. manufacturer and a foreign
government or producer.

[Subcontractor Production]{.underline}: Overseas production of a part or
component of a U.S.-origin defense article. The subcontract does not
necessarily involve license of technical information and is usually a
direct commercial arrangement between the defense prime contractor and a
foreign producer.

[Overseas Investment]{.underline}: Investment arising from an offset
agreement, often taking the form of capital dedicated to establishing or
expanding a subsidiary or joint venture in the foreign country.

[Technology Transfer]{.underline}: 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
overseas subsidiary or joint venture, or other activities under direct
commercial arrangement between the defense prime contractor and a
foreign entity.

## Countries and Regions

For ease of analysis, and in some cases to protect company
confidentiality, countries and country groups actively requiring offsets
in connection with purchases of U.S. defense systems during the
1993-2002 period (as reported by industry) were divided into four
geographic regions: Europe, the Middle East and Africa, North and South
America, and Asia. The countries found in each region are listed in
Table 1-1.

## Scope of Report 

This is the eighth report on the impact of Offsets in Defense Trade
prepared by the Department of Commerce's Bureau of Industry and
Security. This report is prepared after analyzing offset data reported
to the Department of Commerce by U.S. defense firms, in compliance with
regulations established under Section 309 of the DPA.

The eighth report reviews offsets data for the ten-year period from 1993
to 2002. This report was prepared in consultation with the Departments
of Defense, State, Treasury, and Labor; the Office of the U.S. Trade
Representative; and the Central Intelligence Agency. The initial offsets
report, issued in 1996, covered the time period from 1993 to 1994. The
six subsequent offset reports added an additional year to the reporting
period; this report adds two more years. The data for 2000 have been
revised to reflect corrected data provided by industry for that year.

+-----------------------------------+-----------------------------------+
| []{#__RefHeading___Toc57014964    |                                   |
| .anchor}Table 1‑1: **Purchasing   |                                   |
| Countries and Groups with Offset  |                                   |
| Agreements**                      |                                   |
|                                   |                                   |
| **(by Region, 1993-2002)**        |                                   |
+-----------------------------------+-----------------------------------+
| **Europe**                        | **Middle East and Africa**        |
+-----------------------------------+-----------------------------------+
| Austria                           | Israel                            |
+-----------------------------------+-----------------------------------+
| Belgium                           | Kuwait                            |
+-----------------------------------+-----------------------------------+
| Czech Republic                    | Saudi Arabia                      |
+-----------------------------------+-----------------------------------+
| Denmark                           | South Africa                      |
+-----------------------------------+-----------------------------------+
| EPG -- The European Participating | Turkey                            |
| Group (Belgium, The Netherlands,  |                                   |
| Norway)                           |                                   |
|                                   |                                   |
| FINLAND                           |                                   |
+-----------------------------------+-----------------------------------+
|                                   | United Arab Emirates              |
+-----------------------------------+-----------------------------------+
| Finland                           | **North and South America**       |
+-----------------------------------+-----------------------------------+
| France                            | Brazil                            |
+-----------------------------------+-----------------------------------+
| Germany                           | Canada                            |
+-----------------------------------+-----------------------------------+
| Greece                            | Chile                             |
+-----------------------------------+-----------------------------------+
| Italy                             | **Asia**                          |
+-----------------------------------+-----------------------------------+
| NATO                              | Australia                         |
+-----------------------------------+-----------------------------------+
| Netherlands                       | Malaysia                          |
+-----------------------------------+-----------------------------------+
| Norway                            | New Zealand                       |
+-----------------------------------+-----------------------------------+
| Portugal                          | Singapore                         |
+-----------------------------------+-----------------------------------+
| Slovenia                          | South Korea                       |
+-----------------------------------+-----------------------------------+
| Spain                             | Taiwan                            |
+-----------------------------------+-----------------------------------+
| Sweden                            | Thailand                          |
+-----------------------------------+-----------------------------------+
| Sweden/Norway                     |                                   |
+-----------------------------------+-----------------------------------+
| Switzerland                       |                                   |
+-----------------------------------+-----------------------------------+
| United Kingdom                    |                                   |
+-----------------------------------+-----------------------------------+
| Source: U.S. Department of        |                                   |
| Commerce/BIS Offsets Database     |                                   |
+-----------------------------------+-----------------------------------+

This report begins with an overview of the data collected from U.S.
industry for 1993-2002, followed by an analysis of the effects of
offsets on the U.S. defense industrial base. Next, the report presents a
statistical analysis of offset agreements entered into from 1993 through
2002, including consideration of the high concentration of offsets among
a relatively few firms, countries, and weapon systems. The regional
distribution of offset agreements is also reviewed, and a detailed
comparison made of offset activity in European countries with the
countries in the rest of the world. This chapter is followed by a
similar analysis of offset transactions, by type of offset and by the
nine categories, and in terms of the offset recipients. Next, the report
presents a review of aerospace issues -- specifically, the recent offset
trends in the U.S. aerospace industry.

# Statistical Overview

In this part of the report, we provide a general overview of offset
statistics collected by BIS for the years 1993 through 2002, along with
a review of some of the terms used by BIS to organize the data for
analysis. More detailed sections on agreements and transactions will
follow in Chapters 4 and 5.

The following data points are used to organize and analyze the
information collected:

1\. [Offset Agreement]{.underline} -- Year -- Country -- Weapon System
-- Export Contract Value -- Agreement Value -- % Agreement Value to
Export Value; and

2\. [Offset Transaction]{.underline} -- Year -- Country -- Referenced
Weapon System -- Recipient -- Actual Value -- Credit Value -- Multiplier
(credit value ÷ actual value) -- Type -- Category -- Description --
Industry Identification.

## General Overview

A summary of offset activity for 1993 through 2002 is provided in Table
2-1. Data for 2000 have been revised to reflect corrected information
provided by reporting firms.

+-----+------------+------------+-------+---------+---------+-------+
| []{ |            |            |       |         |         |       |
| #__ |            |            |       |         |         |       |
| Ref |            |            |       |         |         |       |
| Hea |            |            |       |         |         |       |
| din |            |            |       |         |         |       |
| g__ |            |            |       |         |         |       |
| _To |            |            |       |         |         |       |
| c57 |            |            |       |         |         |       |
| 014 |            |            |       |         |         |       |
| 965 |            |            |       |         |         |       |
| .   |            |            |       |         |         |       |
| anc |            |            |       |         |         |       |
| hor |            |            |       |         |         |       |
| }Ta |            |            |       |         |         |       |
| ble |            |            |       |         |         |       |
| 2   |            |            |       |         |         |       |
| ‑2: |            |            |       |         |         |       |
| G   |            |            |       |         |         |       |
| ene |            |            |       |         |         |       |
| ral |            |            |       |         |         |       |
| S   |            |            |       |         |         |       |
| umm |            |            |       |         |         |       |
| ary |            |            |       |         |         |       |
| of  |            |            |       |         |         |       |
| Off |            |            |       |         |         |       |
| set |            |            |       |         |         |       |
| Act |            |            |       |         |         |       |
| ivi |            |            |       |         |         |       |
| ty, |            |            |       |         |         |       |
| 199 |            |            |       |         |         |       |
| 3-2 |            |            |       |         |         |       |
| 002 |            |            |       |         |         |       |
|     |            |            |       |         |         |       |
| (   |            |            |       |         |         |       |
| all |            |            |       |         |         |       |
| \$  |            |            |       |         |         |       |
| in  |            |            |       |         |         |       |
| mil |            |            |       |         |         |       |
| lio |            |            |       |         |         |       |
| ns) |            |            |       |         |         |       |
+-----+------------+------------+-------+---------+---------+-------+
| Off |            |            |       |         |         |       |
| set |            |            |       |         |         |       |
| A   |            |            |       |         |         |       |
| gre |            |            |       |         |         |       |
| eme |            |            |       |         |         |       |
| nts |            |            |       |         |         |       |
+-----+------------+------------+-------+---------+---------+-------+
| Y   | Export     | Offset     | \%    | Co      | Agr     | Coun  |
| ear | Value      | Value      | O     | mpanies | eements | tries |
|     |            |            | ffset |         |         |       |
+-----+------------+------------+-------+---------+---------+-------+
| 1   | \$13,957.0 | \$4,806.7  | 34.4% | 18      | 30      | 17    |
| 993 |            |            |       |         |         |       |
+-----+------------+------------+-------+---------+---------+-------+
| 1   | \$4,792.4  | \$2,048.7  | 42.8% | 18      | 49      | 20    |
| 994 |            |            |       |         |         |       |
+-----+------------+------------+-------+---------+---------+-------+
| 1   | \$7,402.0  | \$6,034.1  | 81.5% | 19      | 45      | 18    |
| 995 |            |            |       |         |         |       |
+-----+------------+------------+-------+---------+---------+-------+
| 1   | \$2,987.8  | \$2,270.7  | 76.0% | 15      | 50      | 19    |
| 996 |            |            |       |         |         |       |
+-----+------------+------------+-------+---------+---------+-------+
| 1   | \$5,822.8  | \$3,831.8  | 65.8% | 13      | 57      | 19    |
| 997 |            |            |       |         |         |       |
+-----+------------+------------+-------+---------+---------+-------+
| 1   | \$3,257.8  | \$1,846.6  | 56.7% | 11      | 44      | 17    |
| 998 |            |            |       |         |         |       |
+-----+------------+------------+-------+---------+---------+-------+
| 1   | \$4,681.2  | \$3,851.4  | 82.3% | 10      | 45      | 11    |
| 999 |            |            |       |         |         |       |
+-----+------------+------------+-------+---------+---------+-------+
| 2   | \$6,278.3  | \$5,498.1  | 87.6% | 8       | 38      | 14    |
| 000 |            |            |       |         |         |       |
+-----+------------+------------+-------+---------+---------+-------+
| 2   | \$7,039.2  | \$5,497.3  | 78.1% | 11      | 35      | 14    |
| 001 |            |            |       |         |         |       |
+-----+------------+------------+-------+---------+---------+-------+
| 2   | \$7,406.2  | \$6,094.8  | 82.3% | 12      | 41      | 17    |
| 002 |            |            |       |         |         |       |
+-----+------------+------------+-------+---------+---------+-------+
| *   | **\$       | **\$       | **65  | **39**  | **434** | *     |
| *10 | 63,624.9** | 41,780.3** | .7%** |         |         | *36** |
| Y   |            |            |       |         |         |       |
| ear |            |            |       |         |         |       |
| s** |            |            |       |         |         |       |
+-----+------------+------------+-------+---------+---------+-------+
| Off |            |            |       |         |         |       |
| set |            |            |       |         |         |       |
| Tra |            |            |       |         |         |       |
| nsa |            |            |       |         |         |       |
| cti |            |            |       |         |         |       |
| ons |            |            |       |         |         |       |
+-----+------------+------------+-------+---------+---------+-------+
| Y   | Actual     | Credit     | Multi | Co      | Trans   | Coun  |
| ear | Value      | Value      | plier | mpanies | actions | tries |
+-----+------------+------------+-------+---------+---------+-------+
| 1   | \$1,815.1  | \$2,162.1  | 1.191 | 24      | 440     | 27    |
| 993 |            |            |       |         |         |       |
+-----+------------+------------+-------+---------+---------+-------+
| 1   | \$1,891.1  | \$2,161.5  | 1.143 | 21      | 550     | 26    |
| 994 |            |            |       |         |         |       |
+-----+------------+------------+-------+---------+---------+-------+
| 1   | \$2,713.7  | \$3,390.8  | 1.250 | 20      | 670     | 27    |
| 995 |            |            |       |         |         |       |
+-----+------------+------------+-------+---------+---------+-------+
| 1   | \$2,731.5  | \$3,098.9  | 1.135 | 21      | 623     | 26    |
| 996 |            |            |       |         |         |       |
+-----+------------+------------+-------+---------+---------+-------+
| 1   | \$2,725.5  | \$3,276.2  | 1.202 | 18      | 577     | 26    |
| 997 |            |            |       |         |         |       |
+-----+------------+------------+-------+---------+---------+-------+
| 1   | \$2,364.8  | \$2,684.6  | 1.135 | 19      | 582     | 30    |
| 998 |            |            |       |         |         |       |
+-----+------------+------------+-------+---------+---------+-------+
| 1   | \$2,080.4  | \$2,824.1  | 1.358 | 13      | 512     | 25    |
| 999 |            |            |       |         |         |       |
+-----+------------+------------+-------+---------+---------+-------+
| 2   | \$1,998.5  | \$2,613.0  | 1.307 | 14      | 601     | 23    |
| 000 |            |            |       |         |         |       |
+-----+------------+------------+-------+---------+---------+-------+
| 2   | \$2,588.1  | \$3,295.7  | 1.273 | 15      | 620     | 25    |
| 001 |            |            |       |         |         |       |
+-----+------------+------------+-------+---------+---------+-------+
| 2   | \$2,613.0  | \$3,281.5  | 1.256 | 17      | 728     | 27    |
| 002 |            |            |       |         |         |       |
+-----+------------+------------+-------+---------+---------+-------+
| *   | **\$       | **\$       | **1.  | **42**  | *       | *     |
| *10 | 23,521.5** | 28,788.4** | 224** |         | *5903** | *39** |
| Y   |            |            |       |         |         |       |
| ear |            |            |       |         |         |       |
| s** |            |            |       |         |         |       |
+-----+------------+------------+-------+---------+---------+-------+

Source: BIS Offsets Database

> Note: Due to rounding, totals may not add up precisely. Also, data for
> 2000 have been revised to reflect corrected information provided by
> reporting firms.

## Offset Transaction Types

Table 2-2 presents offset transaction data by type (direct, indirect, or
unspecified) and the percent distribution for each year from 1993 to
2002. As discussed in Chapter 1, direct offset transactions are those
that are directly related to the weapon system that is exported.
Indirect transactions are not related to the exported system. A
transaction is classified as unspecified when there is not enough
information available to determine whether it is direct or indirect. The
table also shows the total actual and credit values of the transactions
for each year. The credit value is normally more than the actual value
assigned to transactions; some foreign governments

<table style="width:100%;">
<colgroup>
<col style="width: 11%" />
<col style="width: 0%" />
<col style="width: 0%" />
<col style="width: 9%" />
<col style="width: 6%" />
<col style="width: 4%" />
<col style="width: 7%" />
<col style="width: 4%" />
<col style="width: 8%" />
<col style="width: 3%" />
<col style="width: 8%" />
<col style="width: 0%" />
<col style="width: 2%" />
<col style="width: 9%" />
<col style="width: 1%" />
<col style="width: 10%" />
<col style="width: 0%" />
<col style="width: 10%" />
</colgroup>
<tbody>
<tr class="odd">
<td colspan="18"><p><span id="__RefHeading___Toc57014966"
class="anchor"></span>Table 2‑3: Offset Transactions by Type,
1993-2002</p>
<p>($ amounts in millions)</p></td>
</tr>
<tr class="even">
<td colspan="2">Year</td>
<td colspan="3">Total</td>
<td colspan="2">Direct</td>
<td colspan="2">Indirect</td>
<td colspan="3">Unsp.</td>
<td colspan="2">Dir.</td>
<td colspan="2">Ind.</td>
<td colspan="2">Unsp.</td>
</tr>
<tr class="odd">
<td colspan="3"></td>
<td colspan="8">Actual Value</td>
<td colspan="7">% Distribution</td>
</tr>
<tr class="even">
<td colspan="2">1993</td>
<td colspan="3">$1,815.1</td>
<td colspan="2">$583.0</td>
<td colspan="2">$1,106.0</td>
<td colspan="3">$126.1</td>
<td colspan="2">32.1%</td>
<td colspan="2">60.9%</td>
<td colspan="2">7.0%</td>
</tr>
<tr class="odd">
<td colspan="2">1994</td>
<td colspan="3">$1,891.1</td>
<td colspan="2">$600.7</td>
<td colspan="2">$1,129.5</td>
<td colspan="3">$160.9</td>
<td colspan="2">31.8%</td>
<td colspan="2">59.7%</td>
<td colspan="2">8.5%</td>
</tr>
<tr class="even">
<td colspan="2">1995</td>
<td colspan="3">$2,713.7</td>
<td colspan="2">$1,064.1</td>
<td colspan="2">$1,649.6</td>
<td colspan="3">NR</td>
<td colspan="2">39.2%</td>
<td colspan="2">60.8%</td>
<td colspan="2">NR</td>
</tr>
<tr class="odd">
<td colspan="2">1996</td>
<td colspan="3">$2,731.5</td>
<td colspan="2">$1,097.5</td>
<td colspan="2">$1,553.8</td>
<td colspan="3">$80.1</td>
<td colspan="2">40.2%</td>
<td colspan="2">56.9%</td>
<td colspan="2">2.9%</td>
</tr>
<tr class="even">
<td colspan="2">1997</td>
<td colspan="3">$2,725.5</td>
<td colspan="2">$1,030.3</td>
<td colspan="2">$1,570.7</td>
<td colspan="3">$124.4</td>
<td colspan="2">37.8%</td>
<td colspan="2">57.6%</td>
<td colspan="2">4.6%</td>
</tr>
<tr class="odd">
<td colspan="2">1998</td>
<td colspan="3">$2,364.8</td>
<td colspan="2">$1,464.2</td>
<td colspan="2">$895.3</td>
<td colspan="3">$5.4</td>
<td colspan="2">61.9%</td>
<td colspan="2">37.9%</td>
<td colspan="2">0.2%</td>
</tr>
<tr class="even">
<td colspan="2">1999</td>
<td colspan="3">$2,080.4</td>
<td colspan="2">$690.2</td>
<td colspan="2">$1,351.0</td>
<td colspan="3">$39.1</td>
<td colspan="2">33.2%</td>
<td colspan="2">64.9%</td>
<td colspan="2">1.9%</td>
</tr>
<tr class="odd">
<td colspan="2">2000</td>
<td colspan="3">$1,998.5</td>
<td colspan="2">$779.9</td>
<td colspan="2">$1,122.5</td>
<td colspan="3">$96.1</td>
<td colspan="2">39.0%</td>
<td colspan="2">56.2%</td>
<td colspan="2">4.8%</td>
</tr>
<tr class="even">
<td colspan="2">2001</td>
<td colspan="3">$2,588.1</td>
<td colspan="2">$949.1</td>
<td colspan="2">$1,638.2</td>
<td colspan="3">$0.8</td>
<td colspan="2">36.7%</td>
<td colspan="2">63.3%</td>
<td colspan="2">0.0%</td>
</tr>
<tr class="odd">
<td colspan="2">2002</td>
<td colspan="3">$2,613.0</td>
<td colspan="2">$938.7</td>
<td colspan="2">$1,667.7</td>
<td colspan="3">$6.6</td>
<td colspan="2">35.9%</td>
<td colspan="2">63.8%</td>
<td colspan="2">0.3%</td>
</tr>
<tr class="even">
<td colspan="2"><strong>Total</strong></td>
<td colspan="3"><strong>$23,521.5</strong></td>
<td colspan="2"><strong>$9,197.8</strong></td>
<td colspan="2"><strong>$13,684.2</strong></td>
<td colspan="3"><strong>$639.5</strong></td>
<td colspan="2"><strong>39.1%</strong></td>
<td colspan="2"><strong>58.2%</strong></td>
<td colspan="2"><strong>2.72%</strong></td>
</tr>
<tr class="odd">
<td colspan="3">Year</td>
<td colspan="8">Credit Value</td>
<td colspan="7">% Distribution</td>
</tr>
<tr class="even">
<td colspan="2">1993</td>
<td colspan="3">$2,162.1</td>
<td colspan="2">$708.2</td>
<td colspan="2">$1,323.0</td>
<td colspan="3">$130.9</td>
<td colspan="2">32.8%</td>
<td colspan="2">61.2%</td>
<td colspan="2">6.2%</td>
</tr>
<tr class="odd">
<td colspan="2">1994</td>
<td colspan="3">$2,161.5</td>
<td colspan="2">$774.1</td>
<td colspan="2">$1,221.9</td>
<td colspan="3">$165.4</td>
<td colspan="2">35.8%</td>
<td colspan="2">56.5%</td>
<td colspan="2">7.7%</td>
</tr>
<tr class="even">
<td colspan="2">1995</td>
<td colspan="3">$3,390.8</td>
<td colspan="2">$1,257.9</td>
<td colspan="2">$2,132.9</td>
<td colspan="3">NR</td>
<td colspan="2">37.1%</td>
<td colspan="2">62.9%</td>
<td colspan="2">NR</td>
</tr>
<tr class="odd">
<td colspan="2">1996</td>
<td colspan="3">$3,098.9</td>
<td colspan="2">$1,188.7</td>
<td colspan="2">$1,795.6</td>
<td colspan="3">$114.7</td>
<td colspan="2">38.4%</td>
<td colspan="2">57.9%</td>
<td colspan="2">3.7%</td>
</tr>
<tr class="even">
<td colspan="2">1997</td>
<td colspan="3">$3,276.2</td>
<td colspan="2">$1,171.1</td>
<td colspan="2">$1,952.3</td>
<td colspan="3">$152.8</td>
<td colspan="2">35.8%</td>
<td colspan="2">59.6%</td>
<td colspan="2">4.7%</td>
</tr>
<tr class="odd">
<td colspan="2">1998</td>
<td colspan="3">$2,684.6</td>
<td colspan="2">$1,621.8</td>
<td colspan="2">$1,055.1</td>
<td colspan="3">$7.8</td>
<td colspan="2">60.4%</td>
<td colspan="2">39.3%</td>
<td colspan="2">0.3%</td>
</tr>
<tr class="even">
<td colspan="2">1999</td>
<td colspan="3">$2,824.1</td>
<td colspan="2">$1,121.8</td>
<td colspan="2">$1,599.5</td>
<td colspan="3">$102.8</td>
<td colspan="2">39.7%</td>
<td colspan="2">56.6%</td>
<td colspan="2">3.6%</td>
</tr>
<tr class="odd">
<td colspan="2">2000</td>
<td colspan="3">$2,613.0</td>
<td colspan="2">$1,135.8</td>
<td colspan="2">$1,377.7</td>
<td colspan="3">$99.4</td>
<td colspan="2">43.5%</td>
<td colspan="2">52.7%</td>
<td colspan="2">3.8%</td>
</tr>
<tr class="even">
<td colspan="2">2001</td>
<td colspan="3">$3,295.7</td>
<td colspan="2">$1,282.3</td>
<td colspan="2">$2,010.2</td>
<td colspan="3">$3.2</td>
<td colspan="2">38.9%</td>
<td colspan="2">61.0%</td>
<td colspan="2">0.1%</td>
</tr>
<tr class="odd">
<td colspan="2">2002</td>
<td colspan="3">$3,281.5</td>
<td colspan="2">$1,108.2</td>
<td colspan="2">$2,165.8</td>
<td colspan="3">$7.5</td>
<td colspan="2">33.8%</td>
<td colspan="2">66.0%</td>
<td colspan="2">0.2%</td>
</tr>
<tr class="even">
<td colspan="2"><strong>Total</strong></td>
<td colspan="3"><strong>$28,788.4</strong></td>
<td colspan="2"><strong>$11,369.9</strong></td>
<td colspan="2"><strong>$16,634.1</strong></td>
<td colspan="3"><strong>$784.4</strong></td>
<td colspan="2"><strong>39.5%</strong></td>
<td colspan="2"><strong>57.8%</strong></td>
<td colspan="2"><strong>2.7%</strong></td>
</tr>
<tr class="odd">
<td colspan="2"></td>
<td colspan="3"></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="3"></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
</tr>
<tr class="even">
<td></td>
<td colspan="9">Multiplier</td>
<td colspan="8"># of Transactions</td>
</tr>
<tr class="odd">
<td>Year</td>
<td colspan="3">Total</td>
<td colspan="2">Direct</td>
<td colspan="2">Indirect</td>
<td colspan="2">Unsp.</td>
<td colspan="3">Total</td>
<td colspan="2">Direct</td>
<td colspan="2">Indirect</td>
<td>Unsp.</td>
</tr>
<tr class="even">
<td>1993</td>
<td colspan="3">1.191</td>
<td colspan="2">1.215</td>
<td colspan="2">1.196</td>
<td colspan="2">1.038</td>
<td colspan="3">440</td>
<td colspan="2">132</td>
<td colspan="2">300</td>
<td>8</td>
</tr>
<tr class="odd">
<td>1994</td>
<td colspan="3">1.143</td>
<td colspan="2">1.289</td>
<td colspan="2">1.082</td>
<td colspan="2">1.028</td>
<td colspan="3">550</td>
<td colspan="2">157</td>
<td colspan="2">383</td>
<td>10</td>
</tr>
<tr class="even">
<td>1995</td>
<td colspan="3">1.250</td>
<td colspan="2">1.182</td>
<td colspan="2">1.293</td>
<td colspan="2">NR</td>
<td colspan="3">670</td>
<td colspan="2">203</td>
<td colspan="2">467</td>
<td>NR</td>
</tr>
<tr class="odd">
<td>1996</td>
<td colspan="3">1.135</td>
<td colspan="2">1.083</td>
<td colspan="2">1.156</td>
<td colspan="2">1.432</td>
<td colspan="3">623</td>
<td colspan="2">220</td>
<td colspan="2">397</td>
<td>6</td>
</tr>
<tr class="even">
<td>1997</td>
<td colspan="3">1.202</td>
<td colspan="2">1.137</td>
<td colspan="2">1.243</td>
<td colspan="2">1.228</td>
<td colspan="3">577</td>
<td colspan="2">200</td>
<td colspan="2">371</td>
<td>6</td>
</tr>
<tr class="odd">
<td>1998</td>
<td colspan="3">1.135</td>
<td colspan="2">1.108</td>
<td colspan="2">1.179</td>
<td colspan="2">1.450</td>
<td colspan="3">582</td>
<td colspan="2">237</td>
<td colspan="2">342</td>
<td>3</td>
</tr>
<tr class="even">
<td>1999</td>
<td colspan="3">1.358</td>
<td colspan="2">1.625</td>
<td colspan="2">1.184</td>
<td colspan="2">2.629</td>
<td colspan="3">512</td>
<td colspan="2">200</td>
<td colspan="2">295</td>
<td>17</td>
</tr>
<tr class="odd">
<td>2000</td>
<td colspan="3">1.307</td>
<td colspan="2">1.456</td>
<td colspan="2">1.227</td>
<td colspan="2">1.035</td>
<td colspan="3">601</td>
<td colspan="2">208</td>
<td colspan="2">383</td>
<td>10</td>
</tr>
<tr class="even">
<td>2001</td>
<td colspan="3">1.273</td>
<td colspan="2">1.351</td>
<td colspan="2">1.227</td>
<td colspan="2">4.000</td>
<td colspan="3">620</td>
<td colspan="2">222</td>
<td colspan="2">397</td>
<td>1</td>
</tr>
<tr class="odd">
<td>2002</td>
<td colspan="3">1.256</td>
<td colspan="2">1.181</td>
<td colspan="2">1.299</td>
<td colspan="2">1.124</td>
<td colspan="3">728</td>
<td colspan="2">193</td>
<td colspan="2">531</td>
<td>4</td>
</tr>
<tr class="even">
<td><strong>Total</strong></td>
<td colspan="3"><strong>1.224</strong></td>
<td colspan="2"><strong>1.236</strong></td>
<td colspan="2"><strong>1.216</strong></td>
<td colspan="2"><strong>1.385</strong></td>
<td colspan="3"><strong>5903</strong></td>
<td colspan="2"><strong>1972</strong></td>
<td colspan="2"><strong>3866</strong></td>
<td><strong>65</strong></td>
</tr>
<tr class="odd">
<td colspan="18"><p>Source: BIS Offsets Database</p>
<p>NR=None Reported</p>
<p>Note: Data for 2000 have been revised to reflect corrected
information provided by reporting firms.</p></td>
</tr>
</tbody>
</table>

give greater credit as an incentive for certain kinds of offset
transactions. This value varies by country and by the kind of
transaction (i.e., purchase, technology transfer, investment). The
multiplier, also shown in table 2-2, is the percentage difference
between the actual value and the credit value. For the 1993-2002 period,
the multiplier is 1.224. This multiplier means that, for the database as
a whole, the total credit value of the transactions is 22.4 percent more
than the actual value. Offset transaction data are more fully discussed
in Chapter 5.

## Offset Transaction Categories

In addition to classifying offset transactions by type (direct or
indirect), offset transactions are identified by various categories,
which more particularly describe the nature of the arrangement or
exchange. These categories include *Purchases, Subcontracts, Technology
Transfers, Credit Assistance, Training, Overseas Investment,
Co-production,* *Licensed Production,* and *Miscellaneous.*

Table 2-3 presents a summary of offset transactions by category and type
for the ten-year reporting period (1993-2002). Appendix F contains a
listing of relevant offset definitions. A brief description of each
category follows:

[Purchases]{.underline} result in overseas production of goods or
services usually for export to the United States. Purchases are always
classified as indirect offsets to distinguish them from subcontracts,
because purchases are of items unrelated to the exported defense system.
The U.S. exporter may make the purchase, or it can be accomplished by
brokering and marketing assistance that result in purchases by a third
party. For 1993-2002, purchases represented 38 percent of the actual
value of all offset transactions, the largest share of all categories.
Purchases had a multiplier of 1.110, which is lower than the multiplier
associated with any other category for the period.

[Subcontracts]{.underline} result in overseas production of goods or
services for use in the production or operation of a U.S.-exported
defense system subject to an offset agreement. Subcontracts are always
classified as direct offsets. During 1993-2002, subcontracts represented
28.5 percent of the actual value of all offset transactions, and 72.9
percent of the value of all direct offsets. At 1.124, subcontracts had
the second lowest multiplier of all transaction categories.

[Technology Transfer]{.underline} includes research and development
conducted abroad, exchange programs for personnel, data exchanges,
integration of machinery and equipment into a recipient's production
facility, technical assistance, education and training, manufacturing
know-how, and licensing and patent sharing. Technology transfer, as that
term is used here, is normally accomplished under a commercial
arrangement between the U.S. prime contractor and a foreign company. A
major subcontractor may also accomplish the technology transfer on
behalf of the U.S. prime contractor. During 1993-2002, about 36 percent
of the value of technology transfers was classified as direct offsets
and 61 percent was indirect offsets; for the balance, the type was
unspecified. Technology transfers accounted for 13 percent of the actual
value of all offset transactions, and the multiplier for technology
transfers was 1.368.

[Credit Assistance]{.underline} includes direct loans, brokered loans,
loan guarantees, assistance in achieving favorable payment terms, credit
extensions, and lower interest rates. Credit assistance transactions
accounted for 4.9 percent of the actual value of all transactions for
1993-2002. Credit assistance is nearly always classified as an indirect
offset transaction, with indirect transactions making up more than 99
percent of the actual value of all credit assistance for the period. The
multiplier for credit assistance was 1.137.

[Training]{.underline} transactions relate to the production,
maintenance, or actual use of the exported defense system or a component
thereof. Training may be required in areas such as computers, foreign
language skills, engineering capabilities, or management. This category
can be classified as either direct or indirect offset transactions; more
than

62 percent of the value of training transactions was direct. Training
accounted for only

3 percent of the total value of offset transactions between 1993 and
2002. The multiplier for training was 1.609, the second highest for all
categories.

[Overseas Investments]{.underline} include capital invested to establish
or expand a subsidiary or joint venture in the foreign country as well
as investments in third-party facilities; the latter received the
highest multipliers. Overseas investments accounted for just 2.3 percent
of the actual value of all offset transactions, and usually were
classified as indirect offsets; 75 percent of overseas investment
transactions was classified as indirect. These transactions have the
highest aggregate multiplier (2.762) of any category of offset
transactions.

[Co-production]{.underline} is overseas production based upon a
government-to-government agreement that permits a foreign government or
producer to acquire the technical information to manufacture all or part
of a U.S.-origin defense system. Co-production is always classified as a
direct offset. It includes government-to-government licensed production,
but excludes licensed production based upon direct commercial
arrangements by U.S. manufacturers. Virtually all of the co-production
reported during the 1993-2002 period was aerospace-related.
Co-production accounted for 1.9 percent of the value of offset
transactions and had a multiplier of only 1.149, ranking just above the
multipliers for purchases and subcontracts.

Past co-production transactions have involved constructing major
production facilities in foreign countries (primarily at the expense of
the foreign government) for the assembly of entire defense systems, such
as aircraft, missiles, or ground systems. Co-production arrangements of
this kind generally impose a high cost on the foreign government,
including upfront construction and tooling costs and increased unit
costs for limited production runs.[^10] Some countries negotiate with
prime contractors for production or assembly contracts related to future
sales to third countries of the weapon system or system components.

[Licensed Production]{.underline} is overseas production of a
U.S.-origin defense article. Licensed production differs from
co-production in that it is based on commercial arrangements between a
U.S. manufacturer and a foreign entity as opposed to a
government-to-government agreement. In addition, licensed production
virtually always involves a part or component for a defense system,
rather than a complete defense system. Licensed production is the
smallest among the offset categories, accounting for only 0.7 percent of
the total value of offset transactions; 75 percent of the licensed
production transactions (by actual value) was directly related to the
weapon systems sold. The multiplier for licensed production was 1.314.

[Miscellaneous]{.underline} transactions include activities such as
feasibility studies, marketing assistance, export assistance,
administrative support, business plan development, and trade
conferences, among others. These varied transactions comprise 7.7
percent of the total, and the average multiplier during 1993-2002 was
1.361.

## Industry Classification -- SIC Codes 

Table 2-4 shows the monetary impact of foreign military offsets on the
U.S. defense industrial base. Each offset transaction is classified by
industry type utilizing the Standard Industrial Classification (SIC)
system, which is managed by the Office of Management and Budget in
consultation with a number of other U.S. Government agencies. In total,
forty SICs are listed, representing a wide cross section of the defense
industrial base.

+--------------+------+------+------+----+-----+------+------+------+
| []{#__       |      |      |      |    |     |      |      |      |
| RefHeading__ |      |      |      |    |     |      |      |      |
| _Toc57014967 |      |      |      |    |     |      |      |      |
| .            |      |      |      |    |     |      |      |      |
| anchor}Table |      |      |      |    |     |      |      |      |
| 2‑4: Offset  |      |      |      |    |     |      |      |      |
| Transactions |      |      |      |    |     |      |      |      |
| by Category  |      |      |      |    |     |      |      |      |
| and Type,    |      |      |      |    |     |      |      |      |
| 1993-2002    |      |      |      |    |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| Transaction  | Ac   |      |      |    | P   |      |      |      |
|              | tual |      |      |    | erc |      |      |      |
| Category     | Va   |      |      |    | ent |      |      |      |
|              | lues |      |      |    | by  |      |      |      |
|              | in   |      |      |    | Col |      |      |      |
|              | \$   |      |      |    | umn |      |      |      |
|              | mill |      |      |    | To  |      |      |      |
|              | ions |      |      |    | tal |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
|              | T    | Dir. | Ind. | U  | To  | Dir. | Ind. | U    |
|              | otal |      |      | ns | tal |      |      | nsp. |
|              |      |      |      | p. |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| Purchases    | \    |      | \    | \  | 38. |      | 62   | 67   |
|              | $8,9 |      | $8,5 | $4 | 00% |      | .14% | .81% |
|              | 37.4 |      | 03.8 | 33 |     |      |      |      |
|              |      |      |      | .6 |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| Subcontracts | \    | \    |      |    | 28. | 72   |      |      |
|              | $6,7 | $6,7 |      |    | 49% | .86% |      |      |
|              | 01.3 | 01.3 |      |    |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| Technology   | \    | \    | \    | \$ | 13. | 11   | 13   | 14   |
| Transfers    | $3,0 | $1,0 | $1,8 | 91 | 01% | .89% | .70% | .32% |
|              | 59.1 | 93.2 | 74.3 | .6 |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| M            | \    | \$3  | \    | \  | 7.  | 3    | 10   | 1    |
| iscellaneous | $1,8 | 09.1 | $1,4 | $9 | 72% | .36% | .94% | .53% |
|              | 15.5 |      | 96.6 | .8 |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| Credit       | \    | \    | \    |    | 4.  | 0    | 8    |      |
| Assistance   | $1,1 | $5.1 | $1,1 |    | 86% | .06% | .31% |      |
|              | 42.8 |      | 37.7 |    |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| Training     | \$7  | \$4  | \$2  | \  | 3.  | 4    | 1    | 0    |
|              | 05.8 | 39.4 | 64.5 | $1 | 00% | .78% | .93% | .29% |
|              |      |      |      | .9 |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| Overseas     | \$5  | \$   | \$3  | \$ | 2.  | 0    | 2    | 12   |
| Investment   | 50.5 | 79.4 | 93.6 | 77 | 34% | .86% | .88% | .11% |
|              |      |      |      | .5 |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| C            | \$4  | \$4  |      | \  | 1.  | 4    |      | 0    |
| o-production | 55.7 | 54.6 |      | $1 | 94% | .94% |      | .17% |
|              |      |      |      | .1 |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| Licensed     | \$1  | \$1  | \$   | \$ | 0.  | 1    | 0    | 3    |
| Production   | 53.3 | 15.7 | 13.6 | 24 | 65% | .26% | .10% | .76% |
|              |      |      |      | .0 |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| Total        | \$   | \    | \$   | \  | 1   | 100  | 100  | 100  |
|              | 23,5 | $9,1 | 13,6 | $6 | 00. | .00% | .00% | .00% |
|              | 21.5 | 97.8 | 84.2 | 39 | 00% |      |      |      |
|              |      |      |      | .5 |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| Transaction  | Cr   |      |      |    | P   |      |      |      |
|              | edit |      |      |    | erc |      |      |      |
| Category     | Va   |      |      |    | ent |      |      |      |
|              | lues |      |      |    | by  |      |      |      |
|              | in   |      |      |    | Col |      |      |      |
|              | \$   |      |      |    | umn |      |      |      |
|              | mill |      |      |    | To  |      |      |      |
|              | ions |      |      |    | tal |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
|              | T    | Dir. | Ind. | U  | To  | Dir. | Ind. | U    |
|              | otal |      |      | ns | tal |      |      | nsp. |
|              |      |      |      | p. |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| Purchases    | \    |      | \    | \  | 34. |      | 56   | 56   |
|              | $9,9 |      | $9,4 | $4 | 46% |      | .97% | .73% |
|              | 21.1 |      | 76.1 | 45 |     |      |      |      |
|              |      |      |      | .0 |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| Subcontracts | \    | \    |      |    | 26. | 66   |      |      |
|              | $7,5 | $7,5 |      |    | 16% | .24% |      |      |
|              | 31.6 | 31.6 |      |    |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| Technology   | \    | \    | \    | \$ | 14. | 13   | 15   | 11   |
| Transfers    | $4,1 | $1,5 | $2,5 | 93 | 53% | .59% | .30% | .87% |
|              | 83.9 | 45.3 | 45.5 | .1 |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| M            | \    | \$5  | \    | \$ | 8.  | 4    | 11   | 9    |
| iscellaneous | $2,4 | 44.7 | $1,8 | 72 | 58% | .79% | .14% | .24% |
|              | 70.6 |      | 53.4 | .4 |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| Credit       | \    | \$   | \    |    | 4.  | 0    | 7    |      |
| Assistance   | $1,2 | 70.6 | $1,2 |    | 52% | .62% | .39% |      |
|              | 99.9 |      | 29.3 |    |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| Training     | \    | \$6  | \$4  | \$ | 3.  | 5    | 2    | 1    |
|              | $1,1 | 81.2 | 40.9 | 13 | 94% | .99% | .65% | .70% |
|              | 35.4 |      |      | .4 |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| Overseas     | \    | \$3  | \    | \  | 5.  | 2    | 6    | 16   |
| Investment   | $1,5 | 39.8 | $1,0 | $1 | 28% | .99% | .33% | .34% |
|              | 20.7 |      | 52.8 | 28 |     |      |      |      |
|              |      |      |      | .2 |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| C            | \$5  | \$5  |      | \  | 1.  | 4    |      | 0    |
| o-production | 23.7 | 22.6 |      | $1 | 82% | .60% |      | .14% |
|              |      |      |      | .1 |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| Licensed     | \$2  | \$1  | \$   | \$ | 0.  | 1    | 0    | 3    |
| Production   | 01.5 | 34.1 | 36.1 | 31 | 70% | .18% | .22% | .98% |
|              |      |      |      | .2 |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| Total        | \$   | \$   | \$   | \  | 1   | 100  | 100  | 100  |
|              | 28,7 | 11,3 | 16,6 | $7 | 00. | .00% | .00% | .00% |
|              | 88.4 | 69.9 | 34.1 | 84 | 00% |      |      |      |
|              |      |      |      | .4 |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| Transaction  | Mu   |      |      |    | \#  |      |      |      |
|              | ltip |      |      |    | of  |      |      |      |
| Category     | lier |      |      |    | Tra |      |      |      |
|              |      |      |      |    | nsa |      |      |      |
|              |      |      |      |    | cti |      |      |      |
|              |      |      |      |    | ons |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
|              | T    | Dir. | Ind. | U  | To  | Dir. | Ind. | U    |
|              | otal |      |      | ns | tal |      |      | nsp. |
|              |      |      |      | p. |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| Purchases    | 1    |      | 1    | 1  | 3   |      | 2960 | 42   |
|              | .110 |      | .114 | .0 | 002 |      |      |      |
|              |      |      |      | 26 |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| Subcontracts | 1    | 1    |      |    | 1   | 1365 |      |      |
|              | .124 | .124 |      |    | 365 |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| Technology   | 1    | 1    | 1    | 1  | 608 | 273  | 330  | 5    |
| Transfers    | .368 | .414 | .358 | .0 |     |      |      |      |
|              |      |      |      | 17 |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| M            | 1    | 1    | 1    | 7  | 404 | 83   | 316  | 5    |
| iscellaneous | .361 | .762 | .238 | .3 |     |      |      |      |
|              |      |      |      | 85 |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| Credit       | 1    | 13   | 1    |    | 82  | 7    | 75   |      |
| Assistance   | .137 | .830 | .081 |    |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| Training     | 1    | 1    | 1    | 7  | 212 | 98   | 109  | 5    |
|              | .609 | .550 | .666 | .1 |     |      |      |      |
|              |      |      |      | 78 |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| Overseas     | 2    | 4    | 2    | 1  | 85  | 9    | 71   | 5    |
| Investment   | .762 | .277 | .675 | .6 |     |      |      |      |
|              |      |      |      | 55 |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| C            | 1    | 1    |      | 1  | 114 | 113  |      | 1    |
| o-production | .149 | .150 |      | .0 |     |      |      |      |
|              |      |      |      | 00 |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| Licensed     | 1    | 1    | 2    | 1  | 31  | 24   | 5    | 2    |
| Production   | .314 | .160 | .660 | .3 |     |      |      |      |
|              |      |      |      | 00 |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| Total        | 1    | 1    | 1    | 1  | 5   | 1972 | 3866 | 65   |
|              | .224 | .236 | .216 | .2 | 903 |      |      |      |
|              |      |      |      | 27 |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+
| Source: BIS  |      |      |      |    |     |      |      |      |
| Offsets      |      |      |      |    |     |      |      |      |
| Database     |      |      |      |    |     |      |      |      |
+--------------+------+------+------+----+-----+------+------+------+

<table>
<colgroup>
<col style="width: 3%" />
<col style="width: 25%" />
<col style="width: 9%" />
<col style="width: 8%" />
<col style="width: 9%" />
<col style="width: 7%" />
<col style="width: 9%" />
<col style="width: 9%" />
<col style="width: 9%" />
<col style="width: 9%" />
</colgroup>
<tbody>
<tr class="odd">
<td colspan="10"><p><span id="__RefHeading___Toc57014968"
class="anchor"></span>Table 2‑5: Offset Transactions by Major Industrial
Sector and Offset Type, 1993-2002</p>
<p>(in $ millions)</p></td>
</tr>
<tr class="even">
<td colspan="2">2-Digit SIC Code and Description</td>
<td>Total</td>
<td>Direct</td>
<td>Indirect</td>
<td>Unsp.</td>
<td>Total</td>
<td>Direct</td>
<td>Indirect</td>
<td>Unsp.</td>
</tr>
<tr class="odd">
<td>07</td>
<td>Agriculture</td>
<td>$42.0</td>
<td> </td>
<td>$42.0</td>
<td> </td>
<td>0.18%</td>
<td></td>
<td>0.31%</td>
<td></td>
</tr>
<tr class="even">
<td>13</td>
<td>Crude Petroleum &amp; Natl. Gas</td>
<td>$16.3</td>
<td> </td>
<td>$16.3</td>
<td> </td>
<td>0.07%</td>
<td></td>
<td>0.12%</td>
<td></td>
</tr>
<tr class="odd">
<td>15</td>
<td>Building Construction</td>
<td>$26.6</td>
<td>$11.6</td>
<td>$15.1</td>
<td> </td>
<td>0.11%</td>
<td>0.13%</td>
<td>0.11%</td>
<td></td>
</tr>
<tr class="even">
<td>16</td>
<td>Heavy Construction</td>
<td>$1.5</td>
<td>$1.2</td>
<td>$0.3</td>
<td> </td>
<td>0.01%</td>
<td>0.01%</td>
<td>0.00%</td>
<td></td>
</tr>
<tr class="odd">
<td>17</td>
<td>Construction - Spec. Trades</td>
<td>$20.2</td>
<td> </td>
<td>$20.2</td>
<td> </td>
<td>0.09%</td>
<td></td>
<td>0.15%</td>
<td></td>
</tr>
<tr class="even">
<td>20</td>
<td>Food And Kindred Products</td>
<td>$15.5</td>
<td> </td>
<td>$15.5</td>
<td> </td>
<td>0.07%</td>
<td></td>
<td>0.11%</td>
<td></td>
</tr>
<tr class="odd">
<td>22</td>
<td>Textile Mill Products</td>
<td>$6.4</td>
<td> </td>
<td>$6.4</td>
<td> </td>
<td>0.03%</td>
<td></td>
<td>0.05%</td>
<td></td>
</tr>
<tr class="even">
<td>23</td>
<td>Apparel &amp; Other Fin Prods</td>
<td>$3.8</td>
<td> </td>
<td>$3.8</td>
<td> </td>
<td>0.02%</td>
<td></td>
<td>0.03%</td>
<td></td>
</tr>
<tr class="odd">
<td>24</td>
<td>Lumber &amp; Wood Products</td>
<td>$0.3</td>
<td> </td>
<td>$0.3</td>
<td> </td>
<td>0.00%</td>
<td></td>
<td>0.00%</td>
<td></td>
</tr>
<tr class="even">
<td>25</td>
<td>Furniture And Fixtures</td>
<td>$0.3</td>
<td> </td>
<td>$0.3</td>
<td> </td>
<td>0.00%</td>
<td></td>
<td>0.00%</td>
<td></td>
</tr>
<tr class="odd">
<td>26</td>
<td>Paper Mills &amp; Allied Products</td>
<td>$21.1</td>
<td> </td>
<td>$21.1</td>
<td> </td>
<td>0.09%</td>
<td></td>
<td>0.15%</td>
<td></td>
</tr>
<tr class="even">
<td>27</td>
<td>Printing &amp; Publishing</td>
<td>$33.9</td>
<td>$23.9</td>
<td>$5.2</td>
<td>$4.8</td>
<td>0.14%</td>
<td>0.26%</td>
<td>0.04%</td>
<td>0.75%</td>
</tr>
<tr class="odd">
<td>28</td>
<td>Chemicals &amp; Allied Products</td>
<td>$188.1</td>
<td>$14.7</td>
<td>$173.4</td>
<td></td>
<td>0.80%</td>
<td>0.16%</td>
<td>1.27%</td>
<td></td>
</tr>
<tr class="even">
<td>29</td>
<td>Petroleum Refining</td>
<td>$3.2</td>
<td> </td>
<td>$3.2</td>
<td></td>
<td>0.01%</td>
<td></td>
<td>0.02%</td>
<td></td>
</tr>
<tr class="odd">
<td>30</td>
<td>Rubber &amp; Misc Plastics Prod</td>
<td>$5.9</td>
<td> </td>
<td>$5.9</td>
<td></td>
<td>0.03%</td>
<td></td>
<td>0.04%</td>
<td></td>
</tr>
<tr class="even">
<td>32</td>
<td>Cut Stone &amp; Stone Products</td>
<td>$12.9</td>
<td> </td>
<td>$12.9</td>
<td></td>
<td>0.05%</td>
<td></td>
<td>0.09%</td>
<td></td>
</tr>
<tr class="odd">
<td>33</td>
<td>Primary Metal Industries</td>
<td>$196.1</td>
<td>$9.1</td>
<td>$187.0</td>
<td></td>
<td>0.83%</td>
<td>0.01%</td>
<td>1.36%</td>
<td></td>
</tr>
<tr class="even">
<td>34</td>
<td>Fabricated Metal Products</td>
<td>$589.2</td>
<td>$146.1</td>
<td>$339.2</td>
<td>$103.9</td>
<td>2.50%</td>
<td>1.59%</td>
<td>2.48%</td>
<td>16.24%</td>
</tr>
<tr class="odd">
<td>35</td>
<td>Indl Machinery, Exc Elec</td>
<td>$1,455.8</td>
<td>$139.7</td>
<td>$1,316.1</td>
<td></td>
<td>6.19%</td>
<td>1.52%</td>
<td>9.62%</td>
<td>0.00%</td>
</tr>
<tr class="even">
<td>36</td>
<td>Electronic/Electrical Equip</td>
<td>$3,574.6</td>
<td>$1,312.6</td>
<td>$2,249.3</td>
<td>$12.7</td>
<td>15.20%</td>
<td>14.27%</td>
<td>16.44%</td>
<td>1.99%</td>
</tr>
<tr class="odd">
<td>37</td>
<td>Transportation Equipment</td>
<td>$12,129.9</td>
<td>$5,851.3</td>
<td>$5,796.1</td>
<td>$482.5</td>
<td>51.57%</td>
<td>63.62%</td>
<td>42.36%</td>
<td>75.45%</td>
</tr>
<tr class="even">
<td>38</td>
<td>Measuring &amp; Analyzing Inst</td>
<td>$1,060.5</td>
<td>$713.1</td>
<td>$347.4</td>
<td> </td>
<td>4.51%</td>
<td>7.75%</td>
<td>2.54%</td>
<td></td>
</tr>
<tr class="odd">
<td>39</td>
<td>Misc Manuf Industries</td>
<td>$5.1</td>
<td></td>
<td>$5.1</td>
<td> </td>
<td>0.02%</td>
<td>0.00%</td>
<td>0.04%</td>
<td></td>
</tr>
<tr class="even">
<td>42</td>
<td>Motor Frt &amp; Warehousing</td>
<td>$1.5</td>
<td> </td>
<td>$1.5</td>
<td> </td>
<td>0.01%</td>
<td></td>
<td>0.01%</td>
<td></td>
</tr>
<tr class="odd">
<td>44</td>
<td>Water Transportation</td>
<td>$40.2</td>
<td> </td>
<td>$40.2</td>
<td> </td>
<td>0.17%</td>
<td></td>
<td>0.29%</td>
<td></td>
</tr>
<tr class="even">
<td>45</td>
<td>Transportation By Air</td>
<td>$70.1</td>
<td>$55.1</td>
<td>$15.0</td>
<td> </td>
<td>0.30%</td>
<td>0.60%</td>
<td>0.11%</td>
<td></td>
</tr>
<tr class="odd">
<td>47</td>
<td>Transportation Services</td>
<td>$3.5</td>
<td>$0.1</td>
<td>$3.4</td>
<td> </td>
<td>0.01%</td>
<td>0.00%</td>
<td>0.03%</td>
<td></td>
</tr>
<tr class="even">
<td>48</td>
<td>Communications</td>
<td>$61.8</td>
<td>$7.1</td>
<td>$54.7</td>
<td> </td>
<td>0.26%</td>
<td>0.08%</td>
<td>0.40%</td>
<td></td>
</tr>
<tr class="odd">
<td>49</td>
<td>Electric, Gas, &amp; San Serv</td>
<td>$2.5</td>
<td> </td>
<td>$2.5</td>
<td> </td>
<td>0.01%</td>
<td></td>
<td>0.02%</td>
<td></td>
</tr>
<tr class="even">
<td>61</td>
<td>Non-Depos Credit Inst</td>
<td>$610.4</td>
<td>$10.2</td>
<td>$600.2</td>
<td> </td>
<td>2.59%</td>
<td>0.11%</td>
<td>4.39%</td>
<td></td>
</tr>
<tr class="odd">
<td>62</td>
<td>Security &amp; Comm Brokers</td>
<td>$46.5</td>
<td> </td>
<td>$46.5</td>
<td> </td>
<td>0.20%</td>
<td></td>
<td>0.34%</td>
<td></td>
</tr>
<tr class="even">
<td>67</td>
<td>Holding &amp; Other Invest Off</td>
<td>$422.3</td>
<td>$32.5</td>
<td>$366.3</td>
<td>$23.6</td>
<td>1.80%</td>
<td>0.35%</td>
<td>2.68%</td>
<td>3.68%</td>
</tr>
<tr class="odd">
<td>73</td>
<td>Business Services</td>
<td>$1,191.7</td>
<td>$295.5</td>
<td>$885.4</td>
<td>$10.7</td>
<td>5.07%</td>
<td>3.21%</td>
<td>6.47%</td>
<td>1.68%</td>
</tr>
<tr class="even">
<td>76</td>
<td>Misc Repair Shops</td>
<td>$8.5</td>
<td>$2.4</td>
<td>$6.1</td>
<td> </td>
<td>0.04%</td>
<td>0.03%</td>
<td>0.04%</td>
<td></td>
</tr>
<tr class="odd">
<td>80</td>
<td>Health Services</td>
<td>$0.0</td>
<td> </td>
<td>$0.0</td>
<td> </td>
<td>0.00%</td>
<td></td>
<td>0.00%</td>
<td></td>
</tr>
<tr class="even">
<td>81</td>
<td>Legal Services</td>
<td>$0.1</td>
<td> </td>
<td>$0.1</td>
<td> </td>
<td>0.00%</td>
<td></td>
<td>0.00%</td>
<td></td>
</tr>
<tr class="odd">
<td>82</td>
<td>Educational Services</td>
<td>$412.3</td>
<td>$193.1</td>
<td>$219.2</td>
<td> </td>
<td>1.75%</td>
<td>2.10%</td>
<td>1.60%</td>
<td></td>
</tr>
<tr class="even">
<td>87</td>
<td>Technical Servs &amp; Cons</td>
<td>$1,081.0</td>
<td>$303.3</td>
<td>$776.4</td>
<td>$1.3</td>
<td>4.60%</td>
<td>3.30%</td>
<td>5.67%</td>
<td>0.21%</td>
</tr>
<tr class="odd">
<td>89</td>
<td>Misc. Services</td>
<td>$60.5</td>
<td>$37.4</td>
<td>$23.1</td>
<td> </td>
<td>0.26%</td>
<td>0.41%</td>
<td>0.17%</td>
<td></td>
</tr>
<tr class="even">
<td>99</td>
<td>Undetermined</td>
<td>$99.9</td>
<td>$38.0</td>
<td>$62.0</td>
<td> </td>
<td>0.42%</td>
<td>0.41%</td>
<td>0.45%</td>
<td></td>
</tr>
<tr class="odd">
<td></td>
<td><strong>Total</strong></td>
<td><strong>$23,521.5</strong></td>
<td><strong>$9,197.8</strong></td>
<td><strong>$13,684.2</strong></td>
<td><strong>$639.5</strong></td>
<td><strong>100.00%</strong></td>
<td><strong>100.00%</strong></td>
<td><strong>100.00%</strong></td>
<td><strong>100.00%</strong></td>
</tr>
<tr class="even">
<td colspan="10">Source: BIS Offsets Database</td>
</tr>
</tbody>
</table>

More than half (51.6 percent) of the actual value of all transactions
fell into the Transportation Equipment (SIC 37) industry group, which
includes aircraft, guided missiles, ships, and motor vehicles. SIC 37
accounted for nearly 64 percent of the value of direct offset
transactions and was also the largest industry group by value for
indirect and unspecified offset transactions. Other major industry
groups include Electronic/Electrical Equipment (SIC 36) with 15.20
percent, Industrial Machinery (SIC 35) with 6.19 percent, Business
Services (SIC 73) with 5.07 percent, and Technical Services and
Consultants (SIC 87) with 4.60 percent. These industry groups together
comprised almost 83 percent of the total value of all transactions
reported to date.

##  {#section .unnumbered}

## Countries and Regions

Table 2.5 lists the countries, by region, with which U.S. firms reported
entering offset agreements. Also shown are the average percentage of
offset requirements of new agreements and the average multiplier applied
to offset transactions in each country. In some cases, the average
offset requirement or multiplier was not reported or could not be
calculated; these instances are marked "NR." In other cases, the offset
requirement or multiplier is withheld to protect company
confidentiality; these cases are marked "W."

Austria led Europe and the rest of the world in terms of its offset
percentage; on average, U.S. weapon system exports to Austria were
associated with offset agreements worth 174.2 percent of the value of
the weapon system. At the same time, Austria offered the lowest reported
multiplier for offset transactions carried out in fulfillment of the
agreements.

Other European countries required offset percentages equal to or greater
than the value of the weapon systems exported to them. These countries
included the Netherlands (120.5 percent), Greece (110.5 percent), Sweden
(103.9 percent), Denmark (100 percent), and Finland (100 percent). In
the rest of the world, only one country, South Africa, required offsets
greater than the price of the weapon systems it purchased; its average
offset percentage was 116.7 percent. These six countries offered
multipliers of 1 or more for offset transactions.

Portugal required an average offset percentage of 27.9 percent, the
lowest of all countries. Its multiplier was also among the most
generous, at 2.24 times the actual value of transactions.

It should be noted that the average regional offset percentages required
by countries in Europe and Asia increased since the previous report on
offsets in defense trade. In the previous report, which covered
1993-2000, Europe's average offset percentage was 92.3 percent; with the
addition of 2001 and 2002, the average rose slightly to 92.6 percent. In
Asia, the average grew from 26.2 percent to 40 percent.

+-------------+--------+-------+-----------------+----------+--------+
| []{#__Re    |        |       |                 |          |        |
| fHeading___ |        |       |                 |          |        |
| Toc57014969 |        |       |                 |          |        |
| .a          |        |       |                 |          |        |
| nchor}Table |        |       |                 |          |        |
| 2‑6:        |        |       |                 |          |        |
| Countries   |        |       |                 |          |        |
| with Offset |        |       |                 |          |        |
| Agreements  |        |       |                 |          |        |
| and         |        |       |                 |          |        |
| Tr          |        |       |                 |          |        |
| ansactions\ |        |       |                 |          |        |
| By Region,  |        |       |                 |          |        |
| 1993-2002   |        |       |                 |          |        |
+-------------+--------+-------+-----------------+----------+--------+
| EUROPE      |        |       | MIDDLE EAST AND |          |        |
|             |        |       | AFRICA          |          |        |
+-------------+--------+-------+-----------------+----------+--------+
| Country     | \%     | Multi | Country         | \%       | Mult   |
|             | O      | plier |                 | Offsets  | iplier |
|             | ffsets |       |                 |          |        |
+-------------+--------+-------+-----------------+----------+--------+
| Austria     | 174.2% | 0.84  | Egypt           | NR       | 1.00   |
+-------------+--------+-------+-----------------+----------+--------+
| Belgium     | W      | 1.09  | Israel          | 49.2%    | 1.05   |
+-------------+--------+-------+-----------------+----------+--------+
| Czech       | W      | W     | Kuwait          | 30.2%    | 2.53   |
| Republic    |        |       |                 |          |        |
+-------------+--------+-------+-----------------+----------+--------+
| Denmark     | 100.0% | 1.27  | Saudi Arabia    | 34.9%    | NR     |
+-------------+--------+-------+-----------------+----------+--------+
| EPG         | 27.8%  | 1.23  | South Africa    | W        | W      |
+-------------+--------+-------+-----------------+----------+--------+
| Finland     | 100.0% | 1.07  | Turkey          | 61.5%    | 1.07   |
+-------------+--------+-------+-----------------+----------+--------+
| France      | 84.6%  | 1.74  | United Arab     | 55.3%    | 2.33   |
|             |        |       | Emirates        |          |        |
+-------------+--------+-------+-----------------+----------+--------+
| Germany     | W      | 1.00  | **Region        | *        | **     |
|             |        |       | Total**         | *44.0%** | 1.11** |
+-------------+--------+-------+-----------------+----------+--------+
| Greece      | 110.5% | 2.60  | ASIA            |          |        |
+-------------+--------+-------+-----------------+----------+--------+
| Italy       | 93.8%  | 1.05  | Country         | \%       | Mult   |
|             |        |       |                 | Offsets  | iplier |
+-------------+--------+-------+-----------------+----------+--------+
| Luxembourg  | NR     | W     | Australia       | 45.6%    | 1.03   |
+-------------+--------+-------+-----------------+----------+--------+
| Netherlands | 120.5% | 1.21  | Indonesia       | NR       | 1.21   |
+-------------+--------+-------+-----------------+----------+--------+
| Norway      | 99.5%  | 1.41  | Malaysia        | 37.3%    | 1.12   |
+-------------+--------+-------+-----------------+----------+--------+
| Portugal    | 27.9%  | 2.24  | New Zealand     | W        | W      |
+-------------+--------+-------+-----------------+----------+--------+
| Slovenia    | W      | NR    | Singapore       | 58.3%    | 2.27   |
+-------------+--------+-------+-----------------+----------+--------+
| Spain       | 88.8%  | 1.26  | South Korea     | 64.7%    | 1.45   |
+-------------+--------+-------+-----------------+----------+--------+
| Sweden      | 103.9% | 1.15  | Taiwan          | 21.2%    | 2.21   |
+-------------+--------+-------+-----------------+----------+--------+
| Switzerland | 78.1%  | 1.01  | Thailand        | 26.6%    | 1.79   |
+-------------+--------+-------+-----------------+----------+--------+
| United      | 92.1%  | 1.01  | **Region        | *        | **     |
| Kingdom     |        |       | Total**         | *40.0%** | 1.49** |
+-------------+--------+-------+-----------------+----------+--------+
| **Region    | **9    | **1   |                 |          |        |
| Total**     | 2.6%** | .21** |                 |          |        |
+-------------+--------+-------+-----------------+----------+--------+
| N. AND S.   |        |       |                 |          |        |
| AMERICA     |        |       |                 |          |        |
|             |        |       |                 |          |        |
| Multiplier  |        |       |                 |          |        |
+-------------+--------+-------+-----------------+----------+--------+
| Country     | \%     | Multi |                 |          |        |
|             | O      | plier |                 |          |        |
|             | ffsets |       |                 |          |        |
+-------------+--------+-------+-----------------+----------+--------+
| Brazil      | W      | W     |                 |          |        |
+-------------+--------+-------+-----------------+----------+--------+
| Canada      | 83.1%  | .997  |                 |          |        |
+-------------+--------+-------+-----------------+----------+--------+
| Chile       | W      | NR    |                 |          |        |
+-------------+--------+-------+-----------------+----------+--------+
| **Region    | **9    | **1.  |                 |          |        |
| Total**     | 0.8%** | 013** |                 |          |        |
+-------------+--------+-------+-----------------+----------+--------+

Source: BIS Offsets Database

Notes: NR=None Reported; W=Withheld to protect company proprietary
information

##  {#section-1 .unnumbered}

# Impact of Offsets on the U.S. Defense Industrial Base

The DPA requires that Commerce determine the impact of offsets on
defense preparedness, industrial competitiveness, employment, and trade
of the United States. This chapter discusses the impact of offsets on
defense preparedness and employment; the impacts on industrial
competitiveness and trade of the United States will be discussed in
Chapter 6.

## Defense Preparedness

Offsets enhance the defense preparedness of the United States in several
ways. Exports and the revenue generated by export sales are crucial to
producers of U.S. defense systems and, by extension, to U.S. foreign
policy and economic interests; almost all purchasers of U.S. defense
systems require offset agreements as a condition of the sale. Exports of
major defense systems help defray high overhead costs for the U.S.
producer and help maintain production facilities and expertise, in case
they are needed to respond to a national emergency. Exports also provide
additional business to many U.S. subcontractors and lower-tier
suppliers, promote interoperability of weapon systems between the United
States and allied countries, and add positively to U.S. international
account balances.

An offset package -- particularly one with a high proportion of
subcontracting or purchases -- can negate some of these benefits. U.S.
subcontractors and suppliers are displaced by exports that include
subcontract or licensed production offsets. Previous examples indicate
that U.S. contractors sometimes develop long-term supplier relationships
with overseas subcontractors based on short-term offset
requirements.[^11] These new relationships can reduce future business
opportunities for U.S. subcontractors, with possible consequences for
the industrial base. Offsets can also increase spending and capital
investment in foreign countries for defense or non-defense industries.

## Employment

While it is difficult to determine precisely the impact of offset
agreements and transactions on employment in the U.S. defense sector,
BIS has developed an estimate by using employment data collected by the
Bureau of the Census. Given that sales of aerospace weapon systems
account for nearly 85 percent of the value of defense exports connected
with offset agreements, this method appears to provide a reliable
estimate.

For 2001,[^12] industry reported approximately \$7.0 billion[^13] in
defense export contracts with an offset agreement attached. According to
the Annual Survey of Manufactures, the value added per employee for the
aerospace product and parts manufacturing industry in 2001 was
\$165,858. Dividing this figure into the defense export sales total
results in a total of 42,440 work-years that were supported in that year
by defense exports associated with offset agreements.

However, by their very nature, subcontracting, purchasing,
co-production, and licensing offset transactions are most likely to
shift sales from U.S. suppliers to overseas firms. Other categories of
offset transactions, in the short or long run, can shift sales from U.S.
suppliers as well. BIS bases its estimate of employment impacts only on
the specified types of transactions. For 2001, these transactions were
valued at \$1.9 billion. Dividing \$1.9 billion by \$165,858 (the value
added by each worker in the aerospace industry in 2001) results in the
loss of approximately 11,460 work-years for 2001, assuming the foreign
contract could have been won without an offset agreement.

Based on these calculations, it appears that defense export sales had a
net positive effect on employment in the defense sector in 2001,
although the net positive effect was diminished by the offset
agreements. It should be noted that the above analysis does not include
an additional \$687 million of offsets in technology transfer, training,
overseas investment, and marketing transactions, because the impact of
these transactions on the U.S. defense industrial base is difficult to
calculate. Further, this calculation assumes that industry would not
have received these defense export contracts if it had not entered into
the related offset agreements.

## Domestic Defense Productive Capability

The DPA Section 309(b)(1) requires identification of the cumulative
effects of offset agreements on "the full range of domestic defense
productive capability with special attention paid to the firms serving
as lower tier subcontractors or suppliers" and "the domestic defense
technology base as a consequence of the technology transfers associated
with such offset agreements." To address the effects of offsets on
defense productive capability, this analysis compares 2001 offset
transactions dealing with transportation equipment and
electronics/electronic equipment[^14] to 2001 value added from these two
industries, as reported in the Census Bureau's Annual Survey of
Manufactures. The comparison between transactions and value added stems
from the lost future opportunity to U.S. companies caused by an offset
transaction. Over time, the lost future opportunity can yield unused
production capacity, affecting capacity utilization and ultimately,
domestic productive capability. Value added, in turn, is a measurement
of the productive capability of an entire industry, encompassing
productivity of labor, efficient capital use, and full production
capacity.

+--------------+-------------------+-----------------+----------------+
| Table 3‑7:   |                   |                 |                |
| Domestic     |                   |                 |                |
| Defense      |                   |                 |                |
| Productive   |                   |                 |                |
| Capability:  |                   |                 |                |
| Offset       |                   |                 |                |
| Transactions |                   |                 |                |
| and Value    |                   |                 |                |
| Added, 2001  |                   |                 |                |
|              |                   |                 |                |
| (in          |                   |                 |                |
| thousands)   |                   |                 |                |
+--------------+-------------------+-----------------+----------------+
|              | Transactions & %  | Value Added for | Transactions   |
|              | of total          | Industry        | as a % of      |
|              |                   |                 | Industry Value |
|              |                   |                 | Added          |
+--------------+-------------------+-----------------+----------------+
| **Tr         | \$1,690,082       | \$72,656,606    | 2.33%          |
| ansportation | (65.3%)           |                 |                |
| Equipment**  |                   |                 |                |
+--------------+-------------------+-----------------+----------------+
| **Electronic | \$316,213 (12.2%) | \$71,289,076    | 0.44%          |
| Components** |                   |                 |                |
+--------------+-------------------+-----------------+----------------+
| **Total**    | **\$2,006,294     | **              | **1.4%**       |
|              | (77.5%)**         | \$143,945,682** |                |
+--------------+-------------------+-----------------+----------------+
| Source:      |                   |                 |                |
| Transaction  |                   |                 |                |
| data from    |                   |                 |                |
| DOC/BIS      |                   |                 |                |
| Offsets      |                   |                 |                |
| Database.    |                   |                 |                |
|              |                   |                 |                |
| Value Added  |                   |                 |                |
| data from    |                   |                 |                |
| Bureau of    |                   |                 |                |
| the Census,  |                   |                 |                |
| Annual       |                   |                 |                |
| Survey of    |                   |                 |                |
| Manufactures |                   |                 |                |
| 2001         |                   |                 |                |
+--------------+-------------------+-----------------+----------------+

As seen in Table 3-1, 2001 offset transactions related to these two
industries averaged 1.4 percent of the 2001 total value added for both
industries. This percentage does not indicate that the domestic defense
productive capability is 1.4 percent less because of offsets. However,
the 1.4 percent, not a negligible amount, is the value added that was
gained abroad instead of domestically because of an offset agreement.
This loss of future opportunity can affect capacity utilization and in
the end, domestic productive capability.

There are no indicators from other agencies that suggest that domestic
defense productive capability has decreased cumulatively because of
offsets. At the same time, there is also no indication that offsets have
enhanced defense productive capability, particularly for lower tier
subcontractors. The recent growth in new defense industrial
subcontractors described and foreseen by officials with the Department
of Defense[^15] illustrate that the supplier base is improving. However,
Defense officials attribute much of that growth to new, high-tech
defense subcontractors that supply weapons systems almost exclusively
marketed to the U.S. government. These new suppliers do not contribute
to those systems sold abroad -- those systems with related offset
agreements. These offset-related weapon systems are often supplied by
more established companies that are not necessarily experiencing the
same kind of growth.

To identify the effects on the domestic defense technology base, this
analysis compares total 2001 technology transfer transactions for
aerospace manufacturing and electronics/electronic component industries
to total 2001 R&D spending for aerospace manufacturing industries,
collected by the Aerospace Industry Association from U.S. Bureau of the
Census data, and electronics/electronic components R&D spending,
collected by the National Science Foundation.

+--------------+----------------------+--------------+----------------+
| Table 3‑8:   |                      |              |                |
| Domestic     |                      |              |                |
| Defense      |                      |              |                |
| Technology   |                      |              |                |
| Base:        |                      |              |                |
| Technology   |                      |              |                |
| Transfer     |                      |              |                |
| Offsets and  |                      |              |                |
| R&D          |                      |              |                |
| Spending,    |                      |              |                |
| 2001         |                      |              |                |
|              |                      |              |                |
| (In          |                      |              |                |
| thousands)   |                      |              |                |
+--------------+----------------------+--------------+----------------+
|              | Technology Transfer  | Total R&D    | Technology     |
|              | Transactions & % of  | spending     | Transfer       |
|              | total tech transfer  |              | Offsets as %   |
|              | transactions         |              | of Total       |
|              |                      |              | Industry R&D   |
|              |                      |              | spending       |
+--------------+----------------------+--------------+----------------+
| **Aerospace  | \$374,931 (68.2%)    | \$7,         | 4.8%           |
| Man          |                      | 868,000[^16] |                |
| ufacturing** |                      |              |                |
+--------------+----------------------+--------------+----------------+
| **Electronic | \$46,981 (8.5%)      | \$14,200,000 | 0.33%          |
| Components** |                      |              |                |
+--------------+----------------------+--------------+----------------+
| **Total**    | **\$421,912          | **\$         | **1.9%**       |
|              | (76.7%)**            | 22,068,000** |                |
+--------------+----------------------+--------------+----------------+
| Source:      |                      |              |                |
| Transaction  |                      |              |                |
| data from    |                      |              |                |
| DOC/BIS      |                      |              |                |
| Offsets      |                      |              |                |
| Database.    |                      |              |                |
|              |                      |              |                |
| Value Added  |                      |              |                |
| data from    |                      |              |                |
| Bureau of    |                      |              |                |
| the Census,  |                      |              |                |
| Annual       |                      |              |                |
| Survey of    |                      |              |                |
| Manufactures |                      |              |                |
| 2001.        |                      |              |                |
+--------------+----------------------+--------------+----------------+

As seen in Table 3-2, 2001 offset transactions that involved technology
transfer for these two industries totaled \$421 million. This value is
equivalent to 1.9 percent of total R&D spending for those two industries
in 2001. As with the value added comparison, this figure does not mean
that domestic firms in these two industries lost 1.9 percent of their
R&D spending in 2001. However, it does indicate that offset activities
provided to foreign companies technology equivalent in value to 1.9
percent, again, not a negligible amount, of 2001 domestic R&D spending.
Indeed, at some point in the past, U.S. R&D funding was used to develop
that transferred technology.

# Offset Agreements Activity, 1993-2002

## Overview

According to offset data collected from industry covering 1993 to 2002,
39 U.S. firms reported entering into 434 offset agreements with a total
value of \$41.8 billion. These offset agreements were made with foreign
purchasers in 36 different countries and were associated with defense
export contracts valued at \$63.6 billion. The exports involved 181 U.S.
weapon systems. The value of the offset agreements represented 65.7
percent of the total value of the related export contracts during the
entire reporting period.[^17] The average term for completing the offset
agreements was 100 months, or slightly more than eight years.[^18] The
percentage of offset agreements to export contracts (by value) declined
slightly from previous years to 78.1 percent in 2001 and then rebounded
in 2002 to 82.3 percent. The lowest percentage was recorded in 1993 at
34.4 percent, the highest in 2000 at 87.6 percent.

The annual values of defense export contracts and offset agreements
(including offset percentages) are presented in Chart 4-1. In a sharp
upward trend, the value of the offset agreements as a percentage of the
value of defense export contracts increased an average of approximately
4.75 percentage points per year over the ten-year reporting period.[^19]

## Offsets Concentration 

The data reported by U.S. companies show that a small number of
companies, countries, and weapon systems dominated offset agreements
between 1993 and 2002. The top five U.S. []{.mark}exporters (of 39
companies reporting data on offsets) accounted for 79.5 percent of the
defense export contracts and 79.0 percent of the offset agreements
during this timeframe. This high level of market concentration reflects
the high costs of modern defense systems and the small number of firms
that produce them. Due to the complexity and expense involved, only a
large, multi-disciplined company could produce and deliver modern
defense systems. In addition, each exporter company coordinated the
activities of hundreds, if not thousands, of subcontractors and
suppliers that contributed to the systems production, as well as the
work of thousands of employees.

![](media/image7.wmf){width="6.5in" height="4.239583333333333in"}Source:
BIS Offsets Database

Offsets also appear to be concentrated in a few purchaser countries. The
top five countries (of a total of 36 involved in the reported offset
activity) accounted for 58.6 percent of the total defense system
purchases and 57.8 percent of the total offset agreements. The top 10
countries (of 36 total) represented 73.1 percent of defense system
purchases and 74.7 percent of the offset agreements. The fact that
relatively few countries accounted for the bulk of offset activity
indicates that relatively few countries were in the market for
big-ticket defense equipment. By dominating offset activity, these few
countries also dominated the impact offsets have on the U.S. defense
industrial base. In addition, these countries set a visible standard for
offset demands for other countries to imitate.

The data reported by U.S. companies also show that specific defense
systems were in high demand overseas. The top five weapon systems (of
the 181 weapon systems sold) were aircraft systems. These top five
exports accounted for 44.4 percent of the value of all export contracts
and 37.3 percent of the offset agreements during the reporting period.
The top 10 defense systems accounted for 59.3 percent of the export
contracts and 56.9 percent of the offset agreements during the reporting
period.

## Regional Distributions

European countries dominated offset activity during the reporting
period. Europe alone accounted for 65 percent of the value of offset
agreements during the reporting period, while at the same time
accounting for 46 percent of the value of U.S. defense export contracts.
Asian countries ranked a distant second in both categories, accounting
for over 22 percent of the value of offset agreements and 37 percent of
related U.S. export contract values. However, Asia's share of offset
agreements is growing. In 2000, Asia accounted for only 2.8 percent of
the value of offset agreements. The same year, European agreements
comprised 78 percent of total offset agreements. By 2002, those numbers
changed significantly: Europe was the source of

33.6 percent of the value of offset agreements (compared to 78 percent
in 2000), while Asian offsets had climbed sharply to 64.8 percent
(compared to 2.8 percent) of the total.

For the ten-year reporting period, Middle Eastern and African countries
also had significant shares, accounting for nearly 10.5 percent of the
value of offset agreements and 15.6 percent of the value of U.S. export
contract business. Offsets with countries in North and South America
(Canada, Brazil, and Chile) were less significant, accounting for
approximately two percent of the value of offset agreements and 1.5
percent of the total value of related U.S. defense export contracts.
Chart 4-2 illustrates regional totals of U.S. defense export contracts
and offset agreements for 1993 to 2002.

## Europe vs. All Other Countries 

As noted above, Europe alone accounted for nearly two-thirds (65
percent) of total offset agreements (by value), but less than half (46
percent) of the value of U.S. defense export contracts. These figures
show the impact of the high offset percentages typically demanded by
European nations in connection with U.S. defense export sales. The
average offset percentage demanded by the 17 European countries involved
in offset activity during the ten-year reporting period was 92.6 percent
of the export contract values -- a percentage that was higher than any
other region. U.S. firms reported entering into 230 offset agreements
with European countries during the ten-year period for a total value of
\$27.3 billion. These offset agreements ranged from less than \$2
million to \$2.5 billion in offset demands, and averaged over \$118
million per agreement. The average offset agreement had a term of 88
months, with a few agreements extending 180 months.

[]{#__RefHeading___Toc77650524 .anchor}Chart 4‑2: Regional Totals of
Export Contracts and Offset Agreements, 1993-2002 (in \$ billions)

![](media/image8.wmf){width="6.489583333333333in"
height="3.7291666666666665in"}

+------+---------+--------+-------------+------------+------+-------+
| T    |         |        |             |            |      |       |
| able |         |        |             |            |      |       |
| 4‑9: |         |        |             |            |      |       |
| Of   |         |        |             |            |      |       |
| fset |         |        |             |            |      |       |
| Agr  |         |        |             |            |      |       |
| eeme |         |        |             |            |      |       |
| nts: |         |        |             |            |      |       |
| Eu   |         |        |             |            |      |       |
| rope |         |        |             |            |      |       |
| vs.  |         |        |             |            |      |       |
| Rest |         |        |             |            |      |       |
| of   |         |        |             |            |      |       |
| W    |         |        |             |            |      |       |
| orld |         |        |             |            |      |       |
+------+---------+--------+-------------+------------+------+-------+
| Ye   | Area    | \# of  | Export      | Offset     | Per  | Dur   |
| arly |         | Agre   | Contracts   | Agreements | cent | ation |
| To   |         | ements |             |            |      |       |
| tals |         |        | (in \$      | (in \$     | Off  | (in   |
|      |         |        | millions)   | millions)  | sets | mo    |
|      |         |        |             |            |      | nths) |
+------+---------+--------+-------------+------------+------+-------+
| 1993 | Europe  | 14     | \$2,        | \$2,3      | 7    | 132   |
|      |         |        | 985,017,012 | 38,052,745 | 8.3% |       |
+------+---------+--------+-------------+------------+------+-------+
|      | Non     | 16     | \$10,       | \$2,4      | 2    | 117   |
|      | -Europe |        | 972,022,686 | 68,671,450 | 2.5% |       |
+------+---------+--------+-------------+------------+------+-------+
|      | World   | 30     | \$13,       | \$4,8      | 3    | 124   |
|      |         |        | 957,039,698 | 06,724,195 | 4.4% |       |
+------+---------+--------+-------------+------------+------+-------+
| 1994 | Europe  | 20     | \$1,        | \$7        | 5    | 99    |
|      |         |        | 508,233,660 | 64,829,660 | 0.7% |       |
+------+---------+--------+-------------+------------+------+-------+
|      | Non     | 29     | \$3,        | \$1,2      | 3    | 102   |
|      | -Europe |        | 284,186,291 | 83,885,998 | 9.1% |       |
+------+---------+--------+-------------+------------+------+-------+
|      | World   | 49     | \$4,        | \$2,0      | 4    | 101   |
|      |         |        | 792,419,951 | 48,715,658 | 2.7% |       |
+------+---------+--------+-------------+------------+------+-------+
| 1995 | Europe  | 26     | \$4,        | \$5,1      | 10   | 132   |
|      |         |        | 944,349,000 | 59,249,000 | 4.3% |       |
+------+---------+--------+-------------+------------+------+-------+
|      | Non     | 19     | \$2,        | \$8        | 3    | 98    |
|      | -Europe |        | 457,697,200 | 74,868,816 | 5.6% |       |
+------+---------+--------+-------------+------------+------+-------+
|      | World   | 45     | \$7,        | \$6,0      | 8    | 127   |
|      |         |        | 402,046,200 | 34,117,816 | 1.5% |       |
+------+---------+--------+-------------+------------+------+-------+
| 1996 | Europe  | 34     | \$1,        | \$1,9      | 9    | 110   |
|      |         |        | 924,154,000 | 19,144,000 | 9.7% |       |
+------+---------+--------+-------------+------------+------+-------+
|      | Non     | 16     | \$1,        | \$3        | 3    | 73    |
|      | -Europe |        | 063,668,414 | 51,532,595 | 3.0% |       |
+------+---------+--------+-------------+------------+------+-------+
|      | World   | 50     | \$2,        | \$2,2      | 7    | 104   |
|      |         |        | 987,822,414 | 70,676,595 | 6.0% |       |
+------+---------+--------+-------------+------------+------+-------+
| 1997 | Europe  | 28     | \$3,        | \$3,0      | 8    | 115   |
|      |         |        | 732,590,000 | 43,800,000 | 1.5% |       |
+------+---------+--------+-------------+------------+------+-------+
|      | Non     | 29     | \$2,        | \$7        | 3    | 91    |
|      | -Europe |        | 090,229,255 | 88,036,633 | 7.7% |       |
+------+---------+--------+-------------+------------+------+-------+
|      | World   | 57     | \$5,        | \$3,8      | 6    | 110   |
|      |         |        | 822,819,255 | 31,836,633 | 5.8% |       |
+------+---------+--------+-------------+------------+------+-------+
| 1998 | Europe  | 21     | \$1,        | \$1,2      | 8    | 115   |
|      |         |        | 390,307,668 | 00,271,496 | 6.3% |       |
+------+---------+--------+-------------+------------+------+-------+
|      | Non     | 23     | \$1,        | \$6        | 3    | 111   |
|      | -Europe |        | 867,517,244 | 46,374,000 | 4.6% |       |
+------+---------+--------+-------------+------------+------+-------+
|      | World   | 44     | \$3,        | \$1,8      | 5    | 113   |
|      |         |        | 257,824,912 | 46,645,496 | 6.7% |       |
+------+---------+--------+-------------+------------+------+-------+
| 1999 | Europe  | 22     | \$2,        | \$2,7      | 9    | 69    |
|      |         |        | 968,749,184 | 07,962,710 | 1.2% |       |
+------+---------+--------+-------------+------------+------+-------+
|      | Non     | 23     | \$1,        | \$1,1      | 6    | 94    |
|      | -Europe |        | 712,460,302 | 43,426,500 | 6.8% |       |
+------+---------+--------+-------------+------------+------+-------+
|      | World   | 45     | \$4,        | \$3,8      | 8    | 75    |
|      |         |        | 681,209,486 | 51,389,210 | 2.3% |       |
+------+---------+--------+-------------+------------+------+-------+
| 2000 | Europe  | 24     | \$3,        | \$4,3      | 11   | 113   |
|      |         |        | 892,796,045 | 24,000,090 | 1.1% |       |
+------+---------+--------+-------------+------------+------+-------+
|      | Non     | 14     | \$2,        | \$1,1      | 4    | 64    |
|      | -Europe |        | 385,535,153 | 74,104,050 | 9.2% |       |
+------+---------+--------+-------------+------------+------+-------+
|      | World   | 38     | \$6,        | \$5,4      | 8    | 79    |
|      |         |        | 278,331,198 | 98,104,140 | 7.6% |       |
+------+---------+--------+-------------+------------+------+-------+
| 2001 | Europe  | 18     | \$3,        | \$3,8      | 9    | 83    |
|      |         |        | 972,372,462 | 08,280,100 | 5.9% |       |
+------+---------+--------+-------------+------------+------+-------+
|      | Non     | 17     | \$3,        | \$1,6      | 5    | 80    |
|      | -Europe |        | 066,806,355 | 88,974,355 | 5.1% |       |
+------+---------+--------+-------------+------------+------+-------+
|      | World   | 35     | \$7,        | \$5,4      | 7    | 82    |
|      |         |        | 039,178,817 | 97,254,455 | 8.1% |       |
+------+---------+--------+-------------+------------+------+-------+
| 2002 | Europe  | 23     | \$2,        | \$2,0      | 9    | 79    |
|      |         |        | 168,281,468 | 45,362,683 | 4.3% |       |
+------+---------+--------+-------------+------------+------+-------+
|      | Non     | 18     | \$5,        | \$4,0      | 7    | 93    |
|      | -Europe |        | 237,949,615 | 49,449,367 | 7.3% |       |
+------+---------+--------+-------------+------------+------+-------+
|      | World   | 41     | \$7,        | \$6,0      | 8    | 85    |
|      |         |        | 406,231,083 | 94,812,050 | 2.3% |       |
+------+---------+--------+-------------+------------+------+-------+
| To   | Europe  | 230    | \$29,       | \$27,3     | 9    | 105   |
| tals |         |        | 486,850,499 | 10,952,484 | 2.6% |       |
|      |         |        |             |            |      |       |
|      |         |        |             |            |      |       |
+------+---------+--------+-------------+------------+------+-------+
|      | Non     | 204    | \$34,       | \$14,4     | 4    | 92    |
|      | -Europe |        | 138,072,515 | 69,323,764 | 2.4% |       |
+------+---------+--------+-------------+------------+------+-------+
|      | World   | 434    | \$63,       | \$41,7     | 6    | 100   |
|      |         |        | 624,923,014 | 80,276,248 | 5.7% |       |
+------+---------+--------+-------------+------------+------+-------+
| Sou  |         |        |             |            |      |       |
| rce: |         |        |             |            |      |       |
| BIS  |         |        |             |            |      |       |
| Off  |         |        |             |            |      |       |
| sets |         |        |             |            |      |       |
| Data |         |        |             |            |      |       |
| base |         |        |             |            |      |       |
+------+---------+--------+-------------+------------+------+-------+

As shown in Table 4-1, the 16 countries representing all other regions
(i.e., non-European countries) accounted for slightly over one-third
(34.6 percent) of offset agreements (by value) but more than half (53.7
percent) the value of reported U.S. defense export contracts. The
resulting average offset requirement for the reporting period was 42.4
percent. Although Europe still accounts for the preponderance of offset
agreements by value, non-European countries' offset requirement
percentages are increasing significantly. For 1993-2000, the average
offset requirement for non-European countries totaled only 33.9 percent.
The past two reporting years alone boosted that percentage nearly 10
percent. Non-European countries accounted for 204 offset agreements that
totaled \$14.5 billion from 1993 to 2002, half of the European total.
The average offset agreement for non-European countries was valued at
\$72 million and had a term of 78 months.

Two large defense export contracts in 1993 -- one to Taiwan and another
to Saudi Arabia -- both featured extremely low offset requirements.
These low requirements significantly lowered the average offset
requirement in non-European nations. Excluding these sales, the average
offset percentage for the ten-year period for non-European countries
would have been 53 percent, or almost 10 points higher.

Overall, Middle Eastern countries and certain countries in the Pacific
area generally demand lower offset levels than European countries. Of
the 204 offset agreements with non-European countries, 136 (two-thirds)
had offset percentages of 50 percent or less. Only 35 (one-sixth) of the
offset agreements had percentages of 100 percent or more, and 11 of
these had offset requirements in excess of 100 percent. Indeed, one
offset agreement had an offset requirement of 333 percent, although this
was associated with a relatively small defense export contract.

In general, the data show that countries with developed, technically
advanced economies have demanded higher levels of offsets than other
countries. As more economies and their military programs advance
technically (e.g., Chile, South Africa, South Korea, and Turkey), higher
levels of offset requirements are likely to continue. More advanced
economies are able to absorb more offsets, both direct and indirect.
Typically, their infrastructures are more advanced, and they are more
likely than other countries already to have in place a diverse pool of
industries among which to distribute offset transactions.

## Are Offset Demands Increasing? 

The data show not only that offset demands are increasing, but also that
more countries outside Europe are demanding these higher offsets.
Although historically low, offset requirements outside Europe are
rising. Two-thirds of the non-European offset agreements valued at 100
percent or more of the export contract value have occurred since 1998.
Of the 35 agreements with offset requirements of 100 percent or more, 13
were with Canada and another six were with Turkey.

Moreover, in the last three years, countries entering into offset
agreements with U.S. firms for the first time have demanded 100 percent
or more. Overall, evidence of these increases outside Western Europe
began in 1999 when the offset percentage demanded by non-European
countries reached an average of 66.8 percent. After a decline in
negotiated offset requirements in 2000 and 2001, 2002 offset
requirements by non-European countries rose to nearly 80 percent. This
level reflects a substantial turnaround from 2001.

Agreements entered into by South Korea and Turkey illustrate the growing
trend in non-European offset demands. From 1993 to 1998, the average
offset requirement (by value) demanded of U.S. firms by South Korea was
36.5 percent. In contrast, from 1999 to 2002, that average nearly
doubled to 71.0 percent. From 1993 to 1998, offset percentages (by
value) demanded by Turkey of U.S. firms averaged 52.3 percent. However,
Turkey's offset requirements jumped in 1999-2002 to 95.7 percent.

[]{.mark}

European offset demands also continued to increase over the ten-year
period, although more slowly than offset demands in the rest of the
world. The trend in offset requirements for European countries increased
at an annual rate of 1.6 percentage points. For the rest of the world,
the average increase in offset percentages was 5.5 percentage points per
year. Based on the three-year weighted averages in Chart 4-3, European
offset requirements increased an average of 2.26 percentage points each
year in the period, while non-European demands increased 2.81 percentage
points. These values are in comparison to the rest-of-world unweighted
average of 4.8 percent each year and the weighted average of 2.95
percent.

Offset requirement trends are more representative when viewed as a
moving, weighted average.[^20] The weighted world trend in offset
percentages still trended upward at an average annual rate of 4.79
percent, but the average was exaggerated by differences between Europe
and all other countries (See Chart 4-3). Indeed, weighted averages of
offset percentages for Europe show an average annual rise of 2.26
percent. The offset percentage for the final three-year period
(2000-2002) topped 100 percent. However, in the same ten-year period
that Europe has seen only a 22.64 percentage point increase, from 77.79
percent to 100.43, the rest of the world nearly doubled its offset
requirements from 32.40 percent to 60.53 percent. Europe's already high
offset requirements may be rising, but at a slower rate, indicating that
limits for higher and higher offset demands may exist.

[]{#__RefHeading___Toc77650525 .anchor}Chart 4‑3: Percentage Offsets for
Europe vs. Rest of World (Weighted Moving Average, 1993-2002)

![](media/image9.wmf){width="6.302083333333333in"
height="4.041666666666667in"}A reason for the upward trend in defense
offset requirements is that the supply of defense systems greatly
exceeds the demand for such items. In the last decade, shrinking
worldwide defense expenditures and the overcrowding in the defense
supplier sector have forced defense industries in many nations to
consolidate. As sales opportunities narrowed, competition for such sales
became more intense. Higher-than-normal overhead related to low levels
of capacity utilization in defense industries coupled with competitive
pressures on prices also have squeezed corporate profits. On the other
hand, foreign purchasing governments are under pressure to sustain their
indigenous defense companies or to create new ones and, accordingly, are
demanding more offsets. Coupled with the recent world economic slowdown,
significant public outlays for foreign-made weapon systems become even
more controversial, which leads to higher offset demands to deflect
political pressure.

In conclusion, the Asian share of total export contracts and the
region's level of offset demands have experienced dramatic growth in
recent years. Individual countries in other non-European regions of the
world are also demanding and receiving increased levels of offsets. At
the same time, increases in Western European offset demands are
moderating, with requirements in 2001 and 2002 remaining around 95
percent.

# Offset Transaction Activity, 1993-2002

An offset agreement typically comprises multiple transactions entered
into by the selling party to satisfy the requirements of the agreement.
Analyzing transactions provides the basis upon which the impacts of
offsets on the U.S. defense industrial base are estimated. For the
purpose of analysis, offset transactions are grouped by type (i.e.,
direct, indirect, and unspecified), and then grouped again into the nine
categories described in Chapter 2 (Purchases, Subcontracts, Technology
Transfer, Credit Assistance, Training, Overseas Investment,
Co-production, Licensed Production, and Miscellaneous).

## Overview

During the time period 1993 to 2002, 42 U.S. defense companies reported
5,903 offset transactions with a total value of \$23.5 billion. The
reported offset transactions were completed with 39 different countries.
The offset transactions were conducted in fulfillment of 230 U.S. weapon
system exports, some dating from the 1980s. U.S. firms received a total
of \$28.8 billion in credit toward open offset obligations during the
reporting period, yielding a composite multiplier of 1.224 (i.e., credit
value divided by offset value). Almost 14 percent of offset transactions
(812) earned extra credit (i.e., had a multiplier greater than 1). The
yearly value of offset transactions averaged \$2.35 billion.

Almost 40 percent of the value of reported offset transactions during
1993-2002 is related to offset agreements signed before 1993 (preceding
BIS's offsets data collection process). These older offset agreements
(approximately 250) included requirements for practically all offset
transactions for Finland, the second largest recipient country; 60
percent of offset transactions for South Korea; more than 80 percent of
offset transactions for Italy; and smaller amounts for many other
countries.

The values of offset transactions by type are reflected in Table 5-1.

  -------------------------------- ------------------ ----------------- ------------------
  []{#__RefHeading___Toc57014974                                        
  .anchor}Table 5‑10: Offset                                            
  Transactions Analysis                                                 

  Offset Transaction Comparisons                      Transactions      
                                                      Addressing Offset 
                                                      Agreements        
                                                      Entered into....  

  Data Element                     All Transactions   Pre-1993          1993 and After

  Total Value                      \$23,521,538,193   \$9,118,144,951   \$14,403,393,242

  Direct Offsets                   \$9,197,835,488    \$3,375,693,397   \$5,822,142,091

  Indirect Offsets                 \$13,684,248,145   \$5,522,641,373   \$8,161,606,772

  Unspecified Offsets              \$639,454,531      \$219,810,182     \$419,644,349

  \% Element                       Percent                              
                                   Distributions                        

  \% Direct Offsets                39.10%             37.02%            40.42%

  \% Indirect Offsets              58.18%             60.57%            56.66%

  \% Unspecified Offsets           2.72%              2.41%             2.91%

  Source: BIS Offsets Database                                          
  -------------------------------- ------------------ ----------------- ------------------

The data in Table 5-2 show that seven countries were the recipients of
approximately 63.2 percent of the actual value of all offset
transactions. These seven countries had a composite multiplier of 1.099,
and each country, with the exception of Spain, had more than \$1 billion
in offset transactions during the reporting period. The multipliers for
the top seven countries ranged from 1.007 for the United Kingdom to
2.602 for Greece.

The United Kingdom and Finland were the two largest recipients of offset
transactions, with totals of \$4.4 billion and \$3.2 billion,
respectively, during the reporting period. Together, the two countries
accounted for 32.3 percent of total offset transactions during the
reporting period. Because of smaller than average multipliers, however,
the United Kingdom and Finland represented only 27.3 percent of the
total credit value of all transactions. Finland's share of total
transactions declined during 2001-2002, because it did not have any new
transaction activity during the two-year period.

After the United Kingdom, Finland, and Israel, individual country offset
transaction totals diminish significantly. For example, the Netherlands
was a distant fourth in total value with only 6.4 percent of the offset
transactions, followed by Switzerland with 5.1 percent. All other
countries each accounted for shares of less than five percent of the
total value of offset transactions. Of these countries, 18 had shares of
less than one percent. The top seven countries receiving offset
transactions with their multipliers are shown in Table 5-2.

+-------------------+----------------+----------------+----------------+
| []{#__RefHead     |                |                |                |
| ing___Toc57014975 |                |                |                |
| .anchor}Table     |                |                |                |
| 5‑11: Offset      |                |                |                |
| Transactions by   |                |                |                |
| Leading Countries |                |                |                |
|                   |                |                |                |
| (Total,           |                |                |                |
| 1993-2002)        |                |                |                |
+-------------------+----------------+----------------+----------------+
| Country           | Actual         | Credit         | Multipliers    |
|                   |                |                |                |
|                   | Value          | Value          |                |
+-------------------+----------------+----------------+----------------+
| 1\. United        | \              | \              | 1.007          |
| Kingdom           | $4,379,418,474 | $4,408,472,682 |                |
+-------------------+----------------+----------------+----------------+
| 2\. Finland       | \              | \              | 1.071          |
|                   | $3,216,337,843 | $3,446,007,399 |                |
+-------------------+----------------+----------------+----------------+
| 3\. Israel        | \              | \              | 1.048          |
|                   | $2,470,037,632 | $2,588,738,935 |                |
+-------------------+----------------+----------------+----------------+
| 4\. Netherlands   | \              | \              | 1.212          |
|                   | $1,503,777,165 | $1,822,252,935 |                |
+-------------------+----------------+----------------+----------------+
| 5\. Switzerland   | \              | \              | 1.007          |
|                   | $1,191,633,656 | $1,200,286,037 |                |
+-------------------+----------------+----------------+----------------+
| 6\. South Korea   | \              | \              | 1.451          |
|                   | $1,146,489,676 | $1,663,977,863 |                |
+-------------------+----------------+----------------+----------------+
| 7\. Greece        | \              | \              | 2.602          |
|                   | $1,036,652,820 | $2,698,232,819 |                |
+-------------------+----------------+----------------+----------------+
| Total             | \$             | \$             | 1.193          |
|                   | 14,944,347,266 | 17,827,971,670 |                |
+-------------------+----------------+----------------+----------------+
| Percent of All    | 63.53%         | 61.92%         |                |
+-------------------+----------------+----------------+----------------+
| All Countries     | \$             | \$             | 1.224          |
| (39)              | 23,521,538,193 | 28,788,386,498 |                |
+-------------------+----------------+----------------+----------------+
| Source: BIS       |                |                |                |
| Offsets Database  |                |                |                |
+-------------------+----------------+----------------+----------------+

## Regional Distributions

As expected, the regional distribution of offset transactions mirrors
the pattern of offset agreements (see Chart 5-1). As with offset
agreements, European countries dominated the regional distribution of
offset transactions. Europe accounted for 67.7 percent of the value of
offset transactions during 1993-2002. However, with a smaller than
average multiplier (1.156), European countries accounted for only 66.8
percent of the total credit value applied toward open offset agreements.

Asian countries ranked a distant second in both categories. Asia
accounted for 13.6 percent of the total value of the offset
transactions. However Asia, with a larger than average multiplier
(1.48), accounted for 16.5 percent of the total credited value of such
transactions.

Middle Eastern and African countries accounted for 14.7 percent of the
total offset transactions and 13.4 percent of the credit value. The
multiplier for Middle Eastern and African countries was 1.115, slightly
lower than Europe's.

![](media/image10.wmf){width="5.930555555555555in" height="4.0in"}

North and South American countries were a distant fourth with only about
4.0 percent of the actual value of transactions and 3.3 percent of the
credit. The multiplier for North and South America was the lowest of the
four regions at only 1.002.

The multipliers for each region directly affect the impact offset
agreements have on the U.S. defense industrial base. For the world at
large, the offset percentage was 65.7 percent (i.e., the value of offset
agreements was 65.7 percent of the total value of the related defense
contracts). The multiplier for the world at large was 1.224. Therefore,
when the 65.7 percent offset percentage is discounted by the multiplier,
the resulting adjusted offset percentage is 53.8 percent. In this way,
the multiplier reduces the requirement for fulfilling offset agreements.

For the four main regions described above, the multiplier discount
reduced Europe's offset percentage from 92.6 percent to 76.6 percent.
The offset percentage for Asia, with its high multiplier, dropped from
40.0 percent to 26.9 percent. The Middle East and Africa fell from 44.0
to 39.4 percent, while North and South America showed little change,
dropping from 84.2 to 84.1 percent. Lesser-developed economies usually
provide larger multipliers as an incentive to the prime contractor in an
effort to obtain needed technology or production capacity. The
calculations and results of this analysis are shown in Table 5-3 below.

+-----------+-----------+----------+----------+----------+----------+
| []{       |           |          |          |          |          |
| #__RefHea |           |          |          |          |          |
| ding___To |           |          |          |          |          |
| c57014977 |           |          |          |          |          |
| .anc      |           |          |          |          |          |
| hor}Table |           |          |          |          |          |
| 5‑12:     |           |          |          |          |          |
| Regional  |           |          |          |          |          |
| Offset    |           |          |          |          |          |
| Tra       |           |          |          |          |          |
| nsactions |           |          |          |          |          |
| and       |           |          |          |          |          |
| A         |           |          |          |          |          |
| greements |           |          |          |          |          |
|           |           |          |          |          |          |
| (Dollar   |           |          |          |          |          |
| values in |           |          |          |          |          |
| \$        |           |          |          |          |          |
| millions) |           |          |          |          |          |
+-----------+-----------+----------+----------+----------+----------+
|           | Offset    |          |          | Offset   |          |
|           | Tra       |          |          | Ag       |          |
|           | nsactions |          |          | reements |          |
+-----------+-----------+----------+----------+----------+----------+
| Region    | Actual    | Credit   | Mu       | \%       | Mu       |
|           |           |          | ltiplier | Offset   | ltiplier |
|           | Value     | Value    |          | Ag       | with     |
|           |           |          |          | reements | Discount |
+-----------+-----------+----------+----------+----------+----------+
| Europe    | \$15,922  | \$19,241 | 1.208    | 92.6%    | 76.6%    |
+-----------+-----------+----------+----------+----------+----------+
| Asia      | \$3,206   | 4,757    | 1.484    | 40.0%    | 26.9%    |
+-----------+-----------+----------+----------+----------+----------+
| Mid-Ea    | \$3,454   | \$3,850  | 1.115    | 44.0%    | 39.4%    |
| st/Africa |           |          |          |          |          |
+-----------+-----------+----------+----------+----------+----------+
| N./S.     | \$939     | \$941    | 1.002    | 84.2%    | 84.1%    |
| America   |           |          |          |          |          |
+-----------+-----------+----------+----------+----------+----------+
| Total     | \$23,522  | \$28,788 | 1.224    | 65.7%    | 53.8%    |
+-----------+-----------+----------+----------+----------+----------+
| Source:   |           |          |          |          |          |
| BIS       |           |          |          |          |          |
| Offsets   |           |          |          |          |          |
| Database  |           |          |          |          |          |
+-----------+-----------+----------+----------+----------+----------+

## Offset Transactions by Type

For 1993-2002, direct offsets accounted for 39.1 percent (\$9.2 billion)
of the total value of offset transactions. Indirect offsets accounted
for 58.2 percent (\$13.7 billion) of the value of offset transactions.
The remaining 2.7 percent (\$639.5 million) consisted of transactions
that were not specified as direct or indirect. The level of direct
offset transactions varied greatly from year to year, based mostly on
which countries dominated the offset activity. The same variation held
for indirect offsets.

Finland was the largest recipient of indirect offsets through most of
the timeframe, receiving nearly 20.1 percent of the total value of
indirect offset transactions.[^21] Only 15 percent of Finland's offset
transactions were classified as direct offsets. Removing the data on
Finland causes the percentage of direct offset transactions to increase
dramatically.

The United Kingdom led all countries in direct offset transactions
received during 1993-2002, capturing almost 20 percent of the direct
offset total, and these were almost exclusively related to aerospace
contracts. A comparison between the United Kingdom and Finland leads to
a conclusion that Finland lacks the indigenous aerospace infrastructure
to take full advantage of direct offsets, while the United Kingdom is
well positioned to do so.

Calculated on an annual basis, the value of direct offsets ranged from
\$583 million (in 1993) to \$1.46 billion (in 1998). Direct offset
transactions averaged \$920 million yearly for the ten-year reporting
period. The value of indirect offset transactions ranged from \$895
million (1998) to \$1.67 billion (2002), averaging \$1.37 billion per
year during the reporting period. Direct offset transactions were at
their lowest levels in 1993 and 1994 relative to indirect offset
transactions, accounting for about 32 percent of total offset
transactions in those years. The share of direct offsets to total
offsets increased in 1995 largely because of the United Kingdom's
substantial increase in direct offsets in that year, which increased to
almost \$650 million by 1997, before tapering off. A large value of
direct offset transactions (\$280 million) also was reported for Israel
in 1995, contributing to the increase in the overall percentage of
direct offsets to

39.2 percent that year.

[]{#__RefHeading___Toc77650527 .anchor}Chart 5‑5: Direct, Indirect, and
Unspecified Offset Transactions, 1993-2002 (in \$ millions)

In 1998, the percentage distribution of direct offsets peaked at an
unusually high 61.9 percent. Exceptionally high direct offset
transactions were reported with Italy, Israel, and the Netherlands in
1998, while transactions with the United Kingdom subsided from the prior
year with direct offsets of \$350 million. During 1999-2002, the ratio
of direct offsets to total offsets remained in a narrow range, from a
low of 33.2 percent to a high of 38.9 percent. These year-to-year
variations in the distribution of direct and indirect offset
transactions are presented in Chart 5-2.

## Offset Transactions by Category

Three categories of offset transactions dominated offset activity during
1993-2002: purchases, subcontracts, and technology transfers. These
three categories accounted for 79.5 percent of the value of all offset
transactions during the timeframe. Purchases (38.0 percent) and
subcontracts (28.5 percent) together accounted for almost two-thirds of
the value of total offset transactions. Technology transfers made up an
additional 13.0 percent. Most of the remaining 25 percent of the value
of offset transactions was categorized as miscellaneous (7.7 percent)
and credit transfer (4.9 percent). The remaining 7.9 percent of the
value of offset transactions was distributed among the other four
categories: training, overseas investment, co-production, and licensed
production. Chart 5-3 shows the distribution of offset transactions by
category.

[]{#__RefHeading___Toc77650528
.anchor}![](media/image11.wmf){width="6.5in" height="3.5875in"} Chart
5‑6: Offset Transactions by Category, 1993-2002 (in \$ millions)

All 39 countries involved in offset transaction activity were recipients
of offset transactions categorized as purchases, which were classified
as either indirect or unspecified offsets. These purchases were
comprised mostly of manufactured goods and services, including metal
castings and forgings, aircraft parts, night vision components, machined
parts, electronic components, software, and educational and consulting
services. The countries with the most purchases were the United Kingdom
(accounting for 25 percent of the value of all purchases), Finland (9.7
percent), and Switzerland (8.2 percent). Almost 49 percent of all offset
transactions categorized as purchases were aerospace-related.

Twenty-seven countries were recipients of offset transactions classified
as subcontracts. Subcontracts are considered direct offset transactions,
and the overwhelming majority of subcontracts involved aerospace-related
manufactured parts, components, and services. Aerospace-related
transactions accounted for 87.4 percent of the total value of all offset
transactions categorized as subcontracts. The United Kingdom alone
accounted for 26.3 percent of all subcontracts, while Israel accounted
for 21.3 percent. Italy accounted for 7.7 percent of all subcontracts,
and the Netherlands accounted for 7.3 percent. Combined, these four
countries accounted for 62.6 percent of the value of all offset
transactions categorized as subcontracts. Despite its large share of
total offset transactions, Finland accounted for only 1.8 percent (or
\$118.1 million) of the value of subcontract transactions.

[]{#__RefHeading___Toc77650529 .anchor}Chart 5‑7: Percentage of Total
Annual Offset Transactions Accounted for by Top Three Transaction
Categories, 1993-2002

![](media/image12.wmf){width="5.989583333333333in"
height="3.6979166666666665in"}

Data showing the percentage of total offset transactions accounted for
by purchases, subcontracts, and technology transfers are shown in Chart
5-4. The dominance of these three categories ranged from 66.3 percent of
all offset transactions (by value) in 1993 to 93.1 percent in 2001.

Some 24 countries accounted for all technology transfers. Finland
accounted for nearly

13 percent of the number and almost 21 percent of the value of
technology transfers, while South Korea (15 percent and 12 percent) and
Spain (16 percent and 11 percent) rounded out the top three. Others with
significant shares included Taiwan (16 percent and 10 percent),
Australia

(7.3 percent and 7.0 percent), and Norway (4.4 percent and 4.4 percent).

## Offset Transactions by Category and Type

Analyzing the distribution of offset transactions by category and by
type provides further insight into the effects of offsets on the U.S.
defense industrial base. For example, subcontracts, co-production, and
licensed production accounted for 79.1 percent of the value of all
direct offset transactions, and each of these categories resulted in
foreign production of goods or services. As a result of such offsets,
U.S. suppliers can be dislodged from participation in the manufacture
and/or assembly of a U.S. defense system as well as its future
maintenance requirements. Offset transactions in these three categories
totaled \$7.3 billion during the 10-year reporting period, with
subcontracts by far the largest portion (\$6.7 billion).

Indirect offsets that involved foreign production of goods and services
included purchases and a small amount of licensed production. Together,
the value of these two categories totaled more than \$8.5 billion during
the period and accounted for 62.2 percent of the value of all offsets
classified as indirect. In total, during the reporting period, \$15.8
billion in overseas production -- or an average \$1.58 billion per year
-- was the result of either direct or indirect offset transactions.

Technology transfers, training, credit assistance, and overseas
investment offsets also can enhance the capabilities of foreign
producers and make them more competitive in the global market. These
categories of offset transactions can be either direct or indirect.
Aside from the monetary value, the effects of such transactions can be
long-term and overflow into other defense systems in the United States
and other countries to the extent that they make foreign manufacturers
more competitive. The value of direct offset transactions in these four
categories was \$1.62 billion during 1993-2002, 67.6 percent of which
was accounted for by technology transfer. The four categories accounted
for approximately 17.6 percent of the value of all direct

![](media/image13.wmf){width="5.625in" height="3.786111111111111in"}

![](media/image14.wmf){width="5.5in" height="3.676388888888889in"}

offset transactions. The value of indirect offset transactions in these
four categories during the ten-year period was \$3.67 billion, most of
which was accounted for by technology transfer

(51.0 percent) and credit assistance (31.0 percent). In total, during
1993-2002, \$5.29 billion in offset transactions was accounted for by
direct and indirect transactions in these four categories. The annual
average was \$529 million. Charts 5-5 and 5-6 show the distribution of
offset transactions by category.

## Offset Transactions by Industrial Sector

Identifying offset transactions by industry sector allows for an even
more detailed analysis of the effect of offsets on the U.S. defense
industrial base. Offset transactions generally are clustered around a
small number of major industries associated with defense production, as
shown by the data in Table 5-4. The detailed data by SIC appear in
Appendix D.

+---+------------------------------+---------+---+-----------+---+-----------+
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+---+------------------------------+---------+---+-----------+---+-----------+
| S | Sector Description           | Number  | V |           | P |           |
| I |                              | of      | a |           | e |           |
| C |                              | Trans   | l |           | r |           |
|   |                              | actions | u |           | c |           |
|   |                              |         | e |           | e |           |
|   |                              |         | i |           | n |           |
|   |                              |         | n |           | t |           |
|   |                              |         |   |           | o |           |
|   |                              |         | \ |           | f |           |
|   |                              |         | $ |           | T |           |
|   |                              |         | m |           | o |           |
|   |                              |         | i |           | t |           |
|   |                              |         | l |           | a |           |
|   |                              |         | l |           | l |           |
|   |                              |         | i |           |   |           |
|   |                              |         | o |           |   |           |
|   |                              |         | n |           |   |           |
|   |                              |         | s |           |   |           |
+---+------------------------------+---------+---+-----------+---+-----------+
| 3 | Transportation Equipment     | 2,672   |   | \         |   | 51.57%    |
| 7 |                              |         |   | $12,129.9 |   |           |
+---+------------------------------+---------+---+-----------+---+-----------+
| 3 | Electronic/Electrical        | 983     |   | \$3,574.6 |   | 15.20%    |
| 6 | Equipment                    |         |   |           |   |           |
+---+------------------------------+---------+---+-----------+---+-----------+
| 3 | Industrial Machinery         | 604     |   | \$1,455.8 |   | 6.19%     |
| 5 |                              |         |   |           |   |           |
+---+------------------------------+---------+---+-----------+---+-----------+
| 7 | Business Services            | 318     |   | \$1,191.7 |   | 5.07%     |
| 3 |                              |         |   |           |   |           |
+---+------------------------------+---------+---+-----------+---+-----------+
| 8 | Technical Services &         | 306     |   | \$1,081.0 |   | 4.60%     |
| 7 | Consultants                  |         |   |           |   |           |
+---+------------------------------+---------+---+-----------+---+-----------+
| 3 | Measuring & Analyzing        | 267     |   | \$1,060.5 |   | 4.51%     |
| 8 | Instrumentation              |         |   |           |   |           |
+---+------------------------------+---------+---+-----------+---+-----------+
|   | Sub-Total                    | 5,150   |   | \         |   | 85.30%    |
|   |                              |         |   | $20,493.5 |   |           |
+---+------------------------------+---------+---+-----------+---+-----------+
|   | Total                        | 5,903   |   | \         |   |           |
|   |                              |         |   | $23,521.5 |   |           |
+---+------------------------------+---------+---+-----------+---+-----------+
| S |                              |         |   |           |   |           |
| o |                              |         |   |           |   |           |
| u |                              |         |   |           |   |           |
| r |                              |         |   |           |   |           |
| c |                              |         |   |           |   |           |
| e |                              |         |   |           |   |           |
| : |                              |         |   |           |   |           |
| B |                              |         |   |           |   |           |
| I |                              |         |   |           |   |           |
| S |                              |         |   |           |   |           |
| O |                              |         |   |           |   |           |
| f |                              |         |   |           |   |           |
| f |                              |         |   |           |   |           |
| s |                              |         |   |           |   |           |
| e |                              |         |   |           |   |           |
| t |                              |         |   |           |   |           |
| s |                              |         |   |           |   |           |
| D |                              |         |   |           |   |           |
| a |                              |         |   |           |   |           |
| t |                              |         |   |           |   |           |
| a |                              |         |   |           |   |           |
| b |                              |         |   |           |   |           |
| a |                              |         |   |           |   |           |
| s |                              |         |   |           |   |           |
| e |                              |         |   |           |   |           |
+---+------------------------------+---------+---+-----------+---+-----------+

Offset transactions related to transportation equipment alone accounted
for 51.6 percent of the value of all offset transactions and were
composed mostly of aerospace products, including aircraft parts,
engines, hydraulic subsystems, and guided missiles. During the reporting
period, over \$12 billion in offset transactions related to
transportation equipment accounted for

63.62 percent (or \$5.85 billion) of the total value of direct offsets
and more than 42.4 percent (or \$5.80 billion) of the total value of
indirect offsets. In addition, more than 75 percent of the value of
transactions not specified by type was in the transportation equipment
sector.

The electronic and electrical equipment sector was a distant second to
the transportation equipment sector, accounting for only 15.2 percent of
the total value of all offset transactions. This sector includes
products such as radar, communications equipment, and electronic
components, as well as completed avionics equipment and material inputs
for avionics such as circuit boards.[^22]

Transactions in the industrial machinery sector accounted for more than
six percent of the value of all offset transactions during the reporting
period. Industrial machinery includes capital equipment used in the
production of both defense and non-defense items. This includes
metal-working machine tools, conveyors, air and gas compressors, textile
machinery, mining equipment, off-road vehicles, and welding equipment.
There were significant offset transactions (by value) in two additional
sectors -- Business Services (SIC 73) and Technical Services and
Consultants (SIC 87). Business services (5.1 percent of total offset
transactions) were mostly related to computer software, databases, and
other information technology. Technical services (4.6 percent of total
offset transactions) included mostly engineering services and
consulting, training, and related technical data packages.

Offset transactions were categorized into a total of 40 industrial
sectors, including one labeled undetermined (SIC 99). The 34 sectors not
specifically listed in Table 5-4 accounted for less than 15 percent of
the total value of all offset transactions. Only four of these sectors
accounted for more than one percent of the total value of offset
transactions, while a majority of the rest had insignificant transaction
values. The four were Non-Depository Credit Institutions (SIC 61) with
2.6 percent, Fabricated Metal Products (SIC 34) with 2.5 percent,
Holding and Investment Offices (SIC 67) with 1.8 percent, and
Educational Services (SIC 82) with 1.8 percent. These four sectors
accounted for an additional 8.7 percent of the total value of offset
transactions. Transactions in just 10 industrial sectors accounted for
95.8 percent of the value of all offset transactions.

Among the remaining 30 sectors, only Primary Metal Industries (SIC 33)
and Chemicals and Allied Products (SIC 28) had significant offset
activity. The total value for Primary Metal Industries was \$179.8
million and for Chemicals and Allied Products was \$188.1 million.
Offset transactions in both sectors were composed almost exclusively of
indirect offsets. No other sector had more than \$70.1 million in total
offset transactions during 1993-2002. The total value for the remaining
30 sectors was \$994 million, and Primary Metal Industries (SIC 33) and
Chemicals and Allied Products (SIC 28) represented over one-third of
this total.

Manufacturing sectors (\$17.2 billion) were by far the dominant offset
choice, representing 73.0 percent of all offset transactions. Services
(\$3.3 billion) accounted for most of the remainder at 18.4 percent. One
percent was composed of a combination of agricultural products (\$42
million), mining (\$15 million), and construction activities (\$48
million); the sector(s) for another \$99.9 million in activity were
undetermined.

In terms of dollar value, the top 12 industrial sectors accounted for
more than 97 percent of the total value of all offset transactions
during the reporting period. Based on offset type distribution, these 12
sectors accounted for 98.1 percent of all direct offsets, 96.8 percent
of indirect offsets, and virtually all of the unspecified offsets. The
transportation equipment sector, with over half the total, was the
leading sector for each type. Direct offsets were 48.3 percent of the
sector's total. Indirect offsets accounted for another 47.8 percent.

Two additional sectors that comprised significant quantities of direct
offsets were the Electrical Equipment sector and the Measuring and
Analyzing Instrumentation sector. Along with the Transportation
Equipment sector, these sectors accounted for 85.2 percent of all direct
offsets. The same three sectors accounted for 61.3 percent of indirect
offsets, which shows a noticeable correlation. Expanding this analysis
to eight sectors captures 97.1 percent of all direct offsets, 85.9
percent of all indirect offsets, and 94.2 percent of unspecified
offsets. Chart 5-7 shows the relative shares of offsets by type for the
12 leading industrial sectors.

![](media/image15.wmf){width="5.75in" height="3.8833333333333333in"}

#  Aerospace Offset Issues

Given its large percentage of the total value of U.S. military exports,
the U.S. aerospace industry is affected by offsets more than any other
major economic sector. Indeed, from 1993 through 2002, aerospace-related
military exports exceeded \$53.5 billion. By comparison, non-aerospace
military exports for the period only reached nearly \$10 billion.
Because aerospace-related exports make up the majority (85 percent) of
export sales associated with offset agreements, the impact of offsets on
the aerospace industry is a good indicator of the effect of offsets on
the competitiveness and trade of the U.S. defense industrial base as a
whole.

During 1998-2000, however, the rate of growth of aerospace exports
declined. The growth rate for offset-related exports during the ten-year
period shows a trend toward more non-aerospace exports, including
maritime, ground transport, and high-tech navigation and radar systems.
Indeed, 60 percent of all offsets-related aerospace exports occurred
during 1993-1997 and only 40 percent occurred in the last five reporting
years. Conversely, more than 70 percent of non-aerospace offsets-related
exports were generated in 1998-2002.

## Trends in the Import and Export Markets

The following analysis looks at trends in the import and export markets
of all aerospace trade, both civil and military (unless otherwise
noted). The U.S. maintained a trade surplus in aerospace products during
1993-2002, ranging from a low of \$21.6 billion (1995) to a high of
\$41.0 billion in 1998 (see Chart 6-1). A large growth in imports during
1998-2001, coupled with flat or declining exports, drove down the
surplus to \$26.0 billion in 2001. The U.S. trade surplus rebounded
slightly in 2002 as imports declined sharply, overshadowing a slight
decline in exports.

Military-related aerospace exports have remained flat since 2000 at a
level marginally higher than \$9 billion and lower than in 1998 (\$12
billion) and 1999 (\$11.8 billion).[^23]

![](media/image16.wmf){width="5.983333333333333in"
height="4.111111111111111in"}

<table>
<colgroup>
<col style="width: 14%" />
<col style="width: 7%" />
<col style="width: 7%" />
<col style="width: 8%" />
<col style="width: 8%" />
<col style="width: 8%" />
<col style="width: 8%" />
<col style="width: 8%" />
<col style="width: 8%" />
<col style="width: 8%" />
<col style="width: 8%" />
</colgroup>
<tbody>
<tr class="odd">
<td colspan="11"><span id="__RefHeading___Toc57014984"
class="anchor"></span>Table 6‑14: U.S. Imports of Aerospace Products by
Major Countries of Origin (in $ millions)</td>
</tr>
<tr class="even">
<td></td>
<td><strong>1993</strong></td>
<td><strong>1994</strong></td>
<td><strong>1995</strong></td>
<td><strong>1996</strong></td>
<td><strong>1997</strong></td>
<td><strong>1998</strong></td>
<td><strong>1999</strong></td>
<td><strong>2000</strong></td>
<td><strong>2001</strong></td>
<td><strong>2002</strong></td>
</tr>
<tr class="odd">
<td>Brazil</td>
<td>119</td>
<td>73</td>
<td>110</td>
<td>154</td>
<td>371</td>
<td>917</td>
<td>1,285</td>
<td>1,494</td>
<td>1,973</td>
<td>1,868</td>
</tr>
<tr class="even">
<td>Canada</td>
<td>2,072</td>
<td>2,443</td>
<td>2,461</td>
<td>3,233</td>
<td>3,800</td>
<td>4,867</td>
<td>5,087</td>
<td>6,253</td>
<td>7,985</td>
<td>7,003</td>
</tr>
<tr class="odd">
<td>France</td>
<td>4,249</td>
<td>4,087</td>
<td>3,072</td>
<td>3,043</td>
<td>4,087</td>
<td>5,814</td>
<td>6,313</td>
<td>8,071</td>
<td>8,721</td>
<td>7,591</td>
</tr>
<tr class="even">
<td>Germany</td>
<td>478</td>
<td>699</td>
<td>826</td>
<td>1,039</td>
<td>1,187</td>
<td>2,044</td>
<td>2,707</td>
<td>3,364</td>
<td>3,775</td>
<td>2,488</td>
</tr>
<tr class="odd">
<td>Japan</td>
<td>538</td>
<td>583</td>
<td>671</td>
<td>1,081</td>
<td>1,728</td>
<td>2,148</td>
<td>1,710</td>
<td>1,614</td>
<td>1,986</td>
<td>1,507</td>
</tr>
<tr class="even">
<td>United Kingdom</td>
<td>2,523</td>
<td>2,546</td>
<td>2,236</td>
<td>2,634</td>
<td>4,034</td>
<td>5,173</td>
<td>4,968</td>
<td>4,197</td>
<td>4,818</td>
<td>3,600</td>
</tr>
<tr class="odd">
<td colspan="11"><p>Source: Aerospace Industries Association,
<em>Aerospace Facts and Figures</em>, various issues</p>
<p>Includes civil and military products, c.i.f. (Cost, Insurance, and
Freight) basis.</p></td>
</tr>
</tbody>
</table>

Primary countries of origin for U.S. aerospace imports over the past
decade have included Canada, France, Germany, and the United Kingdom.
The import rate of growth varied significantly among the top six sources
for U.S. aerospace imports. During the 1993-2001 period (in 2002,
imports from each of the six countries declined), annual imports from
Germany increased nearly eight-fold, those from Canada almost
quadrupled, and import levels from British and French sources doubled.
Other countries also posted significant gains during the period,
including a nearly four-fold increase in imports from Japan and a
16-fold increase in imports from Brazil. Table 6-1 shows the value of
imports of civil and military aerospace products from a list of the
major source countries.

The rapid increases in aerospace product imports from key sources,
specifically Brazil, Germany, and Japan, indicate several trends for the
U.S. aerospace industry. First, U.S. aerospace markets, primarily the
commercial sector, are increasingly using foreign-made, imported systems
and components. Second, the sources of these improving and more
competitive products are becoming more varied internationally.
Brazilian, German, and Japanese manufacturers, specifically, are
relative newcomers to the sizeable U.S. aerospace market in the last ten
years.

The defense trade also feels the effects of these two trends --
increasing competitiveness and growing foreign firms. With more
high-quality aerospace firms producing goods, there is more competition
and a likelihood of fewer sales for existing firms. The resulting more
crowded global aerospace market increases the reliance on offsets as a
negotiation factor.

**Industry-to-Industry Trade**

Industry-to-industry sales provide a picture of both the integrated
nature of the industry and increasing strength of European aerospace
firms. E.U. aerospace industry data indicate that exports of all
aerospace goods from the E.U. aerospace industries to the U.S. aerospace
industries rose 87 percent from 1996 to 2000. In the same time period,
exports from the U.S. aerospace industry to the E.U. industrial market
grew more slowly, rising only 54 percent. In 1996, E.U. aerospace
companies imported 50 percent more from the U.S. industry than vice
versa, but by 2000, this ratio declined to only 20 percent. To
illustrate the importance of intra-industry transactions, intra-industry
E.U.-U.S. trade alone accounted for over 30 percent of total U.S.
aerospace imports. However, these high levels of cross-Atlantic trade
links between industries declined precipitously in 2002 with the overall
industry decline. E.U. industry exports to U.S. industry declined 34
percent from 2001 to 2002.[^24]

This fluid trade balance between companies is in line with a significant
increase in the value of offset agreements over the same 1996-2000
period. The value of offset agreements with E.U. entities more than
doubled between 1996 and 2000 (from \$1.9 billion to \$4.3 billion).
Over the same period, the average offset requirement rose from 99.7
percent to 111.0 percent.

## Trends in Aerospace

The aerospace infrastructure is becoming more global, more integrated,
and at the same time, more competitive. Globalization is exhibited by
the wide reach of key firms. For example, European manufacturer Airbus
maintains 1,500 suppliers from 30 countries; 250 of these suppliers are
located in the United States. By mid-2002, the Airbus A380 team had
signed contracts to source landing gear from U.S.-based Goodrich,
navigation electronics from Honeywell, and in some versions, jointly
developed GE-Pratt & Whitney engines.[^25] American competitor Boeing
has more than 11,300 suppliers in 66 countries and maintains offices in
18 countries. In June 2003, the company announced that five key supply
contracts would go to foreign firms, including three from Japan.[^26]
Honeywell alone has operations in 100 countries and derives 45 percent
of its sales from outside the United States.[^27]

As globalization increases, U.S. aerospace manufacturers broaden their
global supplier chains seeking both subcontractors and strategic
partnerships. At the same time, European counterparts are taking
advantage of longer historical relationships in non-U.S. defense
markets, thus increasing the competitive environment worldwide.[^28]
Although the United States continues to maintain its position in
first-tier integrator companies, with around half of the global
aerospace market, European companies are growing and now command more
than one-third of all global aerospace sales.[^29]

The recent merger-and-acquisition-led formation of large European
defense companies is comparable to American aerospace corporate
consolidation earlier in the 1990s. Today, the United States boasts five
large defense companies. In 1990, there were 33 separate businesses.
[^30] European consolidation occurred later in the 1990s and early
2000s, creating three large, closely linked "mega-firms."[^31] This
consolidation -- both in U.S. and European industry -- has created a
small number of conglomerate first-tier firms. Indeed, this trend of
industry consolidation is likely to continue.

The market power of these "mega-firms" can require lower tier suppliers
to compete at cost and quality levels on a par with foreign
suppliers.[^32] Moreover, a global competitive situation arises where EU
firms generate sales and technology levels on a par with the large U.S.
companies. Of the top seven aerospace companies by defense sales in
1999, three were these European mega-firms, and one -- BAe Systems --
had higher defense sales than any U.S. manufacturer.[^33] This increase
in viable competition to a once formidable U.S. industry creates much
greater competition in third-country markets.[^34] Increased offsets are
a likely consequence of increased global competition.

**Integration: F-35 Joint Strike Fighter**

Falling defense spending in both Europe and the United States after the
Cold War led to the purchase of fewer weapon systems. Defense companies
in both Europe and the United States increasingly targeted each other's
markets for defense sales. To achieve these sales against a backdrop of
political resistance to imports of defense products in both the United
States and Europe, aerospace companies on both sides began forming
transatlantic alliances. Cross-border integration within the industry
continues to grow, with firms which regularly compete for sales in some
sectors forming partnerships in others. U.S defense suppliers prefer
these partnerships or alliances to mergers, because they "allow
companies to choose new partners in each market in which they compete,
increase capabilities without forming permanent relationships, and
enable access to unique technology needed to meet military
requirements."[^35] These forms of cross-border collaboration include
joint ventures, strategic alliances, co-development programs, and
strategic teaming agreements and are almost entirely U.S.-E.U.,
U.S.-U.S., or E.U.-E.U. aerospace company agreements.[^36]

As an example of a co-development program, the F-35 Joint Strike Fighter
(JSF) program combines a number of U.S. and European firms, at both
prime (Lockheed Martin, Northrop Grumman, and BAe Systems) and subsystem
levels (GE, Pratt & Whitney, and Rolls Royce), as well as the
governments of the United States, the United Kingdom, Italy, the
Netherlands, Canada, Turkey, Denmark, Norway, and Australia. Each
partnering country has firms contributing to the project at the
development level, and each provides public sector annual funding to the
program. For example, the Italian government is contributing around \$1
billion, while a number of Italian aerospace companies, including Alenia
Aeronautica, recently sent engineers and technicians to the main
development site in Texas. The British government is contributing \$2
billion to the program, and BAe Systems is one of the key industry
partners while Rolls Royce and Pratt & Whitney have teamed up to develop
the engine propulsion system. Danish and Italian firms recently
partnered with a U.S. firm to develop the JSF's gun-related
components.[^37]

Given the continued need for transatlantic sales and the growing
requirement for armed forces interoperability among the United States
and its allies, industry experts and defense policymakers on both
continents expect this innovative multi-national system of development,
testing, and production to continue in future large-scale system
procurements. Indeed, these individuals largely see it as a
necessity.[^38] Such partnerships may also lead to reduced offset
demands, as more countries become involved at early stages of
development.

**Economic Downturn**

Despite increasing partnership, this globalizing, collaborative, and
complex industry is experiencing a significant downturn, especially in
commercial sales. In the mid-1990s, sizeable increases in U.S. aerospace
sales of civil aircraft were spurred by a growing air travel market
(fueled by expanding economies) worldwide. However, since 2001, the
sales of civilian aircraft have tumbled (See Chart 6-2) reflecting a
declining air travel market. Civilian aircraft sales declined 16 percent
between 2001 and 2002 and were projected to decline a further 27 percent
between 2002 and 2003.[^39]

![](media/image17.wmf){width="5.708333333333333in"
height="3.2395833333333335in"}

## Defense Trade Offsets in Aerospace

The reliance on offsets as a condition of awarding aerospace defense
contracts has increased in recent years. Overall, the average weighted
offset requirements for aerospace export agreements totaled 63.96
percent for 1993-2002; non-aerospace export offset requirements averaged
74.88 percent for the period. However, since 1998, aerospace offset
requirements have increased significantly to 80.50 percent of the export
value, while non-aerospace offset requirements have remained relatively
stable, increasing only to 76.48 percent.

  -------------------------------- --------------- --------------- --------------- ---------------
  []{#__RefHeading___Toc57014985                                                   
  .anchor}Table 6‑15: Aerospace                                                    
  and Non-Aerospace Defense                                                        
  Exports and Offsets, 1993-2002                                                   

                                   Export Value                    Offset          
                                   (in millions)                   Requirement     
                                                                   Percentage      

                                   **1993-2002**   **1998-2002**   **1993-2002**   **1998-2002**

  Aerospace                        \$53,685.97     \$21,549.98     63.96%          80.50%

  Non-Aerospace                    \$9,938.96      \$7,442.29      74.88%          76.48%

  Source: BIS Offsets Database                                                     
  -------------------------------- --------------- --------------- --------------- ---------------

The U.S. aerospace industry represents the major target of offset
activity. New aerospace export contracts totaled 84 percent of all
exports related to offsets (\$53.6 billion) and accounted for

82 percent of the offset agreements (\$34.3 billion). Transactions
involving aerospace products and services totaled \$20.9 billion or 88.9
percent of the value of all transactions for 1993-2002. The percentage
of transactions involving aerospace products has declined slightly in
the last five years, but still maintains a sizeable portion. From 1993
to 1997, aerospace-related offset transactions accounted for 90.7
percent of all transactions. From 1998 to 2002, the portion had declined
to 86.9 percent.

[]{.mark}

The majority (by value) of aerospace-related offset transactions were
not directly related to the sale of an aerospace system. While
approximately 38 percent (\$8.05 billion) of aerospace transactions was
classified as Direct offset transactions; 59 percent (\$12.24 billion)
was Indirect; and three percent (\$599 million) was Unspecified.
Thirty-two percent (\$6.67 billion) of the offset transactions was
categorized as subcontracts; 35 percent (\$7.27 billion) as purchases;
and 12 percent (\$2.49 billion) as technology transfers. These three
categories accounted for

79 percent of the total value of aerospace-related offset transactions.

**Changing Nature of Offsets**

The globalization of the industry affects the trade picture that is
closely linked to offset transactions and agreements. American aerospace
companies conducted five times more trade between their offshore
wholly-owned facilities and their European partners in 2000 than they
did in 1996.[^40]

Moreover the industry recently has begun changing its approach to
developing military systems, which may have an impact on the growth of
offsets in the future. The multi-national and multi-corporate JSF
program has created a situation where governments contribute in the form
of development funding and implied future orders in order to receive
domestic industrial benefits, such as production of one or more pieces
of the F-35 system by a domestic firm. In turn, the U.S. project
participants gain technological know-how through this cooperative
effort, and the U.S. government is relieved of some of the funding
burden. Offsets are not required in this type of arrangement. Such
cross-border joint contract, development, and production projects are
expected to become much more prevalent in the future as governments look
at cost factors and interoperability requirements grow.

# Other Government Offset Activities

In the past, the Department of Commerce, through the Bureau of Industry
and Security, has participated in a Department of Defense-led
Interagency Offsets Steering Committee (the Committee), which includes
representatives from the Departments of Defense, State, Treasury, and
Labor, and the Office of the U.S. Trade Representative. Since the
publication of the seventh report on Offsets in Defense Trade in July
2003, the Committee has been inactive.

# Conclusions

The data show that offset demands are on the rise globally. Although
offsets with European countries accounted for more than two-thirds the
value of total agreements during 1993-2002, offset agreements with
non-European countries, especially in Asia, have risen sharply in the
past two reporting years, capturing a majority of all new contracts. In
a weighted, moving average comparison, European offset demands have
increased only 30 percent points from 1993 to 2002, while the rest of
the world has nearly doubled its average offset requirements in the same
period.

Asian countries are capturing an increasing share of offset agreements
and export contracts as well as demanding higher offsets. In fact, Asian
countries accounted for about 65 percent of the value of new offset
agreements in 2002, up from only 2.8 percent in 2000. In contrast,
European agreements represented 78 percent of the total value of offset
agreements in 2000, but only

34 percent in 2002. Further, new offset requirements from Asian
countries climbed to

52.3 percent in 2001 and jumped to 78.4 percent in 2002.

The aerospace sector continued to attract the majority of offset
agreements, accounting for almost 85 percent of the value of defense
exports associated with offsets during 1993-2002. Despite the large
majority of offset exports involving aerospace-related products over the
ten-year period, the rate of growth of these exports declined during the
1998-2002 period, indicating a trend toward more non-aerospace
offset-related exports, including maritime, ground transport, and
high-tech navigation and radar systems.

BIS estimates that U.S. defense exports with offset agreements required
supported 42,440 work-years in 2001. However, the kinds of offset
transactions (co-production, subcontracting, purchasing, and licensing)
most likely to result in the transfer of work from the U.S. to foreign
firms reduce the number of hours supported by 11,460 work-years. Based
on these calculations, it appears that defense export sales had a net
positive effect on employment in the defense sector, although the net
positive effect was diminished by the offset agreements. This
calculation assumes that industry would not have received these defense
export contracts if it had not entered into the related offset
agreements. It should also be noted that the above analysis does not
include other kinds of offset transactions, valued at about \$687
million, including technology transfer, training, overseas investment,
and marketing transactions, or the long-term implications of creating or
enhancing competitors; the impact of these transactions on the U.S.
defense industrial base is difficult to calculate.

The Department of Commerce neither encourages nor regulates the use of
offsets in defense trade and recognizes that offsets can be market
distorting. However, it should be recognized that offsets are a part of
the current international defense trade environment. In this report,
Commerce has not identified any specific recommendations for remedial
action concerning offsets in defense trade. No other government agency
has offered alternative findings and recommendations. However, in the
coming year, under authorities granted under the DPA, Commerce is
committed to work with U.S. industry, the Department of Defense, other
U.S. Government agencies, and foreign governments to analyze the impact
of offsets on all parties and seek ways to mitigate their effect on
defense preparedness, industrial competitiveness, employment, and trade.
The Department's goal is to support the U.S. defense industry and to
ensure a robust and vibrant industrial base.

[^1]: Codified at 50 U.S.C. app. § 2099 (2000).

[^2]: Remarks from Suzanne Patrick, Deputy Under Secretary of Defense
    (Industrial Policy), Defense Manufacturers Conference, Washington,
    DC, 2 December 2003.

[^3]: See Pub. L. 98-265, April 17, 1984, 98 Stat. 149.

[^4]: Section 309 of the DPA was amended in 2001 to reflect the change
    in the name of the House committee to the "Committee on Financial
    Services of the House of Representatives." [See]{.underline} 50
    U.S.C. app. § 2099(a)(1).

[^5]: See Pub. L. 102-558, Oct. 28, 1992, 106 Stat. 4198; see also Part
    IV of Exec. Order No. 12919, 59 [Fed. Reg]{.underline}*.* 29525
    (June 3, 1994).

[^6]: See 59 [Fed. Reg]{.underline}*.* 61796, Dec. 2, 1994, codified at
    15 C.F.R. § 701.

[^7]: See April 16, 1990 statement by Press Secretary Fitzwater on
    offsets in military exports.

[^8]: Congress incorporated this policy statement into law with the
    Defense Production Act Amendments of 1992 (Pub. L. 102-558, Title I,
    Part C, § 123, 106 Stat. 4198).

[^9]: See Pub. L. No. 106-113, Div. B, § 1000(a)(7) 113 Stat. 1536,
    1510A-500 to 1501A-505 (1999) (enacting into law Subtitle D of Title
    XII of Division B of H.R. 3427 (113 Stat. 1501A-500) as introduced
    on Nov. 17, 1999) (found at 50 U.S.C. App. 2099, Note).

[^10]: Primary examples include an Egyptian co-production facility which
    -- since its 1988 inception -- has only contracted enough orders to
    build half of what the government originally planned and a Japanese
    co-production program that cost the government nearly 2 times more
    per unit than an off-the-shelf purchase. See [Military Aid to Egypt:
    Tank Coproduction Raised Costs and May Not Meet Many Program
    Goals,]{.underline} U.S. General Accounting Office,
    GAO/NSIAD-93-2003, and [U.S. Military Aircraft Coproduction with
    Japan]{.underline}, U.S. General Accounting Office,
    GAO/T-NSIAD-89-6.

[^11]: See GAO report on offset activities, "Defense Trade: U.S.
    Contractors Employ Diverse Activities to Meet Offset Obligations,"
    December 1998 (GAO/NSIAD-99-35), Pp. 4-5.

[^12]: The year 2001 was used because 2002 Census data on value added
    was not available during the preparation of this report. See the
    U.S. Census Bureau website at
    <http://www.census.gov/prod/www/abs/industry.html>

[^13]: The following calculation is based on the assumption that this
    value represents 100 percent U.S. content in all exports, not
    necessarily an accurate assumption.

[^14]: "Electronic Components and accessories" is the title for SIC code
    367. The comparable NAICS classification is 3344 and is titled
    "semiconductor and other electronic component manufacturing." These
    two industries were chosen to reflect the two industries involved in
    the most frequent and the highest levels of offset transactions for
    2001. The year 2001 was chosen as a sample because it was the most
    recent available data for value added from the Annual Survey of
    Manufactures during the preparation of this report.

[^15]: Remarks from Suzanne Patrick, Deputy Under Secretary of Defense
    (Industrial Policy), Defense Manufacturers Conference, Washington,
    DC, 2 December 2003.

[^16]: This value includes federal and company R&D funding. Aerospace
    company R&D alone accounted for \$4.083 billion in 2001.

[^17]: The figure of 65.7 percent is weighted to the annual values of
    export contracts and agreements. An unweighted average can be
    calculated by averaging the annual percentages of offsets. The
    unweighted result was 68.7 percent.

[^18]: A weighted average was calculated based on the value and term of
    each offset agreement.

[^19]: The percentage increase was calculated using a linear
    least-squares function of only the annual percent values.

[^20]: Here, the value of export contracts and offset agreements is
    totaled for each successive three-year period, beginning with
    1993-1995, followed by 1994-1996, and so forth; then the offset
    percentage is determined. This leads to eight three-year
    observations over the ten-year reporting period (1993-2002).

[^21]: Most of these transactions were related to a major offset
    agreement signed before 1993.

[^22]: The completed avionics arguably could be part of sector SIC 38 --
    Measuring and Analyzing Instrumentation, but the appropriate sector
    could not be determined based on the data provided.

[^23]: See Aerospace Industries Association (AIA), *Aerospace Facts &
    Figures*, 2003/2004 (and prior editions). Data also available
    through AIA's website, at
    [www.aia-aerospace.org](http://www.aia-aerospace.org/).

[^24]: From European Aerospace Industry (EAI), *Facts and Figures 2000,
    2002*.

[^25]: From Airbus company overview information (www.airbus.com) and
    Sally B. Donnelly, "America Helps Build the 'Bus," *Time*, Vol. 160,
    Issue 5 (29 July 2002), B14.

[^26]: From Boeing company overview information (www.boeing.com) and
    company press releases.

[^27]: Remarks from Bob Johnson, president and CEO of Honeywell
    Aerospace. Reported in "World Aerospace Industry Is one Big Happy
    Family, Says Honeywell Executive," *Manufacturing and Technology
    News* (17 October 2003).

[^28]: Jerry Grossman, "Thinking Global: A Choice or a Mandate?"
    *Washington Technology* (27 August 2001).

[^29]: In 2002, the export share of the U.S. aerospace industry
    accounted for 49 percent of global industry turnover. The E.U.
    aerospace industry accounted for 35 percent of worldwide turnover.
    Data from AECMA 2002 Facts and Figures. Available at:
    <http://www.aecma.org/Publications/AECMA_FactsnFigures_2002.pdf>.

[^30]: For example, Lockheed Martin was created in 1995 from a merger of
    Lockheed Corporation and Martin Marietta Corporation. In 1994,
    Northrop Aircraft bought Grumman Corporation to create Northrop
    Grumman. In addition, North American Rockwell, McDonnell Douglas and
    Boeing merged in 1996-1997 to create a massive Boeing Corporation.
    From Company Reports and "Defense Trade: Contractors Engage in
    Varied International Alliances," GAO Report, September 2000
    (GAO/NSIAD-00-213).

[^31]: BAe Systems was formed in 1999 from a merger of British Aerospace
    PLC and General Electric's Marconi Electronic Systems. EADS,
    European Aeronautic Defense and Space Company, was created in 2000
    from a merger of Daimler Chrysler's aerospace division, France's
    Airbus, and Spain's CASA. Thales Group was created in June 2000
    combining France-based Thomson-CSF and Britain's Racal, plc as well
    as other Thomson-CSF acquisitions in South Africa and Australia,
    among others. From Company reports, *Going Global? U.S. Government
    Policy and the Defense Aerospace Industry*, RAND's Project Air Force
    (2002) and Dov S. Zakheim, *Toward a Fortress Europe?*, Center for
    Strategic and International Studies, Washington DC (November 2000).

[^32]: From a recent study by A.T. Kearney comparing the aerospace
    supplier base to the automotive supplier base. The study noted that,
    reminiscent of the automakers in the mid-1990s, aerospace suppliers
    are under increasing pressure to compete with rivals in other
    countries---sometimes required to move sub-tier businesses to
    non-traditional regions in return for large deals from prime
    contractors. "Restructuring the Global Aerospace Industry: The
    Shifting Roles of Suppliers," A.T. Kearney (2003).

[^33]: *Going Global?*, pg. 5-6.

[^34]: *Going Global?*, pg. 8.

[^35]: "D*efense Trade: Contractors Engage in Varied International
    Alliances,"* GAO Report, September 2000 (GAO/NSIAD-00-213).

[^36]: Additional cross-border joint corporate efforts, other than the
    JSF described here, include a Northrup Grumman/EADS strategic
    alliance to develop surveillance systems and radar technology, an
    SAIC/Boeing/EADS (France)/British-German-Dutch defense research
    organizations team developed to bid for a NATO Theater Missile
    Defense project, and a Thales-Raytheon 50-50 joint venture focusing
    on air defense and command-and-control centers and air surveillance
    systems. See *Going Global? U.S. Government Policy and the Defense
    Aerospace Industry*, RAND's Project Air Force (2002); Chapter Five.

[^37]: F-35 Joint Strike Fighter Team Newsletter, Issue no. 5 (Summer
    2003), published quarterly by JSF Operations.

[^38]: See the Final Report of the Commission on Transatlantic Security
    and Industrial Cooperation in the 21^st^ Century, *The Future of the
    Transatlantic Defense Community*, Center for Strategic and
    International Studies, Washington, DC (January 2003). John Hamre,
    former Deputy Secretary of Defense, was the Project Chair. Report
    available at: <http://www.csis.org/pubs/2003_future.pdf>.

[^39]: See Aerospace Industry Sales by Product Group from AIA's
    *Year-End Review and Forecast*, compiled from company reports and
    U.S. Department of Defense and Department of Commerce data.

[^40]: European Association of Aerospace Industries (AECMA) Statistical
    Data Report 2000.