United States General Accounting Office

GAO Report to Congressional Requesters

April 1996 MILITARY EXPORTS

Offset Demands

Continue to Grow

G O A

years

1921 - 1996

GAO/NSIAD-96-65

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-270620 

April 12, 1996

The Honorable Robert C. Smith

Chairman, Subcommittee on Acquisition

 and Technology

Committee on Armed Services

United States Senate

The Honorable Donald A. Manzullo

Chairman, Subcommittee on Procurement,

 Exports, and Business Opportunities

Committee on Small Business

House of Representatives

As you requested, we reviewed the nature and extent of offset

requirements associated with military exports. For the purposes of our

review, we define offsets as the entire range of industrial and commercial

compensation practices provided to foreign governments and firms as

inducements or conditions for the purchase of military goods and services.

They include coproduction, technology transfer, training, investment,

marketing assistance, and commodity trading.

Since the mid-1980s, government figures show that U.S. companies have

entered into offset agreements valued at over $84 billion. Our objectives

were to (1) determine how the offset goals and strategies of major buying

countries have changed; (2) identify the offset requirements of these

countries and the types of activities being undertaken to satisfy their

requirements; and (3) identify the impacts of offsets and what actions, if

any, the U.S. government has taken on this issue. Our review focused on

10 buying countries from the Middle East, Asia, and Europe.1

 We obtained

data from nine major defense contractors on their experiences in these

countries over the past 10 years.2

Background Offset arrangements are not new to military export sales. The use of

offsets, specifically coproduction agreements, began in the late 1950s and

early 1960s in Europe and Japan. A country’s desire to coproduce portions

1

These countries are Kuwait, Saudi Arabia, the United Arab Emirates, Singapore, South Korea, Taiwan,

Canada, the Netherlands, Spain, and the United Kingdom.

2

Much of the data provided by these companies is considered commercially sensitive or proprietary.

As a result, we are less specific in some places than is normally our practice and, for illustration

purposes, used examples of offset transactions involving U.S. and foreign companies from defense

publications and trade journals.

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of weapon systems was based on needs such as maintaining domestic

employment, creating a national defense industrial base, acquiring modern

technology, and assisting its balance of payments position. In 1984, we

reported that offsets were a common practice and that demands for

offsets on defense sales would continue to increase.3

 The United States is

the world’s leading defense exporter and held about 52 percent of the

global defense export market in 1994 (the latest year for which statistics

are available).

Offsets are often an essential part of defense export sales. Offset

agreements may specify the level of offset required, normally expressed as

a percentage of the sales contract. Offset agreements may also specify

what types of activity are eligible for offset credit. Offset activities that are

directly related to the weapon system sold are considered “direct” offset,

while those involving unrelated defense or nondefense goods or services

are considered “indirect.” An offset may directly relate to the weapon

system being sold or to some other weapon system or even nondefense

goods or services. Countries may also include conditions specifying the

transfer of high technology and where and with whom offset business

must be done. Other provisions include requirements that offset credit be

granted only for new business and that credits be granted only if local

content exceeds a minimum level.

Negotiating offset credit is an important part of implementing offset

agreements. Countries can grant additional offset credit to encourage

companies to undertake highly desirable offset activities. For example,

countries may offer large multipliers for advanced technology or training

that can greatly reduce a company’s cost of meeting its offset obligation.4

However, a country can also establish criteria that make it difficult for a

company to earn offset credit.

Some countries, such as the United Kingdom and the Netherlands, cite

restrictions in the United States and other defense markets and note that

their offset policies are needed to ensure that their defense industries are

given an opportunity to compete. The United States does not require

offsets for its foreign military purchases, but it does have requirements

that favor domestic production. The Defense Production Act of 1950

allows the Secretary of Defense to preserve the domestic mobilization

3

Trade Offsets in Foreign Military Sales (GAO/NSIAD-84-102, Apr. 13, 1984). Also see Related GAO

Products.

4

A multiplier is used to increase the value of an offset project when determining offset credit. For

example, if an offset project is valued at $1,000, a multiplier of 10 will increase the amount of offset

credit granted to $10,000.

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base by restricting purchases of critical items from foreign sources. While

not precluding foreign suppliers, regulations implementing the Buy

America Act of 1933 allow price preferences for domestic manufacturers,

and annual Department of Defense (DOD) appropriation acts sometimes

contain prohibitions on foreign purchases of specific products.

The General Agreement on Tariffs and Trade (GATT) prohibits the practice

of offsets in government procurement, except for procurement of military

weapons. In 1990, the North Atlantic Treaty Organization (NATO) proposed

a code of conduct for defense trade to regulate offsets in military exports,

but did not adopt it. In addition, reciprocal memorandums of

understanding between the United States and several major allies include

provisions to consult on the adverse effects of offsets.

Results in Brief Demands for offsets in foreign military procurement have increased in

selected countries. Countries that previously pursued offsets are now

demanding more. Countries are requiring more technology transfer, higher

offset percentages, and higher local content requirements to offset their

foreign military purchases. Further, countries that previously did not

require offsets now require them as a matter of policy. The offset

strategies of many countries in our study now focus on longer term offset

deals and commitments. This shift highlights these countries’ use of

offsets as a tool in pursuing their industrial policy goals.

The types of offset projects sought or required by buyer countries in our

review depend on their offset program goals, which in turn are driven by

their industrial and economic development needs. Companies are

undertaking a broad array of activities to satisfy offset requirements.

Countries with established defense industries are using offsets to help

channel work to their defense companies. Countries with developing

defense and commercial industries pursue both defense- and

nondefense-related offsets that emphasize the transfer of high technology.

Countries with less industrialized economies often pursue indirect offsets

as a way to encourage investment and create viable commercial

businesses.

Views on the impact of offsets on the U.S. economy and specific industries

are divided. Measuring the impact of offsets on the economy as well as

specific defense industries is difficult without reliable data. The

Department of Commerce is currently gathering additional information on

the impact of offsets and is expected to issue a report in 1996. To date, the

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executive branch agencies have consulted with other countries about

certain offsets associated with individual defense procurements, but have

not had an interagency team hold the broad-ranging discussions on the

ways to limit the adverse impacts of offsets as called for in a 1990

presidential policy statement. According to the Commerce Department,

industry is not opposed to the initiation of consultations, but are

concerned about unilateral U.S. government actions to limit the use of

offsets. Moreover, representatives from several defense companies

expressed doubt about the government being able to enforce restrictions

on offsets.

Demand for Offsets in

Selected Countries

Has Increased

Over the last 10 years, the countries in our study have increased their

demands for offsets, begun to emphasize longer term offset projects and

commitments, or initiated offset requirements.

New Demands and New

Entrants

All the countries in our review have increased their offset demands on U.S.

companies to achieve more substantial economic benefits.

Canada, the Netherlands, Spain, South Korea, and the United Kingdom

have all had offset policies since at least 1985. These countries are using

new approaches in their offsets to increase economic benefits. These

changes include targeting offset activities and granting offset credit only

for new business rather than existing business. For example, Canada and

the United Kingdom are less willing to grant offset credit for a company’s

existing business in the country, and South Korea has increased its

demands for technology transfer and training as part of any offset

agreement.

Since 1990, Kuwait, Taiwan, and the United Arab Emirates have all

established a new policy for offsets on foreign military purchases. They

are now using offsets to help diversify their economies or promote general

economic development. Although these countries are new entrants,

company officials said they are knowledgeable about the defense market,

and their offset policies can be equally as demanding as countries with

existing offset policies. For example, the United Arab Emirates requires

60 percent of the value of the contract to be offset by commercially viable

business ventures and grants offset credit based only on the profits

generated by these investments.

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Singapore and Saudi Arabia have both recently reinstated their offset

policies. Both countries have intermittently required offsets since the

1980s. However, company officials said these countries now regularly

pursue offsets on their defense purchases. Saudi Arabia’s new approach is

less formal and relies on best effort commitments from companies rather

than formal agreements.

Long-Term Offset

Strategies

Previously, some of the countries in our review allowed companies to

meet offset obligations with existing business in the country or with

one-time purchases of the country’s goods. A country’s requirements for

direct offsets were sometimes met through projects calling for the simple

assembly of weapon systems components. These types of offset activities

often did not result in any long-term economic benefits.

More recently, buying countries have changed their offset strategies in an

attempt to achieve lasting economic benefits. Countries such as Kuwait

and the United Arab Emirates are seeking offset activities that will help

create viable businesses, increase local investment, or diversify the

economy. Countries such as Canada, the Netherlands, and the United

Kingdom are trying to form long-term strategic relationships with the

selling companies to generate future work, instead of always linking offset

activities to individual sales.

Types of Offsets

Required by Countries

Depend on Offset

Goals and Economic

Development

The types of offsets required by the countries in our review depend on

their offset program goals and the country’s economy—whether it is

developed, newly industrialized, or less industrialized. Companies

undertake a broad array of activities to meet these offset obligations.

A country’s offset requirements policy outlines the types of offset projects

sought by the country. All 10 countries in our review now have offset

requirements. These requirements include the amount of offset required

(expressed as a percentage of the purchase price); what projects are

eligible for offset credit; how these projects are valued (e.g., offering

multipliers for calculating credit for highly desired projects);

nonperformance penalties; and performance periods.

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Developed Economies Countries in our study with developed economies encourage offsets

related to the defense or aerospace industries. These offsets typically

involve production and coproduction activities related to the weapon

system being acquired but could also involve unrelated defense or

aerospace projects. These countries have well-established defense

industries and are using offsets to channel work to their defense

companies, thus supporting their defense industrial base. Canada, the

Netherlands, Spain, and the United Kingdom are all in this group.

We reviewed 40 offset agreements, with a stated value of $5.6 billion,

between U.S. companies and countries with developed economies. The

following are highlights from these agreements:

• The agreements with the United Kingdom reflected its focus on defense,

requiring that offsets be satisfied through British companies certified by

the government as performing defense-related work. A majority of the

agreements required that 100 percent of the sale be offset, although the

percentage specified in the agreements ranged from 50 percent to

130 percent.

• The offset agreements with the Netherlands focused on defense-related or

high-technology nondefense projects and specify a minimum local content

threshold before full offset credit will be granted. Such local content

requirements effectively increased the amount of business activity

required to generate credit. Most of the agreements required 100 percent

of the sale to be offset with a range of 45 percent to over 130 percent.

• Coproduction of defense systems is a feature found in some of the offset

agreements with Spain. These agreements specified the particular

products that would be procured from Spain’s defense industry as part of

the offset program. The offset percentage required in these agreements

ranged from less than 30 percent to over 100 percent.

• The offset agreements with Canada showed the country’s focus on

encouraging U.S. procurement and other arrangements with Canadian

suppliers in defense, aerospace, and other high-technology industries.

Most of the agreements also included requirements that contractors place

work throughout the Canadian provinces and also specified that a portion

of the offset be done with small businesses. The offset percentage required

in these agreements ranged from less than 40 percent to 100 percent.

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The following are examples of the offset projects that both U.S. and

foreign firms have implemented or proposed in these developed

economies:5

• The German company Krauss-Maffei agreed to coproduce tanks in Spain

to offset Spain’s purchase of 200 Leopard 2 main battle tanks.

(Countertrade Outlook, Vol. XIII, No. 16, Aug. 21, 1995, p.10.)

• Lockheed will establish a Canadian firm as an authorized service center

for C-130 aircraft to satisfy offset obligations for its sale of C-130s to

Canada. This will ensure that the Canadian firm has ongoing repair and

overhaul work for this aircraft. Lockheed will also procure assemblies and

avionics in Canada for its C-5 transport aircraft. (Countertrade Outlook,

Vol. XIII, No. 10, May 22, 1995, p.3.)

• McDonnell Douglas will offset the United Kingdom’s purchase of Apache

attack helicopters (valued at nearly $4 billion) by producing much of the

aircraft in the United Kingdom, with British equipment. U.S. suppliers are

committed to buying $350 million worth of British equipment for U.S.-built

Apache helicopters. In addition, Westland Helicopters, a United Kingdom

firm, has the potential to get up to $955 million worth of sales for future

support services for Apache helicopters worldwide. (Defense News,

Aug. 21-27, 1995, p. 12.)

Most U.S. companies we reviewed did not have significant difficulty

meeting defense-related offsets in Canada, the Netherlands, and the United

Kingdom because those countries have well-established defense

industries. In addition, many of the companies have significant existing

business in these countries, often making it easier for the companies to

implement offset projects. Meeting Spain’s offset demands was more

difficult because its defense industry is not as advanced as other Western

industrialized countries. Some of the U.S. companies in our review

expressed concern about the impact of defense-related offsets on the U.S.

defense industry, particularly the loss of production to U.S. defense

subcontractors and suppliers.

Appendix I provides detailed information on the terms of the offset

agreements and the requirements for each developed country we

reviewed.

5

Specific information on offset transactions is often considered commercially sensitive by the defense

companies. The examples discussed in this report come from defense trade journals and magazines

and do not necessarily involve the companies we visited.

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Newly Industrialized

Economies

Countries in our study with developing defense and commercial

industries, such as South Korea, Singapore, and Taiwan, have pursued

both defense-related and nondefense-related offsets. Offsets in these

countries typically involve technology transfer in defense or comparable

high-technology industries. They see offsets as a means to further develop

their defense base and economy.

We reviewed 31 offset agreements, with a stated value of $5.1 billion, with

countries that have newly industrialized economies. The following are

highlights from these agreements:

• The agreements with South Korea emphasized work in the defense and

aerospace industries, particularly the transfer of related high technology.

Many agreements included multipliers to encourage work in these sectors.

Many also required the purchase of unrelated products for export resale in

the United States and other markets. Offset agreements generally required

at least a 30-percent offset with a range of less than 30 percent to more

than 60 percent.

• The offset agreements with Singapore focused on defense-related offset

projects, including direct production of parts for purchased weapon

systems. The offset percentage required in these agreements ranged from

25 percent to 30 percent.

• In contrast to other newly industrialized countries, the agreements with

Taiwan focused on commercial projects aimed at developing long-term

supplier relationships with foreign firms. The agreements offered

multipliers for technology transfer, training, and technical assistance

reflecting the priority the government places on these activities. These

agreements all called for a 30-percent offset goal.

The following are examples of the offset projects that both U.S. and

foreign firms have implemented or proposed in these newly industrialized

economies:

• Dassault, as part of an offset arrangement for the $3.5-billion sale of

Mirage fighter aircraft to Taiwan, agreed to form partnerships with firms in

Taiwan to transfer technology and manufacture equipment for civilian

markets. (Jane’s Defence Weekly, Sept. 2, 1995, p.17.)

• Lockheed-Martin, as part of its offset obligation for the sale of 150 F-16

fighter aircraft to Taiwan, is seeking suppliers in Taiwan for repair

contracts for more than 500 aircraft components. Taiwan regards the

offset program as an opportunity to (1) become a regional aviation

maintenance center and (2) obtain similar work on another aircraft under

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development by Lockheed-Martin. (Countertrade Outlook, Vol. XIII, 

No. 13, July 10, 1995, p.4.)

• Lockheed-Martin Tactical Aircraft Systems, formerly the General

Dynamics Fort Worth Company, is in the process of satisfying South

Korea’s offset requirements on the purchase of 120 F-16 fighter aircraft

through several aerospace projects. These projects include codevelopment

of a new trainer aircraft, training, transfer of castings and forgings

technology, and repair and overhaul of aerospace equipment. As part of

the sale, General Dynamics agreed to transfer relevant manufacturing and

assembly know-how to allow South Korea to manufacture 72 aircraft and

assemble an additional 36 aircraft from kits that were manufactured in the

United States. The remaining 12 aircraft were to be completely assembled

in the United States.6

U.S. companies generally considered the offset requirements of Singapore

and Taiwan to be manageable. However, company officials noted that

despite the relatively low percentage of offset required in South Korea,

these requirements can be as difficult as a 100-percent offset requirement.

Appendix II provides detailed information on the offset requirements of

each newly industrialized country and the terms of the offset agreements

we reviewed.

Less Industrialized

Economies

Countries with less industrialized economies, such as Kuwait, Saudi

Arabia, and the United Arab Emirates, generally pursue indirect offsets to

help create profitable businesses and build their country’s infrastructure.

These countries usually do not pursue direct offsets because they have

limited defense and other advanced technology industries and are not

interested in attracting work that would require importing foreign labor.

The United Arab Emirates’ new offset policy grants credit only for profits

generated rather than the value of the investment.

We reviewed five offset agreements, with a value of at least $1.6 billion,

with countries that have less industrialized economies.7

 The following are

highlights of the agreements we reviewed:8

6

U.S.-Korea Fighter Coproduction Program—the F-16 Version (GAO/T-NSIAD-91-53, Aug. 1, 1991).

7

The value for some of these five agreements is not included because figures were not available or the

agreement called for an unspecified “best effort” goal.

8

Although the number of agreements we reviewed for this region is quite small, the terms of these

agreements closely match the countries’ offset requirements.

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• The agreements with Kuwait required that 30 percent of the sales be offset

through investment projects, including infrastructure development.

Kuwait’s offset policy grants multipliers up to 3.5 for investments in high

priority areas.

• The agreements with Saudi Arabia were informal and did not require a

specified offset percentage. The agreements primarily called for

nondefense-related investment projects. The agreements required joint

ventures between Saudi Arabian and foreign companies and assigned

values to technology transfers at the cost the country would have incurred

to develop them.

• The agreements with the United Arab Emirates required that 60 percent of

the sale be offset through nondefense-related investment projects and

granted multipliers for various types of investment projects.

The following are representative examples of the offset projects that both

U.S. and foreign firms have implemented or proposed in these less

industrialized economies:

• Several French firms have established manufacturing facilities or other

investments in the United Arab Emirates to satisfy offset obligations. For

example, Thomson-CSF started a garment manufacturing enterprise in

Abu Dhabi in connection with a contract for tactical transceivers and

audio systems. Giat Industries created an engineering company

specializing in air conditioning as part of its offset commitment for the

United Arab Emirates’ purchase of battle tanks. (Countertrade Outlook,

Vol. XIII, No. 8, Apr. 24, 1995, pp.3-4.)

• McDonnell-Douglas Helicopter Company entered into several joint

ventures with firms in the United Arab Emirates to satisfy offset

commitments for the sale of AH-64 Apache helicopters. Projects included

forming a company to manufacture a product that cleans up oil spills and

creating another firm that will recycle used photocopier and laser

computer printer cartridges. The defense contractor is also paying for a

U.S. law firm to draft the country’s environmental laws. (Countertrade

Outlook, Vol. XIII, No. 2, Jan. 23, 1995, pp. 2-3.)

• General Dynamics and McDonnell-Douglas contracted with companies in

Saudi Arabia to satisfy offset obligations from several weapons sales. In

one case, a Saudi firm will manufacture circuit boards for tanks, while in

another instance, a Saudi company will manufacture components for F-15

fighter aircraft. (Countertrade Outlook, Vol. XIII, No. 6, Mar. 27, 1995, p. 5.)

• The United Arab Emirates is working with Chase Manhattan to establish

an off-shore investment fund to provide international contractors doing

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business in the country the opportunity to satisfy part of their offset

obligations. (Countertrade Outlook, Vol. XIII, No. 2, Jan. 23, 1995, p. 1.)

Some company officials commented that indirect offsets make more sense

for the countries than defense-related offsets. Although U.S. companies

generally found meeting offset demands in Kuwait and Saudi Arabia

manageable, some companies expressed concern over the limited number

of commercially viable investment opportunities in these countries.

Further, the United Arab Emirates’ offset demands were seen as

particularly costly and impractical since offset credits were based on

profits actually generated by the newly established enterprise.

Appendix III provides detailed information on the offset requirements of

each less industrialized country and the terms of the offset agreements we

reviewed.

Divided Views on

Effects of Offsets

Views on the effects of offsets are divided between those who accept

offsets as an unavoidable part of doing business overseas and those who

believe that offsets negatively affect the defense industrial base and other

U.S. interests. It is difficult to accurately measure the impact of offsets on

the overall U.S. economy and on specific industry sectors that are critical

to defense.

Company officials told us that without offsets, most export sales would

not be made and the positive effects of these exports on the U.S. economy

and defense industrial base would be lost. Offsets help foreign buyers

build public support for purchasing U.S. products, especially since weapon

procurement often involves the expenditure of large amounts of public

monies on imported systems. Other company officials indicated that

export sales provide employment for the U.S. defense industry and orders

for larger production runs, thus reducing unit costs to the U.S. military.

They also noted that many offset deals create new and profitable business

opportunities for themselves and other U.S. companies.

Critics charge that offsets have effects that limit or negate the economic

and defense industrial base benefits claimed to be associated with defense

export sales. Mandated offshore production may directly displace U.S.

defense firms that previously performed this work, and offsets that

transfer technology and provide marketing assistance give foreign defense

firms the capabilities to subsequently produce and market their products,

often in direct competition with U.S. defense companies. According to

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company officials, indirect offsets involving procurement, technology

transfer, marketing assistance, and unrelated commodity purchases9

 may

harm nondefense industries by establishing and promoting foreign

competitors.

Data on Impact of Offsets

Limited

Defense exports involving offsets are small relative to the economy as a

whole, making it difficult to measure any effects using national aggregated

data. Similarly, the impact of offsets on specific sectors of the U.S.

economy cannot be accurately measured because reliable data on the

number and size of offset agreements and the transactions used to fulfill

these offsets are not readily available. In addition, it would be difficult to

isolate the effects of offsets from numerous other factors affecting specific

industry sectors. According to officials from large defense firms and an

association representing U.S. suppliers, reliable information on the impact

of offsets is difficult to obtain because company officials are generally not

aware that a particular offset arrangement caused them to lose or gain

business. Only limited anecdotal information from these companies is

available.

The lack of reliable information is a long-standing problem. Recognizing

the need for more information, Congress required in 1984 that the

President annually assess the impact of offsets. The President tasked the

Office of Management and Budget (OMB) to coordinate these assessments

and submit a report to Congress. However, OMB was not able to accurately

measure the impact of offsets on U.S. industry sectors critical to defense

with the information it collected.10 The Defense Production Act

Amendments of 1992 directed the Commerce Department to take the lead

in assessing the impact of offsets. As part of this effort, the statute requires

companies to submit information on their offset agreements that are

valued at $5 million or more. Commerce plans to issue its first report in

1996.

Actions Taken to Address

Offsets

In response to concerns raised about the impact of offsets, the President

issued a policy statement in 1990 that reaffirmed DOD’s standing policy of

not encouraging or participating directly in offset arrangements. This

policy statement also recognized that certain offsets are economically

9

Offset agreements have required U.S. defense companies to help sell, on a one-time basis, large

quantities of nondefense goods such as dental equipment, automobiles, printing press parts, forklifts,

and wire.

10Defense Production Act: Offsets in Military Exports and Proposed Amendments to the Act

(GAO/NSIAD-90-164, Apr. 19, 1990).

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inefficient and directed that an interagency team, led by DOD in

coordination with the Department of State, consult with foreign nations on

limiting the adverse effects of offsets in defense procurement. In 1992,

Congress adopted this policy as part of the Defense Production Act

Amendments.

According to the Commerce Department, DOD and the State Department

have not consulted with foreign nations on the adverse effects of offsets as

detailed in the 1990 presidential policy statement or the 1992 law.

However, in 1990, as part of the discussions over the NATO Code of

Conduct for defense trade, U.S. officials proposed to limit offsets in

defense trade, but no action was taken because countries could not agree

to the Code. DOD took action to include, as part of memorandums of

understanding between the United States and its allies, a provision to

consult on the adverse effects of offsets.11 DOD has discussed offsets on a

case-by-case basis with several countries in the context of specific weapon

sales.

Commerce officials noted that offsets are driven by the demands of

foreign governments against private U.S. companies. These demands place

second and third tier U.S. suppliers at a disadvantage since their interests

are not usually represented in these sales. Commerce officials said that

DOD should take action, in accordance with the 1990 presidential policy, to

consult with other nations to limit the adverse effects of offsets. One DOD

official noted that negotiating the offset issue by itself would not give the

United States a strong bargaining position because of U.S. reluctance to

change Buy America and small business preferences.

According to the Commerce Department, industry is not opposed to the

initiation of consultations on offsets, but is concerned that the U.S.

government might unilaterally limit the use of offsets. Officials from

several large defense companies we interviewed also expressed concern

about any unilateral action by the U.S. government that would limit

offsets. Similarly, several officials expressed doubt that any multilateral

agreement limiting offsets would be enforceable, and some noted that any

ban would likely force offset activity underground. In addition, some

company officials said that unilateral action banning offsets or an

unenforceable multilateral agreement would place U.S. exporters at a

competitive disadvantage in winning overseas defense contracts.

11Reciprocal defense memorandums of understanding seek to facilitate armaments cooperation by

allowing U.S. and foreign companies reciprocal access to the governments’ defense markets, and

calling for reductions in certain barriers, such as buy-national laws and tariffs.

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Commerce and DOD officials agreed that unilateral action to limit offsets

could harm U.S. defense companies.

Agency Comments The Departments of Commerce, Defense, and State were given the

opportunity to comment on a draft of this report. The Department of

Commerce provided written comments (see app. IV) and the Departments

of State and Defense provided oral comments. Commerce said our report

provides a balanced view of the subject. State commented that the report

accurately describes the growth in offset demands and the requirements

countries place on their purchases of foreign military equipment. DOD

concurred with our report and commented that it should contribute to a

better understanding of the nature of offset demands and the role of

offsets in military export sales.

We have made minor technical corrections to the report where

appropriate based on suggestions provided by Commerce and Defense.

Scope and

Methodology

To assess how countries’ offset requirements have evolved and how

companies were meeting these obligations, we focused our analyses on 

10 countries. We selected these countries based on their geographic

distribution and their significant purchases of foreign military equipment.

We then visited nine major U.S. defense companies. These firms were

chosen based on their roles as prime contractors and subcontractors that

provide a full range of defense goods and services.

We interviewed company officials regarding each country in our study and

obtained the offset agreements that they entered into with these countries

since 1985. For the limited number of agreements that we could not

obtain, we relied on summarized data provided by the company. Due to

the proprietary nature of the offset agreements, we are limited in our

ability to present specific information on a particular contract. However,

to illustrate the types of offset projects U.S. and foreign companies

undertook in the countries we reviewed, we used examples from various

defense journals. We did not corroborate the information reported in these

journals.

To determine what each country’s offset policy required, we interviewed

company officials and reviewed each country’s requirements, as provided

by the companies in our study. We then reviewed other government

studies that examined offset requirements for these countries. We did not

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discuss these policies with officials from each country to confirm their

accuracy.

To examine the implications of offsets on the U.S. economy, we examined

studies of defense offsets performed by other U.S. government agencies

and other groups. We interviewed DOD, Commerce, and State officials on

offset trends and any U.S. actions taken regarding offsets. We also

interviewed officials from prime contractors as well as trade associations

that represent mostly smaller U.S. companies.

The companies in our study were cooperative and provided the

information we requested in a timely manner. However, our ability to fully

review the actual offset projects was affected by access restraints. This

information is considered commercially sensitive by defense companies,

and information on projects implementing the offset agreements was

selectively provided by the companies. The companies reviewed our

report to ensure that no sensitive information was disclosed.

We conducted our review from May 1995 to February 1996 in accordance

with generally accepted government auditing standards.

We are sending copies of this report to interested congressional

committees and the Secretaries of Defense, State, and Commerce. We will

also make copies available to other interested parties upon request.

Please contact me at (202) 512-4587 if you or your staff have any questions

concerning this report. Major contributors to this report were Karen

Zuckerstein, Davi D’Agostino, David C. Trimble, Tom Hubbs, and John

Neumann.

David E. Cooper,

Associate Director

Defense Acquisition Issues

Page 15 GAO/NSIAD-96-65 Military Exports
Contents

Letter 1

Appendix I 

Offset Policies and

Practices of

Developed Economies

18

Canada 18

The Netherlands 19

Spain 21

United Kingdom 23

Appendix II 

Offset Policies and

Practices of Newly

Industrialized

Economies

26

Singapore 26

South Korea 27

Taiwan 30

Appendix III 

Offset Policies and

Practices of Less

Industrialized

Economies

32

Kuwait 32

Saudi Arabia 32

United Arab Emirates 34

Appendix IV 

Comments From the

Department of

Commerce

36

Related GAO Products 40

Tables Table I.1: Canada—Offset Guidelines and Agreements 19

Table I.2: The Netherlands—Offset Guidelines and Agreements 21

Table I.3: Spain—Offset Guidelines and Agreements 23

Table I.4: United Kingdom—Offset Guidelines and Agreements 25

Table II.1: Singapore—Offset Guidelines and Agreements 27

Table II.2: South Korea—Offset Guidelines and Agreements 29

Table II.3: Taiwan—Offset Guidelines and Agreements 31

Table III.1: Kuwait—Offset Guidelines and Agreements 32

Page 16 GAO/NSIAD-96-65 Military Exports
Contents

Table III.2: Saudi Arabia—Offset Guidelines and Agreements 34

Table III.3: United Arab Emirates—Offset Guidelines and

Agreements

35

Abbreviations

DOD Department of Defense

GATT General Agreement on Tariffs and Trade

NATO North Atlantic Treaty Organization

OMB Office of Management and Budget

Page 17 GAO/NSIAD-96-65 Military Exports
Appendix I 

Offset Policies and Practices of Developed

Economies

Canada Canada seeks offsets through its Industrial and Regional Benefits policy to

develop and maintain the capabilities and competitiveness of Canadian

companies. It solicits offsets that will benefit its manufacturing and

advanced technological capabilities, including technology transfer,

investments in plants or productivity improvement, and coproduction with

Canadian suppliers. Offset agreements generally range from 75 percent to

100 percent of the weapon systems contract’s value. Most offsets involve

purchasing products from Canadian firms in the defense, aerospace, or

other high-technology industries. The official guidelines do not state a

threshold for requiring offsets, and offsets have been provided on

contracts with values as low as $12 million.1

Canada is distinctive in its emphasis on distributing offset projects across

its various regions, particularly in its lesser-industrialized Western and

Atlantic provinces. Most offset agreements require regional distribution,

including several that specify which suppliers and regions should receive

offset work. In addition, some agreements contain penalty provisions for

not achieving a certain percentage of offset in each Canadian region. Many

offset agreements also specify that small businesses must receive a

portion of the offset projects.

Several agreements included detailed requirements for determining the

amount of offset credit. For example, offset projects will receive credit

only if the minimum Canadian content requirement is met, which was

35 percent in several of the agreements. Also, offset credit will only be

granted for new business or increases in existing business. Companies are

now usually not able to get offset credit for existing business in the

country, as they were in the past.

Generally, the companies in our study did not have significant difficulty

meeting offset requirements in Canada. Several companies found the

defense-related offsets easy to implement because Canada has a

developed defense industry and the companies have a significant amount

of existing business in the country. Table I.1 summarizes Canada’s offset

guidelines and agreements.

1

We reviewed 40 offset agreements with a stated value of $5.6 billion between U.S. companies and

countries with developed economies. We are unable to report the total number of agreements we

examined with each country because doing so might identify the companies in our review.

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Offset Policies and Practices of Developed

Economies

Table I.1: Canada—Offset Guidelines and Agreements

Category Offset guidelines Offset agreements

Date 1991 1985-94

Program objectives Generate long-term industrial benefits. Agreements generated long-term industrial benefits

with an emphasis on the defense and aerospace

industries.

Offset threshold Not stated. Value of contracts with offsets started at $12 million.

Offset type Both direct and indirect offsets are accepted, with

emphasis on high-technology industries.

Many agreements show preference for offsets

related to defense or aerospace industries.

Offset percentage Not stated. Recent agreements required offsets ranging from 75

percent to 100 percent of the contract value.

Multipliers Not stated. Two agreements provided for 20-percent additional

credit for an increase in direct offset amount.

Bankinga Not stated. Banking permitted in several agreements.

Penalties Not stated. Penalties varied from 2.5 percent to 12 percent of

shortfall. Several agreements did not have penalties.

Performance period Not stated. Ranged from less than 5 years to over 10 years.

Milestones Not stated. Several agreements had yearly milestones for

completing offset commitments.

Local content Not stated. Several agreements required a minimum of

35-percent Canadian content to receive any offset

credit.

Targeting Request offset projects that promote regional and

small business development and provide

subcontracts to Canadian suppliers.

Most agreements included regional distribution and

small business requirements. Several recent

agreements specified the actual suppliers to be

used in carrying out offset agreements.

New business Not stated. Recent agreements only provided offset credit for

new business.

Oversight Not stated. Several agreements have high administrative

oversight to determine if offset resulted in new

business and met Canadian content and other

requirements.

aBanking refers to the practice of allowing companies to earn extra offset credit under one offset

agreement and save or “bank” those credits to satisfy a later offset obligation.

The Netherlands The Netherlands uses offsets to maintain and promote its technical

capabilities in defense and other industries. The country has a

well-established defense industry and requires offsets that are related to

defense or high-technology civilian industries. The defense-related offsets

typically involve coproduction of components, parts and assemblies, and

technical services rendered by Dutch firms. Nondefense-related offsets

include a wide range of activities designed to contribute to the

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Offset Policies and Practices of Developed

Economies

Netherlands industrial base, including purchasing products from Dutch

firms in the aircraft, automotive, electronics, optical, or shipbuilding

industries.

The Netherlands’ guidelines require offsets on all weapons contracts

valued at more than $3 million. The standard offset demand is 100 percent,

and the majority of agreements over the last 10 years reflect this

requirement. Many of the agreements require that 70 percent to 85 percent

of any product purchased be produced in the Netherlands in order to

receive full credit toward the offset obligation. In addition, several recent

agreements state that credit will only be granted for new business created

or an increase in existing business.

Company representatives told us that implementing defense-related

offsets in the Netherlands is not a problem, given the country’s

sophisticated and highly developed industrial base. Several companies

identified offsets as a critical factor in winning a contract in the

Netherlands and believe the country would choose a less-desired weapon

system to get a better offset package. Table I.2 summarizes the

Netherlands’ offset guidelines and agreements.

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Appendix I 

Offset Policies and Practices of Developed

Economies

Table I.2: The Netherlands—Offset Guidelines and Agreements

Category Offset guidelines Offset agreements

Date 1992 1986-95

Program objectives Maintain and increase the industrial capacity of the

defense industry.

Most agreements included defense-related offsets.

Offset threshold All defense contracts valued at more than $3 million

require offsets.a

All agreements exceeded the official offset threshold.

Offset type Both direct and indirect offsets are accepted, with

emphasis on dual-use (military and civilian)

technology.

Agreements showed preference for direct offsets or

indirect offsets in the defense or other

technologically equivalent industry.

Offset percentage Government seeks 100-percent offset. Most agreements over last 10 years required

100-percent offset.

Multipliers Not stated. Multipliers are rarely included. However, according

to company officials, the amount of credit granted

for an offset project can be negotiated, achieving

the same results as a multiplier.

Banking Not stated. Banking permitted in several agreements.

Penalties Not stated. Penalties not stated. However, according to a May

1995 press report, the Netherlands legislature

requested that penalties be included in one offset

agreement.

Performance period Not stated. Ranged from 4 years to 15 years.

Milestones Not stated Milestones are generally not included in the

agreements.

Local content Not stated. Most agreements required a minimum of 70-percent

local content to receive 100-percent offset credit.

Targeting Not stated. Some agreements specified the actual suppliers to

be used in carrying out the offset agreement or

required that a portion of the offset activities be

fulfilled by collaboration with small- and

medium-sized businesses.

New business Require indirect offsets to include new business or a

significant increase in existing orders.

Several agreements specified that offset credit

would be granted only for new business or an

increase in business.

aThe guidelines specify an offset threshold of 5 million guilders, which is equivalent to

approximately $3 million based on exchange rates as of October 26, 1995.

Spain Spain uses offsets on defense orders to support and develop its defense

industry. Although Spain does not have written offset guidelines, it does

have a policy of demanding offsets, including coproduction by designated

Spanish firms, technology transfer, and export of Spanish defense

products. Spain’s standard offset requirement is 100 percent; however, the

agreements over the last 10 years have ranged from 30 percent to 

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Offset Policies and Practices of Developed

Economies

100 percent of the value of the weapon system. Spain does not have a

stated threshold amount for requiring offsets, but all of the offset

agreements over the last 10 years were for weapons sales over $7 million.

In some agreements, Spain has included provisions to only credit offset

projects that create new business or represent an increase in existing

business, and not grant credit for companies’ current business in the

country. In addition, Spain has sometimes included a local content

requirement for offset projects, providing credit only for the portion of the

projects that are produced in Spain. Companies report that to get approval

for offset projects, the work usually has to be spread across various

Spanish regions, even though the agreements do not explicitly contain this

requirement. In addition, Spain has targeted specific Spanish companies

that it wants to get offset work.

One U.S. company said offsets were relatively easy to implement in Spain

because Spain’s participation has consisted of producing less

sophisticated components. Another company observed that offsets are

more difficult to implement in Spain than in other European countries

because of Spain’s less diverse industrial base. Table I.3 summarizes

Spain’s offset guidelines and agreements.

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Offset Policies and Practices of Developed

Economies

Table I.3: Spain—Offset Guidelines and Agreements

Category Offset guidelines Offset agreements

Date Has official offset policy, but not written guidelines. 1985-94

Program objectives Provide support for Spain’s defense industry. Some agreements reflected goal of providing

opportunities for defense industry.

Offset threshold Unknown. Agreements were for contracts valued at over 

$7 million.

Offset type Emphasis on defense-related offsets. Agreements reflected preference for offsets in the

defense industry, including coproduction,

technology transfer, and export of Spanish defense

products.

Offset percentage 100 percent is the standard offset demand. Agreements required from 30-percent to

100-percent offset.

Multipliers Unknown. Some agreements included multipliers for

technology and production licenses and joint

development programs.

Banking Permitted. Banking excess credits common.

Penalties Generally requires penalties. Some agreements included penalties ranging from 

3 percent to 5 percent of offset commitment shortfall.

Performance period Unknown. Ranged from 5 years to 8 years, with grace periods

sometimes included.

Milestones Unknown. Only one agreement had milestones.

Local content Sometimes grants credit only for value of local

content.

Included in some agreements.

Targeting Sometimes specifies regional or supplier

requirements.

Some agreements specified the actual supplier to

be used in carrying out offset agreement. In

addition, companies are encouraged to spread

offset projects out over Spanish regions.

Oversight Unknown. Some agreements required regular reporting of

offset implementation status.

United Kingdom The United Kingdom uses offsets to channel work to its defense

companies. The country has a well-established defense industry and

requests offsets that are related to defense, including production,

technology transfer, capital investment, and joint ventures. Offset

agreements focus on procurement of defense-related products and

services from British firms.

According to the country’s guidelines, offsets are not mandatory, but are

used as an assessment factor in contract evaluations. Offsets are

commonly sought from North American companies and on a case-by-case

basis from European companies. Offsets are encouraged for weapon sales

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Appendix I 

Offset Policies and Practices of Developed

Economies

worth more than $16 million. A majority of the agreements required

100 percent of the sale to be offset.

Some companies stated that implementing defense-related offsets in the

United Kingdom is not a problem, given the country’s sophisticated and

diverse industries and the significant amount of existing business these

companies have in the country. However, several recent agreements

specify that offset credit will be given only for new business or a verifiable

increase in existing business, based on a prior 3-year average. A company’s

existing business in the country is not eligible for offset credit.

Furthermore, recent agreements specify that any purchase orders or

subcontracts for offset credit must be placed with one of the companies

on the country’s registry of recognized defense companies. However, this

is not a problem for U.S. companies partly because many British firms are

on the registry. Table I.4 summarizes the United Kingdom’s offset

guidelines and agreements.

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Appendix I 

Offset Policies and Practices of Developed

Economies

Table I.4: United Kingdom—Offset Guidelines and Agreements

Category Offset guidelines Offset agreements

Date 1995 1985-94

Program objectives Compensate for loss of work to the United

Kingdom’s defense industrial sector.

Agreements reflected guidelines’ goal to provide

work to the defense industrial sector.

Offset threshold All defense contracts valued at more than 

$16 million require offsets.a

Most were for contracts valued above the threshold

amount.

Offset type All offsets must be defense-related. Agreements reflected requirement for

defense-related offsets.

Offset percentage Government seeks 100-percent offset. Offset percentage ranged from 50 percent to 

130 percent. Most agreements required at least

100-percent offset.

Multipliers Offset credit can be negotiated. Offset credit can be negotiated. For example, one

agreement provided for “extra credit” if a specific

offset project was undertaken.

Banking Permitted in certain circumstances. Banking permitted in most agreements.

Penalties Not stated. No penalties; agreements call for “best efforts” to

fulfill.

Performance period Not to exceed the delivery period of the contract. Ranged from 3 years to 13 years.

Milestones Not stated. Not stated.

Targeting Offset activities must be placed with a qualified

United Kingdom defense manufacturer. Such

companies are listed in a central registry and are

from various regions of the country.

Most agreements specified that offset credit would

only be granted for work with recognized United

Kingdom defense contractors.

New business Offset activities must be new and consist of

products not previously purchased, products

purchased from new suppliers, or new contracts for

existing business valued at over $50,000.

Several recent agreements specified that offset

credit would be granted only for new business or an

increase in business.

Oversight Offset proposals commonly submitted at time of

contract tender for approval. No other mention of

oversight.

Several agreements required regular reporting of

offset activity progress. Staff to review offset credit.

aThe guidelines specify an offset threshold of 10 million pounds, which is equivalent to

approximately $16 million based on exchange rates as of October 26, 1995.

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Appendix II 

Offset Policies and Practices of Newly

Industrialized Economies

Singapore Singapore uses offsets to build its capability to produce, maintain, and

upgrade its defense systems. It has required offsets on an ad hoc basis

since the mid-1980s, but has recently begun to consistently demand

offsets. Singapore’s official policy requires all major purchases to be offset

with a 30-percent offset performance goal.1

All the offset arrangements we reviewed emphasized defense-related

projects. These arrangements required producing components for the

weapon system being purchased or establishing a Singaporean firm as a

service center for a weapon system. Singapore seeks technology transfer

and training, and most offset agreements include multipliers or provide

credits in excess of contractor costs for highly desired projects. For

example, manufacturing technology transferred for one weapon system

was valued at several times the cost to the company to provide it.

Generally, companies that had offset agreements with Singapore

considered the requirements manageable. Table II.1 summarizes

Singapore’s offset guidelines and agreements.

1

We reviewed 31 offset agreements with a stated value of $5.1 billion between U.S. companies and

countries with newly industrialized economies. We are unable to report the total number of

agreements we examined with each country because doing so might identify the companies in our

review.

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Appendix II 

Offset Policies and Practices of Newly

Industrialized Economies

Table II.1: Singapore—Offset Guidelines and Agreements

Category Offset guidelines Offset agreements

Date 1987 1986-94

Program objectives Assist the Ministry of Defense in building up

Singapore’s capabilities to provide necessary

maintenance, production, and upgrade capability to

support equipment and systems the Ministry has

procured. To be accomplished through technology

transfer, technical assistance, participation in

research and development, and marketing

assistance.

Consistent with the guidelines.

Offset threshold All “major” purchases of equipment, material, and

services; however, the guidelines do not provide a

specific threshold.

All the agreements we reviewed were for sales

valued at over $5 million.

Offset type Direct offset is preferred but indirect 

offset is acceptable.

Most included a mix of direct and indirect offset

transactions.

Offset percentage At least 30 percent of main contract value,

expressed as a goal.

Ranged from 25 percent to 30 percent.

Multipliers Not stated. Some agreements provided multipliers for activities

such as technology transfer (valued at up to 

10 times the cost), training, or technical assistance.

Banking Not stated. Permitted banking in most agreements.

Penalties 10 percent of unfulfilled obligation. 3 to 5 percent of unfulfilled obligation.

Performance period Concurrent with the duration of the main contract up

to a maximum of 10 years, plus a 1-year grace

period.

Agreements are generally consistent with the

guidelines.

Milestones Not stated. Generally not stated.

Targeting Firms owned by the Ministry of Defense are given

first preference on bidding for work with U.S.

contractors.

Agreements are generally consistent with the

guidelines. The Ministry of Defense is very involved

in selecting Singaporean firms that U.S. defense

contractors must work with.

South Korea South Korea uses offsets to acquire advanced technologies for its defense

and commercial industry. Technology transfer and related training has

consistently been a high priority for South Korea, and it has received

increased emphasis in recent years as South Korea has developed its

aerospace industry. To obtain technology transfer and training, South

Korea grants multipliers and awards offset credit that exceeds the actual

cost to the company of providing these items.

As a result of U.S. government pressure to reduce offset demands in the

late 1980s, South Korea’s policy calls for a 30-percent offset on defense

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Appendix II 

Offset Policies and Practices of Newly

Industrialized Economies

purchases exceeding $5 million. Although some agreements required a

30-percent offset, others required an offset of 40 percent or higher.

South Korea has a preference for defense-related offsets, but is also willing

to accept a wide variety of indirect offsets to help develop its industry,

especially its aerospace industry. In addition, South Korea frequently has

required U.S. contractors to buy products, such as forklifts and printing

press parts, for export resale that were unrelated to the weapon system

being purchased.

Several U.S. companies indicated that it can be difficult to work with

South Korea. They noted that the 30-percent offset requirement is tougher

to satisfy than the old 50-percent requirement and can be as tough as a

100-percent requirement. Several company officials also noted that they

have had difficulty in not being allowed to use banked credits. However,

some contractors commented that South Korea was consistent in its

requirements and would negotiate if the U.S. company was trying to meet

its offset obligation. Table II.2 summarizes South Korea’s offset guidelines

and agreements.

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Appendix II 

Offset Policies and Practices of Newly

Industrialized Economies

Table II.2: South Korea—Offset Guidelines and Agreements

Category Offset guidelines Offset agreements

Date Offset requirements first begun before 1985. Latest

version published in January 1992.

1985-94

Program objectives Acquire key advanced technologies required for

defense and commercial industry research and

development and production; enhance depot

maintenance capability; enhance opportunities for

manufacturing equipment and its components; and

provide opportunities to repair and overhaul foreign

military equipment and to export defense-related

products.

Agreements were generally consistent with the

guidelines. However, certain offset projects had no

relationship to the weapon systems being

purchased.

Offset threshold Military procurements exceeding $5 million are

subject to offset.

Several offset agreements prior to 1992 involved

contracts that were below the current $5-million

threshold. In addition, according to one contractor,

South Korea combined two separate purchases into

one contract to reach the offset threshold.

Offset type Direct offset is preferred, but indirect offset is

acceptable.

Agreements were generally consistent with the

guidelines and reflected a willingness to accept

indirect offset, especially involving technology

transfer and training, that will contribute to economic

development.

Offset percentage At least 30 percent of contract value. Since 1985, agreements have generally required at

least a 30-percent offset—and frequently more.

Multipliers Limited use of multipliers. Facilities, equipment, and

tooling provided by the contractor free of charge are

given a multiplier of two times their actual cost.

Several offset agreements provided multipliers that

were larger than the published guidelines,

especially for technology transfer and training. For

example, providing on-the-job training for South

Korean engineers at a U.S. contractor’s plant was

valued at 10 times the cost of providing the training.

Banking Permitted. Banking excess credits allowed in several individual

agreements, but most were silent on banking.

Penalties 10 percent of unfulfilled obligation. Agreements were consistent with the guidelines.

Performance period Generally corresponds to the performance period

for the main contract.

Agreements were generally consistent with the

guidelines.

Milestones Not stated. Agreements occasionally required and paralleled

overall contract performance periods.

Targeting Not stated. Many agreements were prescriptive and specified

the South Korean partners to be used by U.S.

contractors or the exact training to be provided by

the U.S. contractor to South Korean workers.

Unrelated

purchases

Not stated. Agreements frequently required U.S. contractors to

buy South Korean products for export resale that

had no relationship to the contract.

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Appendix II 

Offset Policies and Practices of Newly

Industrialized Economies

Taiwan Taiwan instituted its offset policy about 1993. Taiwan uses offsets to

encourage private investment, upgrade its industries, and enhance

international competitiveness. Taiwan’s goal is to form long-term supplier

relationships with foreign companies, using training and technology

transfer to gain expertise. Taiwan emphasizes these areas by offering large

multipliers for such projects. For example, the agreements included

multipliers as high as 25 for technology transfer, while other activities

such as purchases from local firms received no or very low multipliers.

Company officials noted that Taiwan recently passed a requirement calling

for 30-percent offsets.

Taiwan’s offset guidelines are broad, laying out several categories of

industrial cooperation and methods to achieve it—from production of

weapon system components to local investment. Offset agreements appear

flexible, with projects targeted to areas considered strategic for economic

development. In contrast to South Korea and Singapore, Taiwan generally

prefers commercial offset projects rather than defense-related projects.

Although some agreements include defense-related offset projects, such as

coproduction of weapons components, the agreements more commonly

involve commercial projects, such as marketing assistance.

Generally, the companies we visited believe that Taiwan’s offset

requirements have been easily managed. Table II.3 summarizes Taiwan’s

offset guidelines and agreements.

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Offset Policies and Practices of Newly

Industrialized Economies

Table II.3: Taiwan—Offset Guidelines and Agreements

Category Offset guidelines Offset agreements

Date 1993 All are after date of guidelines.

Program objectives To achieve the timely introduction of key

technologies and high-tech industries to Taiwan.

Targeted industries include aerospace,

semiconductors, advanced materials, information

products, precision machinery and automation, and

advanced sensors.

Agreements are consistent with the guidelines.

Offset threshold To be determined on a case-by-case basis; both

civilian and military government procurements are

subject to offset.

The smallest contract we reviewed with an offset

requirement was for about $60 million.

Offset type Both direct and indirect offsets are acceptable. Agreements reflected preference for indirect offset;

they either required indirect offset only or were

heavily weighted toward indirect.

Offset percentage To be determined on a case-by-case basis.

However, company officials noted that Taiwan’s

legislature passed a law in 1994 requiring

30-percent offsets.

Most of the agreements we reviewed required

10-percent offset with an additional 20 percent

expressed as a goal; however, the most recent

agreement required 30-percent offset.

Multipliers Range from 2 for local purchases to 10 for

technology transfer.

Multipliers provided for a broad range of

transactions—technology transfer, training,

technical assistance, marketing assistance,

investments, and joint ventures—valued at between

2 and 25 times the cost of the service provided.

Banking Permitted. Most agreements do not specifically discuss

banking excess credits.

Penalties None. Guidelines based on good faith. However, the

policy notes that a contractor’s track record in

fulfilling an offset obligation is considered when

awarding future contracts.

Agreements did not include penalties.

Performance period Concurrent with master contract. All agreements had a 10-year performance period.

Milestones Not stated. Not stated.

Long-term

relationship

Goal is to participate in long-term supplier

relationships, using training and technology transfer

to gain expertise. Guidelines are broad, laying out

several categories of industrial cooperation and

methods to achieve it—from production of weapon

system components to local investment.

Consistent with guidelines, the offset projects were

targeted to areas considered “strategic” to

economic development.

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Offset Policies and Practices of Less

Industrialized Economies

Kuwait In 1992, Kuwait began requiring offsets for all defense purchases over

$3 million. Kuwait pursues offsets that will generate wealth and stimulate

the local economy through joint ventures and other investments in the

country’s infrastructure.1

The limited number of agreements we reviewed call for U.S. contractors to

propose investment projects and then manage and design the projects

selected by the Kuwaiti government. The agreements required offsets

equal to 30 percent of the contract values, as stated in Kuwait’s offset

policy.

U.S. companies have had limited experience with Kuwait’s offset program

to date, but generally consider it manageable. Table III.1 summarizes

Kuwait’s offset guidelines and agreements.

Table III.1: Kuwait—Offset Guidelines and Agreements

Category Offset guidelines Offset agreements

Date Offset policy instituted in July 1992. Revised

guidelines issued in March 1995.

All are after the institution of the 1992 guidelines.

Program objectives Promote and stimulate the local economy. Agreements are consistent with program goals.

Offset threshold Offset threshold is about $3 million. Exceed threshold.

Offset type Indirect offsets. Agreements involved indirect offsets.

Offset percentage 30 percent of the value of the contract. Agreements required 30-percent offset.

Multipliers The relative value of multipliers reflect Kuwait’s

preference for capital expenditures, research and

development, training, and increased export sales

of locally produced goods and services (multipliers

of 3.5). Other activities are given smaller multipliers.

Not stated.

Banking Allowed up to 100 percent of offset obligation. Banking permitted.

Penalties 6 percent of unfulfilled obligation. Not stated.

Performance period 8 years. Not stated.

Milestones 50 percent of the offset should be completed within

4 years.

Not stated.

Investment Long-term investment through joint ventures is

encouraged.

Agreements reflected interest in developing viable

businesses.

Saudi Arabia Saudi Arabia has intermittently required offsets since the mid-1980s.

Officials at one company observed that Saudi Arabia has recently pursued

1

We reviewed five offset agreements between U.S. companies and countries with less industrialized

economies. The value of the agreements where figures were available totaled $1.6 billion. We are

unable to report the total number of agreements we examined with each country because doing so

might identify the companies in our review.

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Industrialized Economies

“best effort” agreements with U.S. defense contractors, rather than formal

offset agreements. Saudi Arabia uses its offset policy to broaden its

economic base and provide employment and investment opportunities for

its citizens.

The offset agreements are informal with no set offset percentage, although

officials at one company estimated their arrangement was equivalent to a

35-percent offset agreement. The agreements include a requirement that

companies enter into joint ventures with local companies to implement

offset activities. The offset activities consist of defense- and

nondefense-related projects. In some instances, the offset projects include

local production of parts or components for the weapon system being

purchased. However, these represent small portions of the overall offset

projects, and the Saudi government agreed to pay price differentials to

make Saudi manufacturers price competitive. The agreements do not

include explicit multipliers, but some agreements grant credits for

technology transfers at the cost Saudi Arabia would have incurred to

develop the technology.

Companies commented that Saudi Arabia wants to establish strategic

partnerships and long-term relationships with its suppliers and that the

Saudi government has been fairly flexible in negotiating offset agreements.

Table III.2 summarizes Saudi Arabia’s offset guidelines and agreements.

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Industrialized Economies

Table III.2: Saudi Arabia—Offset Guidelines and Agreements

Category Offset guidelines Offset agreements

Date Undated. 1990-93 (One prior agreement in 1988.)

Program objectives Broaden the economic base, increase exports,

diversify the economy, transfer state-of-the-art

technology, and provide investment opportunities

for Saudi Arabian investors.

Agreements were consistent with program goals.

Offset threshold Not stated. Offset applies to both military and civil

federal procurement.

Agreements were associated with high-dollar value

contracts.

Offset type Indirect offsets are preferred. Mostly indirect offsets that were unrelated to

defense.

Offset percentage 35 percent of contract value. Agreements were consistent with the requirement or

called for “best efforts” commitment.

Multipliers Offset credit for training Saudi Arabian nationals will

be given at two times the contractors’ cost (i.e., a

multiplier of two). No other multipliers cited.

Not stated. However, technology transfers were

valued at the cost Saudi Arabia would have incurred

to develop the technology, plus the value of future

benefits.

Banking Not stated. Not stated.

Penalties Not stated. Not stated. Agreements generally called for “best

efforts” as part of Saudi Arabia’s desire to establish

long-term relationships.

Performance period 10 years. 10 years.

Milestones Not stated. Not stated.

Eligibility Oil- and gas-related projects are not eligible for

credit.

Offset activity involved mostly nondefense-related

projects unrelated to the oil and gas industry.

Investment Should be 50 percent of total offset obligation. Joint

ventures sought between foreign and Saudi firms;

foreign firm’s ownership share may decrease to 

20 percent by end of 10 years.

Agreements required joint ventures, but appeared to

be less formal than published guidelines.

Agreements cited specific Saudi Arabian firms for

joint venture partners.

United Arab Emirates The United Arab Emirates first instituted its offset policy in 1990. In 1993,

it issued new requirements granting offset credit only for the profits

generated by offset projects. The policy requires a 60-percent offset on all

contracts valued at $10 million or more. The United Arab Emirates uses

offsets to generate wealth and diversify its economy by establishing

profitable business ventures between foreign contractors and local

entrepreneurs.

The United Arab Emirates is interested in a wide range of

nondefense-related offset projects.

Page 34 GAO/NSIAD-96-65 Military Exports
Appendix III 

Offset Policies and Practices of Less

Industrialized Economies

Company officials generally questioned the feasibility of the United Arab

Emirates’ current offset requirements. They said only a small number of

viable investment opportunities exist and such projects take several years

to generate profits. Table III.3 summarizes the United Arab Emirates’

offset guidelines and agreements.

Table III.3: United Arab Emirates—Offset Guidelines and Agreements

Category Offset guidelines Offset agreements

Date New guidelines issued about 1993. Prior guidelines

dated 1990.

All after the institution of the 1990 requirements.

Program objectives Generate wealth by creating commercially viable

businesses through partnerships with local

entrepreneurs.

Agreements were consistent with guidelines in effect

at the time.

Offset threshold For all “substantial” defense procurement.

Requirements specifically cite a $10-million

threshold for any government procurement.

All agreements exceeded the threshold.

Offset type Policy implies nondefense, wealth-generating

investments are preferred. The policy explicitly

discourages, however, labor-intensive projects.

Agreements involved indirect offsets unrelated to

defense.

Offset percentage At least 60 percent of the value of the imported

content.

All agreements required a 60-percent offset.

Multipliers Not mentioned under current policy. Credit is based

on profit generated rather than a valuation (using

multipliers) of the investment in the project. The

1990 policy permitted multipliers.

Some agreements that pre-date the new offset

policy included multipliers that reflected the United

Arab Emirates’ preference for investment.

Banking Banking of offset credits is permitted. Agreements permitted banking of offset credits and

buying of excess credits from other companies.

Penalties 8.5 percent of the unfulfilled obligation. Consistent with guidelines.

Performance period 7 years. Some agreements exceeded the 7-year

performance period requirement.

Milestones To be negotiated for each offset proposal. Agreements included milestones throughout the

obligation.

Eligibility Companies must demonstrate that offset ventures

are new work or extensions of existing activities.

Agreements required projects to be preapproved for

eligibility and offset credit.

Investment May require financial investment in an offset

development fund in lieu of conventional offsets.

Chase Manhattan is working to set up a United Arab

Emirates investment fund. According to company

officials, the fund will require a minimum $5-million

investment for at least 10 years, with a guarantee of

at least a 2.5-percent return. The country will

provide 20-percent offset credit against investments

in the fund.

Granting

offset credit

Offset credit for technology transfer, training, parts

production, and all offset projects is granted based

on the profits generated by these activities rather

than the contractor’s implementation cost.

Company officials noted that this requirement was

impractical.

Page 35 GAO/NSIAD-96-65 Military Exports
Appendix IV 

Comments From the Department of

Commerce

Page 36 GAO/NSIAD-96-65 Military Exports
Appendix IV 

Comments From the Department of

Commerce

Page 37 GAO/NSIAD-96-65 Military Exports
Appendix IV 

Comments From the Department of

Commerce

Page 38 GAO/NSIAD-96-65 Military Exports
Appendix IV 

Comments From the Department of

Commerce

Page 39 GAO/NSIAD-96-65 Military Exports
Related GAO Products

Trade Offsets in Foreign Military Sales (GAO/NSIAD-84-102, Apr. 13, 1984).

Foreign Military Sales and Offsets (Testimony, Oct. 10, 1985).

Military Exports: Analysis of an Interagency Study on Trade Offsets

(GAO/NSIAD-86-99BR, Apr. 4, 1986).

Security Assistance: Update of Programs and Related Activities

(GAO/NSIAD-89-78FS, Dec. 28, 1988).

Defense Production Act: Offsets in Military Exports and Proposed

Amendments to the Act (GAO/NSIAD-90-164, Apr. 19, 1990).

Military Exports: Implementation of Recent Offset Legislation

(GAO/NSIAD-91-13, Dec. 17, 1990).

U.S.-Korea Fighter Coproduction Program—The F-16 Version

(GAO/NSIAD-91-53, Aug. 1, 1991).

Military Sales to Israel and Egypt: DOD Needs Stronger Controls Over

U.S.-Financed Procurements (GAO/NSIAD-93-184, July 7, 1993).

Military Aid to Egypt: Tank Coproduction Raised Costs and May Not Meet

Many Program Goals (GAO/NSIAD-93-203, July 27, 1993).

Military Exports: Concerns Over Offsets Generated With U.S. Foreign

Military Financing Program Funds (GAO/NSIAD-94-127, June 22, 1994).

(705108) Page 40 GAO/NSIAD-96-65 Military Exports
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