DEFENSE TRADE 

Issues Concerning the Use 

of Offsets in International 

Defense Sales 

Statement of Katherine V. Schinasi 

Managing Director, Acquisition and Sourcing Management 

United States General Accounting Office 

GAO Testimony

Before the Committee on Armed 

Services, House of Representatives 

For Release on Delivery 

Expected at 9:00 a.m. EDT 

Thursday, July 8, 2004 

GAO-04-954T 
GAO-04-954T

Mr. Chairman and Members of the Committee: 

I am pleased to be here today to discuss issues surrounding the use of defense offsets on the 

basis of our work going back almost 15 years. 

Views on defense offsets range from beliefs that they are both positive and an unavoidable 

part of doing business overseas to beliefs that they negatively affect the U.S. industrial base. 

Defense offsets are often viewed as the key to foreign sales and thus increased business on 

the prime contractor level. They can also result in reduced unit costs to the U.S. military 

because of the increased size of production runs. However, the use of a foreign supplier by 

a U.S. prime contractor as a result of an offset may lead to decreased business opportunities 

for U.S. suppliers. Additionally, U.S. prime contractors may develop long-term relationships 

with foreign suppliers, which may lead to the transfer of capability from the U.S. defense 

industrial base. 

As a result of congressional concerns about emerging trends in defense offsets, we have 

conducted a number of reviews and issued multiple reports. Because of our work in this 

area, you asked us to provide our observations on offset issues. Specifically, we are 

providing our observations on (1) what constitutes offsets and how they are used in defense 

trade, (2) how that use has changed over time, and (3) the quality and extent of information 

concerning offsets that is currently available. 

Results in Brief

Defense offsets are the full range of industrial and commercial benefits that firms provide to 

foreign governments as inducements or conditions for the purchase of military goods and 

services. They include, for example, coproduction arrangements and subcontracting, 

technology transfers, in-country procurements, marketing and financial assistance, and joint 

ventures. Foreign governments use offsets as a means of reducing the financial impact of 

their purchases, obtaining valuable technology and manufacturing know-how, supporting 

domestic employment, creating or expanding their defense industries, and making the use of 

their national funds for foreign purchases more politically palatable. 

Over the almost 15-year period we have studied defense offsets, countries buying U.S. 

defense items have become increasingly sophisticated in their offset demands. These 

demands have included requiring offsets prior to contract award and increasing the offset 

value as a percentage of contract value. These demands are often based on developmental 

goals of the purchasing country and have steadily increased in value so that today these 

demands often equal and may exceed 100 percent of the value of the transaction. It should 

be noted however, that purchasing countries often use multipliers as a means of 

encouraging companies to engage in certain activities to fulfill offset obligations.1

 While the 

use of such multipliers can lessen the dollar effect of offset demands as a percentage of the 

related sale, their use underscores the sophistication of countries using offsets as part of an 

industrial policy. The Department of Defense’s (DOD) current emphasis on engaging in joint 

 

1

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

a company helped facilitate a $10,000 export of a product with particular importance, the country could offer a 

multiplier of 5, thereby increasing the amount of offset credit to $50,000. 
 

Page 2 GAO-04-954T 

development programs can be viewed as an avenue for an even more sophisticated offset. 

The expenditure of public funds by one country to support a another country’s weapon 

system development program will be offset by access to developing technology that the first 

country could not have individually afforded and subsequently the opportunity to take part 

in producing the system and the jobs that production will create. 

The current information available on offsets does not provide an adequate basis for 

evaluating offset practices. Defense exports involving offsets are small relative to the U.S. 

economy as a whole. As a result, it is difficult to measure effects using national aggregated 

data. The lack of reliable data on the impact of offsets on the U.S. economy has been a 

concern for many years, and Congress has on numerous occasions required federal agencies 

to take steps to define and address offset issues. Most recently, in 1999, Congress 

established a national commission to report on the extent and nature of offsets in defense 

trade. Currently, the Department of Commerce reports to Congress on an annual basis on 

offset agreements, as well as activities that U.S. companies engage in to fulfill offset 

obligations. The Departments of Defense and State include limited offset information when 

notifying Congress of large sales of defense items to foreign countries. However, no direct 

linkage has been made between the information collected on these sales and associated 

offset agreements and any impact on the U.S. economy. 

Historically, the U.S. government has maintained a “hands off” policy toward defense 

offsets, viewing them as part of the transaction between the contracting parties. Since 

offsets are one of the many factors contributing to the globalization of the U.S. industrial 

base, studying offset transactions could provide insights into what is occurring in the 

industrial base and whether these transactions need to be considered on a policy level by 

the U.S. government. 

Offsets Are an Integral but Unregulated Part of International Defense Trade 

Relationships

Offsets are an unregulated part of defense export sales. U.S. contractors consider offsets an 

unavoidable cost of doing business overseas. These officials have indicated that if they did 

not offer offsets, export sales would be reduced and the positive effects of those exports on 

the U.S. economy and defense industrial base would be lost. These positive effects include 

both employment in the U.S. defense industry and orders for larger production runs of U.S. 

weapon systems, thus reducing unit costs to the U.S. military. They have also noted that 

many offset deals create new and profitable business opportunities for themselves and other 

U.S. businesses. Critics charge that negative aspects of offset transactions limit or negate 

the economic and industrial benefits claimed to be associated with defense export sales. 

While offsets take many forms, direct offsets generally involve technology transfer, 

coproduction tied to a weapon sale, and subcontracting for defense-related products, 

whereas indirect offsets encompass almost any economic activity not related to the defense 

sale. Offsets may result in the development of long-term supplier relationships. On the one 

hand, the U.S. prime contractor might have found a less costly supplier; on the other hand, 

U.S. subcontractors may find reduced business opportunities, resulting in the loss of 

capability in the U.S. industrial base. U.S. companies also may find that they have 

contributed to the development of a future competitor. We found that in one instance, a 
 

Page 3 GAO-04-954T 

U.S. subcontractor stated that it was required by a prime contractor to grant a licensing 

agreement to a foreign company to produce a subsystem. The foreign company 

subsequently developed a similar subsystem to compete against the U.S. subcontractor. 

Offset-related technology transfer may also affect national security. Currently, little is 

known about the effect of offsets on increasing the foreign content in U.S. weapon systems 

because information linking offsets to foreign content is not collected. We have reported on 

the details of offset transactions in several reports, most recently in our report Defense 

Trade: U.S. Contractors Employ Diverse Activities To Meet Offset Obligations 

(GAO/NSIAD-99-35, Dec. 18, 1998). That report and others are summarized in appendixes to 

my statement today. 

Offset Demands Have Changed Over Time

Over the period that we have been reporting on issues associated with offsets, countries 

buying U.S. defense items have been increasing their demands for offsets. Countries that 

prior to the 1990s did not require offsets now require them as a matter of routine policy. In 

at least one case this policy had been established in law. In some cases, purchasing 

countries require preapproval of offset projects to ensure that they accomplish their 

development goals as well as provide the stated economic benefit. We have also found that 

the nature of the offset demanded varies according to the objectives of the purchasing 

government and, to an extent, the level of economic development. 

Countries are also increasingly sophisticated in their management of offsets to achieve 

specific regional industrial and employment goals. For example, one country requires that 

companies distribute offset projects across its various regions. Some countries establish 

time frames within which an offset must be performed and include penalty clauses for 

nonperformance within those time frames. An offset activity that is considered valuable or 

very desirable–the introduction of a new industry or technology transfer–will be encouraged 

through the use of multipliers. Further, many countries will permit companies to “bank” 

offset credits to be used to fulfill offset obligations associated with future sales of defense 

goods in that country. These countries are managing the timing and location of the 

economic activity prior to committing to purchase a specific defense article. According to 

one U.S. company official, companies have traded offset credits through industry 

associations and individual contacts, and one country has established a company to 

facilitate offset deals. 

DOD’s current emphasis on partnering with allied countries in development programs has 

opened a new avenue for offset activity. In previous offset agreements, the purpose of an 

offset was to encourage the purchase of foreign defense goods by balancing the expenditure 

of public funds with a perceived economic benefit. In joint development programs, the 

balance can be achieved through the promise of access to technology that individually the 

partnering countries could not have afforded to develop and the opportunity to win part of 

the production work and the jobs that it will create. This model is most apparent in the 

Joint Strike Fighter (JSF) program. The JSF program has established a model in which 

countries become partners at specified contribution levels. While there are financial 

benefits connected with the contribution—for example, the waiver of nonrecurring aircraft 

costs—the primary benefit will be access to advanced technology and an advanced tactical 

aircraft that they could not afford to develop on their own. 
 

Page 4 GAO-04-954T 

However, as we pointed out in our work on JSF program, this type of offset comes with its 

own unique set of concerns.2 International participants have significant expectations 

regarding industrial return on the basis of their contributions. Because the prime 

contractor, Lockheed Martin, bears the major responsibility for managing partner industrial 

expectations, it will need to balance its ability to meet program milestones against meeting 

these expectations, which could be key to securing future sales of the JSF for the company. 

The need to offset partner contributions through industrial return has been highlighted in 

several recent news reports on actions being taken by Lockheed Martin and its major 

commercial partners to ensure that the partner countries share in the work being generated. 

Data Not Available to Evaluate the Need for an Offsets Policy 

Based on our work on defense industrial base issues we have concluded that DOD needs to 

improve its knowledge of the supplier base at the lower tiers to enable it to better 

understand who its suppliers are and what vulnerabilities may exist. Congress has on 

numerous occasions attempted to gain increased knowledge about offsets issues and has 

urged the executive branch to take steps to mitigate the adverse effects of offsets. (See 

app. 1.) We believe that there is a relationship between offsets and DOD’s supplier base. To 

properly manage its supplier base and ensure that U.S. technology is protected, DOD needs 

to understand the uses and effects of offsets. 

Evaluating offsets and identifying their effects on industrial sectors or the U.S. economy as a 

whole is difficult. Although we have identified instances of the impact of offsets on 

individual companies, we have not quantified the impact of offsets on the overall U.S. 

economy or on subsectors of the U.S. industry. First, according to officials from large 

defense firms and an association representing U.S. suppliers, obtaining reliable information 

on the impact of offsets is difficult because company officials are generally not aware that a 

particular offset arrangement caused them to lose or gain business. As a result, it is difficult 

to isolate the effects of offsets from the numerous other factors affecting specific industry 

sectors. Additionally, technology is transferred overseas for reasons other than to fulfill an 

offset obligation. In some instances, alliances such as joint ventures may be formed to gain 

access to the European market without being the result of offsets. Likewise, European 

companies may gain access to U.S. technology as they gain access to the U.S. market 

through acquisitions of small and medium-sized U.S. defense companies. Second, defense 

exports involving offsets are small relative to the U.S. economy as a whole, making it 

difficult to measure any effects using national aggregated data. 

The lack of reliable data on the impact of offsets on the U.S. economy has been a concern 

for many years, prompting Congress to enact legislation requiring three federal agencies (the 

Departments of Commerce, Defense, and State) to collect data on offsets. The Defense 

Production Act of 1950 as amended3

 requires the President to report annually to Congress on 

the impact of offsets on U.S. defense preparedness, industrial competitiveness, employment, 

and trade. Commerce prepares the report, and requires companies to annually report 

 

2

Joint Strike Fighter Acquisition: Cooperative Program Needs Greater Oversight to Ensure Goals Are Met

(GAO-03-775, July 21, 2003) and Joint Strike Fighter Acquisition: Managing Competing Pressures Is Critical 

to Achieving Program Goals (GAO-03-1012T, July 21, 2003). 3

 50 U.S.C. App. § 2099. 
 

Page 5 GAO-04-954T 

(1) offset agreements entered into during the previous year that are valued at more than 

$5 million and are associated with the sales of defense articles or services and (2) completed 

offset transactions being used to meet existing offset commitments that have a credit value 

of at least $250,000. The required information includes the name of the country purchasing 

the defense item or service for which the offset is required, the credit value of the offset, the 

actual dollar value of the offset, and a description of the type of offset. 

The Departments of Defense and State report to Congress on offset information pertaining 

to individual sales of defense items. The Arms Export Control Act, as amended,4 requires 

the President to notify Congress of any agreements to sell defense articles or services over a 

certain amount. The President delegated this reporting function to the Secretary of Defense 

for foreign military sales agreements and to the Secretary of State for commercial sales of 

defense items that require an export license. Beginning in 1994,5 the law was amended to 

require that the congressional notification contain a statement of whether or not an offset 

agreement was associated with the sale and a description of it. This requirement applies to 

both government-to-government and commercial sales of defense articles. 

Congress also legislated that the President develop an offset policy and negotiate with 

foreign countries to mitigate the adverse effect of offsets. The National Defense 

Authorization Act for Fiscal Year 1989 directed the President to establish a comprehensive 

offset policy addressing (1) technology transfer, (2) the application of offset arrangements, 

and (3) the effects of offset arrangements on specific subsectors of the U.S. industrial base. 

It also directed that the policy address preventing or ameliorating any serious adverse 

effects on such subsectors.6

 In 1990 the President issued a policy statement recognizing that 

certain offsets are economically inefficient and market distorting but reaffirms the U.S. 

government’s traditional policy of noninvolvement in offset arrangements.7 The policy 

statement did not address technology transfer or the effects of offsets on specific 

subsectors. 

In 1992 the Defense Production Act Amendments of 1992 directed the Secretary of Defense 

to lead an interagency team to consult with foreign nations on limiting the adverse effects of 

offsets.8

 According to Defense Department officials, the interagency team began to meet in 

1999. As of September 1, 2000, the interagency committee had met with representatives of 

the governments of Canada, France, Great Britain, and the Netherlands and had sent letters 

to other nations that had memorandums of understanding with the U.S. government 

requesting meetings to discuss offsets. The committee had also begun to consult with 

industry. 

In 1999 Congress passed the Defense Offsets Disclosure Act of 1999, which expressed the 

sense of Congress that (1) the executive branch should try to establish reasonable, businessfriendly standards for the use of offsets with foreign counterparts for use in international 

business transactions and that (2) the U.S. government should raise offset issues in 

 

4

 22 U.S.C. § 2776. 

5

 Pub L. 103-236. 

6

 Pub. L. 100-456 § 825. 

7

 Congress incorporated this policy statement into statute with the Defense Production Act Amendments of 

1992, Pub. L. 102-558 § 123. 

8

 Pub. L. 102-558 § 123. 
 

Page 6 GAO-04-954T 

discussions with other industrialized nations and should enter into discussions through 

multilateral forums to establish standards for the use of offsets in international defense 

trade.9 That act also established the National Commission on the Use of Offsets in Defense 

Trade. As we reported in May of last year, the Commission’s final report and 

recommendations are still pending. An interim report was published in February 2001, 

based on the last Commission meeting held in December 2000. Since the change of 

administrations in 2001, the President has not appointed new executive branch members. 

Consequently, the Commission has ceased activity and has not issued its final report. 

CONCLUSIONS

Offsets are an element in international defense trade, the nature and importance of which 

have changed over time. Despite the many congressional attempts to force the development 

of information that would enable an accurate evaluation of the role--both positive and 

negative--played by offsets, this information has not been developed. The same would 

appear true for the many times Congress has urged action to address the perceived adverse 

effects of offsets. The last action--establishing the National Commission on Offsets in 

Defense Trade--appeared to be a culmination of many prior efforts. However, because of 

circumstances the Commission never achieved its purpose. The Committee may want to 

consider reinvigorating that process and combining it with a specific direction to the 

executive branch to enter into multilateral talks, particularly with our closest allies, to 

discuss how offsets may result in market distortions and to determine whether steps can be 

taken to mitigate the adverse effects while protecting the interests of all involved. 

*** *** *** 

Mr. Chairman, this concludes my statement. I would be happy to respond to any questions 

that you or members of the Committee may have. 

This statement is based on the results of our work on offsets (see app. 2) and related issues 

(see app. 3) from our reports issued from April 1990 through May 2004, and therefore agency 

comments were not requested. All of the reviews were done according to generally 

accepted government auditing standards. 

Contacts and Acknowledgments

For future questions regarding this testimony, please contact Katherine Schinasi, (202) 512-

4841. Individuals making key contributions to this testimony include Thomas Denomme, 

Paula Haurilesko, and Lillian Slodkowski. 

 

9

 Pub. L. 106-113, App. G. 
Appendix I 

GAO-04-954T Page 7

Selected Legislation Concerning Offsets 

Statute Information gathering Actions to mitigate adverse effects 

1984Defense Production Act Amendments of 1984 (Pub. L. 98-265) 

Requires the President to submit an annual report on the impact of offsets on the defense preparedness, industrial competitiveness, employment, and trade of the United States. 

1986Defense Production Act Amendments of 1986 (Pub. L. 99-441) 

Requires the President’s annual report be a “detailed” study that includes (1) summaries of interagency studies on the effects of offsets, (2) the long- and short-term effects of offsets, and (3) the direct and indirect effects on lower-tier defense subcontractors and non-defense industry sectors. 

1988National Defense Authorization Act, Fiscal Year 1989 (Pub. L. 100-456) 

Requires firms entering into a defense contract subject to an offset arrangement exceeding $50 million to notify the Secretary of Defense of the proposed sale. 

(1) Requires the President to establish a comprehensive offset policy that addresses the effect of offsets on specific subsectors of the industrial base and how to prevent or ameliorate any serious adverse effects on those subsectors. (2) Directed the President to enter into negotiations with foreign countries to limit the adverse effect of offsets on the defense industrial base. Requires the President to report to Congress every year for four years (1989-92) on the status of negotiations. (3) Required a report by March 15, 1990, discussing actions the United States could take in reaction to offsets, such as requiring an offset or other equivalent advantage when buying goods from a country that requires U.S. firms to offer offsets. 

1989National Defense Authorization Act for Fiscal Years 1990 and 1991 (Pub. L. 101-189) 

 Directed the President to “make every effort” to 

achieve an agreement that would limit the adverse effects of offsets during negotiations of memoranda of understanding between the United States and other countries. 

1992Defense Production Act Amendments of 1992 (Pub. L. 102-558) 

(1) Designated the Secretary of Commerce to prepare the annual report on offsets, and required the report to address the cumulative effect of offset agreements on domestic defense productive capability, especially the lower-tier subcontractors or suppliers, and the effect on the defense technology base of technology transfers that occur to fulfill offset agreements. 

Required the President to (1) designate the Secretary of Defense to lead an interagency team to consult with foreign nations on limiting the adverse effects of offsets in defense procurement and (2) report annually on the results of the consultations. 
Appendix I 

GAO-04-954T 

Statute Information gathering Actions to mitigate adverse effects Page 8

(2) Required companies to notify Commerce Department officials when entering into a contract that is subject to an offset agreement exceeding $5 million in value. 

1994Foreign Relations Authorization Act, Fiscal Years 1994 and 1995 (Pub. L. 103-236) 

Amended sections 36(b) and (c) of the Arms Export Control Act to require that notifications to Congress of impending sales of defense goods indicate whether any offset agreement is proposed in connection with the sale and required a description of the offset agreement proposed. 

1999Defense Offsets Disclosure Act of 1999 (Pub. L. 106-113, App. G) 

Established a National Commission on the Use of Offsets in Defense Trade. Required a report within 12 months on (1) the collateral impact of offsets on industry sectors unrelated to the item sold, (2) the role of offsets with respect to U.S. competitiveness in international trade, and (3) the impact on national security of technology transferred to fulfill offset obligations. 

(1) Directed the United States government to enter into discussions through multilateral forums to establish standards for the use of offsets in international defense trade. (2) Required the National Commission on the Use of Offsets in Defense Trade to submit an analysis of proposals for unilateral, bilateral, or multilateral measures to reduce the detrimental effect of offsets and to identify the appropriate agencies to monitor the use of offsets. 

2003Department of Defense Appropriations Act, 2004 (Pub. L. 108-87) 

Requires the Secretary of Defense to report to Congress by March 1, 2005, on the effect of offset arrangements on specific subsectors of the U.S. industrial base; what actions have been taken to prevent or mitigate any serious adverse effects, and the extent to which offsets and other arrangements have provided for technology transfer that would significantly and adversely affect the national technology and industrial base. 

Source: GAO analysis. 
Appendix II 

Page 9 GAO-04-954T 

GAO Reports on Defense Offsets, 1990-2003

Defense Trade: Report and Recommendations of the Defense Offsets Commission 

Still Pending (GAO-03-649, May 30, 2003) 

GAO found that the final report and recommendations of the National Commission on the 

Use of Offsets was still pending although its mandated reporting date was October 2001. 

The Commission had issued an interim report in February 2001 calling for additional work 

on the issues raised. However, the last Commission meeting was held December 4, 2000, 

and no further activity had occurred. The 2001 change in presidential administrations 

resulted in vacancies in the five executive branch positions on the Commission, which were 

never filled. 

Defense Trade: The Use of Intellectual Property Generated at Department of 

Energy’s Laboratories to Satisfy Offset Requirements (GAO-01-271R, Jan. 8, 

2001)

GAO found that the use of Department of Energy laboratories’ intellectual property and 

services to satisfy defense contractors’ offset requirements has been limited. GAO identified 

14 instances from as early as 1995, all at one laboratory, where the laboratory’s intellectual 

property and services were involved in offset projects. The 14 instances, valued at about 

$200 million, involved 4 intellectual property licenses and 10 service arrangements through 

which laboratory personnel performed training, workshops, and other services for various 

foreign countries. In addition to the 14 offset projects, we were informed by three other 

laboratories of other offers to use the laboratories’ intellectual property and services of 

laboratory personnel to meet potential offset requirements. These offers did not result in 

specific projects because the weapon system sales did not take place. 

Defense Trade: Observations on Issues Concerning Offsets (GAO-01-278T, Dec. 

15, 2000) 

GAO provided a statement for the record to the National Commission on the Use of Offsets 

that summarized its work on defense offsets. GAO commented that views on the effects of 

offsets were divided between those that saw them as damaging to the U.S. industrial base 

and those that believed them an unavoidable part of doing business overseas. GAO also 

pointed out that demands for offsets had increased over time and that data to quantify the 

impact of offsets were not available. 

Defense Trade: Data Collection and Coordination on Offsets (GAO-01-83R, Oct. 

26, 2000) 

GAO determined that three federal agencies–the Departments of Commerce, Defense, and 

State–are required by law to report to Congress on defense offsets, although other federal 

agencies may collect related data. The Department of Commerce was the primary agency 

collecting data on offsets and is required to submit an annual report to Congress. GAO also 

found that federal agencies generally had not coordinated defense offset data collection 
Appendix II 

Page 10 GAO-04-954T 

efforts. This lack of coordination might not be significant because (1) the type of data being 

collected by each of the reporting agencies differs or (2) the time period for reporting to 

Congress differs. However, federal agencies were coordinating on reporting and some 

policy issues. 

Defense Trade: U.S. Contractors Employ Diverse Activities to Meet Offset 

Obligations (GAO/NSIAD-99-35, Dec. 18, 1998)

GAO examined over 100 offset transactions of six major U.S. defense contractors to 

determine the types of activities in which U.S. contractors engage to fulfill offset obligations. 

GAO found that companies had undertaken a variety of activities to satisfy offset 

requirements, such as coproduction and subcontracting related to defense items, technology 

transfers, in-country procurements, marketing assistance, financial assistance, and 

investments or joint ventures. Coproduction tied to a weapon sale, subcontracting for 

defense-related products, and technology transferred were transactions commonly found in 

the arrangements reviewed. The long-term supplier relationships that develop through these 

activities might have resulted in reduced business opportunities for some U.S. firms. 

Nonetheless, the value of the export sale, in the transactions examined, greatly exceeded the 

amount of work placed overseas. 

Military Offsets: Regulations Needed to Implement Prohibition on Incentive 

Payments (GAO/NSIAD-97-189, Aug. 12, 1997)

GAO reviewed the status of the State Department’s efforts to issue regulations implementing 

the Feingold Amendment (Pub. L. 103-236, section 733, Apr. 30, 1994, 22 U.S.C. § 2779a). The 

Feingold Amendment prohibits U.S. contractors from making incentive payments to a U.S. 

company or individual to induce or persuade the contractors to buy goods or services from a 

foreign country that has an offset agreement with the contractor. At the time of this report, 

the amendment applied only to the sale of defense articles or services sold under the Arms 

Export Control Act, not commercial sales.1

 GAO also found that the State Department had 

made little progress in developing the needed regulations. 

Military Exports: Offset Demands Continue to Grow (GAO/NSIAD-96-65, Apr. 12, 

1996)

GAO examined the experience of 9 U.S. companies with 10 countries in Asia, Europe, and 

the Middle East in 76 offset agreements. GAO found that, over a 10-year period, demands 

for offsets in foreign military procurement had increased in terms of requiring more 

technology transfer, higher offset percentages, and higher local content. Countries that 

previously did not require offsets now require them as a matter of policy, and many 

countries were now focused on longer-term offset deals to pursue industrial policy goals. 

Also, the type of offset project required varied according to each country’s industrial and 

economic development needs. For example, countries with developed economies 

encouraged offsets related to the defense or aerospace industries; whereas, countries with 

 

1

The Defense Offsets Disclosure Act of 1999 (Pub. L. 106-113, App. G § 1246) expanded the prohibition to include items 

licensed under the Arms Export Control Act, i.e., commercial sales. 
Appendix II 

Page 11 GAO-04-954T 

less industrialized economies generally pursued indirect offsets to help create profitable 

businesses and build their country’s infrastructure. 

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

Financing Program Funds (GAO/NSIAD-94-127, June 22, 1994)2

GAO examined offset transactions associated with weapon sales to countries that received 

grants or loans from the U.S. Foreign Military Financing Program. At the time of this review, 

four countries–Egypt, Greece, Israel, and Turkey–were the largest recipients of Foreign 

Military Financing Program funds. GAO found that all four countries were obtaining offsets 

in purchases funded by the Program. Thus, these countries benefited from the Program by 

(1) using U.S. funds to purchase weapon systems and (2) developing their industrial bases 

through offset requirements, such as technology transfer and directed subcontracting. At 

the time this report was issued, U.S. laws, regulations, and policies did not preclude offsets 

when purchasers were using Foreign Military Financing Program funds.3

 

Military Exports: Implementation of Recent Offset Legislation (GAO/NSIAD-91-

13, Dec. 17, 1990) 

GAO examined the implementation of the National Defense Authorization Act, Fiscal Year 

1989 (Pub. L. 100-456), which (1) directed the President to establish a comprehensive offset 

policy and enter into negotiations with foreign governments about limiting the adverse 

effects of offsets and (2) required U.S. industry to notify the Secretary of Defense of offset 

arrangements exceeding $50 million. GAO found that the President’s April 1990 policy 

statement on offsets did not specifically discuss technology transfers and the effects of 

offsets on U.S. industrial base subsectors, as required by the law. Additionally, the President 

directed that an interagency team consult–not negotiate–with foreign nations. Finally, at the 

time of the report, the Department of Defense had not developed regulations, in accordance 

with the law, requiring U.S. industry notification. 

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

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

GAO reviewed (1) the administration’s 1988 report to the Congress, Offsets in Military 

Exports, and (2) proposed amendments to the Defense Production Act of 1950, under Senate 

bill 1379. GAO found that the results of the methodology used to prepare the defense 

preparedness and employment sections of the 1988 report were of limited value because, 

although they provided an assessment of the overall impact of offsets on U.S. industry, they 

did not identify the effect on more specific industry sectors critical to defense. Additionally, 

the use of differing assumptions in applying that methodology to the sections on defense 

preparedness and employment made the analyses of the two sections inconsistent and 

 

2

GAO also testified on this issue before the Subcommittee on Commerce, Consumer Protection, and Competitiveness, 

House Committee on Energy and Commerce. See Military Sales: Concerns Over Offsets Generated Using U.S. Foreign 

Military Financing Program Funds (GAO/T-NSIAD-94-215, June 22, 1994). 3

The Defense Federal Acquisition Regulation Supplement partially addressed this in 1994 when it precluded U.S. 

companies from recovering offset-related costs if the sale was financed with nonrepayable foreign military financing 

grants.
Appendix II 

Page 12 GAO-04-954T 

appeared contradictory. Regarding Senate bill 1379 as well as the Defense Production Act 

itself, GAO stated the need to better provide for disclosing significant differing agency views 

in the annual report.4

 

4

 Senate bill 1379 was not passed, although similar language on offsets was included in the Defense Production 

Act Amendments of 1992 (Pub. L. 102-558). 
Appendix III 

Page 13 GAO-04-954T

GAO Reports on Issues Related to Defense Offsets, 1994-2004

Joint Strike Fighter Acquisition: Observations on the Supplier Base (GAO04-554, May 3, 2004) 

GAO reported that subcontract awards for the Joint Strike Fighter (JSF) had been 

made to 16 foreign countries. These included the eight partner countries and France, 

Germany, India, Israel, Poland, Russia, Spain, and Switzerland. However, the 

majority of subcontracts were with U.S. firms. The second major recipient of 

subcontract dollars on the JSF program was the United Kingdom. GAO also reported 

that the Buy American Act and the Preference for Domestic Specialty Metals clause 

implementing the Berry Amendment apply to the purchase of manufactured end 

products and that only one of the JSF prime contractors was under contract in the 

current phase of the program to deliver manufactured end products. GAO found that 

the information maintained by the JSF program office, while greater than required, 

was not sufficient to provide a complete picture of the supplier base. 

Joint Strike Fighter Acquisition: Cooperative Program Needs Greater 

Oversight to Ensure Goals are Met (GAO-03-775, July 21, 2003)1

GAO found that the JSF program faces management challenges that are made more 

difficult because of international participation. The Department of Defense (DOD) 

expects to benefit from partners’ financial contributions and access to foreign 

industrial capabilities, while partner countries expect to benefit from access to 

advanced U.S. technology and industrial return through contracts for their defense 

companies. Because the prime contractor bears the responsibility for managing 

partners’ industrial expectations, it will be forced to balance its ability to meet 

program milestones against meeting those expectations, which could be the key to 

securing future sales of the JSF for the company. While steps have been taken to 

position the program for success, additional attention on the part of DOD and the 

program office could help minimize the risks associated with implementing the 

international program. DOD and the program office need to maintain a significant 

knowledge base to enable adequate oversight that can ensure that the program is 

carried out to the satisfaction of both the United States and the international 

partners. 

Defense Trade: Contractors Engage in Varied International Alliances 

(GAO/NSIAD-00-213, Sept. 7, 2000)

GAO surveyed four large U.S. contractors, reviewed four weapon system programs, 

and studied three foreign-owned U.S. companies to determine (1) what types of 

 

1

 GAO also testified on this issue before the Subcommittee on National Security, Emerging Threats, 

and International Relations, House Committee on Government Reform. See Joint Strike Fighter 

Acquisition: Managing Competing Pressures Is Critical to Achieving Program Goals (GAO-03-

1012T, July 21, 2003). 
Appendix III 

Page 14 GAO-04-954T

alliances U.S. and European defense companies are establishing and the reasons for 

forming alliances; (2) why companies prefer certain types of alliances over others, 

and (3) whether U.S. laws, regulations, policies, and practices influence a company’s 

decision to form an alliance or the type of alliance chosen. GAO found that U.S. and 

European companies created teams, joint ventures, and subsidiaries and sometimes 

merged with or acquired another company to access and increase their 

competitiveness in another country’s market. Large U.S. companies preferred to 

engage in flexible alliances, such as teaming, whenever possible to increase company 

capabilities without forming permanent relationships, and access unique technology 

needed to meet military requirements. Companies that wanted to satisfy European 

governments’ desire for greater industrial participation formed joint ventures in 

which companies shared risk, decision making, work, and technology. Subsidiaries 

were not a favored approach for U.S. companies because in the fragmented European 

market a subsidiary in one country had no impact on market access in another 

country. However, European acquisitions of small and medium-sized U.S. defense 

companies were common because they provided access to the U.S. market, which is 

the world’s largest. The companies reviewed did not consider the U.S. legal and 

regulatory environment to be a major impediment to forming an alliance or to be a 

principal determinant of the type of alliance chosen. 

Defense Trade: Department of Defense Savings From Export Sales are 

Difficult to Capture (GAO/NSIAD-99-191, Sept. 17, 1999)

GAO reviewed the sales of five major weapon systems–The Hellfire Missile, 

Advanced Medium Range Air-to-Air Missile (AMRAAM), High Mobility Multipurpose 

Wheeled Vehicle (HMMWV), Black Hawk Helicopter, and Aegis Weapon System–to 

determine whether DOD is maximizing the cost benefits of export sales. DOD saved 

at least $342 million on its purchases of the five systems because either the 

department or its contractors also exported the systems to foreign governments. 

However, the full impact of contractor direct sales on the price of weapon systems 

could not be assessed because sufficient information was not available. Nonetheless, 

DOD could have realized greater savings had it (1) combined purchases for foreign 

governments with purchases for the U.S. military; (2) negotiated prices for export 

sales without giving up U.S. system price reductions; (3) required the contractor to 

perform work in the most economical manner, even if offset agreements were 

affected; or (4) ensured that the export prices always included a proportionate share 

of the sustaining engineering and program management costs. 

Defense Trade: Weaknesses Exist in DOD Foreign Subcontract Data 

(GAO/NSIAD-99-8, Nov. 13, 1998)

GAO reviewed (1) DOD’s reported trends on contracts performed outside the United 

States, (2) DOD’s use of foreign subcontract information, and (3) the completeness 

and accuracy of how DOD collects and manages its data. From fiscal year 1987 

through fiscal year 1997, DOD’s prime contract awards outside the United States 

remained about 5.5 percent of total DOD contract awards. These contracts tended to 

be concentrated in countries such as Germany, Italy, Japan, South Korea, and the 
Appendix III 

Page 15 GAO-04-954T

United Kingdom and in sectors such as services, fuel, and construction. DOD’s Office 

of Foreign Contracting and industrial base offices each collect and use foreign 

subcontract data but do not exchange data with one another. Additionally, the Office 

of Foreign Contracting, which is responsible for collecting foreign subcontract 

information from prime contractors and first-tier subcontractors, had no process or 

procedures to systematically ensure that contractors were complying with the foreign 

subcontract reporting requirement. Furthermore, the office lacked standards and 

procedures for managing its database, which had caused numerous data entry errors 

that compromised the database’s usefulness. 

U.S.-Japan Fighter Aircraft: Agreement on F-2 Production (GAO/NSIAD-97-

76, Feb. 11, 1997)

This report examined issues relating to the F-2 fighter aircraft program–known as the 

FS-X program during the development phase–such as (1) the proportion of 

production work that will be done in the United States, (2) the status of technology 

transfers from Japan to the United States and whether these technologies are of 

interest to U.S. government and industry, and (3) the program’s potential 

contributions to Japan’s future aerospace industry. Under the F-2 production 

agreements, signed on July 30, 1996, U.S. industry was expected to receive about 

40-percent workshare, based on estimated production costs and a constant exchange 

rate of 110 yen/dollar. The U.S. workshare was to be monitored through verifying 

that Japan has awarded contracts to U.S. companies, although the value of the 

contracts would not be tracked. Transfers of technology from Japan to the United 

States were generally in accordance with the development agreements, although U.S. 

access to some technologies has been limited because of disagreements over whether 

these technologies are derived from U.S. technical data–to which the United States is 

entitled to free and automatic access–or Japanese indigenous technologies–for which 

U.S. companies would have to pay a licensing fee to use. The United States 

conducted several technology visits to explore the potential benefits of F-2 

technologies but found that some technologies were too costly to produce or not 

advanced enough to be of interest. However, officials at one company indicated that 

tooling techniques from the F-2 program were being applied to the Joint Advanced 

Strike Technology program. DOD officials believed that the F-2 program would 

significantly enhance Japan’s systems integration capability but would not provide 

significant new capability in engine production. 

Export Controls: Sensitive Machine Tool Exports to China (GAO/NSIAD-97-

4, Nov. 19, 1996) 

In September 1994, the Department of Commerce approved an export of machine 

tools to China. The machine tools were to be used to produce parts for commercial 

aircraft that would be built in China under a contract with McDonnell Douglas but 

were subsequently diverted to a Chinese facility in Nanchang engaged in military 

production. GAO reviewed (1) the military and civil applications of the equipment 

and whether these military applications were important to China’s military 

modernization plans and (2) the process for approving the export licenses and how 
Appendix III 

Page 16 GAO-04-954T

the process addressed the risks associated with the export, and determined whether 

export control license conditions were violated and what the U.S. government’s 

response was. GAO found that, although the equipment was not state-of-the-art, it had 

military and civil applications, and China needed machine tools to upgrade both its 

military and civil aircraft production capabilities. The Commerce Department had 

approved the export, subject to conditions to mitigate the risk of diversion. The 

movement of the machine tools to Nanchang violated key conditions in the 

Commerce export licenses. However, before it could be misused, the diverted 

equipment was relocated to a facility associated with the McDonnell Douglas aircraft 

project. Commerce’s enforcement office did not formally investigate the export 

control violations until 6 months after the violations were first reported, and the 

Justice Department was overseeing a criminal investigation at the time of the report. 

Asian Aeronautics: Technology Acquisition Drives Industry Development 

(GAO/NSIAD-94-140, May 4, 1994)

GAO reviewed (1) the approaches that selected Asian nations used to develop their 

aeronautics industries, (2) the level of aeronautics development that each country 

had achieved, and (3) the implications of this development for the U.S. aeronautics 

industry. China, Japan, Indonesia, and Taiwan appeared intent on developing their 

own aeronautics industries by acquiring technologies developed in the West and 

improving them over time. These countries were developing their aeronautics 

industries using (1) strong government support; (2) the importation of technologies; 

(3) a strong emphasis on applied research rather than basic research; and (4) direct, 

synergistic links between military and civil aeronautics projects. The Asian countries 

reviewed often required technology to be transferred as a condition of purchasing 

Western equipment. These transfers can occur through such activities as 

subcontracting, licensed production, and codevelopment. The four countries differed 

in the level of aeronautics development, with Japan being the most advanced and 

China the slowest to develop, and each could be expected to continue to develop at 

varying rates because of differences in their political and economic environments. It 

appeared unlikely that Asian aeronautics companies would compete directly with 

U.S. aircraft builders in the immediate future, but some industry observers believed 

that in the long term, cooperative aeronautics technology transfers to Asia could help 

to create a new competitor for the U.S. aeronautics industry. 

(120367) 
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