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 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. 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.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 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. 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. 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. 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. 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. 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. 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. The following are examples of the offset projects that both U.S. and foreign firms have implemented or proposed in these developed economies: 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.