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pdfOffsets in Defense Trade
Sixteenth Study
Conducted Pursuant to Section 723 of the Defense
Production Act of 1950, as Amended
U.S. Department of Commerce
Bureau of Industry and Security
January 2012
Table of Contents
Executive Summary ..................................................................................................................... i
Background ................................................................................................................................. 1
Defense Export Sales with Offset Agreements........................................................................... 3
Offset Transactions ..................................................................................................................... 4
Impact of Offsets on the U.S. Industrial Base ............................................................................ 6
Utilization of Annual Report .................................................................................................... 17
Annex A Not for Public Release............................................................................................... 18
Annex B Not for Public Release ............................................................................................... 19
Annex C – Overview of Offset Transactions by Category, 1993-2010.................................... 20
Annex D Not for Public Release............................................................................................... 25
Annex E – Department of Defense’s Prime Contract Purchases of Manufactured Items
from U.S. and Foreign Firms, Fiscal Year 2010 ....................................................................... 26
Annex F – Glossary and Offset Example ................................................................................. 27
Annex G – Interagency Team Progress Report on Consultation with Foreign Nations
on Limiting the Adverse Effects of Offsets in Defense Procurement ...................................... 31
Executive Summary
This is the sixteenth annual report to Congress on the impact of offsets in defense trade prepared
by the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) pursuant to
Section 723 of the Defense Production Act (DPA) of 1950, as amended.1 Offsets in defense
trade encompass a range of industrial compensation arrangements required by foreign
governments as a condition of the purchase of defense articles and services from a non-domestic
source.
BIS collects data annually from U.S. firms involved in defense exports with associated offset
agreements in order to assess the impact of offsets in defense trade.2 In 2010, U.S. defense
contractors reported entering into 24 new offset agreements with 12 countries valued at $2.04
billion. The value of these agreements equaled 63.52 percent of the $3.21 billion in reported
contracts for sales of defense articles and services to foreign entities with associated offset
agreements. In 2010, U.S. firms reported 690 offset transactions (transactions conducted to
fulfill offset agreement obligations) with 28 countries with an actual value of $3.61 billion, and
an offset credit value of $4.42 billion.
This report notes that exports of defense articles and services can lower overhead costs for the
Department of Defense; help sustain production facilities, workforce expertise, and the supplier
base to support current and future U.S. defense requirements; promote interoperability of defense
systems, subsystems and components between the United States and friends and allies; and
contribute positively to U.S. international account balances. However, offset agreements and
associated offset transactions can negate some of the potential economic and industrial base
benefits accrued through defense exports if the offset activity displaces work that would
otherwise have been conducted in the United States.
The U.S. Government has established an interagency team to consult with foreign nations on
limiting the adverse effects of offsets in defense procurement. The data collected by BIS is
utilized in the multilateral and bilateral consultations of the team and its working group. This
report also includes an annual progress report on the work of the Interagency Working Group on
Offsets during the past year as an annex.
1
2
Codified at 50 U.S.C. app. § 2172 (2009).
Pursuant to 15 CFR Part 701 (2011).
i
1
Background
Offsets in defense trade encompass a range of industrial compensation arrangements required by
foreign governments as a condition of the purchase of defense articles and services from nondomestic suppliers. This mandatory compensation can be directly related to the purchased
defense article or service or it can involve activities or goods unrelated to the defense sale.
In 1984, the U.S. Congress amended the Defense Production Act (DPA) to require the President
to submit an annual report to Congress on the impact of offsets on the U.S. defense industrial
base.3 The Office of Management and Budget was the first agency appointed as the interagency
coordinator for preparing the report for Congress. In 1992, Congress amended the DPA and
directed that the Secretary of Commerce function as the President’s Executive Agent in
preparing the annual report to Congress.4 Section 723 of the DPA authorizes the Secretary of
Commerce to develop and administer the regulations necessary to collect offset data from U.S.
firms.5 The Secretary of Commerce has delegated this authority to the Bureau of Industry and
Security (BIS). BIS published its offset reporting regulation in 1994.6 BIS amended its offset
regulation in 2009.7
The U.S. Government policy on offsets in defense trade states that the government considers
offsets to be “economically inefficient and trade distorting,” and prohibits any agency of the U.S.
Government from encouraging, entering directly into, or committing U.S. firms to any offset
arrangement in connection with the sale of defense articles or services to foreign governments.8
U.S. defense contractors generally see offsets as a reality of the marketplace for companies
competing for international defense sales. Several U.S. defense contractors have informed BIS
that offsets are usually necessary in order to make defense sales – sales which can help support
the U.S. industrial base.
3
See Pub. L. 98-265, April 17, 1984, 98 Stat. 149.
See Pub. L. 102-558, Oct. 28, 1992, 106 Stat. 4198; see also Part IV of Exec. Order No. 12,919, 59 Fed. Reg.
29,525 (June 3, 1994).
5
Previously, the offset report was submitted pursuant to Sec. 309 of the Defense Production Act of 1950. However,
as a result of the Defense Production Act Reauthorization of 2009, Pub. L. 111-67, which rewrote Title III of the Act
and introduced a new Sec. 723 on offsets, the report is now submitted pursuant to Sec. 723. Section 723 is largely
the same in content as the prior Sec. 309.
6
See 59 Fed. Reg. 61,796 (December 2, 1994) codified at 15 C.F.R. § 701.
7
See 74 Fed. Reg. 68,136 (December 23, 2009) codified at 15 C.F.R. § 701.
8
Defense Production Act Amendments of 1992 (Pub. L. 102-558, Title I, Part C, §123).
4
1
This is the sixteenth report to Congress on offsets in defense trade that BIS has prepared. This
report reviews offset data for the 18-year period from 1993-2010.9 BIS has structured this report
similarly to reports published in December 2008, December 2009 and December 2010; the
chapters correspond with the sequence of events for defense sales involving offsets. In preparing
this report, BIS has incorporated data from other U.S. Government sources, including the
Department of Defense, the Bureau of the Census (Census), and the Bureau of Economic
Analysis (BEA).
BIS published a notice in the Federal Register on February 23, 2011 reminding the public that
U.S. firms are required to report annually on contracts for the sale of defense articles or defense
services to foreign governments or foreign firms that are subject to offset agreements exceeding
$5,000,000 in value, and offset transactions completed in performance of existing offset
commitments for which offset credit of $250,000 or more has been claimed from the foreign
representative.10 Twenty-five firms reported offset agreement and transaction data to BIS for
calendar year 2010. The data elements collected each year from industry are listed in Section
701.4 of the BIS offset reporting regulation and were referenced in the notice.
BIS prepared this report in consultation with the Departments of Defense, State and Labor, and
the Office of the United States Trade Representative. Collectively these agencies are members
of the interagency working group established by Congress chartered to consult with foreign
nations on limiting the adverse effects of offsets in defense procurement.11 A copy of the
Interagency Offset Working Group’s annual progress report to Congress is included in this report
under Annex G.
9
The initial offsets report, issued in 1996, covered the time period from 1993 to 1994; each subsequent offset report
added an additional year to the reporting period, with the exception of the eighth report, which added two years.
10
See 76 Fed. Reg. 10,005 (February 23, 2011).
11
See Pub. L. 108-195, Dec. 19, 2003, 117 Stat. 2892.
2
2
Defense Export Sales with Offset Agreements
In 2010, 12 U.S. firms reported entering into 24 contracts that had related offset agreements for
the sale of defense items and services. These contracts, signed with 12 countries, were valued at
$3.21 billion. The offset agreements were valued at $2.04 billion which equaled 63.5 percent of
the value of the signed defense export sales contracts. During 2010, reported offset agreements
ranged from a low of three percent of the defense export sales contract value to a high of 100
percent.
In 2010, almost half of the signed offset agreements reported by U.S. industry included penalties
for non-performance of the offset obligation. Those penalties ranged from liquidated damages,
increases in the obligation amount, reduction of the value of the signed export sales contract, or
the requirement for prime contractors to post performance bonds.
During 1993-2010, 52 U.S. firms reported entering into 763 offset-related defense export sales
contracts worth $111.59 billion with 47 countries. The associated offset agreements were valued
at $78.08 billion.
Table 2-1: Summary of Defense Export Sale Contract Values with Related Offset Agreements, 1993-2010
Offset Agreement
Percent of Offset
Contract Value
Value
Agreement to
U.S. Firms
Agreements
Countries
Year
($ millions)
($ millions)
Contract Value
(Number)
(Number)
(Number)
1993
$13,935.00
$4,784.43
34.33%
17
28
1994
$4,792.42
$2,048.72
42.75%
18
49
1995
$7,529.92
$6,102.58
81.04%
20
47
1996
$3,119.67
$2,431.62
77.94%
16
53
1997
$5,925.47
$3,825.53
64.56%
15
60
1998
$3,029.20
$1,768.15
58.37%
12
41
1999
$5,656.62
$3,456.89
61.11%
10
45
2000
$6,576.21
$5,704.81
86.75%
10
43
2001
$7,116.00
$5549.55
77.99%
12
35
2002
$7,406.23
$6,094.81
82.29%
12
41
2003
$7,293.05
$9,110.44
124.92%
11
32
2004
$4,927.51
$4,329.69
87.87%
14
40
2005
$2,259.87
$1,464.13
64.79%
8
25
2006
$5,088.53
$3,573.91
70.23%
14
46
2007
$6,735.74
$5,437.57
80.73%
11
44
2008
$6,286.16
$3,664.43
58.29%
15
53
2009
$10,700.53
$6,696.44
62.58%
13
57
2010
$3,209.39
$2,038.48
63.52%
12
24
Total
$111,587.54
$78,082.20
69.97%
52
763
Source: BIS Offset Database
Note: Due to rounding, totals may not add up exactly. Figures for certain previous years have been revised to reflect offset data recently
submitted by U.S. firms.
3
16
20
18
19
20
17
11
16
13
17
13
18
18
21
19
17
21
12
47
3
Offset Transactions
In 2010, 25 U.S. firms reported concluding 690 offset transactions with 28 countries to fulfill
offset agreement obligations. The offset transactions reported by U.S. firms had an actual value
of $3.61 billion in 2010 and a credit value of $4.42 billion. In 2010, U.S. industry reported that
89 offset transactions (12.9 percent of all transactions completed during the 12 month period)
had a multiplier greater than “one” applied and 53 transactions (7.7 percent of all transactions
completed during the 12 month period) had a multiplier of less than “one” applied.12
During 1993-2010, a total of 61 U.S. firms reported 11,353 offset transactions with 50 countries.
The actual total value of the offset transactions reported from 1993-2010 was $56.22 billion and
the total credit value was $66.94 billion. See Table 3-1.
Table 3-1: Summary of Offset Transactions, 1993-2010
Credit Offset
Transaction
Value
($ millions)
Year
Actual Offset
Transaction Value
($ millions)
1993
$1,897.88
$2,213.62
22
444
27
1994
$1,934.86
$2,206.09
21
566
26
1995
$2,890.49
$3,592.59
21
711
26
1996
$2,875.82
$3,098.02
22
634
26
1997
$2,720.58
$3,272.31
19
578
26
1998
$2,312.17
$2,623.21
20
582
29
1999
$2,059.73
$2,808.33
13
513
25
2000
$2,208.18
$2,846.44
16
627
24
2001
$2,559.08
$3,277.70
16
618
25
2002
$2,632.53
$3,301.01
18
735
26
2003
$3,565.51
$4,010.65
17
690
31
2004
$4,934.53
$5,365.74
16
710
33
2005
$4,721.98
$5,439.03
13
624
30
2006
$4,705.84
$4,906.42
16
661
28
2007
$3,804.53
$4,741.70
19
633
28
2008
$3,290.73
$4,768.23
22
671
30
2009
$3,495.37
$4,041.25
23
666
28
2010
$3,608.13
$4,423.52
25
690
28
Total
$56,217.94
$66,935.87
61
11,353
50
U.S. Firms
(Number)
Transactions
(Number)
Countries
(Number)
Source: BIS Offset Database
Note: Due to rounding, totals may not add up exactly. Figures for certain previous years have been revised to reflect
amended data from prime defense contractors.
12
A multiplier is a factor applied to the actual value of certain offset transactions to calculate the credit value earned.
Foreign purchasers use multipliers to provide firms with incentives to offer offsets that benefit targeted areas of
economic growth. When a multiplier greater than “one” is applied to the value of a service or product offered as an
offset, the defense firm receives a higher credit value toward fulfillment of an offset obligation than would be the
case without application of a multiplier. Conversely, foreign purchasers apply multipliers less than “one” to
discourage certain types of transactions.
4
U.S. firms are required to classify offset transactions by type (direct or indirect) and report to
BIS offset transactions by category specifically describing the nature of the transaction. In the
offset reporting regulation, BIS has categorized offset transactions as one of the following: coproduction, technology transfer, subcontracting, credit assistance, training, licensed production,
investment, purchases, and other.13 See Annex F for definitions of each offset transaction
category.
In 2010, direct offsets (transactions directly related to the defense export sale with an associated
offset agreement) accounted for 33.10 percent of the actual value of reported offset transactions.
Indirect offsets (transactions not directly related to the defense export sale with an associated
offset agreement) accounted for 63.11 percent of the actual value of reported offset
transactions.14 During 1993-2010, direct offsets accounted for 40.22 percent of the actual value
of the reported offset transactions, with indirect offsets accounting for 59.04 percent.
The top three offset transaction categories reported by industry for 2010 were purchases,
subcontracting, and technology transfer. These three categories represented 81.59 percent of all
offset transactions reported for 2010 based on quantity, 75.31 percent of the transactions based
on actual value, and 71.35 percent of the transactions based on credit value. Based on the total
number of transactions that included a multiplier greater than “one”, technology transfers
accounted for 30.34 percent and subcontracting and purchases accounted for 13.48 percent each.
The top three offset transaction categories reported by industry for the 18-year reporting period
(1993-2010) were also purchases, subcontracting, and technology transfer (on the basis of
quantity, actual value, and credit value). During 1993-2010, based on quantity, the top three
offset transaction categories that included multipliers greater than “one” were purchases,
technology transfer, and subcontracting.
See Annex C for a summary of reported offset transactions by type, category, value, and with
multipliers on an annual basis during the 18-year reporting period (1993-2010).
13
With respect to the export of any item or technology from the United States, U.S. export control laws apply.
Whether or not an export is associated with an offset agreement, U.S. exporters must comply with U.S. export
control requirements, which include, among other things, licensing requirements. License applications are carefully
reviewed by the appropriate U.S. Government agencies to ensure that the proposed export of an item (commodity,
software or technology) or service is consistent with U.S. laws, regulations, and foreign policy and national security
considerations. Where no license is required, U.S. exporters must comply with end-use and end-user restrictions.
14
The total does not equal 100 percent because a small number of reported offset transactions are not specified as
direct or indirect.
5
4
Impact of Offsets on the U.S. Industrial Base
Defense export sales can be an important component of U.S. defense contractors’ revenues and
further U.S. foreign policy and economic interests. Exports of major defense systems can also
lower overhead and unit costs for the Department of Defense (DOD); and help sustain
production facilities, workforce expertise, and the supplier base to support current and future
U.S. defense requirements. Exports also promote interoperability of defense systems between
the United States and friends and allies and contribute positively to U.S. international trade
account balances. However, offset agreements and associated offset transactions can negate
some of the potential economic and industrial base benefits accrued through defense exports if
the offset activity displaces work that otherwise would have been conducted in the United States
and/or if competitors are established in foreign countries.15
Studies and discussions between industry and U.S. Government officials indicate that, at times,
U.S. prime contractors develop long-term supplier relationships with foreign subcontractors
based on short-term offset requirements. These new relationships, combined with the mandatory
offset requirements related to offset agreements, can limit future business opportunities for U.S.
subcontractors and suppliers, with negative consequences for the domestic industrial base. Other
kinds of offsets, such as technology transfers, may increase research and development spending
and capital investment in foreign countries for defense or non-defense industries, thereby helping
to create or enhance current and future competitors to U.S. industry.
Export and Offset Activity Trends
According to Census, the value of U.S. merchandise exports totaled $1.28 trillion in 2010.
Based on end-use export data published by Census, defense-related merchandise exports totaled
$15.0 billion in 2010, or approximately 1.17 percent of total U.S. merchandise exports.16 In
2010, U.S. industry reported entering into offset-related defense export sales contracts worth
$3.21 billion. The value of U.S. merchandise exports cannot be directly compared with the value
of defense export sales contracts and offset agreements because export data reflect actual
shipments made during the calendar year and there is usually a delay of several years between
15
See GAO report on offset activities, “Defense Trade: U.S. contractors Employ Diverse Activities to Meet Offset
Obligations,” December 1998 (GAO/NSIAD-99-35), pp 4-5.
16
The value of defense exports includes the exports categorized under the following export end-use codes: (50000)
Military aircraft, complete; (50010) Aircraft launching gear, parachutes, etc.; (50020) Engines and turbines for
military aircraft; (50030) Military trucks, armored vehicles, etc.; (50040) Military ships and boats; (50050) Tanks,
artillery, missiles, rockets, guns, and ammunition; (50060) Military apparel and footwear; and (50070) Parts for
military-type goods. The end-use data series does not include exports of defense services. See
www.census.gov/foreign-trade/statistics.
6
the conclusion of a contract for a defense sale and the beginning of shipments. See Table 4-1 for
defense-related merchandise exports and offset activity trends from 2003–2010.
Year
Table 4-1: U.S. Merchandise Exports and Reported Offset Activity
Value of
DefenseReported
Related
Defense Export
DefenseExports as a
Sale Contracts
Value of
Total
Related
Percentage of
with Related
Reported
Merchandise
Merchandise
Total
Offset
Offset
Exports
Exports
Merchandise
Agreements
Agreements
($ millions)
($ millions)
Exports
($ millions)
($ millions)
Value of
Reported
Offset
Transactions
($ millions)
2003
2004
$724,770.98
$814,874.65
$11,509.11
$11,844.30
1.59%
1.46%
$7,293.05
$4,927.51
$9,110.44
$4,329.69
$3,565.51
2005
$901,081.81
$12,834.77
1.42%
$2,259.87
$1,464.13
$4,721.98
2006
$1,025,967.50
$16,628.72
1.62%
$4,951.97
$3,437.35
$4,705.84
2007
$1,148,198.72
$16,893.87
1.47%
$6,735.74
$5,437.57
$3,804.53
2008
$1,287,442.00
$16,594.06
1.29%
$6,286.16
$3,664.43
$3,290.73
2009
$1,056,042.96
$14,795.97
1.40%
$10,700.53
$6,696.44
$3,495.37
2010
$1,278,263.20
$14,999.94
1.17%
$3,209.39
$2,038.48
$3,608.13
$4,934.53
Sources: BIS Offset Database and the U.S. Census Bureau, End-Use Export Data and U.S. Trade in Goods – Balance of Payments Basis vs. Census
Basis
Economic Impact of Offsets on U.S. Industrial Activity and Employment
BIS amended its offset reporting regulation in 2009 to require that companies assign the
appropriate North American Industry Classification System (NAICS) code(s) to each offsetrelated defense export sales contract and to each offset transaction reported. Prior to 2009, BIS
required industry to classify offset transactions and defense export sales by broad industry
descriptions. The change to NAICS classification reporting has allowed BIS to gather more
accurate information on defense export sales with related offset agreements and offset
transactions. This enhances BIS’s ability to assess the economic impact of offsets on the U.S.
industrial base by allowing BIS to better utilize other data published by statistical agencies of the
U.S. Government.
Reported Defense Export Sales by Industry Sector
Industry sectors, as defined in the NAICS, include both manufacturing and non-manufacturing
(including services) sectors. During 2009-2010, 85.4 percent of the reported defense export sales
contracts with offset agreements were manufacturing-related based on the total value of reported
contracts (90.2 percent based on the total number of reported export sales contracts). The top
four industry sectors reported by industry during 2009-2010 were aircraft manufacturing
(NAICS 336411); other guided missile and space vehicle parts and auxiliary equipment
manufacturing (NAICS 336419); radio and television broadcasting and wireless communications
7
equipment manufacturing (NAICS 334220); and military armored vehicle, tank, and tank
component manufacturing (NAICS 336992). These four categories represented 58.0 percent of
all defense export sales contracts reported during 2009-2010 based on quantity and 70.3 percent
of the defense export sales contracts based on value. See Table 4-2.
Table 4-2: Reported Defense Export Sales by Industry Sector, 2009-2010
Industry Sector
$7,280,175,856
Percent of Total
Value of Defense
Export Sales
Contracts
52.34%
$949,000,000
$906,600,000
Value of Reported Defense
Export Sales Contracts
Manufacturing
Aircraft Manufacturing
Other Guided Missile and Space
Vehicle Parts and Auxiliary Equipment
Manufacturing
Radio and Television Broadcasting and
Wireless Communications Equipment
Manufacturing
Military Armored Vehicle, Tank, and
Tank Component Manufacturing
All Others
Total Manufacturing
Total Services and Other NonManufacturing
Total
No. of
Defense Export
Sales Contracts
Percent of the
Total Number of
Defense Export
Sales Contracts
22
27.16%
6.82%
10
12.35%
6.52%
13
16.05%
$647,000,000
4.65%
Data Suppressed
2.47%
$2,097,872,913
15.08%
26
32.10%
$11,880,648,769
85.41%
73
90.12%
$2,029,275,175
14.59%
Data Suppressed
9.88%
$13,909,923,944
100.00%
81
100.00%
Source: BIS Offset Database
Note: Certain information is suppressed so that company data are not disclosed.
Reported Offset Transactions by Industry Sector
During 2009-2010, 71.5 percent of reported offset transactions were manufacturing-related based
on the total value of reported offset transactions (75.5 percent based on the total number of
reported offset transactions). The top four industry sectors reported by industry during 20092010 were aircraft manufacturing (NAICS 336411); other aircraft parts and auxiliary equipment
manufacturing (NAICS 336413); aircraft engine and engine parts manufacturing (NAICS
336412); and search, detection, navigation, guidance, aeronautical, and nautical system and
instrument manufacturing (NAICS 334511). These four categories represented 41.4 percent of
all offset transactions reported for 2009-2010 based on quantity and 50.7 percent of offset
transactions based on value. See Table 4-3.
8
Table 4-3: Reported Offset Transactions by Industry Sector, 2009-2010
Industry Sector
190
Percent of the
Total Number of
Transactions
14.01%
15.02%
188
13.86%
10.18%
61
4.50%
Aircraft Manufacturing
$1,139,556,194
Percent of the
Total Value
16.04%
Other Aircraft Parts and Auxiliary Equipment
Manufacturing
$1,066,708,474
$723,207,643
Manufacturing
Aircraft Engine and Engine Parts Manufacturing
Search, Detection, Navigation, Guidance, Aeronautical,
and Nautical System and Instrument Manufacturing
Total Value
Number of
Transactions
674,107,752
9.49%
123
9.07%
$1,475,600,136
20.77%
462
34.07%
$5,079,180,199
71.50%
1,024
75.52%
Industrial Building Construction
$380,973,092
5.36%
8
0.59%
Engineering Services
$296,699,001
4.18%
49
3.61%
$285,729,209
4.02%
43
3.17%
$1,060,913,113
14.94%
232
17.11%
$2,024,314,415
28.50%
332
24.48%
$7,103,494,614
100.00%
1,356
100.00%
Other Manufacturing
Total Manufacturing
Services and Other Non-Manufacturing
Other Support Activities for Air Transportation
Other Services and Non-Manufacturing
Total Services and Other Non-Manufacturing
Total
Source: BIS Offset Database
BIS compared defense export sales contracts and offset transactions reported for 2009-2010 with
data published by the Census on total 2009-2010 U.S. shipments of selected manufacturing
industry sectors to provide context for the volume of offset activity relative to the U.S. economy.
Industry reported defense export sales contracts with 18 NAICS codes and offset transactions
with 138 NAICS codes. The comparison of 2009-2010 offset-related data with 2009-2010 U.S.
shipment data highlights that, while the reported defense export sales contracts accounted for a
significant percentage compared to U.S. shipment data in certain manufacturing industry sectors,
reported offset transactions data did not account for a significant percentage in other
manufacturing industry sectors. See Table 4-4.
9
Table 4-4: 2009 Reported Defense Export Sales and Reported Offset Transactions
and 2009-2010 U.S. Shipments by Industry Sector
Reported Defense Export Sales Contracts
$7,280,175,856
Total Value of
2009-2010 U.S.
Shipments
$170,106,237,000
Percent of Defense
Export Sales
Contracts to Total
U.S. Shipments
4.28%
Other Guided Missile and Space Vehicle Parts and
Auxiliary Equipment Manufacturing
$949,000,000
Data Suppressed
N/A
Broadcasting and Wireless Communications
Equipment Manufacturing
$906,600,000
$57,867,725,000
1.57%
Military Armored Vehicle, Tank, and Tank
Component Manufacturing
$647,000,000
Data Suppressed
N/A
$2,097,872,913
N/A
N/A
$11,880,648,769
$9,336,148,278,000
0.13%
Percent of
Transactions to Total
U.S. Shipments
0.67%
Industry Sector
Manufacturing
Value of Reported 2009-2010
Defense Export Sales
Contracts
Aircraft Manufacturing
All Others
Total Manufacturing
Reported Offset Transactions
Industry Sector
Aircraft Manufacturing
$1,139,556,194
Total Value of
2009-2010 U.S.
Shipments
$170,106,237,000
Other Aircraft Parts and Auxiliary Equipment
Manufacturing
$1,066,708,474
$64,488,851,000
1.65%
$723,207,643
$55,314,478,000
1.31%
Manufacturing
Value of Reported 2009-2010
Offset Transactions
Aircraft Engine and Engine Parts Manufacturing
Search, Detection, Navigation, Guidance,
Aeronautical, and Nautical System and Instrument
Manufacturing
Other Manufacturing
Total Manufacturing
$674,107,752
$93,787,933,000
0.72%
$1,475,600,136
$8,952,450,779,000
0.016%
$5,079,180,199
$9,336,148,278,000
0.054%
Source: BIS Offset Database and U.S. Census 2010 Annual Survey of Manufactures
Note: Certain shipment data is suppressed by the U.S. Census Bureau in accordance with federal law so that the operations of an
individual establishment or company are not disclosed.
10
Offset-Related Impact Analysis
Given the variety of the reported defense export sales contracts and the number of reported offset
transactions, it is not possible to determine precisely the impact of the defense export sales
contracts, offset agreements, and offset transactions on industrial activity and employment.
Utilizing BEA’s Benchmark Input-Output Accounts of the United States (I/O accounts)17, and
Census’ Annual Survey of Manufactures data,18 BIS has developed a method to approximate the
value added shipment and employment impact of offset activities across the United States
economic sectors.
During 2009-2010, industry reported defense export sales contracts valued at $11.88 billion in
manufacturing industry sectors for which Census publishes annual employment and value-added
data by NAICS code. Based on the I/O accounts, the value of inputs from all other industry
sectors associated with the $11.88 billion in defense export sales contracts was $12.33 billion as
shown in Table 4-5.19 For the purpose of this analysis, BIS has assumed that all the work
associated with the defense export sales contracts would be conducted in the United States.
However, this is not necessarily an accurate assumption. According to Census’ Annual Survey of
Manufactures data, this $12.33 billion in inputs would create or sustain 45,576 employment
opportunities.20 As shown in Table 4-5, the I/O accounts also demonstrate how these defense
export sales contracts have a positive multiplier effect not only on selected U.S. manufacturing
industry sectors but on hundreds of other U.S. economic sectors that supply inputs related to the
export sales contracts.
Conversely, for the purpose of this analysis, BIS considers offset transactions to have a negative
impact on U.S. inputs because the offset transactions are primarily conducted outside the United
States and represent activity that is not provided by sectors of the U.S. economy. For the
purpose of this analysis, BIS has also assumed that all the work associated with offset
transactions would have been conducted in the United States if there were no offset agreement in
17
The I/O accounts show the dollar value of inputs from all industries required to produce a dollar worth of an
industry’s output. The I/O accounts provide an extensive accounting of the production of goods and services by
each industry, which includes the goods and services purchased by each industry, the income earned in each
industry, and the distribution of sales for all goods and services to industries and final uses.
18
With the availability of 2010 offset data, BIS’ analysis under the revised method of measuring offset-related
impact is based on two years of data, which will compensate somewhat for annual fluctuations. The basis for
estimating the impact of offset activity on industrial activity and employment utilizes the NAICS codes data
reported by Census and the I/O accounts.
19
The multiplier effect in the I/O model occurs because the total inputs supplied to an industry sector consist of
direct inputs (the product and services directly used in generating the output) supplied to that industry sector plus the
indirect inputs (additional economic activities) created by the supplying industry sectors.
20
BIS analysis utilizes the 2010 Annual Survey of Manufactures, U.S. Census Bureau, November 2011.
11
place. This is not necessarily an accurate assumption. According to Census’ Annual Survey of
Manufactures data, the $5.08 billion for which Census publishes annual employment and valueadded data by NAICS code (valued at $5.16 billion with the I/O multiplier applied) in reported
offset transactions during 2009-2010 could have created or sustained 23,022 employment
opportunities if the work associated with those transactions were performed in the United States.
As shown in Table 4-5, the I/O accounts provides an approximation of the multiplier effect
across all U.S. economic sectors had these transaction been performed in the United States.
Table 4-5 also shows the net impact in terms of inputs across all sectors of the U.S. economy
resulting from offset-related defense export sales contracts. BIS derived this information by
subtracting the reported offset transaction-related data from the reported defense export sales
contracts-related data. In ten manufacturing industry sectors shown in Table 4-5, as well as a
number of other industry sectors captured in an “all other” category, the data indicate a negative
impact on U.S. employment opportunities. However, the results indicate an overall net gain on
U.S. manufacturing opportunities arising from export sales contracts with associated offset
agreements, resulting in a positive $7.2 billion in added “input” opportunities for the U.S.
industrial base, and a net gain of 22,553 in employment opportunities created or sustained during
the 2009-2010 period. As a caveat, as noted above, certain NAICS categories associated with
offset-related export contracts and transactions are not included in the I/O data provided by BEA.
Therefore, the net employment impact analysis may be slightly understated for both reported
export sales contracts and reported offset transactions.
12
Table 4-5: Employment Opportunities Created or Sustained in Manufacturing Industry Sectors, 2009-2010
Positive Economic Activities as Defined by Export Sales Contracts Benefiting U. S. Prime Contractors
Export Sales Contracts in Manufacturing Industry Sectors
Aircraft manufacturing
Total Inputs
$8,017,814,922
Value-added
Output /
Employee
$303,880
Broadcasting and wireless communications equipment manufacturing
Employment
Opportunities
Created or
Sustained
26,385
$1,392,043,412
$241,066
5,775
Other aircraft parts and auxiliary equipment manufacturing
$617,318,658
$200,181
3,084
Military armored vehicle, tank, and tank component manufacturing
$677,840,355
$236,651
2,864
Aircraft engine and engine parts manufacturing
$653,988,517
$237,981
2,748
Guided missile and space vehicle manufacturing
$422,094,942
$211,689
1,994
Search, detection, and navigation system and instrument manufacturing
$405,716,633
$233,821
1,735
Other engine equipment manufacturing
$72,460,044
$162,989
445
Other electronic component manufacturing
$30,401,445
$114,114
266
Other commercial and service industry machinery manufacturing
$32,991,327
$138,642
238
All Others
Total
$5,682,150
42
$12,328,352,406
45,576
Negative Economic Activities as Defined by Offset Transactions
Total Inputs
$1,189,629,185
Value-added
Output /
Employee
$303,880
Employment
Opportunities
Created or
Sustained
3,915
$253,775,863
$241,066
1,053
$1,299,974,331
$200,181
6,494
$52,329,159
$236,651
221
$1,099,452,798
$237,981
4,620
$54,259,539
$211,689
256
$734,669,119
$233,821
3,142
$6,831,322
$162,989
42
Other electronic component manufacturing
$43,688,454
$114,114
383
Other commercial and service industry machinery manufacturing
$65,504,282
$138,642
472
Offset Transactions Related to Manufacturing Industry Sectors
Aircraft manufacturing
Broadcasting and wireless communications equipment manufacturing
Other aircraft parts and auxiliary equipment manufacturing
Military armored vehicle, tank, and tank component manufacturing
Aircraft engine and engine parts manufacturing
Guided missile and space vehicle manufacturing
Search, detection, and navigation system and instrument manufacturing
Other engine equipment manufacturing
All Others
Total
$360,595,486
2,424
$5,160,709,540
23,022
Net Impact of Economic Impact from Export Sales Contracts and Offset Transactions
Value-added
Output /
Employee
Net Employment
Opportunities
Created or
Sustained
22,470
Net Employment Opportunities Created or Sustained
Aircraft manufacturing
Total Inputs
$6,828,185,737
Broadcasting and wireless communications equipment manufacturing
$1,138,267,549
4,722
-$682,655,673
-3,410
Other aircraft parts and auxiliary equipment manufacturing
Military armored vehicle, tank, and tank component manufacturing
$625,511,196
2,643
Aircraft engine and engine parts manufacturing
-$445,464,281
-1,872
Guided missile and space vehicle manufacturing
$367,835,403
1,738
-$328,952,486
-1,407
Search, detection, and navigation system and instrument manufacturing
Other engine equipment manufacturing
$65,628,722
403
Other electronic component manufacturing
-$13,287,009
-116
Other commercial and service industry machinery manufacturing
-$32,512,955
-235
-$354,913,336
-2,382
$7,167,642,867
22,553
All Others
Total
BIS Offset Database and BEA's Benchmark Input-Output Accounts of the United States
13
Research and Development and Offset- Related Technology Transfer Trends
Comparing reported offset transactions involving technology transfer to total research and
development (R&D) expenditures in the United States provides, for purposes of context, a
measure of the magnitude of this type of offset activity. Because 2009 and 2010 total U.S
research and development data was not available from the National Science Foundation, 2008
data will be utilized to illustrate the relationship between the offset-related technology transfer
and total U.S. research and development expenditures. Table 4-6 provides the available data for
the 2003-2010 period.21 For example, as shown in Table 4-6, in 2008, the value of reported
offset transactions that involved technology transfers was $985.0 million, equivalent to 0.24
percent of total R&D spending in the United States.22
Table 4-6: Trends in U.S. R&D Spending and Reported Offset Transactions Involving Technology Transfer,
2003-2010
Year
2003
Reported Technology
Transfer
Offset Transactions
Total Private and Federal R&D
Expenditures
Technology Transfer Transactions as a
Percentage of R&D Spending
$547,446,305
$288,324,000,000
0.19%
2004
$669,457,809
$299,201,000,000
0.22%
2005
$1,479,648,075
$322,104,000,000
0.46%
2006
$717,679,906
$347,046,000,000
0.21%
2007
$709,925,212
$372,527,000,000
0.19%
2008
$958,313,688
$397,616,000,000
0.24%
2009
$986,715,904
N/A
N/A
2010
$874,836,815
N/A
N/A
Sources: BIS Offset Database and the National Science Foundation, Division of Science Resources Statistics, R&D: 2010.
Note: 2009-2010 R&D expenditure data was not released prior to publication of this report.
BIS does not collect data from industry on the specific technologies transferred as a result of
offset agreements and offset transactions. However, anecdotal information obtained from
industry suggests that “cutting edge” or nascent technologies under development in the United
States are less likely to be transferred to foreign companies in fulfillment of offset obligations
than are mature technologies. Regardless, any transfer of export-controlled technology must be
approved through the U.S. Government’s export licensing processes. The existence of an offset
agreement does not allow companies to circumvent the established licensing processes managed
by the Departments of Commerce and State, in consultation with DOD.
21
2008 aerospace R&D data is the latest available from the National Science Foundation.
This figure does not mean that U.S. industry lost 0.24 percent of its R&D spending in 2008. Rather, the number
indicates that the actual value of offset transactions involving technology transfer was equivalent to 0.24 percent of
domestic R&D spending in this sector.
22
14
Domestic Defense Productive Capability
DOD has stated that the industrial base on which it draws must be reliable, cost-effective, and
sufficient to meet strategic objectives. DOD’s ultimate objective is to have reliable, costeffective, and sufficient industrial capabilities to develop, produce, and support the defense
material necessary to support national defense.23
DOD is willing to use reliable foreign suppliers when such use offers comparative advantages in
performance, cost, schedule, or coalition operations. DOD has negotiated bilateral Reciprocal
Defense Procurement Memoranda of Understanding (RDP MOUs) with 21 countries. The RDP
MOUs include procurement principles and procedures that provide transparency and access for
each country’s industry to the other country’s defense market. The RDP MOU relationship
facilitates defense cooperation and promotes rationalization, standardization, and interoperability
of defense equipment. For example, based on these RDP MOUs, the Secretary of Defense or
Deputy Secretary of Defense has made blanket public interest exceptions to the Buy American
Act (41 U.S.C. 10a-d) for 20 of the 21 RDP MOU partners. As a result of these blanket
exceptions, these 20 countries’ products are evaluated on the same basis as domestic products in
competitive DOD procurements.
Despite the capabilities that may accrue to foreign firms resulting from offset agreements signed
with U.S. industry, purchases from foreign firms do not represent a significant share of DOD’s
total purchases.24 According to DOD, its prime contract purchases of manufactured items
categorized under DOD Claimant Program codes A1A-A7 (which exclude most commercial
manufactured items) totaled $106.80 billion in Fiscal Year 2010. Of the $106.80 billion,
contracts made with U.S. entities totaled $102.46 billion, while DOD prime contracts made with
foreign entities totaled $4.34 billion, accounting for approximately 4.07 percent of the total.
DOD reports that in Fiscal Year 2010, its prime contract purchases of manufactured items
overall totaled approximately $140.75 billion. DOD reports that the value of its procurement of
U.S.-origin goods (from U.S. sources) totaled approximately $133.0 billion in Fiscal Year 2010,
compared with DOD purchases of manufactured goods from foreign sources which totaled $7.75
billion (5.5 percent of the total).25
23
See Office of the Under Secretary of Defense (Acquisition, Technology, and Logistics), Office of Manufacturing
and Industrial Base Policy, Annual Industrial Capabilities Report to Congress, September 2011.
24
For example, see Office of the Under Secretary of Defense (Acquisition, Technology, and Logistics), Report to
Congress – Department of Defense FY 2010 Purchases of Supplies Manufactured Outside the United States, May
2011.
25
Id.
15
See Annex E for an overview of DOD’s Fiscal Year 2010 prime contract purchases of
manufactured items from U.S. and foreign firms, by Claimant Program codes.
16
5
Utilization of Annual Report
BIS is an active participant in the Interagency Working Group on Offsets’ (IaWG) work to
engage foreign nations on ways to limit the adverse effects of offsets. BIS consulted with
members of the IaWG in completing this report and has briefed the IaWG on the report.
The data contained in this report is also considered and utilized by representatives of the United
States during bilateral and multilateral discussions with foreign governments to limit the adverse
effects of offsets.
For instance, aggregated data was used by IaWG members during discussions on offsets with the
European Defense Agency (EDA) during the year. In 2010, U.S. firms reported entering into six
new offset agreements with members of the EDA valued at $736.3 million. EDA members
accounted for 25 percent of the new offset agreements reported by U.S. firms in 2010 based on
quantity and 36.12 percent based on value. In 2010, U.S. firms reported 205 offset transactions
with EDA members with an actual value of $1.22 billion, and an offset credit value of $1.69
billion. The EDA members accounted for 29.71 percent of all offset transactions reported by
U.S. firms in 2010 based on quantity and for 33.86 percent of the overall offset transaction value.
See Annex G for the IaWG’s 2011 progress report on consultations with foreign nations on
limiting the adverse effects of offsets in defense procurement.
17
Annex A – Not For Public Release
18
Annex B – Not For Public Release
19
Annex C – Overview of Offset Transactions by Category, 1993-2010
Table C-1: Offset Transactions by Type
Year
Total
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Total
$1,897.88
$1,934.86
$2,890.49
$2,875.82
$2,720.58
$2,312.17
$2,059.73
$2,208.18
$2,559.08
$2,632.53
$3,565.51
$4,934.53
$4,721.98
$4,705.84
$3,804.53
$3,290.73
$3,495.37
$3,608.13
$56,217.94
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Total
$2,213.62
$2,206.09
$3,592.59
$3,098.02
$3,272.31
$2,623.21
$2,808.33
$2,846.44
$3,277.70
$3,301.01
$4,010.65
$5,365.74
$5,439.03
$4,906.42
$4,741.70
$4,768.23
$4,041.25
$4,423.52
$66,935.89
Direct
Indirect
Actual Value ($ millions)
$636.65
$1,197.37
$628.17
$1,202.38
$1,108.76
$1,756.84
$1,248.79
$1,625.64
$1,041.70
$1,657.52
$1,469.68
$842.37
$699.79
$1,348.52
$785.63
$1,411.91
$944.15
$1,614.93
$958.25
$1,672.95
$1,112.99
$2,446.96
$2,535.71
$2,398.33
$1,797.53
$2,924.45
$1,688.94
$2,998.60
$1,890.09
$1,905.57
$1,570.88
$1,719.23
$1,299.22
$2,190.87
$1,194.19
$2,276.94
$22,611.12
$33,191.36
Credit Value ($ millions)
$737.40
$1,407.54
$802.47
$1,294.81
$1,302.57
$2,250.70
$1,182.01
$1,880.01
$1,183.49
$2,039.12
$1,629.41
$991.27
$1,133.99
$1,604.02
$1,146.35
$1,689.46
$1,295.60
$1,982.10
$1,127.74
$2,171.94
$1,215.47
$2,783.23
$2,664.81
$2,700.43
$1,870.94
$3,568.09
$1,634.97
$3,257.64
$2,498.80
$2,226.24
$2,755.59
$2,009.31
$1,598.42
$2,437.55
$1,779.69
$2,604.83
$27,559.72
$38,898.29
Unspecified
Direct
$63.85
$104.32
$24.89
$1.40
$21.37
$0.13
$11.43
$10.63
$1.33
$5.56
$0.50
$18.30
$8.87
$0.62
$5.28
$137.00
$415.47
33.55%
32.47%
38.36%
43.42%
38.29%
63.56%
33.98%
35.58%
36.89%
36.40%
31.22%
51.39%
38.07%
35.89%
49.68%
47.74%
37.17%
33.10%
40.22%
$68.68
$108.82
$39.31
$36.00
$49.71
$2.54
$70.32
$10.63
$1.33
$11.96
$0.50
$13.80
$16.67
$3.34
$5.28
$39.00
$477.89
33.31%
36.38%
36.26%
38.15%
36.17%
62.12%
40.38%
40.27%
39.53%
34.16%
30.31%
49.66%
34.40%
33.32%
52.70%
57.79%
39.55%
40.23%
41.17%
Source: BIS Offset Database
Note: Due to rounding, totals may not add up exactly. Figures for certain previous years have been revised.
20
Indirect
Unspecified
% Distribution
63.09%
3.36%
62.14%
5.39%
60.78%
0.86%
56.53%
0.05%
60.93%
0.79%
36.43%
0.01%
65.47%
0.56%
63.94%
0.48%
63.11%
63.55%
0.05%
68.63%
0.16%
48.60%
0.01%
61.93%
63.72%
0.39%
50.09%
0.23%
52.25%
0.02%
62.68%
0.15%
63.11%
3.80%
59.04%
0.74%
% Distribution
63.59%
3.10%
58.69%
4.93%
62.65%
1.09%
60.68%
1.16%
62.31%
1.52%
37.79%
0.10%
57.12%
2.50%
59.35%
0.37%
60.47%
65.80%
0.04%
69.40%
0.30%
50.33%
0.01%
65.60%
66.40%
0.28%
46.95%
0.35%
42.14%
0.07%
60.32%
0.13%
58.89%
0.88%
58.11%
0.71%
Table C-2: Number of Offset Transactions by Type and with Multipliers
Number of Transactions
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Total
Total
Direct
444
566
711
634
578
582
513
627
618
735
690
710
624
661
633
671
666
690
11,353
160
178
204
228
202
241
212
216
225
200
180
375
210
288
294
226
238
207
4,084
Indirect
280
383
505
404
372
340
296
409
393
534
506
334
414
371
337
443
427
482
7,230
Unspecified
4
5
2
2
4
1
5
2
1
4
1
2
2
2
1
1
39
Transactions with
Multipliers Greater than 1
Percent of
Number of
Total
Transactions Transactions
66
14.9%
83
14.7%
110
15.5%
64
10.1%
61
10.6%
87
15.0%
87
17.0%
83
13.2%
115
18.6%
84
11.4%
64
9.3%
74
10.4%
52
8.3%
33
5.0%
88
13.9%
74
11.0%
60
9.0%
89
12.9%
1,374
12.1%
Source: BIS Offset Database
Note: Because of rounding, totals may not add up exactly. Figures for certain previous years have been revised.
Table C-3: Number of Offset Transactions by Category and Type and with Multipliers
Number of Transactions, 1993-2010
Transaction
Category
Co-production
Credit Assistance
Investment
Licensed Production
Other
Purchase
Subcontracting
Technology Transfer
Training
Total
Total
557
165
234
133
728
5,372
2,517
1,317
330
11,353
Direct
Indirect
557
14
33
78
161
2,517
570
154
4,084
Source: BIS Offset Database
21
151
196
53
559
5,372
728
171
7,230
Unspecified
5
2
8
19
5
39
Number of
Transactions
with Multipliers
Greater than 1
27
26
77
12
189
412
189
313
129
1,374
Table C-4: Offset Transactions by Category, Type, and Value, 1993-2010
Transaction
Category
Co-production
Credit Assistance
Investment
Licensed Production
Other
Purchase
Subcontracting
Technology Transfer
Training
Total
Total
$3,712.56
$2,065.51
$1,680.90
$952.49
$3,650.02
$20,628.58
$11,986.43
$10,450.38
$1,091.07
$56,217.94
Transaction
Category
Co-production
Credit Assistance
Investment
Licensed Production
Other
Purchase
Subcontracting
Technology Transfer
Training
Total
Total
$4,188.53
$2,309.81
$3,024.14
$1,170.57
$5,761.00
$22,511.71
$13,536.53
$12,568.37
$1,865.24
$66,935.89
Actual Values ($ millions)
Dir.
Ind.
$3,712.56
$220.86
$1,844.66
$331.24
$1,272.20
$415.32
$513.13
$672.17
$2,954.22
- $20,628.58
$11,986.43
$4,737.42
$5,424.47
$535.10
$554.10
$22,611.12 $33,191.36
Credit Values ($ millions)
Dir.
Ind.
$4,188.53
$290.11
$2,019.70
$672.84
$2,223.14
$439.24
$700.09
$1,816.68
$3,858.06
- $22,511.71
$13,536.53
$5,677.76
$6,671.75
$938.03
$913.84
$27,559.72 $38,898.29
Unsp.
$77.46
$24.03
$23.63
$288.49
$1.86
$415.47
Unsp.
$128.16
$31.23
$86.26
$218.86
$13.38
$477.89
Source: BIS Offset Database
Note: Due to rounding, totals may not add up precisely.
22
Total
6.60%
3.67%
2.99%
1.69%
6.49%
36.69%
21.32%
18.59%
1.94%
100.00%
Total
6.26%
3.45%
4.52%
1.72%
8.61%
33.63%
20.22%
18.78%
2.79%
100.00%
Percent by Column Total
Dir.
Ind.
16.42%
0.98%
5.56%
1.46%
3.83%
1.84%
1.55%
2.97%
8.90%
62.15%
53.01%
20.95%
16.34%
2.37%
1.67%
100.00%
100.00%
Percent by Column Total
Dir.
Ind.
15.20%
1.05%
5.19%
2.44%
5.72%
1.59%
1.80%
6.59%
9.92%
57.87%
49.12%
20.60%
17.15%
3.40%
2.35%
100.00%
100.00%
Unsp.
18.64%
5.78%
5.69%
69.44%
0.45%
100.00%
Unsp.
26.82%
6.53%
18.05%
45.80%
2.80%
100.00%
Table C-5: Offset Transactions by Category ($ thousands)
Co-Production
Year
Actual
Value
Credit
Value
Credit Assistance
No. of
Transactions
Actual
Value
Credit
Value
$340,492
$366,794
Investment
No. of
Transactions
1993
$35,550
$35,550
6
12
1994
$111,895
$112,185
10
$3,494
$21,639
3
1995
$86,898
$86,898
11
$374,248
$468,930
20
1996
$16,952
$22,052
3
$244,270
$258,970
15
1997
$28,339
$28,339
22
$168,410
$168,410
1998
$94,332
$98,283
30
$43,920
$43,920
1999
$47,803
$47,803
19
$16,888
2000
$27,691
$27,691
15
2001
$16,575
$80,300
2
2002
$0
$0
2003
$260,250
2004
2005
Actual
Value
Credit
Value
$41,499
Licensed Production
No. of
Transactions
Actual
Value
Credit
Value
Other
No. of
Transactions
Actual
Value
Credit
Value
No. of
Transactions
$41,500
13
$37,851
$41,451
8
$50,967
$68,168
17
$93,265
$98,474
17
$45,424
$67,629
15
$148,742
$163,370
36
$117,152
$363,556
9
$5,110
$4,965
2
$197,760
$295,647
51
$10,656
$10,656
2
$26,425
$26,425
1
$113,266
$257,647
42
20
$85,126
$271,538
6
$0
$0
0
$454,159
$487,010
64
4
$0
$0
0
$0
$0
0
$144,550
$157,246
54
$16,888
3
$28,475
$219,079
9
$460
$23,000
2
$303,704
$713,077
65
$9,952
$9,952
2
$56,233
$108,521
8
$9,816
$9,816
1
$302,950
$388,093
50
$4,726
$8,027
3
$61,825
$91,837
8
$25,000
$25,000
1
$48,656
$82,960
14
0
$29,453
$29,453
1
$24,484
$85,234
12
$0
$0
0
$135,848
$149,847
28
$266,465
18
$51,610
$51,610
6
$175,281
$228,813
14
$1,500
$0
1
$145,262
$297,232
34
$1,395,766
$1,268,666
105
$141,234
$170,453
20
$162,077
$393,819
15
$13,679
$13,679
3
$211,266
$273,924
33
$309,409
$322,204
74
$61,028
$76,828
10
$185,819
$192,387
19
$123,836
$268,326
5
$95,146
$152,360
34
2006
$383,587
$432,089
93
$442,028
$453,521
28
$118,733
$124,593
17
$62,000
$64,000
3
$174,010
$136,966
29
2007
$398,250
$496,255
83
$76,997
$84,164
8
$106,953
$158,986
21
$2,972
$2,972
1
$662,926
$1,046,377
64
2008
$243,888
$519,084
51
$41,641
$54,171
5
$116,063
$168,033
22
$10,393
$10,393
2
$226,486
$626,111
44
2009
$107,080
$107,080
13
$6,377
$6,377
3
$111,923
$160,883
17
$207,742
$214,696
43
$118,210
$242,668
31
2010
$148,300
$237,583
2
$8,745
$19,700
2
$185,338
$306,236
25
$380,277
$398,213
45
$116,107
$222,297
38
23
Table C-5: Offset Transactions by Category ($ thousands) (continued)
Purchase
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Actual
Value
Credit
Value
$703,850
$865,524
$694,506
$735,909
Subcontracting
No. of
Transactions
Actual
Value
Credit
Value
226
$336,368
$405,101
288
$267,518
$319,081
Technology Transfer
No. of
Transactions
Training
Actual
Value
Credit
Value
No. of
Transactions
Actual
Value
Credit
Value
No. of
Transactions
109
$300,307
$320,504
32
$50,994
$69,027
21
95
$462,569
$495,849
68
$107,448
$191,956
34
$863,425
$932,133
367
$830,419
$887,985
147
$334,328
$395,024
71
$81,146
$157,453
33
$1,090,104
$1,116,434
298
$721,298
$733,511
175
$476,657
$426,849
60
$176,196
$245,478
38
$837,071
$894,517
245
$848,489
$868,412
141
$289,527
$492,451
67
$9,460
$61,636
13
$582,198
$595,910
253
$1,215,476
$1,244,506
164
$196,765
$413,335
63
$34,929
$70,007
14
$869,591
$883,930
203
$452,464
$476,331
140
$336,018
$396,856
69
$4,330
$31,370
3
$840,845
$915,622
299
$598,427
$832,488
149
$293,377
$430,962
76
$68,887
$123,299
27
$1,132,958
$1,250,367
331
$721,569
$921,615
155
$529,343
$788,885
89
$18,427
$28,710
15
$1,302,590
$1,690,401
453
$826,348
$929,994
163
$287,465
$383,076
66
$26,344
$33,004
12
$1,790,932
$1,835,692
422
$506,058
$602,288
101
$547,446
$563,306
75
$87,170
$165,247
19
$1,351,878
$1,463,620
213
$848,650
$849,886
207
$669,458
$782,957
85
$140,524
$148,739
29
$1,975,390
$2,393,048
286
$485,233
$508,445
91
$1,479,648
$1,504,264
100
$6,473
$21,167
5
$2,029,212
$2,280,352
252
$690,033
$690,033
150
$717,680
$637,598
75
$88,558
$87,265
14
$916,823
$963,306
219
$879,561
$921,161
169
$709,925
$905,483
56
$50,120
$162,998
12
$940,543
$956,295
327
$680,119
$863,793
121
$958,314
$1,462,126
86
$73,283
$108,226
13
$1,469,915
$1,463,299
322
$472,836
$675,964
119
$986,716
$1,093,956
105
$14,571
$76,325
13
$1,236,751 $1,275,349
368
$605,563
$805,934
121
$874,837
Source: BIS Offset Database
Note: Figures for certain previous years have been revised to reflect offset data recently submitted by U.S. firms.
$1,074,883
74
$52,207
$83,329
15
24
Annex D – Not For Public Release
25
Annex E – Department of Defense’s Prime Contract Purchases of Manufactured Items from
U.S. and Foreign Firms, Fiscal Year 2010
DOD Claimant Program
A1A – Air Frames & Spares
A1B – Aircraft Engine & Spares
Total
Purchases
Foreign
Purchases
U.S.
Purchases
Foreign
Purchases as
Percent of
Total
$28,481,176,409
$167,517,721
$28,313,658,688
0.59%
$4,478,442,764
$30,587,951
$4,447,854,813
0.68%
$6,268,449,714
$314,611,068
$5,953,838,646
5.02%
A2 – Missile & Space Systems
$11,556,454,108
$57,666,704
$11,498,787,404
0.50%
A3 – Ships
$10,839,712,669
$44,176,107
$10,795,536,562
0.41%
A4A – Combat Vehicles
$13,337,259,671
$2,901,462,326
$10,435,797,345
21.75%
A1C – Other Aircraft Equipment
A4B – Non Combat Vehicles
$6,602,562,848
$76,421,592
$6,526,141,256
1.16%
A5 – Weapons
$3,508,712,520
$349,087,579
$3,159,624,941
9.95%
A6 – Ammunition
A7 – Electronic &
Communication Equipment
A8C – Separately Procured
Containers and Handling
Equipment
A9 – Textiles, Clothing, and
Equipage
$4,351,415,291
$185,847,224
$4,165,568,067
4.27%
$17,375,559,266
$217,235,661
$17,158,323,605
1.25%
$18,247,637
$204,826
$18,042,811
1.12%
$2,888,742,478
$55,166,402
$2,833,576,076
1.91%
$38,286,459
$3,184,161
$35,102,298
8.32%
B3 – Transportation Equip.
$3,750,911
$5,254
$3,745,657
0.14%
B9 – Production Equipment
$270,844,109
$1,977,715
$ 268,866,394
0.73%
C9A – Construction Equipment
C9B – Medical & Dental Supplies
and Equipment
C9C – Photographic Supplies and
Equipment
C9D – Materials Handling
Equipment
C9E – All Other Supplies and
Equipment
$599,933,340
$4,854,687,633
$596,983,810
0.49%
$4,878,935,075
$24,247,442
$4,854,687,633
0.50%
$43,035,752
$419,645
$42,616,108
0.98%
$128,990,315
$30,338,512
$98,651,803
23.52%
$3,306,810,489
$3,285,023,109
$21,787,380.14
99.34%
$4,343,710
($8,075)
$4,351,785
-0.19%
$140,747,258,292
$7,748,122,453
$132,999,135,839
5.50%
B1 – Building Supplies
Unknown - Not coded
Total
Source: Office of the Under Secretary of Defense (Acquisition, Technology, and Logistics), Report to Congress –
Department of Defense FY 2010 Purchases of Supplies Manufactured Outside the United States, May 2011.
26
Annex F – Glossary and Offset Example
Actual Value of Offset Transactions: The U.S. dollar value of the offset transaction without taking
into account multipliers or intangible factors.
Co-production: Transactions that are based upon government-to-government agreements
authorizing the transfer of technology to permit foreign companies to manufacture all or part of
U.S.-origin defense articles. Such transactions are based upon an agreement specifically referenced
in Foreign Military Sales (FMS) Letters of Offer and Acceptance (LOA) and a government-togovernment Memorandum of Understanding (MOU). Co-production is always classified as a
direct offset.
Credit Assistance: Credit assistance includes direct loans, brokered loans, loan guarantees,
assistance in achieving favorable payment terms, credit extensions, and lower interest rates. Credit
assistance specifically excludes the use of “banked” offset credits (credits that exceed the
requirement of the offset agreement and are permitted, by the terms of the agreement, to be applied
to future offset obligations). Credit assistance is nearly always classified as an indirect offset
transaction but can also be direct.
Credit Value of Offset Transactions: The U.S. dollar value credited for the offset transaction by
application of a multiplier, any intangible factors, or other methods. The credit value may be
greater than, equal to, or less than the actual value of the offset.
Direct Offsets: An offset transaction directly related to the article(s) or service(s) exported or to be
exported pursuant to the military export sales agreement. The diagram below illustrates how each
category may be classified as direct and/or indirect offsets.
Indirect Offsets: An offset transaction unrelated to the article(s) or service(s) exported or to be
exported pursuant to the military export sales agreement. The diagram below illustrates how each
category may be classified as direct and/or indirect offsets.
Direct
Offsets
-Co-production
-Subcontracting
Either or Both
-Credit Assistance
-Investment
-Licensed Production
-Technology Transfer
-Training
-Other
27
Indirect
Offsets
-Purchases
Investment: Investment arising from an offset agreement, often taking the form of capital dedicated
to the establishment of a foreign entity unrelated to the defense sale or to expanding the U.S. firm’s
subsidiary or joint venture in the foreign country. Investment can be either a direct or indirect
offset.
Licensed Production: Overseas production of a U.S.-origin defense article based upon transfer of
technical information under direct commercial arrangements between a U.S. manufacturer and a
foreign government or producer. Licensed production is not pursuant to a co-production
government-to-government MOU. In addition, licensed production almost always involves a part
or component for a defense system, rather than a complete defense system. Licensed production
transactions can be either direct or indirect offsets.
Multiplier: A factor applied to the actual value of certain offset transactions to calculate the credit
value earned. Foreign purchasers use multipliers to provide firms with incentives to offer offsets
that benefit targeted areas of economic growth. When a “positive” multiplier is applied to the
price of a service or product offered as an offset, the defense firm receives a higher credit value
toward fulfillment of an offset obligation than would be the case without application of a
multiplier. Conversely, foreign purchasers apply “negative” multipliers to discourage certain types
of transactions not thought to be in the best economic interest of the receiving entity.
Example: A foreign government interested in a specific technology may offer a multiplier of
“six” for offset transactions providing access to that technology. A U.S. defense company with
a 120 percent offset obligation from a $1 million sale of defense systems ordinarily would be
required to provide technology transfer through an offset equaling $1.2 million. With a
multiplier of six, however, the U.S. company could offer only $200,000 (actual value) in
technology transfer and earn $1.2 million in credit value, fulfilling its entire offset obligation
under the agreement.
Offset Agreement: Any offset as defined under “offsets” that the U.S. firm agrees to in order to
conclude a military export sales contract. This includes all offsets, whether they are “best effort”
agreements or are subject to penalty clauses.
Offset Transaction: Any activity for which the U.S. firm claims credit for full or partial fulfillment
of the offset agreement. Activities to implement offset agreements are categorized as coproduction, technology transfer, subcontracting, credit assistance, training, licensed production,
investment, purchases, and other.
Offsets: Compensation practices required as a condition of purchase in either government-togovernment or commercial sales of defense articles and/or defense services as defined by the Arms
Export Control Act (22 U.S.C. § 2751, et seq.) and the International Traffic in Arms Regulations
(22 C.F.R. §§ 120-130).
Other: An offset transaction other than co-production, credit assistance, licensed production,
investment, purchases, subcontracting, technology transfer, or training.
28
Purchases: Purchases involve the procurement of off-the-shelf items from the offset recipient.
Purchases are indirect offset transactions.
Subcontracting: In the offset context, subcontracting is the overseas production of a part or
component of a U.S.-origin defense article. The subcontract does not necessarily involve license
of technical information. Instead, it is usually a direct commercial arrangement between the
defense prime contractor and a foreign producer.
Technology Transfer: Transfer of technology that occurs as a result of an offset agreement and that
may take the form of research and development conducted abroad, technical assistance provided to
the subsidiary or joint venture of overseas investment, or other activities under direct commercial
arrangement between the defense prime contractor and a foreign entity.
Training: Generally includes training related to the production or maintenance of the exported
defense item. Training, which can be either direct or indirect offset, may be required in unrelated
areas, such as computer training, foreign language skills, or engineering capabilities.
OFFSET EXAMPLE
This example is for illustrative purposes only and in no way represents an actual offset agreement.
Nation A purchased ten KS-340 jet fighters from a U.S. defense firm, Company B for a total of
$500 million with a related 100 percent offset agreement. In other words, the offset agreement
obligated Company B to fulfill offsets equal to the value of the contract, or $500 million. The
government of Nation A decided what would be required of Company B in order to fulfill its offset
obligation, which would include both direct and indirect offsets. The government also assigned
the credit value for each category.
Direct Offsets (i.e., related to the production of the export item, the KS-340 jet fighter)
Technology Transfer: The technology transfer requirement was assigned 36 percent of the total
offset obligation. Company B agreed to transfer all the necessary technology and know-how to
firms in Nation A in order to repair and maintain the jet fighters. The government of Nation A
deemed this capability to be vital to national security and, therefore, gave a multiplier of six. As a
result, the transfer of technology actually worth $30 million was given a credit value of $180
million.
Licensed Production: Firms from Nation A manufactured some components of the KS-340 jet
fighters, totaling $240 million, which accounted for 48 percent of the offset obligation. There was
no multiplier associated with this activity.
Indirect Offsets (i.e., not related to the production of the export item, the KS-340 jet fighter)
Purchase: Company B purchased marble statues from manufacturers from Nation A for eventual
resale. These purchases accounted for nine percent of the offset obligation, or $45 million. There
was no multiplier associated with this activity.
29
Technology Transfer: Company B provided submarine technology to firms from Nation A, which
accounted for seven percent of the offset obligation, or $35 million. There was no multiplier
associated with this activity.
30
Annex G – Interagency Team Progress Report on Consultation with Foreign Nations on
Limiting the Adverse Effects of Offsets in Defense Procurement
Report of the Interagency Team on Consultation with Foreign Nations on
Limiting the Adverse Effects of Offsets in Defense Procurement
December 2011
2011 Interagency Team Annual Report on Offsets
Table of Contents
Page No.
Mandate, Purpose and Practice of the Interagency Team
33
Continuing the Dialogue on Limiting the Adverse Effects of Offsets
33
Continuing the Approach
34
Future Activities
36
32
Annual Progress Report
Interagency Working Group
Continued Dialogue on Limiting the Adverse Effects of
Offsets in Defense Procurement
Mandate, Purpose and Practice of the Interagency Team
In December 2003, the President signed into law a reauthorization of, and amendments
to, the Defense Production Act of 1950 (DPA). Section 7 (c) of Public Law 108-195 amended
Section 123 (c) of the DPA by requiring the President to designate a chairman of an interagency
team to consult with foreign nations on limiting the adverse effects of offsets in defense
procurement without damaging the economy or the defense industrial base of the United States,
or United States defense production or defense preparedness. The statute also provides that the
interagency team be comprised of the Secretaries of Commerce, Defense, Labor, and State, and
the United States Trade Representative.
The DPA, as amended, required the interagency team to send to Congress an annual
report describing the results of its consultations and meetings. On August 6, 2004, President
Bush formally established the interagency team chaired by the Secretary of Defense. Within the
Department of Defense, chairmanship was delegated to the Under Secretary of Defense for
Acquisition, Technology and Logistics. The interagency team subsequently established an
Interagency Working Group (IaWG) to conduct the background research and prepare for the
consultations, execute the consultations, analyze the results, and write the annual reports.
Continuing the Dialogue on Limiting the Adverse Effects of
Offsets
In February 2007, the third report of the interagency team was submitted to Congress as
Appendix H to the Department of Commerce’s 11th Report to Congress on Offsets in Defense
Trade. This report was a comprehensive account of the interagency team’s findings and
recommendations. Since then, these same IaWG findings have been briefed to various foreign
embassy representatives and U.S. defense industry associations. This is the fifth annual progress
report submitted since the issuance of the comprehensive, third report. The interagency team was
able to conclude that the United States is not alone in its concerns about the use of offsets in
defense procurement. Other industrialized nations, which also are major providers of offsets,
expressed concerns about the adverse effects of offsets associated with the sale of their defense
weapons systems. These provider nations expressed interest in a multinational dialogue to
address their concerns. From both providers and demanders of offsets, most nations agree with
the United States’ view that there is a real cost associated with offsets.
33
A key recommendation of the comprehensive interagency team report was that the United
States Government (USG) should continue a dialogue with nations and international
organizations to promote global understanding of how the different types of offsets impact the
industrial base; encourage the development of global offset principles to limit the adverse effects
of offsets; and encourage countries to provide defense contractors with maximum flexibility in
fulfilling offset requirements. Building upon this recommendation, the IaWG on offsets has
continued a strategy of engagement with relevant parties to facilitate the dialogue on reducing
the adverse effects of offsets in defense procurement.
In fulfilling its mandate, the IaWG continues with a multi-faceted strategy designed to
allow various foreign and domestic entities to inform the IaWG of their views regarding offsets
and to offer suggestions on possible ways to help limit the adverse effects of offsets in defense
procurement.
Continuing the Approach
The IaWG articulated in its December 2007 report the following two-tiered approach for
the United States to continue the dialogue on limiting the adverse effects of offsets: (1) to
engage offset providers that espouse similar views to those of the United States to build
consensus and further common goals, then leverage combined efforts of offset providers in
further dialogue with offset demanders; and (2) to engage offset demanders bilaterally to
encourage flexibility in offset demands.
The IaWG also concluded that the United States should actively engage multinational
organizations and continue discussions with the European Defence Agency (EDA), European
Commission (EC), and the North Atlantic Treaty Organization. The intent of these engagements
is to limit the adverse effects of offsets in defense trade. Additionally, the United States should
consider further avenues of dialogue with other multinational organizations,
ministries/departments of defense, other government agencies/ ministries, industry
representatives, academia, and other actors responsible for offset policies in key nations having
an interest in working with the United States to limit the adverse effects of offsets.
European Dialogue
The most significant event regarding offsets and defense trade overall in Europe during
2011 was the entry into force of the European Union (EU) Defense Procurement Directive in
August 2011. The Directive was adopted by the EU in August 2009 and member states were to
transpose the Directive into their national laws by August 2011. Although the IaWG
understands that not all member states transposed the Directive by August, the EU considers the
Directive to be in force. The Directive seeks to bring European defense trade under the rules of
the EU Treaty. Although the Directive does not explicitly use the term “offsets,” published
guidance from the EC stated that offsets would not be permitted for procurements made pursuant
to the Directive. If a member state wishes to impose offset obligations on the procurement of
defense articles, it will need to invoke Article 346 of the EU Treaty (national security exception).
The entry into force of the Directive potentially could reduce the use of offsets in Europe.
34
In addition, the EDA also remained an active participant in offsets and other defense
trade issues of interest to the IaWG, relating primarily to the EDA’s Code of Conduct on Offsets,
which entered into effect on July 1, 2009. All member states of the EDA have subscribed to the
Code, except Romania which has chosen to opt out. In addition, non-EDA member Norway has
subscribed to the Code.
The Code applies when a member state invokes Article 346 so that the EU Directive does
not apply. The Code states that offsets, both required and accepted, will not exceed the value of
the procurement contract (100 percent offset limit). It also states that offsets will be considered
of a less significant weight (or used as a subsidiary criteria in case of offers with the same
weight) in order to ensure that a procurement decision is based on the best available and most
economically advantageous solution for the particular requirement. Finally, the Code states that
the member states will allow foreign suppliers providing offsets to select the most cost effective
business opportunities within the purchasing country for the offset fulfillment (subcontracting),
enabling fair and open competition within supply chains where it is efficient, practical and
economically or technically appropriate.
Although the EDA Code is non-binding, the EDA has reported that its members have
generally adopted its provisions. The EDA also prepares a yearly report on member state offset
activity, including data reported to the EDA by each state on offset agreements signed by such
states and offset transactions conducted to implement offset agreements. The EDA collects
statistical data on signed offset agreements throughout the year. The EDA submitted its first
report on aggregated offset data to the EDA Steering Board in April 2011. The EDA reported
that U.S. industry was the largest provider of offsets to EDA members.
Although the members of the IaWG did not collectively meet with the EC or the EDA
during 2011, different members met separately throughout the year with representatives of the
two organizations. In February 2011, representatives from the Department of Commerce
(Commerce) met with the EC, EDA and members of the EU Parliament in Brussels to discuss
the Directive, offsets, and other defense trade-related issues. In July 2011, representatives from
Commerce met again at the staff level with EDA staff to continue the discussion from February
and also to discuss the EDA report and the Commerce annual report to Congress on offsets in
defense trade. Finally, in September 2011, senior Commerce officials hosted a senior EDA
delegation led by the EDA’s Chief Executive, Ms. Claude-France Arnould.
Members of the IaWG also discussed the Directive with member states during various
bilateral defense industrial cooperation meetings throughout the year. These discussions focused
on the member states’ views of the Directive, the steps they have taken to implement it, and its
potential impact on offsets.
The IaWG will continue to monitor the implementation of the Directive closely and will
continue to conduct a dialogue with the EC, the EDA and bilaterally with nations as appropriate.
35
Future Activities
Dialogue with foreign nations will continue take place into 2012 and beyond on limiting
the adverse effects of offsets in defense procurement. Notional measures of success will be
largely contingent upon the outcome of such meetings, and nations’ responsiveness to these
cooperative endeavors. Ultimately, the goal for continuing the dialogue is to achieve multilateral
agreement on the creation of principles which will serve to limit the adverse effects of offsets.
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