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Offsets in Defense Trade Eleventh Report to Congress

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Offsets in Defense Trade Eleventh Report to Congress Offsets in Defense Trade Eleventh Report to Congress January 2007 U.S. Department of Commerce Bureau of Industry and Security Offsets in Defense Trade Eleventh Study Conducted Pursuant to Section 309 of the Defense Production Act of 1950, as Amended U.S. Department of Commerce Bureau of Industry and Security Office of Strategic Industries and Economic Security January 2007 For more information, please contact the Office of Strategic Industries and Economic Security at 202-482-4506 www.bis.doc/osies i Table of Contents EXECUTIVE SUMMARY ............................................................................................................iii 1 BACKGROUND ..................................................................................................................1-1 1-1 STATUTES AND REGULATIONS.........................................................................................1-1 1-2 U.S. GOVERNMENT POLICY ............................................................................................1-2 1-3 OFFSETS TERMINOLOGY .................................................................................................1-3 1-4 COUNTRIES AND REGIONS..............................................................................................1-5 1-5 SCOPE OF REPORT..........................................................................................................1-6 2 STATISTICAL OVERVIEW ..................................................................................................2-1 2-1 GENERAL OVERVIEW.......................................................................................................2-1 2-2 TYPES OF OFFSET TRANSACTIONS...................................................................................2-4 2-3 OFFSET TRANSACTION CATEGORIES................................................................................ 2-6 2-4 INDUSTRY CLASSIFICATION – SIC CODES ......................................................................2-10 2-5 COUNTRIES AND GROUPS ............................................................................................. 2-12 3 IMPACT OF OFFSETS ON THE U.S. DEFENSE INDUSTRIAL BASE ..............................................3-1 3-1 DEFENSE PREPAREDNESS.................................................................................................3-1 3-2 EMPLOYMENT ................................................................................................................3-2 3-3 DOMESTIC DEFENSE PRODUCTIVE CAPABILITY ................................................................3-3 4 OFFSET AGREEMENTS, 1993-2005...................................................................................4-1 4-1 OVERVIEW......................................................................................................................4-1 4-2 CONCENTRATION OF OFFSET ACTIVITY ..........................................................................4-1 4-3 REGIONAL DISTRIBUTIONS ..............................................................................................4-4 4-4 EUROPE VS. THE REST OF THE WORLD.............................................................................4-5 4-5 ARE OFFSET DEMANDS INCREASING?...............................................................................4-8 5 OFFSET TRANSACTION ACTIVITY, 1993-2005 ..............................................................5-1 5-1 OVERVIEW .....................................................................................................................5-1 5-2 REGIONAL DISTRIBUTIONS ..............................................................................................5-3 5-3 THE ROLE OF MULTIPLIERS .............................................................................................5-5 5-4 OFFSET TRANSACTIONS BY TYPE...................................................................................5-10 5-5 OFFSET TRANSACTIONS BY CATEGORY..........................................................................5-11 5-6 OFFSET TRANSACTIONS BY CATEGORY AND TYPE .........................................................5-14 5-7 OFFSET TRANSACTIONS BY INDUSTRIAL SECTOR ............................................................5-17 ii 6 BACKGROUND ON THE INTERAGENCY TEAM ON CONSULTATION WITH FOREIGN NATIONS ON LIMITING THE ADVERSE EFFECTS OF OFFSETS IN DEFENSE PROCUREMENT ....................................6-1 Appendix A: Section 309 of the Defense Production Act of 1950, as amended Appendix B: U.S. Department of Commerce Regulations Regarding Reporting of Offset Activity Appendix C: Executive Order 12919 Appendix D: Defense Production Act Reauthorization of 2003 (Pub. L. 108-195) Appendix E: Offset Transactions by Economic Sector Appendix F: Country Offset Policies Appendix G: Glossary and Offset Example Appendix H: Interagency Team Final Report on Consultation with Foreign Nations on Limiting the Adverse Effects of Offsets in Defense Procurement iii Executive Summary his is the eleventh annual report on the impact of offsets in defense trade prepared by the U.S. Department of Commerce’s Bureau of Industry and Security (BIS), Office of Strategic Industries and Economic Security pursuant to Section 309 of the Defense T Production Act of 1950,1 as amended (DPA). The report analyzes the impact of offsets on the defense preparedness, industrial competitiveness, employment, and trade of the United States. Offsets in defense trade encompass a range of industrial compensation arrangements required by a foreign government as a condition of purchase of U.S. defense articles and services. This mandatory compensation can take many forms; it can be directly related to the purchased defense system and related services, or it can involve activities or goods unrelated to the defense system. The compensation can be further classified as a Subcontract, Purchase, Co-production, Technology Transfer, Licensed Production, Credit Assistance, Overseas Investment, or Training. Some have raised concerns about the effects of offsets on the U.S. industrial base, since most offset arrangements involve purchasing, subcontracting, and co-production opportunities for U.S. competitors, as well as transferring technology and know-how. The official U.S. Government policy on offsets in defense trade states that the Government considers offsets to be “economically inefficient and trade distorting,” and forbids Government agencies from helping U.S. contractors to fulfill their offset obligations.2 U.S. prime contractors generally see offsets as a reality of the marketplace for companies competing for international defense sales. Several U.S. prime contractors have informed BIS that offsets are usually necessary in order to make a defense sale. In order to assess the impact of offsets in defense trade, BIS obtained data from U.S. defense firms involved in defense exports and offsets. These firms report their offset activities to BIS annually3. This report covers offset agreements entered into and the offset transactions carried out to fulfill these offset obligations from 1993 through 2005. This report also includes the final report (Appendix H) of the Interagency Team on Offsets in Defense Trade, which is chartered to consult with foreign nations on limiting the adverse effects of offsets in defense procurement. 1 Codified at 50 U.S.C. app. § 2099 (2000). 2 Defense Production Act Amendments of 1992 (Pub. L. 102-558, Title I, Part C, §123) 3 Pursuant to 15 CFR Part 701(1994). iii Offset Activity Offset activities examined in this report involve two distinct business arrangements: 1) the export agreements and the associated offset obligations, and 2) the actual transactions concluded to satisfy the obligations. Agreements Total offset activity is measured by the number and value of new offset agreements (imposed offset requirements) entered into between U.S. defense contractors and foreign governments in connection with a U.S. defense-related export. Offset Agreements 2005: In 2005, U.S. defense contractors reported 25 new offset agreements with 18 countries. These new offset agreements both in number and value were the lowest annual levels reported in the 13-year reporting period. For 2005, new offset agreements totaled only $1.5 billion and were associated with defense export contracts totaling $2.3 billion. The offset requirement equaled 64.8 percent of the value of the defense exports. In 2005, European nations received offset agreements worth an average of 83.7 percent of the total contract value of defense-related exports to Europe during the year, an increase from 63.9 percent in 2004. In contrast, for non-European nations, the average offset requirement was worth an average of 54.4 percent of the total contract value of defense-related exports to non- European countries in 2005, down sharply from 93.2 percent in 2004. Offset Agreements 1993-2005: During the 13-year period of 1993-2005, U.S. companies reported entering into 538 offset agreements with 41 countries. Export sales totaled $79.5 billion. Offset agreements related to those export contracts were valued at $56.6 billion, or 71.2 percent of the export contract value, down slightly from 71.4 percent for 1993-2004. Sales of aerospace defense systems (i.e., aircraft, engines, and missiles) were valued at $66.8 billion and accounted for 84 percent of the total export contracts. During the period of 1993-2005, European countries alone accounted for 65 percent of the value of offset agreements, but less than half (46.9 percent) of the
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