Offsets in Defense Trade.

[The following material is extracted from the ninth annual report, March 2005, on offsets in defense trade and is prepared pursuant to Section 309 of the Defense Production Act of 19501 (DPA), as amended. This report covers offset agreements entered into and offset transactions carried out from 1993 through 2003 and their implications for the U.S. industrial base. The Department of Commerce's Bureau of Industry and Security (BIS) (2) has been delegated responsibility for preparing the reports required under Section 309. It also reports of the progress of the newly formed Interagency Team on offsets in defense trade, which is chartered to engage in consultations with foreign governments on eliminating the adverse effects on offsets in defense trade. Finally, the report summarizes the results of Commerce's August 2004 Supplemental Offsets Report to Congress. Some of the footnotes and tables have been omitted from this excerpt; however, the footnotes and table numbers remain the same as in the original document. The complete report is available at the following website: http://www.bis.doc.gov/ DefenseIndustrialBasePrograms/OSIES/ Offsets/Offsets%209%20Final%20Report.pdf.]

Executive Summary

This is the ninth annual report on the impact of offsets in defense trade prepared pursuant to Section 309 of the Defense Production Act of 1950, (3) as amended. The report analyzes the impact of offsets on the defense preparedness, industrial competitiveness, employment, and trade of the United States. To assess the impact of offsets in defense trade, the Department of Commerce obtained data from U.S. defense firms involved in defense exports and related offsets and supplemented this information with statistics from the Bureau of the Census and other sources.

Offset Activity

Total offset activity can be measured by the number and value of new offset agreements entered into between U.S. defense contractors and foreign governments in connection with a U.S. defense-related export.

Offset Agreements 2003: U.S. defense contractors reported entering into 32 new offset agreements with 13 countries in 2003. New offset agreements had a total value of $8.9 billion, and were attached to defense export contracts totaling $7.3 billion. The offset requirement equaled 121.8 percent of the value of the defense exports. (4)

European nations received offsets equal to an average of 148.8 percent of the total export values in 2003, up from 94.3 percent in 2002. Without the large sale mentioned in footnote (4), the average for Europe would fall to 103.9 percent for 2003. For non-European nations, the average offset requirement was 48.4 percent in 2003, down from 77.3 percent in 2002.

Offset Agreements 1993-2003: U.S. companies reported entering into 466 offset agreements with 36 countries during the time period from 1993 to 2003. U.S. companies reported export sales totaling $70.9 billion. Offset agreements related to those export contracts were valued at $50.7 billion, or 73.8 percent of the export contract value, up from 65.7 percent for 1993-2002. Sales of aerospace defense systems (i.e., aircraft, engines, and missiles) were valued at $59.6 billion and accounted for 84 percent of the total export contracts.

Over the eleven-year period, European countries alone accounted for 69.6 percent of the value of offset agreements, but less than half (49.1 percent) of the value of related export contracts. European offset demands continued to increase over the eleven-year period. Between 1993 and 2003, European offset demands as a percentage of exports increased by 70.5 percentage points, going from 78.3 percent in 1993 to 148.8 percent in 2003; (5) for the rest of the world, the increase was almost 26 percentage points, rising from 22.5 percent to 48.4 percent. Overall, 73.3 percent of offset agreements (by number) with European countries totaled 100 percent or more of the value of the weapon system export during the period.

By comparison, Middle Eastern countries and most countries in the Pacific area generally demand lower offset levels than European countries. Of the 219 offset agreements with non-European countries, 150 (68.5 percent) had offset percentages of 50 percent or less. Only sixty-nine of the 219 offset agreements (31.5 percent) had percentages of more than 50 percent. Eleven of the sixty-nine (15.9 percent) had offset requirements in excess of 100 percent.

In a country-by-country analysis, Austria led Europe and the rest of the world in terms of its offset requirement percentage. On average, sales of U.S. weapons systems to Austria were associated with offset agreements worth 174.2 percent of the value of the weapon systems. Austria was followed closely by a number of Eastern European countries with offset requirements well above 100 percent. Other countries with offset percentages greater than the value of the weapon systems exported were the Netherlands (120.5 percent), South Africa (116.7 percent), Greece (110.0 percent), and Sweden (103.9 percent).

Offset requirement trends are more representative when viewed as a moving, weighted average.(6) A moving average smoothes out the yearly fluctuations in weapon system sales and related offset agreements. The weighted world trend in offset percentages rose from 52.9 percent to 94.1 percent. For the eleven-year period European offsets had a 35.2 percentage point increase (from 77.8 percent to 113.0 percent); the rest of the world nearly doubled its offset requirements, from 32.4 percent to 60.3 percent.

Transactions

Offset activity can also be measured by the number and value of individual offset transactions carried out in fulfillment of offset agreements during the reporting period.

* Offset Transactions 2003:

U.S. companies reported offset transactions with a total actual value of $3.6 billion in 2003, the highest value reported for the eleven-year period, up from $2.6 billion in 2002. The 2003 figure represents a 38.5 percent increase from the 2002 total. The percentage of the value of offset transactions classified as indirect rose during 2003, reaching 68.6 percent, up from 64.0 percent in 2002. This was the highest percentage classified as indirect transactions for all years in the period. Direct transactions accounted for 31.2 percent of the value of transactions in 2003, the lowest level of direct transactions over the eleven-year period. The remaining 0.2 percent of the value was unspecified.

* Offset Transactions 1993-2003:

For 1993-2003, U.S. companies reported 6,593 offset transactions executed in 46 countries. The actual value of the offset transactions from 1993 to 2003 was $27.1 billion. Indirect offsets accounted for 61.1 percent of the total value of transactions and direct offsets made up 38.1 percent of the value. The remaining 0.8 percent of the value was unspecified.

The categories of Purchases, Subcontracts, and Technology Transfers accounted for the majority of offset transaction activity during 1993-2003; for that eleven-year period, they accounted for 79.9 percent of the total value of offset transactions. Purchases accounted for 39.6 percent of the total value, and subcontracts accounted for 26.6 percent. The value of technology transfer offset transactions was 13.8 percent of the total value. The categories of Miscellaneous, Credit Transfer, Training, Overseas Investment, Co-production, and Licensed Production made up the remaining 20.1 percent of the total value of offset transactions.

The majority of offset transactions fell in the manufacturing sectors; manufacturing-related transactions accounted for $21.9 billion, or 80.8 percent of all transactions. Service-related transactions accounted for $3.2 billion, or 11.8 percent of the total. Financial, insurance, and real estate industries accounted for an additional 4.8 percent of the total value of transactions during the period.

The Role of Multipliers

Multipliers are incentives used by purchasing countries to stimulate particular types of offset transactions. Prime contractors receive added credit toward their obligation above the actual value of the transaction when multipliers are used. In a small number of cases, a negative multiplier is used to discourage certain types of offsets. In Europe, 83 percent of transactions (by number) have no multiplier involved for the prime contractor when fulfilling the offset commitment. For North and South America, 85.5 percent of transactions (by number) have no multiplier involved; for Asia, the figure is 76.6 percent, and 87.9 percent for the Middle East and Africa.

For the small percentage of transactions that did have multipliers, Overseas Investment and Training transactions were most widely used: 44.3 percent of Overseas Investment transactions and 39.3 percent of Training transactions had positive multipliers. The categories of Purchases and Subcontracts together accounted for 73.4 percent of the 6,593 transactions reported over the eleven-year period, but only 8.4 percent of transactions in each of these categories had positive multipliers applied.

Interagency Offset Team

In December 2003, President Bush signed into law a reauthorization of, and amendments to, the DPA. Section 7(c) of P.L. 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 provides that the team will be comprised of the Secretaries of Commerce, Defense, Labor, and State, and the United States Trade Representative. On August 6, 2004, the President formally established the Team with the Department of Defense (DoD) as chair. The Secretaries and the U.S. Trade Representative delegated membership on the team to appropriate officials within their departments.

On September 15, 2004, the Defense Department activated a working group to support the consultation process of the interagency team. The working group met three times in 2004:

* September 30;

* November 4; and

* December 7.

The interagency team met on December 8 to review the efforts of the working group. The interagency team reviewed and approved the terms of reference for the team and the working group, a top-level plan of work, and a submission for this annual report to Congress.

The goals of the Interagency Team and Working Group are as follows:

* Establish a plan of work to fulfill the requirements of the statute.

* Identify and define meaning of "effects" of offsets in defense procurement.

* Identify potential strategies for limiting "adverse effects."

* Identify foreign nations and other parties, both domestic and foreign, for consultation.

* Develop methods and objectives of consultation.

* Develop schedule for and engage in consultations.

* Provide annual report to Congress describing meetings and the results of consultations.

* Submit to the President any recommendations that may result from these consultations.

Findings

In the Eighth Report to Congress on Offsets in Defense Trade, Commerce reported that Europe's already high offset requirements were rising, but at a slower rate. In 2003, however, Europe's average offset percentage rose significantly to 148.3 percent across North Atlantic Treaty Organization (NATO) and non-NATO countries. (8) Non-European nations, meanwhile, returned to historical offset levels, ranging between 40 and 50 percent of the value of the sale. In 2003, non-European offset percentages averaged 48.4 percent.

In 2003, direct offset transactions (related to weapon systems sold) accounted for just 31.1 percent of the value of all transactions, the lowest percentage for the eleven-year period. Similarly, indirect offsets (not related to weapon systems sold) were 68.9 percent of the value of all transactions, which was the highest percentage for the period. Whether direct or indirect, the great majority of offset transactions fell in the manufacturing sectors; $21.9 billion, or 80.8 percent of all transactions were manufacturing related.

Multipliers are applied to only a small number of offset transactions. For Europe, transactions with a multiplier greater than 1 only accounted for 8.4 percent of the value of all European transactions; the Middle East/Africa, 6.9 percent; Asia, 5.3 percent; and North and South America, 1.5 percent. For each region, multipliers of less than 1 and transactions with no multiplier together accounted for over 90 percent of the value of transactions. It should be noted that transactions with multipliers less than 1 further add to the costs of fulfilling offsets, as countries for certain transactions give less than full credit for offset transactions completed.

BIS estimated the impact on defense productive capacity by combining BIS offsets data with aerospace industry data from the Census Bureau's 2002 Economic Census (2002 is the most recent data published). BIS estimates that 2002 U.S. defense export contracts ($7.4 billion) with offset agreements attached supported 47,122 work-years. This calculation is based on the supposition that this value represents 100 percent U.S. content in all defense exports, which is not necessarily an accurate assumption.

Applying the same value added figure used above ($157,173) leads to the loss of 25,450 work-years associated with the agreements entered into in 2002. Based on these calculations, it appears that 2002 defense export sales had a net positive effect on work-years in the defense sector, although the net positive effect was diminished by the offset agreements. It should be noted that the above analysis does not include an additional $338.3 million in 2002 of Technology Transfer, Training, Overseas Investment, and Marketing transactions, because the impact of these transactions on the U.S. defense industrial base is difficult to calculate. Nor does this calculation include consideration of the long-term effects of creating new or enhanced foreign competitors.

Purpose of Report

DPA Section 309(b)(1) requires BIS to identify the cumulative effects of offset agreements on "the full range of domestic defense productive capability with special attention paid to the firms serving as lower-tier subcontractors or suppliers" and "the domestic defense technology base as a consequence of the technology transfers associated with such offset agreements." To address the effects of offsets on defense productive capability, this analysis compares 2002 offset transactions dealing with transportation equipment to 2002 value added data for this industry, as reported in the Census Bureau's most recent Economic Census. (10) Over time, the lost current and future opportunity of offset transactions can negatively affect capacity utilization and, ultimately, domestic productive capability. Value added, in turn, is a measurement of the productive capability of an entire industry, encompassing productivity of labor, efficient capital use, and full production capacity.

No other U.S. government agencies have assessed the impact of offsets on the domestic defense productive capability. Although the Department of Commerce is authorized by the Defense Production Act to make recommendations for appropriate remedial action, at this time no recommendations are provided.

1 Background

1.1 Legislation and Regulations

In 1984, the Congress enacted amendments to the DPA, which included the addition of Section 309 addressing offsets in defense trade. (11) Section 309 required the President to submit an annual report on the impact of offsets on the U.S. defense industrial base to the Congress's then-Committee on Banking, Finance, and Urban Affairs of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate. (12)

The 1992 amendments to Section 309 of the DPA also reduced the offset agreement reporting threshold from $50 million to $5 million for U.S. firms entering into foreign defense sales contracts subject to offset agreements. Firms are also required to report all offset transactions for which they receive offset credits of $250,000 or more. Every year, U.S. companies report offset agreement and transaction data for the previous calendar year to BIS.

1.2 U.S. Government Policy

The U.S. government policy on offsets in defense trade was developed by an interagency offset team. On April 16, 1990, the President announced a policy on offsets in military exports. (15)

In 1992, Congress passed the following provision, which closely reflects the policy announced by the President: (16)

* In General. Recognizing that certain offsets for military exports are economically inefficient and market distorting, and mindful of the need to minimize the adverse effects of offsets in military exports while ensuring that the ability of United States firms to compete for military export sales is not undermined, the following is the policy of the Congress:

** No agency of the United States Government shall encourage, enter directly into, or commit United States firms to any offset arrangement in connection with the sale of defense goods or services to foreign governments;

** United States Government funds shall not be used to finance offsets in security assistance transactions, except in accordance with policies and procedures that were in existence on March 1, 1992;

** Nothing in this section shall prevent agencies of the United States Government from fulfilling obligations incurred through international agreements entered into before March 1, 1992; and

** The decision whether to engage in offsets, and the responsibility for negotiating and implementing offset arrangements, reside with the companies involved.

* Presidential Approval of Exceptions. It is the policy of the Congress that the President may approve an exception to the policy stated in subsection (a) after receiving the recommendation of the National Security Council.

* Consultation. It is the policy of the Congress that the President shall designate the Secretary of Defense to lead, in coordination with the Secretary of State, an interagency team to consult with foreign nations on limiting the adverse effects of offsets in defense procurement. The President shall transmit an annual report on the results of these consultations to the Congress as part of the report required under section 309(a) of the DPA. Provisions in the Defense Offsets Disclosure Act of 1999 (17) supplemented the offset policy:

* A fair business environment is necessary to advance international trade, economic stability, and development worldwide, is beneficial for American workers and businesses, and is in the United States national interest.

* In some cases, mandated offset requirements can cause economic distortions in international defense trade and undermine fairness and competitiveness, and may cause particular harm to small- and medium-sized businesses.

* The use of offsets may lead to increasing dependence on foreign suppliers for the production of United States weapons systems.

* The offset demands required by some purchasing countries, including some close allies of the United States, equal or exceed the value of the base contract they are intended to offset, mitigating much of the potential economic benefit of the exports.

* Offset demands often unduly distort the prices of defense contracts.

* In some cases, United States contractors are required to provide indirect offsets which can negatively impact nondefense industrial sectors.

* Unilateral efforts by the United States to prohibit offsets may be impractical in the current era of globalization and would severely hinder the competitiveness of the United States defense industry in the global market.

The Defense Offsets Disclosure Act of 1999 continues with the following declaration of policy:</p> <pre> It is the policy of the United States to monitor the use of offsets in international defense trade, to promote fairness in such trade, and to ensure that foreign participation in the production of United States weapons systems does not harm the economy of the United States. </pre> <p>1.4 Countries and Regions

Countries and country groups actively requiring offsets in tandem with purchases of U.S. defense systems during the period of 1993-2003, as reported by industry, were divided into four geographic regions:

* Europe;

* Africa and the Middle East;

* North and South America; and

* Asia.

This was done for ease of analysis and in some cases to protect company confidentiality. The countries found in each region are listed in Table 1-1 found on the next page.

2 Statistical Overview

This chapter provides a general overview of offset statistics collected by BIS for the years 1993 through 2003 along with a review of some of the terms used to organize the data for analysis.

The following data points are used to organize and analyze the information collected:

* Offset Agreement:

** Year;

** Country;

* Weapon System;

** Export Contract Value;

** Agreement Value - percent; and

** Agreement Value to Export Value.

* Offset Transaction:

** Year;

** Country;

** Referenced Weapons System;

** Recipient;

** Actual Value;

** Credit Value;

** Multiplier (credit value - actual value);

** Type

** Category;

** Description; and

** Industry Identification.

2.1 General Overview

A summary of offset activity for 1993 through 2003 is provided in Table 2-1.

2.2 Types of Offset Transactions

Table 2-2 presents offset transaction data by offset type (direct, indirect, or unspecified) and the percent distribution for each year from 1993 to 2003. As discussed in Chapter 1, direct offset transactions are those that are directly related to the weapon system that is exported. Indirect transactions are not related to the exported weapon system. A transaction is classified as unspecified when there is not enough information available to determine the whether it is direct or indirect.

Table 2-2 also shows the total actual and credit values of the transactions for each year. The credit value is sometimes more than the actual value assigned to transactions; some foreign governments give greater credit as an incentive for certain kinds of offset transactions. This incentive varies by country and by the kind of transaction (i.e., Purchase, Technology Transfer, Investment). The multiplier, also shown in Table 2-2, is the percentage difference between the actual value and the credit value. For the 1993-2003 period, the multiplier is 1.211. This multiplier means that, for the database as a whole, the total credit value of the transactions is 21.1 percent more than the actual value. However, it is important to note that a significant majority of transactions do not include multipliers or have multipliers that provide less than actual credit for the transaction. Offset transaction data and multipliers are more fully discussed in Chapter 5.

2.3 Offset Transaction Categories

In addition to classifying offset transactions by type (direct or indirect), offset transactions are identified by various categories, which more particularly describe the nature of the arrangement or exchange. These categories include:

* Purchases;

* Subcontracts;

* Technology;

* Transfers;

* Credit Assistance;

* Training;

* Overseas Investment;

* Co-production;

* Licensed Production; and

* Miscellaneous.

Table 2-3 presents a summary of offset transactions by category and type for the eleven-year reporting period (1993-2003). Appendix I contains a listing of relevant offset definitions. A brief description of each category follows:

Purchases result in overseas production of goods or services usually for export to the United States. Purchases are always classified as indirect offsets to distinguish them from subcontracts, because the purchases are of items unrelated to the exported defense system. The U.S. exporter may make the purchase, or they can also involve brokering and marketing assistance that result in purchases by a third party. For 1993-2003, Purchases represented 39.6 percent of the actual value of all offset transactions, the largest share of all categories. They made up 64.7 percent of the value of indirect offsets.

Subcontracts result in overseas production of goods or services for use in the production or operation of a U.S. exported defense system subject to an offset agreement. Subcontracts are always classified as direct offsets. During the 1993-2003 reporting period, Subcontracts represented 26.6 percent of the actual value of all offset transactions, and 69.9 percent of the value of all direct offsets.

Technology Transfer includes research and development conducted abroad, exchange programs for personnel, data exchanges, integration of machinery and equipment into a recipient's production facility, technical assistance, education and training, manufacturing know-how, and licensing and patent sharing. Technology Transfer, as used here, is normally accomplished under a commercial arrangement between the U.S. prime contractor and a foreign company. A major subcontractor may also accomplish the Technology Transfer on behalf of the U.S. prime contractor. During the reporting period, 34.9 percent of Technology Transfers were classified as direct offsets and 62.3 percent were indirect offsets; the balance was unspecified. Technology Transfers accounted for approximately 13.8 percent of the actual value of all offset transactions.

Credit Assistance includes direct loans, brokered loans, loan guarantees, assistance in achieving favorable payment terms, credit extensions, and lower interest rates. Credit Assistance transactions accounted for 4.4 percent of the actual value of all transactions for 1993-2003. Credit Assistance is nearly always classified as an indirect offset transaction, with indirect transactions making up 99.6 percent of the actual value of all Credit Assistance for the period.

Training transactions relate to the production, maintenance, or actual use of the exported defense system or a component thereof. Training may be required in areas such as computers, foreign language skills, engineering capabilities, or management. This category can be classified as either direct or indirect offset transactions; by value, 58.7 percent of the value of Training transactions during the reporting period was direct and 41.0 percent was indirect. Training accounted for only 2.5 percent of the total value of offset transactions between 1993 and 2003.

Overseas Investments include capital invested to establish or expand a subsidiary or joint venture in the foreign country as well as investments in third-party facilities; the latter received the highest multipliers. Overseas Investments accounted for just 2.6 percent of the actual value of all offset transactions; 57.8 percent of Overseas Investment transactions were classified as indirect and 31.1 percent as direct.

Co-production is overseas production based upon a government-to-government agreement that permits a foreign government or producer to acquire the technical information to manufacture all or part of a U.S.-origin defense system. Co-production is always classified as a direct offset. It includes government-to-government licensed production, but excludes licensed production based upon direct commercial arrangements by U.S. manufacturers. Virtually all of the Co-production reported during the 1993-2003 period was aerospace-related.

Co-production accounted for 2.6 percent of the value of offset transactions. Past production transactions have involved constructing major production facilities in foreign countries (primarily at the expense of the foreign government) for the assembly of entire defense systems, such as aircraft, missiles, or ground systems. Co-production arrangements of this kind generally impose a high cost on the foreign government, including up front construction and tooling costs and increased unit costs for limited production runs. (18) Some countries negotiate with prime contractors for production or assembly contracts related to future sales to third countries of the weapon system or system components.

Licensed Production is overseas production of a U.S.-origin defense article. Licensed Production differs from Co-production in that it is based on commercial arrangements between a U.S. manufacturer and a foreign entity as opposed to a government-to-government agreement. In addition, Licensed Production virtually always involves a part or component for a defense system, rather than a complete defense system. Licensed Production is the smallest among the offset categories, accounting for only 0.6 percent of the total value of offset transactions; 75.7 percent of the Licensed Production transactions (by actual value) were directly related to the weapon systems sold.

Miscellaneous transactions include activities such as feasibility studies, marketing assistance, export assistance, administrative support, business plan development, and trade conferences, among others. These varied transactions comprise 7.4 percent of the total.

2.5 Countries and Regions

Table 2-5 is a compilation of the average offset requirements and multipliers for all countries requiring offsets in connection with defense export sales during the 1993-2003 period. The multipliers presented are averages; as mentioned earlier, a significant majority of transactions do not include multipliers or have multipliers that provide credit that is less than their actual value. The countries are divided into four regions: Europe, North and South America, the Middle East and Africa, and Asia. The notation none reported (NR) is used when the offset requirement or multiplier cannot be calculated or was not reported; and withheld (W) is used to protect company confidentiality.

Austria had the largest offset percentages; on average, U.S. weapon systems exports to Austria were associated with offset agreements worth 174.2 percent of the value of the weapon systems. It is interesting to note that Austria also offered the lowest reported multiplier (0.84 a negative multiplier) where multipliers were granted for the offset transactions carried out in fulfillment of the agreements.

Austria was followed closely by a number of Eastern European countries with offset requirements above 100 percent. Other European countries also required offset percentages equal to or greater than the value of the weapon systems exported to them. These countries included the Netherlands (120.5 percent), Greece (110.0 percent), Sweden (103.9 percent), Denmark (100.0 percent), and Finland (100.0 percent).

The percent offset averages for the Middle East/Africa and Europe increased since the previous report on offsets in defense trade; since the last report that covered 1993-2002, the Middle East and Africa's percent offset average for the reporting period increased from 44.0 percent to 45.1 percent for 1993-2003. For Europe, the average offset percentage grew from 92.6 percent for 1993-2002 to 101.2 percent for 1993-2003.

The regional offset averages for Asia and North and South America both decreased since the previous report on offsets in defense trade; Asia's average went from 40.0 percent for 1993-2002 to 39.9 percent for 1993-2003. North and South America's average fell from 90.8 percent to 84.2 percent for 1993-2003.

3 Impact of Offsets on the U.S. Defense Industrial Base

The DPA requires that commerce determine the impact of offsets on defense preparedness, industrial competitiveness, employment, and trade of the United States. This chapter discusses the impact of offsets on defense preparedness and employment.

3.1 Defense Preparedness

The relationship of offsets to the defense preparedness of the United States is complex. Exports and the revenue generated by export sales are crucial to producers of U.S. defense systems and, by extension, to U.S. foreign policy and economic interests; almost all purchasers of U.S. defense systems require offset agreements as a condition of the sale. Exports of major defense systems help defray high overhead costs for the U.S. producer and help maintain production facilities and expertise in case they are needed to respond to a national emergency. Exports also provide additional business to many U.S. subcontractors and lower-tier suppliers, promote interoperability of weapon systems between the United States and allied countries, and add positively to U.S. international account balances.

An offset package, particularly one with a high proportion of subcontracting or purchases can negate many of these benefits. U.S. subcontractors and suppliers are displaced by exports that include subcontract or licensed production offsets. More than 80 percent of offset transactions reported fell in the manufacturing sectors of the U.S. economy. Previous incidents indicate that U.S. contractors sometimes develop long-term supplier relationships with overseas subcontractors based on short-term offset requirements. (19) These new relationships can reduce future business opportunities for U.S. subcontractors, with possible consequences for the industrial base. Offsets can also increase spending and capital investment in foreign countries for defense or non-defense industries, helping to create or enhance current and future competitors.

3.2 Employment

While it is difficult to determine precisely the impact of offset agreements and transactions on employment in the U.S. defense sector, BIS has developed an estimate by using employment data collected by the Bureau of the Census. Given that sales of aerospace weapon systems account for nearly 85 percent of the value of defense exports connected with offset agreements, this method appears to provide a reliable estimate.

For 2002, industry reported approximately $7.4 billion in defense export contracts with an offset agreement attached. (20) According to the Economic Census, the value added per employee for the aerospace product and parts manufacturing industry in 2002 was $157,713. Dividing this figure into the defense export sales total results in a total of 47,122 work-years that were supported by defense exports associated with offset agreements. (21)

For 2002, the $7.4 billion in defense export contracts had a related $6.1 billion in offset commitments. Although it takes on average almost seven years of offset transactions to fulfill an offset agreement, in order to more accurately assess the impact of offset transactions on work years, we compared the export contract to the prime contractor's offset obligation at the time of the sale.

Subcontracting, purchasing, co-production, and licensing offset transactions are most likely to shift production and sales from U.S. suppliers to overseas firms. Other categories of offset transactions, technology transfer, training, overseas investment, and marketing, in the short or long run, can shift sales from U.S. suppliers as well; however, their impact is more difficult to calculate. Therefore, BIS bases its estimate of employment impacts only on subcontracting, purchasing, co-production, and licensing offset transactions.

Assuming that the offset obligations entered into in 2002 have the same proportions as past offset transactions, then the subcontracting, purchasing, co-production, and licensing portions would account for approximately 66 percent of the total, or about $4 billion. Applying the same value added figure used above ($157,173) leads to the loss of 25,450 work-years associated with the agreements entered into in 2002.

Based on these calculations, it appears that 2002 defense export sales had a net positive effect on employment in the defense sector during 2002, although the net positive effect was diminished by the offset agreements. It should be noted that the above analysis does not include an additional $338.3 million of Technology Transfer, Training, Overseas Investment, and Marketing transactions, because the impact of these transactions on the U.S. defense industrial base is difficult to calculate.

4 Offset Agreements, 1993-2003

4.1 Overview

As was shown in Table 2-1, during the eleven-year period from 1993 to 2003, thirty-nine prime contractors reported that they had entered into 466 offset agreements valued at $50.7 billion. The agreements were signed in connection with defense weapon system exports totaling $70.9 billion to thirty-six different countries. The value of the offset agreements represented 71.4 percent of the total value of the related export contracts during the entire reporting period. The average term for completing the offset agreements was eighty-three months, or just under seven years. Sales of aerospace defense systems (i.e., aircraft, engines, and missiles) were valued at $59.6 billion, 84 percent of all export contracts. In 2003, the percentage of offset agreements to export contracts (by value) reached its highest point during the eleven-year period: 121.8 percent. (23) The lowest percentage was recorded in 1993 at 34.4 percent. (24)

4.2 Concentration of Offset Activity

The data reported by U.S. firms show that a small number of companies, countries, and weapon systems dominated offset agreements between 1993 and 2003. The top five U.S. exporters of thirty-nine companies reporting data on offsets accounted for 82.3 percent of the value of defense export contracts and 85.0 percent of the value of offset agreements during this eleven-year period. This market concentration reflects the high costs of developing and manufacturing defense systems and the small number of firms that have the financial and productive resources to produce them. Each prime contractor coordinated the activities of hundreds, if not thousands, of subcontractors and suppliers that contributed to the systems production, as well as the work of thousands of employees.

Similarly, offsets and related defense system exports appear to be concentrated in a few purchaser countries. The top five countries with a total of thirty-six involved in the reported offset activity, accounted for 56.2 percent of the value of defense systems purchased and 60.1 percent of the value of offset agreements during 1993-2003. The top ten countries of thirty-six total represented 79.1 percent of defense system purchases and 80.1 percent of the offset agreements. In turn, these countries also accounted for the majority of the impact offsets have on the U.S. defense industrial base. In addition, these countries set a visible standard for offset demands for other countries to imitate. The weighted average of the offset percentage required by the top five countries is 66.0 percent.

According to data provided by U.S. prime contractors, the top five weapon systems exported were aircraft systems. These top five exports accounted for 43.1 percent of the value of all export contracts and 43.4 percent of the offset agreements during the reporting period. Nine of the top ten defense systems were aerospace-related; the top ten accounted for 57.0 percent of the export contracts and 59.5 percent of the offset agreements during the eleven-year period.

4.3 Regional Distributions

European countries accounted for the majority of offset activity and weapon system exports during the eleven-year reporting period. Europe accounted for 69.6 percent of the value of offset agreements and 49.1 percent of the value of U.S. defense export contracts. Asian countries ranked second in both categories, with 18.7 percent of the value of offset agreements and 33.5 percent of related U.S. export contract values.

In 2003, however, the Middle East and Africa played a larger role than did Asia. For the first time, the Middle East and Africa share of offsets and sales was greater than Asia's. The region accounted for 20 percent of weapon systems exports and 8.7 percent of the value of new offset agreements. In contrast, Asia made up just 6.9 percent of the value of defense exports and 2.0 percent of the value of new offset agreements.

4.5 Are Offset Demands Increasing?

The data show not only that offset demands are increasing over time, but also that more countries outside Europe are demanding these higher offset percentages. Historically low, offset requirements outside Europe are rising. Two-thirds of the non-European offset agreements valued at 100 percent or more of the export contract value have occurred since 1998. Of the thirty-six agreements with offset requirements of 100 percent or more, thirteen were with Canada and another six were with Turkey. Moreover, in the last three years, countries entering into offset agreements with U.S. firms for the first time have demanded 100 percent or more, emulating their European counterparts.

Agreements entered into by South Korea and Turkey illustrate the growing trend in non-European offset demands. From 1993 to 1998, the average offset requirement by value demanded of U.S. firms by South Korea was 36.5 percent. In contrast, from 1999 to 2003, that average nearly doubled, to 69.6 percent. From 1993 to 1998, offset percentages by value demanded by Turkey of U.S. firms averaged 52.3 percent. However, Turkey's offset requirements rose in 1999-2003 to 60.1 percent.

European offset demands also continued to increase over the eleven-year period, although more slowly than offset demands in the rest of the world. Offset requirements for European countries increased at an annual rate of 6.4 percentage points. For the rest of the world, the average increase in offset percentages was 5.5 percentage points per year. European offset requirements increased an average of 3.2 percentage points each year in the eleven-year period, while non-European demands increased 2.5 percentage points.

Offset requirement trends are more representative when viewed as a moving, weighted average. (25) A moving average smoothes out the yearly fluctuations in weapon system sales and related offset agreements. The weighted world trend in offset percentages rose from 52.9 percent to 94.1 percent. In the same eleven-year period that European offset percentages rose by 35.2 percentage points (from 77.8 percent to 113.0 percent), the rest of the world nearly doubled its offset requirements, from 32.4 percent to 60.3 percent.

Defense offset requirements have increased as the supply of defense systems has exceeded the demand for such items. In the last decade, shrinking worldwide defense expenditures and the overcrowding in the defense supplier sector have forced defense industries in many nations to consolidate. As sales opportunities narrowed, competition for such sales became more intense. Higher-than-normal overhead related to low levels of capacity utilization in defense industries coupled with competitive pressures on prices also have squeezed corporate profits.

On the other hand, foreign purchasing governments are under pressure to sustain their indigenous defense companies or to create new ones (defense and commercial) and, accordingly, are demanding more offsets. Significant public outlays for foreign-made weapon systems become even more controversial, leading to higher offset demands to deflect political pressure and increase domestic economic development. In a growing number of cases, defense purchases are being driven by the competitiveness of the offset package offered rather than the quality and price of the weapon system purchased.

5 Offset Transaction Activity, 1993-2003

An offset agreement typically requires the prime contractor to complete multiple transactions over a period of years to satisfy the requirements of the agreement. Analyzing transactions provides the basis upon which the impacts of offsets on the U.S. defense industrial base are estimated. For the purpose of analysis, offset transactions are grouped by type (i.e., direct, indirect, and unspecified), and then grouped again into of the nine categories: purchases, subcontracts, technology transfer, credit assistance, training, overseas investment, co-production, licensed production, and miscellaneous.

5.1 Overview

From 1993 to 2003, 42 U.S. defense companies reported 6,593 offset transactions with forty-six countries totaling $27.1 billion. The values of offset transactions by type are reflected in Table 5-1. U.S. firms received a total of $32.8 billion in credit (see Table 5-2) toward open offset obligations during the reporting period. The yearly value of offset transactions averaged $2.46 billion.

U.S. companies reported offset transactions with a total actual value of $3.6 billion in 2003, the highest value reported for the eleven-year period, up from $2.6 billion in 2002. The 2003 figure represents a 38.5 percent increase from the 2002 total. The percentage of the value of offset transactions classified as indirect rose during 2003, reaching 68.8 percent, up from 64.0 percent in 2002. This was the highest percentage of indirect for all years in the period. Direct transactions accounted for 31.1 percent of the value of transactions in 2003, the lowest level of direct transactions over the eleven-year period. The remaining 0.1 percent of the value was unspecified.

Table 5-2 shows the countries receiving the most offset transactions, by actual value during 1993-2003, along with the actual and credit values and multipliers for the transactions, and the portion of transactions granted multipliers. The nineteen countries listed in Table 5-2 were the recipients of approximately 96.3 percent of the actual value of all offset transactions from 1993 to 2003. The multipliers for the countries listed ranged from 0.998 for Canada to 2.508 for Greece.

For the reporting period of 1993 to 2003, the United Kingdom and Finland were the two largest recipients of offset transactions, with total actual values of $5.0 billion and $3.2 billion, respectively. The two countries combined accounted for 30.4 percent of the total actual value of offset transactions during the reporting period. However, the United Kingdom and Finland accounted for 25.9 percent of the total credit value, because their multipliers were lower than those of some of the other countries.

The fifth column in Table 5-2 shows the percentage of the number of each country's transactions with multipliers greater than one, in other words, offset transactions for which the credit value received was greater than the actual value. France led, with 46.6 percent of the transactions having multipliers greater than one, followed by Greece and Taiwan, both with 43.4 percent. However, these countries are not typical. For all countries, only 13 percent of the transactions had a multiplier greater than one. Conversely, almost 87 percent of the number of transactions had no multiplier (or had a negative multiplier) applied. For the nineteen countries listed in Table 5-2, the overall percentage of transactions with multipliers greater than one was 12 percent, lower than the percentage for all countries (13 percent).

5.3 The Role of Multipliers

Multipliers can make it easier for prime contractors to fulfill their offset obligations. However, further inspection of multipliers by region provides a better understanding of how infrequently multipliers are being utilized by purchasing nations to reward prime contractors for certain types of offset transactions. Table 5-3 highlights the use of multipliers by region as a percentage of the number of all transactions for the 1993-2003 period. In Europe, for example, 83 percent of transactions by number have no multiplier involved for the prime contractor when fulfilling the offset commitment (multiplier = 1). For North and South America, 85.5 percent of transactions by number have no multiplier involved; for Asia, the figure is 76.6 percent, and 87.9 percent for the Middle east and Africa.

In reviewing European multiplier data further, 15.6 percent of the European transactions (by number) have a multiplier greater than one applied to them, and an additional 1.5 percent of transactions with Europe have a multiplier of less than one applied. Multipliers of less than one mean that prime contractors are only credited a portion of the total actual value of a transaction. In Asia, 21.6 percent of the transactions by number have multipliers greater than one applied, while 1.8 percent of transactions have multipliers of less than one. For the Middle East and Africa, only 9.9 percent of transactions have multipliers greater than one applied, while 2.2 percent of transactions have multipliers of less than one. In North and South America, 8.9 percent of transactions by number receive less than full credit.

7 Report of the Interagency Team on Consultation with Foreign Nations on Limiting the Adverse Effects of Offsets in Defense Procurement

7.1 Background

In December 2003, President Bush signed into law a reauthorization of, and amendments to, the DPA. Section 7(c) of P.L. 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 provides that the team will be comprised of the Secretaries of Commerce, Defense, Labor, and State, and the United States Trade Representative.

The law requires the interagency team to meet quarterly, and to send to Congress an annual report describing the results of the consultations and meetings. The report is to be included as part of the annual assessment to Congress of Offsets in Defense Trade that is prepared by the Department of Commerce's Bureau of Industry and Security. On August 6, 2004, President Bush formally established an interagency committee, hereafter referred to as the interagency team, as in the statute, chaired by the Secretary of Defense. The Secretaries and the U.S. Trade Representative delegated membership on the team to appropriate officials within their departments. Within the Department of Defense, chairmanship has been delegated to the Under Secretary of Defense for Acquisition, Technology and Logistics.

On September 15, 2004 the Acting Under Secretary of Defense (Acquisition, Technology and Logistics) activated a working group to support the consultation process of the interagency team. The working group met three times in 2004: September 30, November 4 and December 7. The interagency team met on December 8 to review the efforts of the working group. The interagency team reviewed and approved the terms of reference for the team and the working group, the following top-level plan of work, and this annual report to Congress for 2004.

7.2 Plan of Work

The top-level plan of work will involve the following steps:

* During the 1st Quarter CY 2005, the interagency team will:

** Develop an offset consultation strategy, which will include the U.S. government's objectives and detailed plan of work to achieve those objectives.

** Identify domestic and foreign entities for consultation, and

** Commence consultations with domestic entities, and possibly foreign entities.

* During the 2nd Quarter CY 2005 and continuing beyond, the interagency team will implement the plan of work through continuing consultations with the identified foreign and domestic entities on limiting the adverse effects of offsets in defense procurement.

7.3 Terms of Reference

The interagency team and working group developed the following terms of reference to guide their work. They include the composition of the interagency team and working group; the operation of the team and group; and the goals of the team and group.

Operation of the Interagency Team and Working Group

* The Department of Defense will chair the interagency team and working group.

* The Department of Defense will provide administrative support to the interagency team and working group.

* The interagency team will meet quarterly; the working group will meet as often as the chairman deems necessary.

* A quorum for a meeting of the interagency team or working group will be three of the five members.

* The interagency team and working group will operate by consensus, but dissenting views of a principal may be presented in the annual report.

* The interagency team will provide an annual report to Congress describing the results of meetings and consultations.

* The Department of Commerce principal will ensure that the report is included in their annual assessment to Congress on offsets in defense trade. Goals of the Interagency Team and Working Group

* Establish a plan of work to fulfill the requirements of the statute.

* Identify and define meaning of effects of offsets in defense procurement.

* Identify potential strategies for limiting adverse effects.

* Identify foreign nations and other parties, both domestic and foreign, for consultation.

* Develop methods and objectives of consultation.

* Develop schedule for and engage in consultations.

* Provide annual report to Congress describing meetings and the results of consultations.

* Submit to the President any recommendations that may result from these consultations.

8 Conclusions

Eleven years of Commerce Department data highlight the sustained increase in foreign governments' offset demands relating to defense trade. European nations continue to lead the world in offset requirements, accounting for 69.6 percent of the value of offset agreements, but less than half (49.1 percent) of the value of related export contracts. Between 1993 and 2003, European offset demands as a percentage of the value of exports increased by 70.5 percentage points, going from 78.3 percent to 148.8 percent; for the rest of the world, the increase was almost 26 percentage points, rising from 22.5 percent to 48.4 percent. Overall, 73.3 percent of offset agreements (by number) with Europe totaled 100 percent or more of the value of the weapon system export during the period.

By comparison, Middle Eastern countries and most countries in the Pacific area generally demand lower offset levels than European countries. Of the 219 offset agreements with non-European countries, 150 (68.5 percent) had offset percentages of 50 percent or less. Only sixty-nine of the offset agreements (31.5 percent) had percentages of more than 50 percent, and eleven of these (15.9 percent) had offset requirements in excess of 100 percent.

An examination of the role of multipliers granted by foreign governments in crediting offset transactions leads to the conclusion that they are used infrequently. In Europe, 83 percent of transactions (by number) have no multiplier involved for the prime contractor when fulfilling the offset commitment. For North and South America, 85.5 percent of transactions (by number) have no multiplier involved; for Asia, the figure is 76.6 percent, and 87.9 percent for the Middle East and Africa.

U.S. companies reported offset transactions with a total actual value of $3.6 billion in 2003, the highest value reported for the eleven-year period. The percentage of the value of offset transactions classified as indirect rose during 2003, reaching 68.6 percent, the highest percentage of indirect for all years in the period. Direct transactions accounted for 31.2 percent of the value of transactions in 2003, the lowest level of direct transactions over the eleven-year period.

The offset transaction categories of purchases, subcontracts, and technology transfers accounted for the majority of offset transaction activity during 1993-2003: for that eleven-year period, they accounted for 79.9 percent of the total value of offset transactions. The majority of offset transactions fell in the manufacturing sectors; $21.9 billion, or 80.8 percent of all transactions were manufacturing-related.

BIS estimates that 2002 U.S. defense export contracts ($7.4 billion) with offset agreements attached supported 47,122 work-years. This calculation is based on the supposition that this value represents 100 percent U.S. content in all exports, which is not necessarily an accurate assumption.

For 2002, the $7.4 billion in defense export contracts had a related $6.1 billion in offset commitments. Subcontracting, purchasing, co-production, and licensing offset transactions are most likely to shift production and sales from U.S. suppliers to overseas firms. Therefore, BIS bases its estimate of employment impacts only on subcontracting, purchasing, co-production, and licensing offset transactions. Assuming that the offset commitments have the same proportion as the offset transactions for 2002, then the subcontracting, purchasing, co-production, and licensing portions would account for approximately 66 percent of total, or about $4 billion. Applying the same value added figure used above ($157,173) leads to the loss of 25,450 work-years associated with the agreements entered into in 2002.

Based on these calculations, it appears that 2002 defense export sales had a net positive effect on employment in the defense sector, although the net positive effect was diminished by the offset agreements. It should be noted that the above analysis does not include an additional $338.3 million of technology transfer, training, overseas investment, and marketing transactions, because the impact of these transactions on the U.S. defense industrial base is difficult to calculate.

While Commerce has not identified any specific recommendations for remedial action concerning offsets in defense trade for this report, the Department is playing an active role in the newly-formed interagency offset team and related working group (see Chapter 7). The team was formed 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 team has developed a comprehensive action plan and will rely on Commerce's extensive offset database to provide background information on the countries chosen for consultations.

(1) Codified at 50 U.S.C. app. Section 2099 (2000).

(2) On April 18, 2002, the Bureau of Export Administration changed its name to the bureau of Industry and Security.

(3) Codified at 50 U.S.C. app.Section 2099 (2000).

(4) One large weapon system export in 2003 with an offset percentage of more than 150 percent skewed the data for that year. Without this export and its related offset agreement, the average offset percentage for 2003 for the world would fall to 75.1 percent (from 121.8 percent with the sale).

(5) Ibid.

(6) Here, the value of export contracts and offset agreements is totaled for each successive three-year period, beginning with 1993-1995, followed by 1994-1996, and so forth; then the offset percentage is determined. This leads to nine three-year observations over the eleven year reporting period (1993-2003).

(8) One large weapon system export in 2003 with an offset percentage of more than 150 percent skewed the data for that year. Without this export and its related offset agreement, the average offset percentage for 2003 would fall to 75.1 percent (from 121.8 percent with the sale).

(10) This industry was chosen because it was involved in the most frequent and the highest level of offset transactions for 2002. The year 2002 was chosen as a sample because it was the most recent available data for value added from the Economic Census during the preparation of this report.

(11) See Pub. L. 98-265, April 17, 1984, 98 Stat. 149.

(12) Section 309 of the DPA was amended in 2001 to reflect the change in the name of the House committee to the "Committee on Financial Services of the House of Representatives." See 50 U.S.C. app. B 2099(a)(1).

(15) See April 16, 1990 statement by Press Secretary Fitzwater on offsets in military exports.

(16) Congress incorporated this policy statement into law with the Defense Production Act Amendments of 1992 (Pub. L. 102-558, Title I, Part C, B 123, 106 Stat. 4198).

(17) See Pub. L. No. 106-113, Div. B, B 1000(a)(7) 113 Stat. 1536, 1510A-500 to 1501A-505 (1999) (enacting into law Subtitle D of Title XII of Division B of H.R. 3427 (113 Stat. 1501A-500) as introduced on Nov. 17, 1999) (found at 50 U.S.C. App. 2099, Note).

(18) Primary examples include an Egyptian co-production facility which, since its 1988 inception, has only contracted enough orders to build half of what the government originally planned and a Japanese co-production program that cost the government nearly two times more per unit than an off-the-shelf purchase. See Military Aid to Egypt: Tank Co-production Raised Costs and May Not Meet Many Program Goals, U.S. General Accounting Office, GAO/NSIAD-93-2003, and U.S. Military Aircraft Co-production with Japan, U.S. General Accounting Office, GAO/T-NSIAD-89-6.

(19) 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.

(20) The value added data was taken from the 2002 Economic Census, Manufacturing Industry Series (see http://www.census.gov/econ/census02/index.html). The year 2002 is the most recent year for which value added data was available.

(21) This calculation is based on the supposition that this value represents 100 percent U.S. content in all exports, which is not necessarily an accurate assumption.

(23) One large weapon system export in 2003 with an offset percentage of more than 150 percent skewed the data for that year. Without this export and its related offset agreement, the average offset percentage for 2003 would fall to 75.1 percent (from 121.8 percent with the sale). This export also affected the average offset percentage for the entire period. With this sale and offset, the average offset percentage for 1993-2003 is 71.4 percent; without it, the percentage is 66.2 percent.

(24) A similar event occurred in 1993, when two large exports with low offset percentages skewed the average offset percentage downward.

(25) Here, the value of export contracts and offset agreements is totaled for each successive three-year period, beginning with 1993-1995, followed by 1994-1996, and so forth; then the offset percentage is determined. This leads to nine three-year observations over the eleven-year reporting period (1993-2003).

United States Department of Commerce, Bureau of Industry and Security

Table 1-1: Purchasing Countries and Groups with Offset Agreements
(by Region, 1993-2003)

Europe

Austria
Belgium
Czech Republic
Denmark
The European Participating Group (EPG)
  (Belgium, The Netherlands, Norway)
Finland
France
Germany
Greece
Italy
Lithuania
North Atlantic Treaty Organization
Netherlands
Norway
Poland
Portugal
Romania
Slovenia
Spain
Sweden
Sweden/Norway
Switzerland
United Kingdom

Middle East and Africa

Israel
Kuwait
Saudi Arabia
South Africa
Turkey
United Arab Emirates

North and South America

Brazil
Canada
Chile

Asia

Australia
Indonesia
Malaysia
New Zealand
Singapore
South Korea
Taiwan
Thailand

Source: BIS Offsets Database

Table 2-1 General Summary of Offset Activity, 1993-2003
($ millions)

                  Export           Offset        Percent
Year               Value            Value         Offset

1993           $13,957.0         $4,806.7           34.4%
1994            $4,792.4         $2,048.7           42.8$
1995            $7,402.0         $6,034.1           81.5%
1996            $2,987.8         $2,270.7           76.0%
1997            $5,822.8         $3,831.8           65.8%
1998            $3,257.8         $1,846.6           56.7%
1999            $4,681.2         $3,851.4           82.3%
2000            $6,278.3         $5,498.1           87.6%
2001            $7,039.2         $5,497.3           78.1%
2002            $7,406.2         $6,094.8           82.3%
2003            $7,284.9         $8,872.0          121.8%

11 Years      $70,909.60       $50,652.20          71.40%

Year           Companies       Agreements      Countries

1993                  18               30             17
1994                  18               49             20
1995                  19               45             18
1996                  15               50             19
1997                  13               57             19
1998                  11               44             17
1999                  10               45             11
2000                   8               38             14
2001                  11               35             14
2002                  12               41             17
2003                  11               32             13

11 Years              39              466             36

Offset Transactions

                  Actual           Credit
Year               Value            Value    Multiplier *

1993            $1,815.1         $2,162.1           1.191
1994            $1,891.1         $2,161.5           1.143
1995            $2,713.7         $3,390.9           1.250
1996            $2,731.5         $3,098.9           1.135
1997            $2,725.5         $3,276.2           1.202
1998            $2,364.8         $2,684.6           1.135
1999            $2,080.4         $2,824.1           1.358
2000            $1,998.5         $2,613.0           1.307
2001            $2,588.1         $3,295.7           1.273
2002            $2,616.0         $3,284.5           1.256
2003            $3,565.5         $4,010.6           1.125

11 Years      $27,090.00       $32,802.00           1.211

Year           Companies     Transactions      Countries

1993                   24              440             27
1994                   21              550             26
1995                   20              670             27
1996                   21              623             26
1997                   18              577             26
1998                   19              582             30
1999                   13              512             25
2000                   14              601             23
2001                   15              620             25
2002                   17              729             27
2003                   16              689             30

11 Years               42            6,593             46

Source: BIS Offsets Database

Note: Due to rounding, totals may not add up precisely.

* Multipliers are used only in a small percentage of the total
number of transactions. See Chapter 5 for further discussion.

Table 2-2 Offset Transactions by Type, 1993-2003
($ millions)

                   Actual Vale
Year          Total          Direct

1993        $1,815.1        $584.2
1994        $1,891.1        $600.7
1995        $2,713.7       $1,064.1
1996        $2,731.5       $1,097.5
1997        $2,725.5       $1,030.3
1998        $2,364.8       $1,464.2
1999        $2,080.4        $690.2
2000        $1,998.5        $779.9
2001        $2,588.1        $949.1
2002        $2,616.0        $941.7
2003        $3,565.5       $1,113.0
Total       $27,090.0      $10,314.9

                 Actual Vale
Year         Indirect     Unspecified

1993        $1,167.1         $63.9
1994        $1,186.1        $104.3
1995        $1,649.6           NR
1996        $1,632.5         $1.4
1997        $1,673.8         $21.4
1998         $900.5          $0.1
1999        $1,378.7         $11.4
2000        $1,210.7         $7.9
2001        $1,639.0           NR
2002        $1,673.0         $1.3
2003        $2,447.0         $5.6
Total       $16,557.8       $217.3

                       % Distribution
Year          Direct        Indirect     Unspecified

1993          32.2%          64.3%           3.5%
1994          31.8%          62.7%           5.5%
1995          39.2%          60.8%            NR
1996          40.2%          59.8%           0.1%
1997          37.8%          61.4%           0.8%
1998          61.9%          38.1%           0.0%
1999          33.2%          66.3%           0.5%
2000          39.0%          60.6%           0.4%
2001          36.7%          63.3%            NR
2002          36.0%          64.0%           0.1%
2003          31.2%          68.6%           0.2%
Total         38.1%          61.1%           0.8%

                  Credit Values
Year          Total          Direct

1993        $2,162.1        $709.3
1994        $2,161.5        $774.1
1995        $3,390.9       $1,257.9
1996        $3,098.9       $1,188.7
1997        $3,276.2       $1,171.1
1998        $2,684.6       $1,621.8
1999        $2,824.1       $1,121.8
2000        $2,613.0       $1,135.8
2001        $3,295.7       $1,282.3
2002        $3,284.5       $1,111.2
2003        $4,010.6       $1,215.5
Total       $32,802.0      $12,589.5

                 Credit Values
Year         Indirect     Unspecified

1993        $1,384.1         $68.7
1994        $1,278.6        $108.8
1995        $2,132.9           NR
1996        $1,874.3         $36.0
1997        $2,055.4         $49.7
1998        $1,060.3         $2.5
1999        $1,632.0         $70.3
2000        $1,469.2         $7.9
2001        $2,013.3           NR
2002        $2,171.9         $1.3
2003        $2,783.2         $12.0
Total       $19,855.2       $357.3

                        % Distribution
Year          Direct        Indirect     Unspecified

1993          32.8%          64.0%           3.2%
1994          35.8%          59.2%           5.0%
1995          37.1%          62.9%            NR
1996          38.4%          60.5%           1.2%
1997          35.7%          62.7%           1.5%
1998          60.4%          39.5%           0.1%
1999          39.7%          57.8%           2.5%
2000          43.5%          56.2%           0.3%
2001          38.9%          61.1%            NR
2002          33.8%          66.1%           0.0%
2003          30.3%          69.4%           0.3%
Total         38.4%          60.5%           1.1%

                   Multiplier *
Year          Total          Direct

1993          1.191          1.214
1994          1.143          1.289
1995          1.250          1.182
1996          1.135          1.083
1997          1.202          11.137
1998          1.135          1.108
1999          1.358          1.625
2000          1.307          1.456
2001          1.273          1.351
2002          1.256          1.180
2003          1.125          1.092
Total         1.211          1.221

                  Multiplier *
Year         Indirect     Unspecified

1993          1.186          1.076
1994          1.078          1.043
1995          1.293            NR
1996          1.148          25.714
1997          1.228          2.327
1998          1.177          19.976
1999          1.184          6.154
2000          1.214            1
2001          1.228            NR
2002          1.298            1
2003          1.137          2.151
Total         1.199          1.644

           Number of Transactions
Year          Total          Direct

1993           440            133
1994           550            157
1995           670            203
1996           623            220
1997           577            200
1998           582            237
1999           512            200
2000           601            208
2001           620            222
2002           729            194
2003           689            179
Total          6593           2153

           Number of Transactions
Year         Indirect     Unspecified

1993           303             4
1994           388             5
1995           467             NR
1996           401             2
1997           373             4
1998           344             1
1999           307             5
2000           392             1
2001           398             NR
2002           534             1
2003           506             4
Total          4413            27

Source: BIS Offsets Database
NR = Non Reported
Due to rounding, totals may not add up precisely.
* Multipliers are used only in a small percentage of the
number of transactions (see Chapter 5 for further
discussion).

Table 2-3 Offset Transactions by Category and Type, 1993-2003

Transaction                       Actual Values in $ Millions

Category                        Total        Direct      Indirect

Purchases                   $10,717.1                   $10,717.1
Subcontractors               $7,210.1      $7,210.1
Technology Transfers         $3,724.3      $1,298.6      $2,321.6
Miscellaneous                $2,016.7        $361.8      $1,645.1
Credit Assistance            $1,191.3          $5.1      $1,186.2
Training                       $665.7        $390.6        $273.2
Overseas Investment            $694.0        $215.5        $401.0
Co-production                  $716.0        $716.0
Licensed Production            $154.8        $117.2         $13.6

Total                       $27,090.0     $10,314.9     $16,557.8

Transaction

Category                   Unspecified

Purchases
Subcontractors
Technology Transfers           $104.1
Miscellaneous                    $9.8
Credit Assistance
Training                         $1.9
Overseas Investment             $77.5
Co-production
Licensed Production             $24.0

Total                          $217.3

Transaction                   Percent by Column Total

Category                        Total        Direct

Purchases                        39.6%
Subcontractors                   26.6%         69.6%
Technology Transfers             13.7%         12.5%
Miscellaneous                     7.4%          3.5%
Credit Assistance                 4.4%          0.1%
Training                          2.5%          3.8%
Overseas Investment               2.6%          2.1%
Co-production                     2.6%          6.9%
Licensed Production               0.6%          1.1%

Total                           100.0%        100.0%

Transaction                   Percent by Column Total

Category                      Indirect     Unspecified

Purchases                        64.7%
Subcontractors
Technology Transfers             14.0%         47.9%
Miscellaneous                     9.9%          4.5%
Credit Assistance                 7.2%
Training                          1.6%          0.9%
Overseas Investment               2.4%         35.6%
Co-production
Licensed Production               0.1%         11.1%

Total                           100.0%        100.0%

Transaction                       Credit Values in $ Millions

Category                        Total        Direct      Indirect

Purchases                   $11,735.9                   $11,735.9
Subcontractors               $8,133.7      $8,133.7
Technology Transfers         $4,868.1      $1,671.0      $3,085.0
Miscellaneous                $3,031.6        $869.6      $2,089.5
Credit Assistance            $1,348.5         $70.6      $1,277.9
Training                     $1,173.4        $639.2        $520.9
Overseas Investment          $1,519.2        $281.1      $1,109.9
Co-production                  $790.1        $790.2
Licensed Production            $201.5        $134.1         $36.1

Total                       $32,802.0     $12,589.5     $19,855.2

Transaction

Category                   Unspecified

Purchases
Subcontractors
Technology Transfers           $112.1
Miscellaneous                   $72.4
Credit Assistance
Training                        $13.4
Overseas Investment            $128.2
Co-production                    $0.0
Licensed Production             $31.2

Total                          $357.3

Transaction                    Percent by Column Total

Category                        Total        Direct

Purchases                        35.8%
Subcontractors                   24.8%         64.6%
Technology Transfers             14.8%         13.3%
Miscellaneous                     9.2%          6.9%
Credit Assistance                 4.1%          0.6%
Training                          3.6%          5.1%
Overseas Investment               4.6%          2.2%
Co-production                     6.3%
Licensed Production               0.6%          1.1%

Total                           100.0%        100.0%

Transaction                    Percent by Column Total

Category                       Indirect    Unspecified

Purchases                        59.1%
Subcontractors
Technology Transfers             15.5%         31.4%
Miscellaneous                    10.5%         20.3%
Credit Assistance                 6.4%
Training                          2.6%          3.7%
Overseas Investment               5.6%         35.9%
Co-production
Licensed Production               0.2%          8.7%

Total                           100.0%        100.0%

Transaction                                Multiplier *

Category                         Total        Direct

Purchases                        1.095
Subcontractors                   1.128         1.128
Technology Transfers             1.307         1.287
Miscellaneous                    1.503         2.404
Credit Assistance                1.132        13.843
Training                         1.763         1.636
Overseas Investment              2.189         1.304
Co-production                    1.103         1.104
Licensed Production              1.302         1.144

Total                            1.211         1.211

Transaction

Category                       Indirect    Unspecified

Purchases                        1.095
Subcontractors
Technology Transfers             1.329         1.077
Miscellaneous                     1.27         7.388
Credit Assistance                1.077
Training                         1.906         7.053
Overseas Investment              2.768         1.654
Co-production
Licensed Production              2.662           1.3

Total                            1.199         1.644

Transaction                     Number of Transactions

Category                         Total        Direct

Purchases                         3414
Subcontractors                    1464          1464
Technology Transfers               687           303
Miscellaneous                      452            96
Credit Assistance                   87             7
Training                           227           107
Overseas Investment                 98            19
Co-production                      132           132
Licensed Production                 32            25

Total                             6593          2153

Transaction                     Number of Transactions

Category                       Indirect    Unspecified

Purchases                         3414
Subcontractors
Technology Transfers               374            10
Miscellaneous                      351             5
Credit Assistance                   80
Training                           115             5
Overseas Investment                 74             5
Co-production
Licensed Production                  5             2

Total                             4413            27

Source: BIS Offsets Database

Note: Due to rounding, totals may not add up precisely.

* Multipliers are used only in a small percentage of the total number
of transactions. See Chapter 5 for further discussion.

Table 2-5 Countries with Offset Agreements and
Transactions by Region, 1993-2003

                        Europe
Country              % Offsets    Multiplier *

Austria                 174.2%          0.84
Belgium                  80.1%          1.08
Czech Republic              W              W
Denmark                 100.0%          1.17
EPG **                   27.8%          1.23
Finland                 100.0%          1.07
France                   84.6%          1.81
Germany                  99.9%             1
Greece                  110.0%          2.51
Italy                    93.8%          1.02
Lithuania                   W             NR
Luxembourg                 NR              1
NATO                     55.8%             1
Netherlands             120.5%          1.21
Norway                   99.5%          1.39
Poland                      W              W
Portugal                 27.9%          1.99
Romania                    NR              W
Slovenia                    W             NR
Spain                    88.4%          1.23
Sweden                  103.9%          1.13
Switzerland              78.1%          1.01
United Kingdom           92.6%          1.01
Region Total            101.2%          1.24

                   Middle East and Africa
Country             % Offsets               Multiplier *

Egypt                                    NR           1.00
Israel                                 49.2%          1.04
Kuwait                                 30.4%          2.48
Saudi Arabia                           34.9%            NR
South Africa                          116.7%          1.00
Turkey                                 57.1%          1.06
United Arab                            55.3%          2.33
  Emirates
Region Total                           45.1%          1.49

                                            Asia
Country                           % Offsets    Multiplier *

Australia                              45.6%          1.02
Indonesia                                NR           1.21
Malaysia                               37.3%          1.12
New Zealand                               W           2.97
Singapore                              58.3%          2.25
South Korea                            63.7%          1.33
Taiwan                                 21.7%          2.04
Thailand                               26.6%           1.6
Region Total                           39.9%          1.69

                   North and South America
Country                           % Offsets    Multiplier *

Brazil                                    W             W
Canada                                 83.1%          1.00
Chile                                     W             W
Region Total                           84.2%          1.70

Source: BIS Offsets Database
Notes: NR = Non Reported
W = With held to protect company proprietary information.

* Multipliers are used only in a small percentage of the
total number of transactions. See Chapter 5 for
further discussion.

** PG = European Participating Group (Belgium, The
Netherlands, and Norway).

Table 5-1 Offset Transactions Analysis
Offset Transaction Comparisons

Data Element                         All Transactions
Total Value                           $27,090,039,493
Direct Offsets                        $10,314,928,359
Indirect Offsets                      $16,557,825,885
Unspecified Offsets                      $217,285,249

Percent Distribution

Percent Direct Offsets                           38.1%
Percent Indirect Offsets                         61.1%
Percent Unspecified Offsets                       0.8%

Source: BIS Offsets Database

Table 5-2 Offset Trans  Transactions by
Actual Value
Total, 1993-2003

Country                    Actual Value         Credit Value

United Kingdom           $5,008,303,563       $5,037,424,541
Finland                  $3,228,137,843       $3,457,807,399
Israel                   $3,003,051,089       $3,125,982,392
Netherlands              $1,675,325,707       $2,009,865,606
South Korea              $1,600,049,256       $2,129,274,493
Greece                   $1,360,944,494       $3,413,544,611
Switzerland              $1,198,226,265       $1,206,881,646
Canada                   $1,133,186,265       $1,131,126,557
Australia                $1,123,016,982       $1,146,113,610
Italy                    $1,114,412,777       $1,139,903,777
Spain                    $1,055,111,613       $1,295,616,711
Turkey                     $878,787,871         $930,518,635
Taiwan                     $824,028,358       $1,679,148,369
Germany                    $724,241,540         $724,241,540
Norway                     $708,482,461         $983,947,765
Denmark                    $455,207,245         $534,119,249
France                     $438,046,928         $794,754,494
Malaysia                   $294,807,399         $329,507,399
Belgium                    $256,995,553         $278,442,931

Total                   $26,080,363,210      $31,348,221,725
All Countries (46)      $27,090,039,493      $32,802,032,552

                                             Percentage of
                                           Transactions With
Country                      multiplier      Multiplier >1

United Kingdom                     1.006                 1.0%
Finland                            1,071                22.9%
Israel                             1.041                 5.6%
Netherlands                          1.2                10.0%
South Korea                        1.331                21.0%
Greece                             2.508                43.3%
Switzerland                        1.007                 1.5%
Canada                             0.998                 1.8%
Australia                          1.021                 2.7%
Italy                              1.023                 4.9%
Spain                              1.228                30.6%
Turkey                             1.059                 8.2%
Taiwan                             2.038                43.3%
Germany                                1                 0.0%
Norway                             1,389                25.7%
Denmark                            1.173                14.3%
France                             1.814                46.6%
Malaysia                           1.118                12.0%
Belgium                            1.083                 2.4%

Total                              1.202                12.0%
All Countries (46)                 1.211                13.0%

Source: BIS Offsets Database

Table 5-3 Multipliers by Region, by Number 1993-2003

                               % Multipliers = 1
% Multipliers < 1              (No Multiplier)      % Multipliers > 1

Europe                          1.5%       83.0%         15.6%
Mid - East and Africa           2.2%       87.9%          9.9%
Asia                            1.8%       76.6%         21.6%
North and South America         8.9%       85.5%          5.6%

Source: BIS Offsets Database

Table 7-1 Composition of the Interagency Team and Working Group

Department      Principal               Working Group Member

Commerce        Assistant Secretary     Director, Office of
                for Export              Strategic Industries
                Administration          and Economic Security

Defense         Under Secretary of      Director, International
                Defense (Acquisition,   Cooperation
                Technology and
                Logistics)

Labor           Deputy Secretary        Senior International
                of Labor                Economist

State           Principal Deputy        Economic and Commercial
                Assistant Secretary     Officer, Office
                for Economic and        Office of Multilateral
                Business Affairs        Trade Affairs, Bureau
                                        of Economic and
                                        Business Affairs

United States   Assistant U.S.          Director, International
                Trade Representative    Procurement
                (WTO and
                Multilaterial Affairs)