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Implications of offset agreements.

I. INTRODUCTION

What do offset agreements tell us about international law? This question is the primary focus of this article. The question may appear challenging in that doubts may arise as to the feasibility of interpreting international law based on a single type of contract. Moreover, the opacity and the complexity of offset agreements and defense offsets may not permit a complete analysis. Still, there are threefold answers to such doubts.

First, international agreements--treaties or international commercial contracts--are the foremost sources of international law. However, it must be stated that treaties are not as popular as they were in the 20th century. At present, new kinds of international law-making have, to a certain extent, replaced treaties. In coarse terms, it is known as "informal international law-making." (1) Informal international law-making has begun to challenge classical treaty-based law-making. Indeed, due to their idiosyncrasies, certain special agreements, such as offset agreements, may offer a certain type of law-making which challenges the classical parameters of international law and international economic law. (2) Thus offset agreements are evidence of certain trends in international law and if a certain type of agreement is in vogue, this is an occasion to reinterpret and re-identify international law. In this regard, the concept of "informal international law" will be expanded upon and elaborated in this article.

Second, the stakeholders of an international contract can tell us much about the current state of international law. The parties to offset agreements are governments and corporations. Governments are the foremost subjects of international law, whereas corporations are its ascending and putative subjects. The way these two form contracts is crucial. It gives signals to both governments and corporations with a view to acceptable standards in contracting. A precise international contract law and its concomitant practice take root, a phenomenon and process to which international law cannot remain indifferent.

Third, the subject-matter of a contract can be of utmost importance for the development and interpretation of international law. If the contract's subject-matter involves a dominant theme with which international law is involved and is attempting to resolve, that theme emerges in the clothes of international law. Indeed, there are two dominant themes of the offset agreement: one is essential security interests, whilst the other is the defense industry. Both shall be explored in this article in due course.

The argument of this article is that an offset agreement cannot be merely reduced to a contract ancillary to the defense industry's main acquisition contracts. Rather, an offset agreement reflects a larger dimension of international law in that, first, it makes clear the role of governments in the international transactions of defense companies, and, second, an offset agreement represents a challenge to international law regarding the concepts of state secrets, trade secrets, treaty, contract and national public policy. This article posits international arbitration as the mechanism to settle disputes with regards to those concepts. Hence, the offset agreement provides an important toolkit for understanding and interpreting international law. Arguably, offset agreements have become a prominent feature of international law, largely seen as instruments which offer a boost to industrial economies worldwide. (3) Their popularity seems set only to increase.

To clarify, this article starts by defining the offset agreement. The concept of "state secret" is then developed, following which national public policy's dominance over international public order is explored. The latter will explain how national security and its corollaries are favored over international peace and security, the prime objective--allegedly--of the United Nations. The fifth section will analyze the exceptionality of the defense industry, after which the sixth section will discuss "informal international law" in relation to offset agreements and will elaborate the theoretical framework of offset agreements. The following section will then deal with the concepts of treaty and contract, after which the eighth section will posit international arbitration as the most suitable method for dispute settlement regarding offset agreements. The article will conclude by reasserting the above argument with a view to the significance of offset agreements.

II. DEFINING THE OFFSET AGREEMENT

Basically, an offset agreement is the contract to offset the advantages given to the contractor by the main contract (the acquisition contract). The main contract is a sort of privilege for the supplying company and the second contract (offset contract) offsets that privilege. In fact, the purchasing government is leveraging its purchasing power through the offset agreement. The defense contractor submits to this leveraging due to his wish to enter the buyer government's market. The buyer exerts real power and defense contractors, in competition with each other, submit to the conclusion of offset agreements. The power of the buyer governments (most of whom are developing countries) comes from the fact that western defense companies have seen their domestic markets shrink (4) and are now trying to penetrate developing countries' markets.

While on the one hand, the offset agreement helps to mask the financial liabilities of companies, on the other, governments may present advantages granted by offsets as a success, although the price of the acquisition contract (the main contract) may have increased due to the offset agreement. That is, the price of the offset agreement is tacitly added to the value of the acquisition contract. Offsets could give some export advantages to the purchasing government, which in turn may sell such exports as a stand-alone success of the government, seeing as it does not have a connection with the increase in price of the acquisition contract. Hence, there is an important political economy dimension of the offset agreement. Indeed, it may even be interpreted as a contribution by developing countries to international contracting and international law.

The properties of the market are important for the ability of the purchasing government to impose its offset terms on the contractor: the acquisition contract should involve large sums. High-tech products often constitute the subject-matter of the contract, products whose infrastructure and maintenance require considerable investment and expenditure. Such products or services may be civilian (e.g., commercial airlines) or military in nature. This article looks at the latter, for which there are important reasons.

Firstly, offset agreements have come into vogue through defense procurement. The post-World War II era has seen the increasing emergence of offset agreements in arms deals. Arguably, offset practices began with the deal between the United States of America and West Germany in the 1950s, whereby West Germany was required to buy American military equipment and services to "offset" the expenses America incurred in stationing of troops in West Germany. (5) Defense offsets have now become common practice, arguably, to the point of becoming customary law. Just like many other customs, (6) the offset "practice" started at the behest of a powerful country, namely, the United States of America, and has now grown to become accepted practice in around 120 countries. (7)

Second, the most widespread offsets are still likely to take place in the defense industry. The highly dynamic defense procurement market has adopted and developed the offset practice and, notwithstanding its discontents, this trend seems to have continued. The competition between supplying defense companies leads them to offer special and attractive offsets to buyer governments.

Third, considering international law, the defense industry presents an idiosyncratic case. It is a 'sensitive' sector, in which regulation is not easy. Although national laws try to tackle the defense industry to ensure a level of transparency, accountability and the rule of law, national law per se is not the subject of this article. Rather, this article focuses on the international legal dimension. In gross terms, under the term "essential security interests", international law has procured a certain 'exceptionality' for the defense industry. That is, international (trade) law has concurred that the defense industry is an exceptional political matter rather than a purely economic sector that is to be regulated, even though it does possess market-distorting and anti-competitive effects. Still, this does not mean that the defense industry and its now well-established component--defense offset--are wholly outside international law. This article aims to clarify this 'predicament'.

Arguably, the defense contract is not directly relevant to the public--viz., the tax-payer--in terms of benefits. Defense expenditure is often regarded as a reallocation of funds that could be (better) spent on social and economic facilities that directly serve the interests of the citizens, such as health, social security, education, transport and environment. Hence defense offsets serve to compensate the purchasing country's economy through investing either in its national defense industry or in these other sectors which are directly beneficial to the public. Rather than one single agreement, there exist two (or more) interdependent agreements--the acquisition agreement and the offset agreement--that constitute a common framework.

In commercial life, it is possible to see interrelated agreements constituting a commercial relationship. In particular, in the event of a sustainable partnership among contracting parties, it is more natural that a series of contracts exists. These contracts may be mutually influential and supportive, and, indeed, may constitute the components of the same framework thus forming a "contractual relationship".

A web of contracts may be necessary because of the long-term dimension of the commercial relationship. As only one contract may not be sufficient to cover all aspects of a commercial relationship, all the contracts are to be seen in the light of a continuing commercial relationship. The element of trust is thus corroborated through multiple contracts, which reflects the real-world dynamics of commercial-contractual relations. A commercial relationship cannot always be reduced to a single contract.

This is even more important as a commercial relationship may concern a specific sector plagued by uncertainty, and the defense industry is indeed such a sector. The offset agreement aims to confront and overcome this uncertainty. It injects an element of trust into a relationship where budget overruns and program delays are inherent. Cutting-edge technology may widen the gap between the expectations of the parties and the concrete execution of the contract. Offset agreements thus "offset" exaggerated or false expectations in defense contracts. Indeed, offset agreements have become a prominent feature of defense industries the world over and have become an integral part of defense firms' strategy. This is even more natural and expected as they also serve to keep certain bundles of information secret.

III. STATE SECRETS

An offset agreement creates concerns as to secrecy. "Commitments made by the companies in terms of local arms development are not publicly available." (8) This is the case, in particular, when the acquisition agreement and the offset agreement are directly concluded between two governments. However, international law does not look upon secret agreements with a positive eye. Secret agreements are, in principle, regarded as susceptible of breaching international peace and security, a result of the experience of World War I. Still, in the post-1945 system, secret treaties are not deemed invalid; nevertheless, they cannot be invoked before UN organs, such as, for instance, the International Court of Justice, the judicial organ of the UN. (9)

Governments and national defense companies advance the concept of the "state secret" to justify the confidentiality of both acquisition and offset agreements. In the process, the concept of the state secret may be extended to things that do not deserve such high protection. There may be, for instance, rule of law concerns. Apart from the problem of accountability in domestic politics and within the framework of national law, undisclosed offset agreements may pose a problem as regards the preservation of international peace and security. Governments may breach their obligations under the United Nations Charter.

State secrets are held to bind both government and private parties/entities and may be protected through formal national legislation and measures or through informal means--this depends on the domestic law. For instance, formal legislation on state secrets have become visible in the United States, the foremost country of the defense, technology and privacy/security industries. (10) Indeed, government contractors before U.S. courts may block lawsuits by invoking the notion of the state secret and the American government may intervene in proceedings before the court on behalf of contractors. (11) The concept of the state secret may be regarded as one of the bases of the offset contract. That is, the offset contract may--legitimately--be kept secret, notwithstanding any distorting effects it may have on the market. Indirect offset contracts, which provide for offset through products or services outside the defense industry sector--that is, investment by the supplying company into the host country's civilian products or services, may distort the market by favoring the provision of products and services from certain companies. For instance, a defense acquisition contract can be offset by investment in the tourism industry or agriculture, or through help provided by the contractor to export specific products of the host state (which may include products of the private sector of the host state) to third countries.

Additionally, the offset as provided by the contractor may be research and developmental support for local civilian technology via cooperation with certain companies of the host country, such as, for example, in the field of telecommunications. The distortion of the market takes place especially if certain products are pledged to be bought from a certain company. Rather than buying the same products or services from other competitors, a certain provider is chosen for the sake of fulfilling the terms of the offset contract. Moreover, this transaction may take place under wholly nontransparent conditions. More expensive, yet inferior goods and services may be bought rather than higher quality goods and services at a lesser price. The competitors may be unaware of the presence of the offset agreement although they may recognize the mysterious "success" of their competitors due to sales made under the offset transactions.

Still, the notion of the state secret prevails over fair competition. Worse, there may be no accountability mechanism or determinate criteria as to the selection of products and service providers. The government may favor specific providers and support them through an undisclosed offset agreement, and this may legitimately take place wholly under the cover of state secrets.

From another perspective, offset agreements may be considered unfair business practices. Business practices (lex mercatoria) are determined through the traditions of the international business community. Nonetheless, what constitutes "unfair practice" may be difficult to determine. Moreover, not every unfair business practice constitutes an illegal practice. As such, the business perspective may not coincide or be compatible with the legal perspective. If this "unfair" business practice is qualified with the label of "state secret," legal proceedings are difficult to initiate.

We are thus faced with a dilemma. On the one hand, the offset practice may be supported as a wholly legitimate practice, whilst on the other, such "fair business" practices may violate "legally established" business practices--namely, those of fair competition and fair trade. If the business practice is widespread, a clash between lex mercatoria and written trade law--consisting of fair competition and fair trade--emerges.

This clash can be prevented through the concept of "secret law." Offset agreements can be defined as 'secret laws'; that is, they constitute classified information that concern state security. Defense industry practices are concerned with state security and may thus deserve to be non-transparent. Yet, secret law--a term which was used especially to denote Eastern European countries' national legal systems during the Cold War or, at present, to define national directives and regulations dealing with security concerns in the United States after the 2001 terrorist attacks--should have a different meaning in international law. (12) In effect, "secret law" represents those treaties which are not registered with the UN Secretariat and which are still valid--the only sanction being that such treaties cannot be invoked before UN organs. Indeed, offset agreements are not registered with UN Secretariat and remain confidential.

"Secret law" has many security connotations. Indeed, defense offset agreements have this security dimension. However, there are caveats to be made at this point, because offset agreements cannot be wholly interpreted within the security dimension. First, offset agreements are, at the end of the day, "trade deals." The national security dimension cannot cancel out the commercial dimension of the offset agreement. Second, the effort expended on the secret should be the reason for protecting the business secret. Indeed, offset agreements involve a serious effort on the part of companies and governments to keep their business information secret. Third, the confidentiality, or secrecy, of the offset agreements gives them a certain "economic benefit." That is, the mere beholding of the information from outsiders creates an economic benefit for the parties to the offset agreement. This, indeed, is the commercial dimension, and the latter is compatible with the definition of "trade secret," a wholly protected legal category, rather than the ambiguous term of "secret law."

Even negative information such as research options which have been tried, tested and found to be redundant or inoperable, may be considered trade secrets. (13) The reason is that costs are also incurred in acquiring negative information. Negative information may not be common knowledge within the industry which constitutes an advantage for those who have access or are privy to this knowledge. Hence, the use of offset agreements may represent the culmination of negative information and previous failed trials, which represents valuable information that is to be withheld from competitors. In this context, business strategies, business methods, marketing plans and schedules and information about research and development activities may all constitute trade secrets (14) and therefore may all constitute part of an offset agreement.

Trade secrets confer some sort of economic benefit on their holders. A trade secret is an invisible part of a corporation's intellectual property rights and represents an important contribution to a company's value. More concretely, a trade secret may be a customer or client list, a business plan or a manufacturing process; (15) all have a tangible commercial value (16) and it thus makes commercial sense to hide them from competitors. In the case of competitors discovering or acquiring this information, there is a possibility of them legally and legitimately utilizing it. Moreover, trade secret can be applied to those issues which are not amenable to patenting. Arguably, offset agreements have become too widespread to be patented by any competitor, whatever the variations may be among different offset agreements. Offset agreements may be envisaged in this light--as trade secrets. Another reason for the non-patentability of offset agreements is that they do not seem sufficiently inventive to be deserving of a patent. A defense offset is, ultimately, a contract. A contract cannot be patented but it can be kept as a trade secret. The type and the style of the offset agreement may be kept secret for good, unless discovered by others. This is also an advantage over patents, in which the protection is generally limited to twenty years.

Trade secrets are protected without the need for registration with any authority. No procedural formalities exist. There is no time limit to the duration of a trade secret. Indeed, this 'limitlessness' is what ensures a sustainable relationship between selling companies and purchasing governments. "[T]here is in a sense no law of trade secrets." (17) That is, unless an illegal means is resorted to, trade secrets can be legitimately discovered and used by the competitors. Illegality may occur only if a specific contract protecting a trade secret is breached or a non-disclosure obligation (or non-compete clause) of an employee is violated. (18)

Moreover, trade secrets' subject matter may be broad. For instance, they may include sales methods, a list of suppliers and/ or customers, all constituting significant constituents of offset agreements, in the field of defense industry. Indeed, large defense industry companies and governments build and improve long term relationships among themselves by adopting specific sales methods, e.g., installments, technology transfer, training, industrial participation and activities, specialized technology transfers and individualized price reductions. Any of these may constitute an integral part of the trade secret. All and any of these may constitute part and parcel of the secret. In particular, if these techniques and practices are not sufficiently inventive and new, considering them as trade secrets rather than as patentable matters is more convenient. Both companies and governments may wish to keep these as trade secrets, which need not be patented, in order to keep a competitive edge over their competitors. These specific techniques and practices of the offset agreement may prove sustainable only by being kept confidential. Confidentiality thus makes commercial sense and it has understandably become usual business practice to keep offset agreements and their costs secret.

Offsets' complexities actually make it hard to measure the true cost of defense deals. Indeed, sometimes it may be difficult to form the right contract. Still, "[s]ince 1975, many countries purchasing major defense equipment have required offset agreements to boost their industrial economies." (19) A local firm (or firms) in the buyer's country is advanced, (20) thus, governments and companies on both sides are engaged in offset negotiations. A good relationship between the contractor's government and the domestic company is necessary, too. (21) Officially or not, the government of the defense contractor is always in the equation.

Hence crafting offset packages is a challenge, which is why brokers and lobbyists are effective in this field. Facilitators may help navigate the complexities of negotiation, contracting and dispute settlement. However, judging performance remains difficult because of the lack of openness. Not only are the offset agreement and the acquisition agreement confidential, but the negotiation phase is also conducted behind closed doors.

All in all, secrecy surrounds offset agreements, which poses questions in terms of public policy.

IV. PREPONDERANCE OF NATIONAL PUBLIC POLICY

Public policy could be defined as the course of action adopted by the government to deal with the needs and the problems of the public. It does not consist of single acts or legislative measures; rather, it is the totality of actions, measures and engagements on the part of the government in dealing with public concerns. Hence, national public policy addresses the concerns of the national public, while international public policy deals with the concerns of the international public. International law can be said to represent international public policy.

Specifically, offset agreements are evidence for the dominance of national public policy over and above international public policy, and defense offset agreements represent national security interests. National public policy in the guise of national essential interest comes before formal international law and as offset agreements embody national "essential interest" in its purest and strongest form, they constitute, in the realist perspective of international law, exceptions to that international law. International law cannot override national priorities. The former must allow for exceptions to and for the latter.

Indeed, the exceptionality of essential national interests has been overtly recognized in European Union (EU) law, (22) World Trade Organization (WTO) law, (23) the North American Free Trade Agreement (NAFTA), (24) the Energy Charter Treaty (25) and bilateral investment treaties. (26) Hence, in terms of classical public international law, the national essential interest is part of exclusive domestic jurisdiction. Indeed, Article 2 section 7 of the United Nations (UN) Charter (27) provides that the UN is not entitled to intervene in matters that are essentially within the domestic jurisdiction of any state. The limit of the UN--the foremost organization of international law--is the "essential" domestic jurisdiction, and the defense industry--an exceptional national economic sector--is inherently under domestic jurisdiction. That is, the economic dimension of domestic jurisdiction can be read into Article 2 section 7. Offset agreements, by distorting competition and fair trade, may violate international commercial law. Offset agreements are illegal under the Government Procurement Agreement of the World Trade Organization (28) and the North American Free Trade Agreement (NAFTA), (29) and the European Union does not see them in positive terms, although they are not prohibited strictly under EU law. (30)

Offsets are inherently regarded as a violation of the free market due to their market-distorting effects. Offsets lead to unfair competition. The World Trade Organization (WTO) prohibits offsets and bans the use of offsets in its criteria for contract evaluations. NAFTA holds a similar position on offsets. However, offsets are permitted when they are necessary for the protection of essential security interests. A similar exception exists within EU law. Such security interests are considered valid reasons for derogating from treaty or contractual obligations. Article 25 of the International Law Commission's (ILC) draft on the Responsibility of States for Their Wrongful Acts specifically includes essential security interests within the parameters of necessity. (31) Application of Article 25 of the ILC is seemingly the most detailed and concrete version of essential security protection.

Under Article 25, the act (involving essential interests) should be the only way to protect an essential interest against a grave and imminent peril. It is important to point out that conditions of Article 25 have been diligently examined by the International Court of Justice (ICJ), as in the decision of the Gabcikovo-Nagymoros project. (32) The decision made it clear that the principle of necessity can be invoked only in the case of an essential interest facing a grave and imminent peril. Moreover, the course of action taken under the principle of essential security should be "the only way" to protect the essential security interest. (33) No other alternative should be at hand. The threshold for the ICJ accepting the invocation of necessity (essential interests) is highly elevated. Yet this difficult-to-attain threshold should not divert our attention from the fact that the principle of necessity may be invoked as an exception in a treaty regime. The principle of necessity is conceived as an exception in existing treaty regimes.

However, in the case of offsets, the treaty framework itself is based upon the rationale of essential interests--that is, the principle of necessity. Offset agreements are concluded between and amongst governments and companies in the first place with a view to essential security interests. The normative framework is wholly based upon the necessity of providing essential security. Thus, the offset agreement constitutes an exception. It establishes an exceptional legal framework and represents the culmination of the protection of essential interests). Rather than being an exception to another treaty regime, it is a norm and by entering into offset agreements, governments and corporations accept this norm of the essential security interest. Hence the importance of the offset agreement for international law. It has become a conspicuous policy exception in international law. Hence the need for a further definition and delineation of national public policy.

National public policy is an aspect of national sovereignty. It is a function of statehood on and over a certain territory, or territories. The sovereign state, as the original subject and actor of international law, has the right to shape international law. In the process, national public policy determines the stance and attitude of the sovereign state. National public policy is also an aspect of the social contract. Arguably the relationship between the state and citizens--the relationship that represents the fulcrum of the social contract--consists not merely of civil rights and human rights, but also involves and invokes the assurance by government of the security of its citizens. Hence, defense offset agreements may be envisaged within this assurance.

Whether defined as an aspect of national sovereignty or social contract, national public policy is not invoked to prevent the application of foreign laws in the forum state. That is, this is not a "conflict of laws" situation where the applicability of a foreign law to a fact containing a foreign element is discussed. Rather, the issue here is the ability to conclude a specific contract with a view to protecting and promoting national interests. In other words, national public policy, in the context of offset agreements, has a constitutive function rather than a preventive one. National public policy promotes a specific type of international commercial agreement (offset agreement) and thus shapes international public policy. That is, the widespread practice of concluding offset agreements in the field of defense could be labeled as "international public policy", which is undergirded by national public policies. Then, rather than a clash between the two, one ought to underline the influence of national public policy on international public policy.

Yet, there may still be questions about the preponderance of national sovereignty and national public policy. The distortion of World Trade Organization (WTO) trade rules could increase to such an extent that the WTO may request a change in the national trade policies of the countries practicing offsets. The Trade Policy Review (TPR) mechanism of the WTO serves such a formal supervision by the WTO. (34) Yet, the WTO has still not engaged on that course of action through TPR or any other instrument. To date, there has been no such warning regarding offsets from the WTO to any nation. Still, national public order could eventually be criticized and challenged via the TPR mechanism of the WTO, which is one of the foremost representatives of "international public and commercial order."

Offset agreements are about the relationship of private property rights and markets. This relationship has both an interstate and company-state dimension. Indeed, offset agreements should be understood as a reflection of the preponderance of the governments in shaping the discourse and the instruments of international property rights in the field of defense. Although global capitalism and international capital accumulation take on an "impersonal" and "neutral" shape in expanding, this impersonality and neutrality become far less defensible in the case of the defense industry. In this sector, the preponderance of both the developed countries and the developing countries, together with their "national" companies, becomes clearly visible. This makes every acquisition contract and offset contract exceptional.

Put differently, the so-called argument of neutral and natural capital accumulation, where states are seen merely as passive objects of a system, does not hold in the case of the defense industry. Offset agreements endorse the dominance of national governments in and over the capitalist system. (35) The purported separation of "the economic" and "the legal" and the submission of the rights and obligations of the contracting parties to the "technical" and "neutral" international commercial contract does not stand up to scrutiny in the case of offset agreements.

Offset agreements make the state's contribution apparent in the accumulation of capital. Those companies which are party to the offset agreements are under the strict supervision of their own states. States oversee the global capitalism of the defense industry and the making and management of the global capitalism of the defense industry cannot be accepted without the participation of states. (36) States pursue specific national public policies in the field of defense.

National public policy consists of essential security interests that can be invoked against economic interests, (37) and this "national" application of "policy" challenges the objective of bringing about an orderly and ordered international trade regime whereby market distortion and unfair competition are prevented. In brief, international economic law has accepted the concept of "essential security interests" as a universal exception in the guise of offset agreements in the field of defense. This raises the question of the 'exceptionalisnr or uniqueness of the defense industry.

V. DEFENSE INDUSTRY

The preamble to the UN General Assembly resolution 64/ 48 stipulates "the right of all states to manufacture, import, export, transfer and retain conventional arms for self-defense and for security needs and in order to participate in peace support operations." (38) In other words, the legitimate interest of states in acquiring conventional arms to exercise their right to self-defense is recognized. That is, the production and transfer of conventional arms are seen as the inherent rights of states.

The conventional arms trade, however, has been poorly regulated. Indeed, the 2014 Arms Trade Treaty (ATT) is the first global legally-binding treaty in regard to the control of the global trade in conventional arms. (39) The ATT lays the responsibility of preventing such diversions on the shoulders of governments. The ATT has a criminal law dimension. That is, the current regime of arms trade has a criminal law perspective, rather than a perspective of regulating the economics and the contracting of the arms trade. This treaty is rather concerned with the prevention of the diversion of arms into war crimes, crimes against humanity and genocide. Yet, there is no such treaty or any other internationally binding instrument regulating the commercialization of arms industry. Likewise, the defense offset agreement is not regulated in international law. Hence the large margin of manoeuver peculiar to offset agreements.

The lack of reference by the ATT to World Trade Organization (WTO) law--the lack of coordination, that is, between the ATT and the WTO--is testimony to the fact that the ATT is more concerned with international criminal law and does not, in fact, deal as such with trade or contracting. Arguably, trade restrictions or contracting practices in the field of defense industry are exempt from WTO law, and from any other regulation. That is, rather than being part of the international trade law corpus or WTO law, the ATT should be considered, in general, an addition to the regulation of international peace and security and to international criminal law. Put in more concrete terms, the ATT is to be regarded as an adjunct and continuation of Chapter VII of the UN (United Nations) Charter, common Article 1 of the 1949 Geneva Conventions and the International Law Commission's draft articles on the responsibility of states for their wrongful acts. That is, the ATT is a supplement to the questions of self-defense, enforcement actions in international law and the use of force.

In this context, the defense industry is regarded as inherent to the right to self-defense, as proclaimed in Article 51 of the UN Charter. If self-defense is legal, the same is true of "the economic means and the instruments" ensuring that defense. Offset and acquisition agreements are thereby to be conceived and evaluated under the notion of self-defense. It is interesting to note that a core UN exception to the prohibition of use of force legitimizes an economic right--a contractual right, or a right to make a specific contract.

Article XXI (b)(ii) of the General Agreement on Tariffs and Trade (GATT) provides for security exceptions covering trade carried out for the purpose of supplying a military establishment. There is also a specific security exception in Article XXIII:1. Thus all arms trades are carved out of the WTO trade. WTO members can impose all kinds of restrictions on private commercial deals by invoking security exceptions. Cross-border arms sales are at the discretion of governments, unless they contribute to and facilitate war crimes, crimes against humanity or genocide. (40) Such large discretion provides a free hand in shaping and making defense industry contracts. The "special" status of the defense industry leads to "special" agreements, offset agreement being foremost among them. In this respect, an offset agreement is a "special" technique which brings defense contracts into the realm of "informal international law," which will be explained in the next section.

Most defense companies turned their attentions to developing markets after the end of the Cold War, and once again following the 2008 economic crisis that struck the United States and Europe. (41) In particular, developing countries earned a certain leverage over western defense companies and have used this opportunity to gain arms production capabilities. (42) This has taken place mostly through confidential deals.

Procuring investment in the defense industry of a host country by a foreign company constitutes Foreign Direct Investment (FDI). Yet, rather than through classical marketing methods of an investment, defense products and services are marketed through political power, lobbying and a strong company image. Defense products and services need be sustainable. Otherwise, they would be outmoded in a short span of time. Moreover, it should be possible for military technology to be converted into civilian technology, thus directly benefitting the general public. Actually, offset agreements are partly motivated by this wish to transfer cutting-edge military technology into the civilian domain. This is all the more natural as, in general, defense companies are structured to also provide civilian products and services. For instance, Boeing, (43) aside from defense products, produces and sells commercial (civilian) airplanes. It is wholly conceivable that if Boeing wins a defense contract from a purchasing government, the latter may require offset in respect of civilian airplanes. Actually, their presence in both the military and civilian sectors leads defense companies to engage in intensive negotiations, lobbying and brokering in respect of offsets.

For instance, Lockheed Martin, (44) the world's largest defense company, has an effective political network and enjoys bipartisan support in the U.S. Congress. (45) Indeed, the company sets aside a considerable budget purely for lobbying (46) The American government and Lockheed Martin enjoy a particularly close and fruitful relationship. Indeed, there exists a wider symbiosis between governments and defense companies, which is visible not only in domestic lobbying (47) but also in international lobbying. For example, Boeing funds American diplomatic efforts abroad and, in return, American diplomats and politicians lobby for and on behalf of Boeing to improve the company's sales. (48) Actually, this peculiarity of the defense industry--the symbiosis of essential security interests and economic interests and the secrecy surrounding offset transactions--leads us to analyze the concept of "informal international law," the topic of the next section.

Foreign direct investment (FDI) involves the transfer of technology and expertise. It is concerned with participation in management and may take the shape of a joint venture. Simply buying shares of another company is not sufficient to qualify as FDI. The buying company must control the company whose shares it buys. Hence, FDI is distinct from mere capital movements. The foreign direct investor has an essential stake in the sound progress of the investment and is closely associated with it. That is, there is an identification between the investor and the investment made. This is typical of acquisition contracts and offset contracts in the defense industry. The investor controls its business activities in the host country.

Multinational firms--such as those operating in the defense sector--are adept at engaging in FDI. (49) Normally, FDI is rationalized as the consequence of lower production costs, product differentiation or accessing economies of scale. (50) Yet, the negative view of FDI argues that the foreign investor merely brings low-level technology to the host country. Indeed, this has been one of the hotly contested issues in India where defense offsets are popular. (51)

FDI is a function of the strategy of firms (defense firms) to control and increase their production. Offset investment, as a form of FDI, should be seen in that light. Defense offset is the strategy of defense firms to access foreign markets. It is seen as a companion to acquisition contracts. The governments of defense companies may not be happy with offset agreements and may see them as prejudicial to their own national defense industry. Indeed, for example, the American administration is disturbed by this rapid growth of offset industry, but regards it as a necessary concession granted for the sake of acquisition contracts.

Defense firms are dependent on their governments in their FDI and internationalization strategies. In particular, in the defense industry, where critical technology and national security concerns are prevalent, governments always keep an eye on the activities of the companies. In other words, the private defense firm's activities abroad in the form of FDI cannot be extirpated from its own government's supervision and approval. Hence this article argues that in the offset agreement, whether clearly visible or not, governments are in equation at both sides of the agreement. Thus, it is all the more natural to conceive of this relationship as part of international law. Yet, it is still challenging to envisage offset agreements within the rubric of classical public international law, which is why we resort to the concept of "informal international law".

VI. INFORMAL INTERNATIONAL LAW

The term "informal international law" has been put forward to denote the existence of informal processes, informal actors and informal output. (52) In fact, rather than law-making, "regime building" remains the central question. In "informal international law," non-binding rules take center stage. (53) And, as for enforcement, rather than coercion, habitual compliance is key. Less politicized and more intensive debates over a longer period of time culminate in informal law. (54) Although the arena of informal international law is trans-cultural and trans-national, it is also an unofficial arena and is not transparent, with little or no publicity. Most importantly, informal international law is preferred in sensitive fields, such as finance, banking supervision, labor standards, health regulation, food regulation, competition law, and also, arguably, in the defense industry.

In this respect, arguably, the defense offset agreement constitutes informal international law, primarily and particularly due to its process and secrecy. Granted, the actors of offset agreements--government and company representatives--have formal statuses. However, "invisible" brokers and lobbyists are "informal actors." Admittedly, the output is also "formal," in that offset negotiations end up in a "formal" offset agreement, yet, the whole process is informal in that the exact parameters of the negotiation and conclusion of offset agreements are not known in advance. In that regard, there is a lack of publicity.

"Informality" of offsets is more compatible with the fact that the defense industry is, in effect, not regulated by "formal" international law. The defense industry is still seen as a national matter and its parameters are determined by national necessities --that is, by national public policy. It is interesting in that although the foundation of international law is international peace and security, the latter did not automatically bring about a regulation of defense industry, which stands as an important element of international peace and security. Arguably, the defense industry remains lodged in a non-law area and within this non-law area there exists a certain preponderance of offset agreements. That is, offset agreements, in this void, have become a cogent factor in building international partnerships in and via military procurement.

The informality of offset agreements is inherent in the fact that offset agreements are not publicized. The reasons for the conclusion of offset agreements with specific companies for specific products and services are not disclosed to the general public. In general, open deliberations on the conditions of offset agreements in the national parliaments do not take place. Actually, all those lacking properties are that of public law. Reason giving, open deliberation and publicity are components of public law and formal accountability. This does not mean that offset agreements are definitely outside public law; it simply means that offset agreements should be envisaged under the rubric of another conception of law--that is, of "informal law."

Offset agreements constitute an "informal sector," to borrow a term from economics. (55) This term normally denotes employment outside the modern industrial sector. The informal sector may be at the low-end or the top-end of the economy. The low-end jobs are generally those that do not include work security and social security. It is unreported employment, which evades regulation and taxation. Those who cannot participate in the modern industrial sector engage in informal employment and do not participate in the mainstream economy.

Yet, the term "informal sector" may also be applied to the top-end jobs, products and services requiring intensive research and development, advanced technology and a high degree of innovation at the outer edges of capitalism. (56) The defense industry is such an economic sector. It is highly innovative, specialized and idiosyncratic and requires a legal framework distinct from that of the mainstream economic sector. Hence offset agreements fulfill that function. They are special, individualized agreements for the "informal" top-end of the defense industry.

True, the defense industry is, at the end of the day, under government supervision and may be taxed. Yet, the informality of the business transactions in the field of defense manifests itself through non-transparency, lack of open deliberation, longterm and successive contracts conducive to confidential and sustainable relationship between governments and companies without much public knowledge, the transfer of cutting-edge and ambiguous technology that may prove problematic and the need for a great(er) degree of mutual trust, rather than the stringency of paperwork and complete documentation. That is, the offset agreement represents the culmination and the evidence of the mutual trust between governments and companies with a view to full and lasting participation.

This "informality" may also be a euphemism for the "incompleteness" of the transaction. In other words, the "informality" of the offset transaction is a veil covering the incomplete offset agreement. On the one hand, arguably, the offset agreement seems an efficient contract in the field of defense industry --"an efficient contract gives the optimal incentives for trade and investment." (57) On the other hand, the offset agreement constitutes only one component of the "contractual relationship" between the supplying company and the purchasing government. Hence, as a self-standing contract, the offset agreement is "incomplete" without other contracts within the "contractual relationship".

In this regard, the "incomplete contract theory" maintains that a single, specific acquisition contract may not provide for full security and efficiency regarding contingencies. (58) Moreover, the cost of writing a complex and lengthy single contract may be onerous. (59) Indeed, uncertainty and intricate bargaining procedures exist within the defense procurement. The search for adequate offset to balance out the rights and obligations of the parties, the degree and the method of the transfer of sophisticated technological know-how, the sensitivity involved in finding a right and reliable counterpart (government and company), the frequent delays in the delivery of the products and services and the need for adjustments throughout the implementation of the defense procurement, in particular, during the long-term deals, all recall the theory of "incomplete contract".

Incomplete contract is a requirement because of the uncertainty related to the determination of the transacted product and service. That is, defense industry transactions involve cutting-edge technologies with a great variety of customized products. Defense industry goods and services are exceptional and specific and governments request specific defense products and services for specific needs. The product to be delivered to the government may be subject to successive adjustments, together with unexpected hitches and delays, and every government poses new challenges for the defense contractors. Hence, offset agreements together with the chief acquisition contracts are incomplete contracts, which do not constitute the totality of the contractual relationship, but rather represent the expectations, the reputational concerns and the business culture of the international defense industry transactions. (60) They represent the equilibrium reached as a result of repeated transactions in the international defense market.

The incompleteness agreement may also be invoked from another angle--that is, from the problem of accounting. The defense industry involves high-tech products, highly trained personnel and sophisticated infrastructure. But an equally important problem is with clear accounting. The offset and its suitability to compensate for the acquisition contract may not be amenable to neutral accounting. For instance, the value of the training to be given to the purchasing government's personnel may be assessed differently by the government and the defense contractor. Or, the level of technology transferred could be found insufficient by the government while the defense contractor may find it in tune with the acquisition and the offset agreement.

Hence, on the one hand, the offset agreement may be concluded behind closed scenes while on the other hand, once concluded, there may also emerge the problem of exact accounting. It is true that contracting has never been an exact science and that contract may include a speculative aspect. Yet in defense offsets, this higher degree of fragility and speculation forces the boundaries of a reliable, complete and one-time contract. A secret offset accounting smacking of corruption is not the main issue here. The real problem is that the defense accounting may be subject to inevitable deficiencies--whether secret or not. Hence this problematic accounting leads governments and companies to reach "informal" understandings.

Such symbiosis of formalism and informality, together with considerable state intervention, leads us to further question the nature of the offset agreement. That is, does the offset agreement constitute a treaty in the sense of public international law or an international commercial contract?

VII. OFFSET AGREEMENT: TREATY OR CONTRACT

Arguably, in offset agreements, the state is operating as a commercial entity (Jure gestionis), not as a sovereign power. The contract has an economic value, notwithstanding its repercussions on state sovereignty. Indeed, the supplying company would prefer to treat its agreement made with the state as an international commercial contract, whereas the purchasing government may prefer to consider the offset agreement as a state contract within the rubric of its domestic legal framework (under its administrative law). The latter favors the sovereign powers of the state. That is, the state would prefer not to label the offset as a purely international commercial contract.

Be that as it may, the offset agreement challenges the traditional understanding of treaty and contract. Roughly said, treaty is the agreement between states while contract is concluded between private (individual) persons and companies. The distinction between the two is based upon the identities of the parties. Moreover, treaty connotes a public international law domain, whereas contract implicates the private law domain. The public law domain signifies the presence of a sovereign power with superior/supreme sovereign concerns whereas private law is concerned with private individuals and corporations advancing their own (equal) private interests. In effect, the offset agreement comprises the properties of both.

The contract serves two main purposes: autonomy and welfare. (61) Thanks to the freedom to commit oneself through contracting, one can indeed increase its autonomy and welfare. (62) A similar relationship exists as regards the sovereignty of states. Making treaties strengthens the sovereignty of states, just as making contracts strengthens the individual's autonomy. Thus, the treaty and the contract can be interpreted in similar terms. But more than labeling the offset agreement as a treaty or contract, it may be more useful to decide the way to interpret the offset agreement. That is, are we going to interpret offset agreements as contracts or as treaties?

Hence the difficulty with interpretation of offset agreements. Are offset agreements to be interpreted according to textualism (contractual formalism) by sticking merely to the text or (modern) contract theory by making teleological interpretation? Both are contractual methods of interpretation. (63) Contract theory argues that the agreement cannot be reduced to its mere text. What counts is the expectations of the parties, and, in this respect, the practice of the parties to the treaty is as important as the treaty's wording itself. The outward acts of the parties help determine the shared expectations of the parties. The context of the treaty, not only the written words is important. In this sense, there is a degree of subjectivity in treaty interpretation. (64) While the textualist (formalist) approach focuses on the interpretation of the treaty in the treaty's actual text and wording, contract theory does not content itself merely with textual boundaries. Textualism looks at the neutral meaning to be ascribed to treaty terms by impartial third parties. (65) In contrast, contract theory maintains that the putative expectations of the contracting parties could be employed to fill contractual gaps. The contract is seen as more than the written contract itself.

For some, conceiving of a treaty as contract is inconceivable as contract theory would make the interpretation of treaties too flexible. Still, treaty interpretation may be compatible with contract theory. Arguably, treaty interpretation, as evidenced by the Vienna Convention on the Law of Treaties, (66) is in tune with such a "contractual approach" to treaty. The treaty interpretation cannot be reduced to textualism where repeat interactions are at issue rather than a discrete and single interaction. Article 31 of the Vienna Convention refers to the "practice" and the "context" of the treaty, in addition to its wording. Moreover, Article 31(4) refers to the "special meaning" to be given to the terms of the treaty in case the parties so intended. This is the foremost embodiment of the modern contractual theory where the shared expectations of the parties are sought. Article 32 of the Vienna Convention also refers to the preparatory work and the circumstances of the conclusion of the treaty as the supplementary means of interpretation. Both are all necessary to interpret the "outward acts" of the parties which can be observed.

Indeed, the offset agreements imply a long-term relationship with a series of interactions. Only focusing on the wording of the offset agreement would prevent us from understanding the fact that the offset agreement involves a long-term commitment requiring mutual trust. This "relationship" between the government and the company cannot be merely reduced to the "text" of the offset agreement. The written agreement is only the "evidence" of this relationship and may be subject to successive adjustments, implicit and "informal" understandings and tacit changes which may take place under an overarching umbrella treaty.

In effect, real protection is given to those contracts, which are under an umbrella treaty. For instance, protection by the International Center for the Settlement of Investment Disputes (ICSID) (67) has made any unnamed investor secure thanks to the bilateral investment treaty between two governments. The contract--between the contractor company and the purchasing government--is thus automatically to be interpreted under international law. In this manner, international commercial contracts become more "public". (68) The same may be said in respect of the "privatization" of public international law. The more private individuals participate in treaties or treaty frameworks, the more public international law assumes a private law dimension. (69) Legitimate expectations as created by globalization justify such an intertwining of public and private law. Globalization is about more and more national markets being penetrated by global transactions. Many nation-states' domestic concerns are currently regulated by international transactions. This intertwining of foreign and domestic elements increases the legitimate expectations of private individuals and governments alike.

Although an offset agreement, prima facie, involves only a contractor company and a government, there is an explicit or implicit agreement between the government of the contractor company and the purchasing government. No defense company acts without the supervision of its own government. If a defense industry company enters into an agreement with a foreign government, there shall be explicit or implicit consent of its own government.

In fact, the acquisition agreement and the offset agreement are executed under the tacit umbrella as between two governments. This is even more understandable as corporations are not autonomous entities under international law. Moreover, there may not be a formal treaty between the two governments at all. This informal law dimension of offset agreements puts them into an international law framework through the backdoor--that is, through the "presumed presence" of the government of the defense contractor in the offset agreement, which creates legitimate expectations stemming from international law.

The contractor company is entitled to rely on legitimate expectations rooted in international law. The general safeguards of international law, such as state responsibility for internationally wrongful acts, the prohibition of unfair expropriation of the investor's property and the concept of pacta sunt servanda (70) enter the stage, even though the only apparent interlocutor of the purchasing government in the contract seems to be an individual company. This is due to the peculiarity of the defense industry, the increasing penetration of national markets by foreign governments and companies, the ascent of individuals and companies in treaty frameworks; the understanding that public law and private law can work together symbiotically and the informal nature of international law-making.

"Informal international law" increases the activism and dynamism of private actors with the "informal" presence of the state behind the scenes. The individual company becomes a partner and the interlocutor of another government thanks to the permission of its own government. Therefore, it is even more normal to expect in those contracts between company and purchasing government the same guarantees provided in classical public international law. They cannot be considered private, commercial contracts isolated from the safeguards of international law. These treaty and contract dimensions of the offset agreement raise challenging questions regarding the importance of dispute settlement. The mutual trust, the informality, and the confidentiality surrounding offset agreements lead to the conclusion that international commercial (and investment) arbitration is apt to examine and settle offset disputes.

VIII. INTERNATIONAL ARBITRATION

International arbitration seems the most suitable dispute settlement method for disputes involving offset agreements. There are several reasons for this assertion. First, the essential security interests of the state can be objectively evaluated before neutral arbitrators, rather than by state courts. International investment arbitration tribunals do not permit the self-judging of essential security interests by governments. (71)

Second, international arbitration--in particular, international investment arbitration--has traditionally dealt with international contract and treaty. That is, the investment contract between the government and the company and the bilateral investment treaty between the two governments (the purchasing government and the government of the investing company) are considered in tandem by the arbitral tribunal. The same arbitral tribunal draws up the interpretation of the treaty and the con tract. Private commercial rights are considered in the light of an "umbrella" treaty and the treaty is examined with a view to ensuring the commercial balance between the contracting parties. Thus, the treaty and the contract are visualized through both public international law and private commercial law. They influence and modify each other with a view to a sound settlement.

Granted, not every acquisition and offset agreement is concluded under an "umbrella" treaty. The acquisition and the offset agreements may constitute self-standing deals between the purchasing government and the contractor company. Still, international arbitration is the most convenient method as it can consider both dimensions of the offset agreement--that is, commercial rights and obligations and international legal rights and obligations. That is because, as mentioned in the last section, the shadows of governments are ubiquitous, even though companies may appear to be the 'visible' actors. That is, every defense acquisition agreement and every offset agreement is amenable to interpretation under both public international law (as if the deal is between two governments) and private commercial law (as if the deal is merely between two commercial operators).

This is a crucial matter because an offset agreement cannot be accepted solely as a matter of pure commercial transaction. It involves state secret(s), state security, public policy, the defense industry and probably and possibly a treaty or a treaty framework between the state of the supplying company and the purchasing state. Inter-government relations are behind the scenes in every offset agreement, whatever the commercial appearance of the transactions. International arbitration can readily cope with all these challenges.

Offset agreements involve states and companies. Indeed, international arbitration has an established tradition of dealing with disputes involving states and companies. International arbitration can deal with offset agreements in an effective manner without reference to a court of law. Moreover, the International Court of Arbitration of the International Chamber of Commerce offers states a specific deference and does not treat them as private contractors. (72) International arbitration is private dispute resolution in which individuals, governments, and corporations can take part. There is no uniform practice or procedure of international commercial arbitration. (73) Arbitral procedure depends on the dispute at hand and the wish of the parties to the dispute. This is one aspect of the flexibility of arbitration. Therefore, offset agreements can be subject to adequate procedure as decided by arbitrators, parties and counsel, whatever their complicated nature.

The history of international arbitration is evidence that international arbitration operates among participants in specific trades. (74) In such communities, there are implicit expectations and peer-group pressures. (75) The reputation of merchants within a group is of utmost importance. This concern for reputation is the most important mechanism for the enforcement of arbitral agreements and awards. An analogy may be made with the current global community of the defense market and industry. Within the latter, governments, companies, lobbyists and brokers are well-acquainted with one another and with the various exporters and importers of military equipment and services. The stakeholders' concerns regarding reputation are paramount as the acts of all the stakeholders are observed in this closed market and the insiders of this sector assess and evaluate each other on a continuing basis. This is a closed community and international arbitration is optimally structured and positioned to deal with closed communities. Hence it is natural to resort to international arbitration in offset disputes.

International arbitration deals with both commercial matters as well as public policy issues. Offset agreements have both commercial and public policy dimensions and both can be adequately examined before the international arbitral tribunal. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (76) explicitly provided for public policy exceptions to the enforcement of foreign arbitral awards. In other words, arbitrators cannot solely look at the commercial and investment dimension of the acquisition and offset agreements, but also must consider the public policy implications of their award; otherwise, the award will not be enforced.

Offsets take place through Foreign Direct Investment (FDI). In contrast to mere capital movement (portfolio investment), a certain physical presence in the host country is at stake. This physical presence involves technology transfer, execution of training programs and joint management and participation in the home state's industry can take place. Hence, international investment arbitration (e.g., as takes place at the ICSID--the International Center for the Settlement of Investment Disputes) is a convenient platform for settling disputes regarding offsets. Offset contract does not limit the totality of the relationship between the supplying company and the purchasing government. Aside from the offset contract, the host state's global attitude towards the supplying company as well as the relationship (and the treaty) between the two states are to be considered. This is not a simple commercial arbitration limited to the arbitration agreement and the commercial contract between the parties; the relationship is larger and broader than this. The host state shall protect the client from expropriation, while it shall grant national treatment, most-favored nation treatment, fair and equitable treatment, full protection and security and freedom to transfer funds--all of which are inherent to international law and international investment law.

IX. CONCLUSION

The offset agreement demonstrates the preponderance of national security interests over international law and represents the weight and importance of national sovereignty. The widely accepted and unchallenged secrecy surrounding offset agreements demonstrates the power of national public policy in international law. This is because of the symbiosis between governments and defense companies. Strong state capitalism aims at increasing capital accumulation in respect of the national balance of payments and of defense companies alike. The weak regulation of national defense industries in international law at present is the further evidence of the sustainability and popularity of offset agreements.

The weakness of formal international law leads us to place offset agreements within "informal international law". The latter concept permits us to think of offset agreements within the confines of international law. An offset agreement can be designated as both a contract and a treaty. It does not constitute a special 'third category' outside treaty or contract. In terms of dealing with the actors, the subject-matter and complex concepts and interactions involved by the offset agreements, international arbitration is the most suitable platform.

Offset agreements represent the current state of international law. Offset agreements involve governments in commercial transactions and reflects national public policies in the field of defense and national security. Although ostensibly side-contracts, the offset agreements have, in fact, become an important source of international law.

Halil Rahman Basaran, PhD (University of Vienna, Austria), LLM (London School of Economics, United Kingdom), LLM (College of Europe, Belgium), LLB (Galatasaray University, Faculty of Law, Turkey). Dr. Halil Rahman Basaran is Assistant Professor of International Law at Istanbul Sehir University, Law Faculty, Turkey.

(1.) See Ramses Wessel, Informal International Law-Making as a New Form of World Legislation8 Int'l Org. L. Rev. 253, 254-65 (2011), available at https:// www.utwente.nl/bms/pa/research/wessel/wessel81.pdf. See also INFORMAL INTERNATIONAL LAWMAKING (Joost Pauwelyn, Ramses Wessel & Jan Wouters, eds., Oxford Univ. Press, 2012).

(2.) International economic law could be defined as the law of cross-border economic activity and business transactions.

(3.) See Chyan Yang & Tsung-Cheng Wang, Interactive Decision-Making for the International Arms Trade: The Offset Life Circle Model, 28 DISAM J. OF INT'L SECURITY ASSISTANCE MGMT. 101 (2006), available at http://connection.ebscohost.com/ c/articles/22803589/interactive-decision-making-international-arms-trade-offset-lifecycle-model.

(4.) The end of the Cold War between the communist and the capitalist blocs and the 2008 economic crisis are generally cited among reasons for the insufficiency of the defense markets of the developed countries.

(5.) See Guns and Sugar, The Economist, (May 25, 2013) http://www.economist.com/news/business/ 21578400-more-governments-are-insisting-weapons-sellersinvest-side-deals-help-them-develop.

(6.) MICHAEL P. SCHARF, CUSTOMARY INTERNATIONAL LAW IN TIMES OF FUNDAMENTAL CHANGE, RECOGNIZING GROTIAN MOMENTS, (Cambridge Univ. Press 2013).

(7.) See Guns and Sugar, supra note 5.

(8.) See Aude Fleurant, Future Challenges in the Monitoring of International Arms Transfers, STOCKHOLM INT'L PEACE RESEARCH INST., (Apr. 30, 2014) https:// www.sipri.org/node/400.

(9.) See U.N. Charter art. 102, [paragraph] 2.

(10.) See Laura K. Donohue, The Shadow of State Secrets, 159 U. PA. L. REV. 77, 93-95 (2010).

(11.) See Donohue, supra note 10, at 129, 169.

(12.) See Steven Aftergood, The Arrival of Secret Law, Fed'n of Am. Scientists, (Nov. 14, 2004) http://www.fas.org/sgp/news/secrecy/2004/11/111404.html.

(13.) See Trade Secrets are Gold Nuggets: Protect Them, WIPO MAGAZINE 12-14, (Apr. 2002) http://www.wipo.int/export/sites/www/sme/en/documents/wipo_ magazine/04_2002.pdf.

(14.) Id. at 12.

(15.) David D. Friedman, William M. Landes & Richard A. Posner, Some Economics of Trade Secret Law, 5 J. Econ. Perspectives 61, 71 (1991).

(16.) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement), Apr. 15, 1994, 1869 U.N.T.S. 299, 33 I.L.M. 1197; Marrakesh Agreement Establishing the World Trade Organization Annex 1C, Apr. 15,1994,1867 U.N.T.S. 154 [hereinafter Marrakesh Agreement]; WORLD TRADE ORGANIZATION, THE RESULTS OF THE URUGUAY ROUND OF MULTILATERAL TRADE NEGOTIATIONS: THE LEGAL TEXTS 320 (1999).

(17.) Friedman, Landes & Posner, supra note 15, at 62.

(18.) Id.

(19.) Yang & Wang, supra note 3, at 101.

(20.) Id.

(21.) Id.

(22.) Consolidated Versions of the Treaty on the Functioning of the European Union art. 346(1)(b), Oct. 26, 2012, 2012 OJ. (C 326) 194.

(23.) See General Agreement on Trade in Services art. XIV, Jan. 1,1994. See also Government Procurement Agreement art. II, Jan. 1, 1996.

(24.) See North American Free Trade Agreement ch. XXI, Jan. I, 1994, TIAS 03725 [hereinafter NAFTA],

(25.) See Energy Charter Treaty Art. 24, Dec. 27, 1994, Misc. 6, Cm 2952.

(26.) Katia Yannaca-Small, Essential Security Interests Under International Investment Law, OECD 98-99 (2007), available at http://www.oecd.org/investment/interna tionalivestmentagreement/40243411.pdf.

(27.) United Nations Charter, art. 2 17 states that: "Nothing contained in the present Charter shall authorize the United Nations to intervene in matters which are essentially within the domestic jurisdiction of any state or shall require the Members to submit such matters to settlement under the present Charter; but this principle shall not prejudice the application of enforcement measures under Chapter VII." Id.

(28.) World Trade Organization, Revised Agreement on Government Procurement, Art. IV [section][section]1-2 (Mar. 30, 2012), available at http://www.wto.org/english/docs_e/legal_e/ rev-gpr-94_01_e.pdf.

(29.) NAFTA, supra note 24, at art. 102.

(30.) Stanislaw Michalowski & Jaroslaw Kruk, Offset and Polonization in View of the European Union Law, Defense 24, (Mar. 15, 2016), http://www.defence24.com/ 326924,offset-and-polonization-in-view-of-the-european-union-law.

On the one hand, a constitutive feature of offset practices--regardless
   of how they are approached--is to impose additional obligations on
   foreign suppliers the aim of which is to strengthen the national
   defense industry. On the other hand, the main task of the European
   Commission is to ensure proper application of EU legislation by the
   Member States, including the provisions relating to freedoms of
   movement of goods and services which form a basis for the proper
   functioning of the internal market. Thus, discriminatory treatment
   of business operators from other Member States--because they are
   foreign entities--in order to strengthen one's own defense
   industry, is naturally OBJECTIONABLE.


Id. (emphasis in original).

(31.) Int'l Law Comm'n, Rep. from the Work of its Fifty-Third Session, Draft Articles on Responsibility of States for Internationally Wrongful Acts, A/56/10, at ch. 5, art. 25 (2001).

(32.) The Gabeikovo-Nagymaros Project, (Hung./Slovk.), Judgment, 1997 I.C.J. Rep. 7 (Sept. 25).

(33.) See id.

(34.) Trade Policy Review Mechanism (TPRM), Marrakesh Agreement Establishing the World Trade Organization, Annex 3, 1869 U.N.T.S. 401 [hereinafter TPRM],

(35.) See Leo Panitch & Sam Gindin, Towards a Theory of the Capitalist Imperial State, MARXSITE, (Apr. 1, 2005) http://www.marxsite.com/Towards%20a%20The ory%20of%20the%20Capitalist%20Imperial%20State%201 April2.pdf (stating how the article clarifies and underlines the preponderant role of the states in the establishment and the functioning of the global capitalism).

(36.) See id. at 7.

(37.) See Yannaca-Small, supra note 26, at 105.

(38.) G.A. Res. 64/48, at 1, U.N. Doc. A/RES/64/48 (Jan. 12, 2010).

(39.) G.A. Res. 67/234B, Arms Trade Treaty, 52 I.L.M. 988 (Dec. 24, 2014).

(40.) Id. at art. 6 (3). See General Agreement on Tariffs and Trade, Oct. 30, 1947, 61 Stat. A-11, 55 U.N.T.S. 194 [hereinafter GATT] (providing specific security exception for military entities).

(41.) Fleurant, supra note 8.

(42.) Id.

(43.) See Boeing, http://www.hoeing.com (last visited Oct. 24, 2016).

(44.) See LOCKHEED MARTIN, http://www.lockheedmartin.com/us.html (last visited Oct. 24, 2016).

(45.) Leigh Munsil & Aystin Wright, Is Lockheed Martin Too Big To Fail? Lockheed Has Made Itself Dominant On Capitol Hill--With Defense Jobs In Virtually Every State, POLITICO, (Aug. 12, 2015) http://www.politico.com/story/2015/08/is-lock heed-martin-too-big-too-fail-121203.

(46.) Id.

(47.) Ctr. For Responsive Politics, 2010 Lobbying Summary: Boeing, OpenSecrets, http://www.opensecrets.org/lobby/clientsum.php?id=D000000100&year=20 10, (last visited January 11, 2017).

(48.) Eric Lipton et al., Diplomats Help Push Sales of Jetliners on the Global Market, N.Y. TIMES, Jan. 3, 2011, at Al.

(49.) See John H. Dunning & Christos N. Pitelis, Stephen Hymer's Contribution to International Business Scholarship: An Assessment and Extension, 39 J. INT. BUS. STUD. 167, 167-176 (2008).

(50.) See GRAZIA IETTO-GILLIES, TRANSNATIONAL CORPORATIONS AND INTER NATIONAL PRODUCTION: CONCEPTS, THEORIES AND EFFECTS (2nd ed. 2012)

(51.) See Puja Mehra & Josy Joseph, 'Made In India' F-16s On Radar Thanks to FDI, THE HINDU, (Jun. 22, 2016) http://m.thehindu.com/news/national/ made-in-indiafl6s-on-radar-thanks-to-fdi/article8756876.ece; Sarosh, Bana, India Modernizes Its Military, The Jerusalem Post, (Apr. 15, 2016) http://www.jpost.com/Opinion/Indiamodernizes-its-military-451620.

(52.) See Joost Pauwelyn, Ramses A. Wessel & Jan Wouters, The Exercise of Public Authority Through Informal International Lawmaking: An Accountability Issue? (Jean Monnet Working Paper 06/11, Oct. 10, 2016) available at http:// www.jeanmonnetprogram.org/wp-content/uploads/2014/12/JMWP06Wessel.pdf; Ayelet Berman, Sanerijin Duquet, Joost Pauwelyn, Ramses A. Wessel & Jan Wouters, Introduction and Key Issues Surrounding Informal International Lawmaking (Law of the Future Series Working Paper No. 3, 2012) available at https://www.utwente.nl/ bms/pa/research/wessel/wessel101.pdf.

(53.) See id.

(54.) See id.

(55.) See WILLIAM LEWIS, THE THEORY OF ECONOMIC GROWTH (London, 1955).

(56.) See Saskia Sassen, The Informal Economy: Between New Development and Old Regulations, 103 YALE L. J. 2289, 2304 (1994); DHARAVI: DOCUMENTING INFORMALITIES (Jonatan Habib Engqvist & Maria Lantz eds., 2009).

(57.) Bruce R. Lyons, Incomplete Contract Theory and Contracts Between Firms: A Preliminary Empirical Study, CTR. FOR COMPETITION AND REGULATION, available at http://competitionpolicy.ac.uk/documents/8158338/8199514/ccpl-l.pdf/0028c37c-la574594-88e3-blf9ccf82936 (last visited Oct. 24, 2016).

(58.) Id. at 2.

(59.) Id.

(60.) Id. at 21.

(61.) Matthew Lister, Contract, Treaty and Sovereignty Draft for Conference at Penn Law, https://www.law.upenn.edu/live/files/1881-lister-contract-treaty-and-sovereignty-penn (last visited on Oct. 24, 2016).

(62.) Id.

(63.) Curtis J. Mahoney, Treaties as Contracts: Textualism, Contract Theory and the Interpretation of Treaties, 116 YALE L.J. 824, 826-27 (2007).

(64.) See id. at 833.

(65.) See id.

(66.) See Vienna Convention on the Law of Treaties (with annex), 1980 U.N.T.S. 332 (May 23, 1969).

(67.) Int'l Ctr. For Settlement of Investment Disputes, About Us, ICSID, https://icsid.worldbank.org/apps/ICSIDWEB/Pages/default.aspx (last visited on October 24, 2016).

(68.) See FRANCISCO ORREGO VICUNA, OF CONTRACTS AND TREATIES IN THE GLOBAL MARKET, IN MAX PLANCK YEARBOOK OF U.N. LAW 8, at 348 (2004).

(69.) Id.

(70.) Pacta sunt servanda entitles states to require that obligations be respected. Basically, this principle implies that nonfulfillment of respective obligations is a breach of the pact.

(71.) Katia Yannaca-Small, International Investment Perspectives: Freedom of Investment in a Changing World, OECD, 105 (2007).

(72.) See Vicuna, supra note 68.

(73.) NIGEL BLACKABY, CONSTANTINE PARTASIDES, ALAN REDFERN & J. MARTIN HUNTER, REDFERN AND HUNTER ON INTERNATIONAL ARBITRATION 83 (Oxford Univ. Press, 6th ed. 2009).

(74.) Id. at 5.

(75.) Id.

(76.) See generally Convention on the Recognition and Enforcement of Foreign Arbitral Awards art." 5, June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 38.
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