Military Exports

"Offsets" are industrial and commercial compensation practices provided to foreign governments and firms as inducements or conditions for the purchase of military goods and services. Israel, Egypt, Greece, and Turkey are the largest recipients of the U.S. Foreign Military Financing (FMF) Program, which provides offsets in conjunction with foreign military sales. Since fiscal year 1975, the United States has provided more than $60 billion in FMF grants and loans to these countries. The FMF Program has been justified to Congress on the basis of its role in (1) strengthening the security of friendly and allied countries and (2) benefiting the U.S. economy because the funds are generally spent on U.S. goods and services. U.S. laws and regulations, however, do not preclude offsets when recipients are making purchases with FMF funding. Using FMF funds, Israel, Egypt, Greece, and Turkey benefitted in two ways--first with the U.S. government funding or underwriting their weapons purchase with grants or loans, and then by developing their industrial bases and other aspects of their economic through offset requirements from the U.S. government or contractors. Offsets reduce the employment, defense industrial base, and other economic benefits that normally accrue to the United States from weapons exports. Some offsets have caused U.S. contractors as well as companies in nondefense businesses to lose work. Pentagon officials said that no other arms supplier provides a combination of grant aid and offsets like the United States does. GAO summarized this report in testimony before Congress; see: Military Sales: Concerns Over Offsets Generated Using U.S. Foreign Military Financing Program Funds, by Frank C. Conahan, Assistant Comptroller General for National Security and Internal Affairs Programs, before the Subcommittee on Commerce, Consumer Protection, and Competitiveness, House Committee on Energy and Commerce. GAO/T-NSIAD-94-215, June 22, 1994 (seven pages).

GAO found that: (1) U.S. regulations do not prohibit offsets when recipients make purchases with FMF funding; (2) the four largest recipients of FMF funding have used this funding to obtain billions of dollars in offset obligations; (3) offset obligation agreements have allowed FMF recipients to produce certain parts of weapon systems they purchase, U.S. contractors to buy parts from FMF recipients, and U.S. contractors to link commodities buyers and sellers with FMF recipients; (4) although FMF funding programs generally support U.S. foreign policy and security objectives, certain offsets reduce U.S. employment, the defense industrial base, and other economic benefits that normally accrue from foreign military sales; (5) some FMF offsets require U.S. contractors to enter into coproduction agreements with FMF recipients which has resulted in the loss of U.S. prime and subcontractor production work, the displacement of U.S. subcontractors, and the creation of new competitors in the world market; (6) the FMF aid program is unique, since no other arms supplier has a program that provides grant aid and allows offsets; (7) it is unlikely that U.S. contractors would lose sales to foreign competitors if they could not provide offsets funded with U.S. grant aid; and (8) the 1990 offset policy allows the use of U.S. government funds to pay for offsets in security assistance transactions.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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