Defense Trade

Offsets are industrial and commercial benefits that are given to foreign governments as inducements or conditions for the purchase of military goods and services. They include coproduction and subcontracting, technology transfers, in-country procurements, marketing and financial assistance, and joint ventures. This report provides information on the types of activities undertaken by U.S. contractors to meet offset obligations associated with the sale of defense equipment to foreign governments. GAO examines the offset transactions of six major U.S. defense contractors. GAO analyzes data for more than 100 offset transactions for weapon system purchases by countries in the Middle East, Europe, and Asia.

GAO noted that: (1) companies undertake a broad array of activities to satisfy offset requirements; (2) under offset programs, U.S. contractors commonly award subcontracts for components and subsystems to firms in purchasing countries, and in a few cases, have made longer-term commitments covering foreign firm participation in the event of future sales of weapon systems; (3) this activity has been accompanied by technology transfers, for example, providing manufacturing technology needed to produce a component; (4) placing contracts overseas has resulted in the emergence of additional contractors that are qualified to participate in weapon system development and production; (5) the long-term supplier relationships that develop may result in reduced business opportunities for some U.S. firms; (6) nonetheless, the value of the export sale, in the transactions examined, greatly exceeded the amount of work placed overseas; (7) for procurements not directly related to weapon systems, U.S. prime contractors enlisted their major subcontractors, their suppliers, and other foreign entities to help meet offset obligations; (8) U.S. contractors also undertook a wide variety of activities that could be labelled business development; (9) contractors provided technical assistance to foreign firms across a wide range of technologies and industries and assisted foreign firms in marketing their products in export markets using the expertise of the contractors' own organizations or consultants; (10) in a few cases, U.S. contractors advocated a foreign firm's product to the Department of Defense or suppliers; (11) in isolated cases, offset transactions involved financial assistance to subsidize particular export sales; (12) these transactions were limited to foreign markets and therefore did not involve improper incentive payments under U.S. law; (13) U.S. contractors also facilitated or established joint ventures with firms in the offset country; and (14) while a country's economic development ministry might perform similar activities, the offset program allowed the country, or firms in the country, to leverage the expertise and know-how of major U.S. multinational firms.