Trade Offsets in Foreign Military Sales

In response to a congressional request, GAO reviewed arrangements wherein U.S. industry shares production of foreign military sales (FMS) items with sources within a foreign country to offset an established percentage of the cost of the procurement. Specifically, GAO was asked to determine: (1) what the national policy was on these offsets; (2) which federal agency has responsibility for monitoring offset activities; (3) how agencies coordinate the administration of offsets; (4) to what extent offsets are used in FMS and commercial transactions; and (5) what type of database exists to track offset activities in order to determine their effect.

GAO found that no comprehensive national policy exists to guide federal officials or industry representatives in offset transactions. The Department of Defense has instituted its own policy to rely on industry market forces to regulate offsets except when industry is unable to satisfy any particular government's demands. There is little coordination among the agencies studying offsets, and no single federal agency has taken the lead to ensure that the various U.S. interests are served when a U.S. firm makes an offset commitment with a foreign government. No central database exists on offset commitments, and complete and accurate data on offsets are not otherwise readily available. Some of the countries now requesting offsets are also receiving FMS credit or grant assistance. This offset commitment could be used by the recipient country to expand its own industrial base at the expense of the U.S. industrial base and U.S. jobs. GAO believes that, if this practice becomes widespread, it could run counter to U.S. interests, especially when a country's FMS credits have been a significant grant element, are forgiven, or might not be repaid. The House Committee on Banking, Finance and Urban Affairs, Economic Stabilization Subcommittee, may wish to consider the need for Congress to direct that the administration institute a policy to resist offset demands by foreign governments when FMS credits or grants are involved in the sale.

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.

Director: Joan M. McCabe Team: General Accounting Office: National Security and International Affairs Division Phone: (202) 275-5857