Offsets: Legalized Bribery or Half-Baked Policy or Both?

February 18, 2003

Comment: #474

Attached References:

[Ref. 1] Leslie Wayne, "Foreigners Exact Trade-Offs From U.S. Contractors," New York Times (Money and Business), February 16, 2003.

In the attached article, Ref 1, Leslie Wayne describes the nefarious world of defense "offsets." These are contracting deals that include technology transfers and/or local job creation in foreign countries. They are cut by US weapons contractors as part of the exchange in their contracting arrangement to sell weapons to those foreign countries. Some people regard these offsets as equivalent to bribes that would be outlawed under the provisions of the Foreign Corrupt Practices Act. But according to Wayne, they are legal, or at least, the government is not willing to prosecute anyone for setting them up.

As most readers know, I have very little sympathy for the plight of defense contractors. I regard them than an integral part of a Military - Industrial - Congressional Complex (MICC) which, in my opinion, is faction that places its narrow interests ahead of the national interest. The MICC has been an unstoppable faction because it is organized in a way that was entirely unanticipated by the constitutional defenses against faction as explicated by Mr. Madison in Federalist #10 (in this case, a minority of people spread around the nation have evolved a way of forming a Majority Faction among the people's representatives in Congress). More than thirty years experience in government service has convinced me that contractors exercise too much influence in this kabuki dance, but I recognize they are only one part in the subtle choreography that is the political-economy of the MICC faction. So naturally, when Wayne's article [i.e., Ref 1] was brought to my attention, I felt I would be sympathetic to its expose.

But upon reading it, my BS detector went off. Something in Wayne's report does not smell right.

Wayne says the U.S. government frowns on offsets, but then also says the contractors complain privately that offsets are a "necessary evil." In fact Wayne quotes an industry lobbyist as saying "The U.S. government should be insisting that foreign governments cease offset policies. They are killing our industry. It's like Pac-Man. It breeds industry cannibalism to the detriment of the U.S. taxpayer." Wayne also reports that organized labor does not like offsets because they cost the United States thousands of precious manufacturing jobs.

In short, according to Wayne, no one likes offsets on the supply side of the arms deal. Nevertheless, Wayne says offsets are a growing business -- with more than 120 countries now requiring offsets as part of America's arms sales, even though the domestic arms business is booming and will continue to boom for a long time if the Bush Administration has its way.

All this begs the question: If everyone is opposed to offsets on the supply side of the deal, why does everyone go along? Particularly when Pentagon is pumping hundreds of billions of dollars into the long term R&D and procurement budgets, which amounts to a bonanza for the arms contractors? Are the weapons buyers like the Czech Republic, the UAE, or Poland so powerful economically that they are squeezing the good ole unilateralist USA to doing something it does not want to do?

I asked my friend, Mr. XXXX, to shed a little light on these questions? He has wide experience in the defense business from the contracting side of the house. And although we often disagree on the extent to which contractors control the flow of events, these disagreements are usually a matter of emphasis ... and I have learned to listen to him carefully, because Mr. XXXX knows what he is talking about when it comes to the defense industry. It turns out that he is also an authority on offsets. Since he has been involved professionally in many, if not most, of these deals over the last 40 years, he must remain anonymous.

Here is his response.

----[Memo on Offsets]-----

Memorandum on Offsets

Leslie Wayne has written a very important article in opening up the "business" in offsets.

The trouble with the article is that it suggests that the offsets business is some nefarious scheme U.S. defense contractors to give foreign nations kickbacks; one that is dreamed up between the defense contractors and those foreign nations.

The reality is very different; we have been negotiating offsets for nearly forty years and IN NO INSTANCE was the company involved in the creation of such a plan. ALL of these plans have been the product of government-to-government negotiations and the companies have MERELY been the instruments of government policy...literally!!

The article says that the government "frowns" on offsets but just keeps track of them. This is an absurd lie, and literally a lie. Virtually ALL of the offsets with which we are familiar (and that is a large percentage of them) have been the products of schemes dreamt up by DoD, State, Commerce, CIA and some other improbable "agencies" of the U.S. government, and even, on some occasions, the White House itself.

Yes, it is true that offsets are part of doing business abroad BUT they are just as anathema to the industry and to anyone you can think of; they distort every aspect of a deal and make no economic sense for the companies.

In MOST instances their sole reason for existence is to provide a legal kickback to someone(s) who is generally designated by OUR GOVERNMENT or to provide an instrument of foreign aid for which our government THEN takes credit!!

Much worse yet, these deals OFTEN place in the hands of irresponsible foreign governments and their agents technological capabilities that they should NEVER have and for which our clients would be prosecuted were it not for the fact that the deals are sponsored by our government in the first place.

Finally, these offset deals produce some absolutely horrific problems in costing the domestic products for the government.

What is most troublesome about these deals is NOT the barter provisions but rather the technology and manufacturing export elements. We are making a most unfortunate contribution to arming the world (sometimes the third world) with sophisticated weapons by making these deals and this needs to STOP!


----[End Memo on Offsets]---

Mr. XXXX is right, there is more than one side to this complex story ... unless, perhaps, France is the problem.

Chuck Spinney

"A popular government without popular information, or the means of acquiring it, is but a prologue to a farce or a tragedy, or perhaps both. Knowledge will forever govern ignorance, and a people who mean to be their own governors must arm themselves with the power which knowledge gives." - James Madison, from a letter to W.T. Barry, August 4, 1822

[Disclaimer: In accordance with 17 U.S.C. 107, this material is distributed without profit or payment to those who have expressed a prior interest in receiving this information for non-profit research and educational purposes only.]

Reference 1

Foreigners Exact Trade-Offs From U.S. Contractors
By Leslie Wayne
New York Times (Money and Business)
February 16, 2003





"It's an essential part of doing business overseas," said Kent Kresa, chief executive of Northrop Grumman. "I'm not negative on it."


The Pentagon has stockpiled so many F-18 and F-16 fighter jets and other weapons that it is only through overseas sales that many aging production lines are kept running.

If the public knows little about this corner of the military industry, that is by design. Most contractors refuse to talk about offsets. They disclose little about them to shareholders or regulators and grumble privately that they are a "necessary evil." Yet they have done little to halt the practice.


Offsets can be any form of aid - direct investments, agreements to help countries export their goods, pacts to use more foreign components in the weapons sold, even transferring subassembly jobs overseas.

American arms makers have helped the Dutch to export yarn and missile parts, the Finns to sell rail carriers and passenger ferries, the Swiss to sell machine tools and ball bearings, and the Norwegians to market power-generating equipment. Lockheed had to use British-made Rolls-Royce engines instead of ones made by General Electric to power Apache attack helicopters sold in Europe. And, in a sale of F-16's to Poland, Lockheed agreed to have the jets' engines built there.


So complicated are offsets that most major contractors have entire departments to devise them and to twist the arms of suppliers into participating as well. Contractors usually agree to pay damages if they fail to deliver on a deal; in practice, though, offset agreements that run into trouble are often renegotiated.


Those statistics show that more than 120 countries require offsets in military sales.


"From a general industry perspective, while we'd prefer that offsets did not exist, most companies would say that we are pretty good at them," said Michael Messina, chairman of the Defense Industry Offset Association, a group of military contractors. "If U.S. companies did not provide offsets, we would not have the business in the first place. Half a loaf is better than none."