The World Is Building U.S. Arms

Jan. 4, 2001 -- Beginning in 2005, the F-22 stealth aircraft is expected to become the most technologically advanced, most capable fighter jet U.S. Air Force’s arsenal.

But because of a special kind of arms deal that the jet’s engine manufacturer, Pratt & Whitney, says was unavoidable, part of the aircraft’s engines will be machined in Taiwan and then shipped back to the U.S. for assembly, irking U.S. defense workers who might otherwise have done the work.

That special type of deal is called an “offset” deal and it’s become an increasingly expensive aspect of selling defense equipment to foreign governments.

The latest government data suggests several billion dollars worth of U.S. defense manufacturing work and technology and thousands of defense sector jobs annually are traded abroad through the offsets demanded by foreign governments as conditions of arms deals.

Foreign countries “want to do that more than just get the hardware from the United States,” says Pat Scott, a spokesperson for the State Department’s Office of Defense Trade Controls, which is responsible for restricting and approving defense offsets. “The trend is the desire to have U.S. technology and the ability to manufacture these items themselves, and to sell them.”

Rebates for High-Tech Weaponry

Offset deals are made when foreign countries successfully demand some form of compensation, a non-monetary rebate if you will, for purchasing armaments.

With international competition to win lucrative arms sales around the globe so fierce, the returns regularly surpass 100 percent of the value of the equipment purchased.

An offset arrangement can include sharing part of the manufacturing work of the purchased equipment. It can also involve transfers of American technology, licensed co-production of the American equipment for U.S. troops or for sales to other countries, or other types of technological or economic benefits provided by the U.S. exporter.

The phenomenon has strategic thinkers concerned America is bartering away some of its technological edge. U.S. defense workers are concerned about losing jobs. And small- to medium-sized defense contractors worry about losing sub-contracting work.

Offsets have become such a concern, lately, the government has begun treating them as a priority. A congressionally required presidential commission recently was created to study the problem.

The commission, which met for the first time in December, includes the Secretaries of Defense, State and Labor, the director of the Office of Management and Budget, and the Deputy Secretary of Commerce, as well as the heads of the two biggest defense companies and the largest defense union.

A Buyers’ Arms Market

Defense union leaders protested when Pratt & Whitney last January announced it would move jobs from Connecticut facilities to other countries to fulfill offset obligations with various countries.

But America’s big defense contractors say they have little choice but to offer substantial offsets. Without them, they say, the U.S. would lose out on major arms deals. And with the U.S. government buying fewer arms since the Gulf War, they say, foreign sales are needed to keep their companies healthy and their work force employed.

“Defense exports — with their associated offset requirements — have kept several key U. S. military systems production lines alive,” Lockheed Martin’s Vice President for Corporate Business Development, Robert Trice, told the commission.

Giants like Lockheed Martin and Boeing “are squeezed between a rock and a hard place,” says Joel Johnson, vice president of international sales for the Aerospace Industries Association, which represents the industry in Washington, D.C.

Foreign arms sales secured through offsets currently account for about one third of current U.S. defense production, he says. “From the [prime contractors’] perspective, if they weren’t winning that one-third sales, the production base would be one-third smaller.”

Massive Returns

The drawbacks of winning new deals with offsets, however, are also significant. U.S. defense companies trade away billions of dollars worth of U.S. manufacturing technology and work sometimes performed by smaller U.S. sub-contractors.

Over a recent six-year period (1993-98), U.S. arms manufacturers concluded $38.5 billion in new arms deals — but they agreed to return $21 billion in offsets, or 55 percent of the value, according to a draft of a Commerce Department study soon to be released.

While offsets help win U.S. companies and defense workers a significant amount of new work, Commerce has estimated that in recent years have traded an average of 35,000 job-years of work annually. Randy Barber of the Center for Economic Organizating in Washington, D.C., told the presidential commission an analysis should be done to see if deals made with offsets have actually resulted in a net increase or loss in jobs for American workers.

The State Department reports last year issuing to U.S. companies a record number of 4,000 licenses for offshore defense manufacturing and related agreements.

Exporting that capability also can have national security implications, says Tom Cardamone, executive director of the Council for a Livable World Education Fund arms control group in Washington, D.C. “It leaks U.S. weapons technology to countries that don’t have it. And that proliferation of weapons technology is an important contributor to the continued militarization around the globe.”

A similar concern was expressed in a recent U.S. intelligence community report forecasting future security threats to the United States. It predicted some U.S. military advantages could diminish “as weapons and militarily relevant technologies are moved rapidly and routinely across national borders in response to increasingly commercial rather than security calculations.”

Politics Is a Factor

Surprisingly, the countries demanding some of the highest offset terms are some of America’s closest, most economically stable and technologically advanced allies.

The United Kingdom, the Netherlands, Denmark, Sweden, Switzerland, Norway, and Germany all require offsets averaging more than 100 percent, according to a draft of the upcoming Commerce study. Canada, South Korea, Brazil, and Israel also demand such high offsets.

“The irony is that the more democratic the government, the more likely they are to have an offset program, because their parliamentarians are just like our congressmen, they want jobs for taxpayer revenue,” says Johnson. “When you have a military in charge, they’re less likely to have offsets, because they don’t have to answer to the general public.”

Offsets have become such big business in some countries, laws have been created requiring high offsets and bureaucracies were formed to negotiate and try to enforce the often-secret deals.

Boeing, a civilian and military contractor, recently said it does business with more than 225 U.K. companies, accounts for more than 40,000 U.K. jobs on an annual basis, and is Britain’s third-largest export market, behind only the countries of the United States and Saudi Arabia.

But where economies abroad may be helped by offsets, workers in the country of origin can be hurt.

“At the same time we are transferring valuable technology developed by IAM members and paid for by U.S. taxpayers, we are also downsizing our work force and hence limiting our future ability to produce products for our own defense,” said Thomas Buffenbarger, President of the International Association of Machinists and Aerospace Workers (IAMAW), recently. “For U.S. defense workers, this is an especially bitter pill to swallow.”

Right or Wrong?

Pratt & Whitney spokesman Mark Sullivan defends the use of offsets by his company. “Part of doing business is to do business in a way that benefits you and your customer,” he says, adding, “[In] Countries that are growing and developing, or in some cases we sell to some very developed countries, the health of their economy is very important to our business. And so therefore investment in those countries is well taken.”

Sen. Russell Feingold, D-Wisc., a leading congressional critic of the practice, wrote the commission some offsets look like “kickbacks” paid to the foreign governments, sometimes at the expense of other American companies and workers.

He also said U.S. defense companies are trading away through offsets special technologies bought by taxpayers for America’s defense. “Essentially, we are talking a most peculiar set of arrangements in which heavily subsidized industries then further subsidize the sale of their own products through offsets.”

The AIA’s Johnson notes that offsets are legal, and have become an essential way for American companies to compete in today’s competitive global arms market. “We don’t have export financing [to reduce prices] like our competitors. We can’t bribe like our competitors, offsets are all we have,” he says.

No Light on the Horizon

Nearly everyone agrees offsets are a problem, but, so far, no one has come up with a mutually satisfactory and effective solution.

“That’s what the [presidential] commission is all about to put together a venue where representatives from labor, industry and academia can sit down in a relaxed fashion and discuss this very complicated issue and get a solution,” says Owen Herrnstadt, director of international affairs at IAMAW.

The one solution that everyone seems to agree on is to negotiate with America’s closest allies to agree to mutual restrictions on the levels of offsets. But because the offset deals are often secret it won’t be easy, says Johnson. “It’s just very hard to control.”

The presidential commission is expected to meet again next year, manned with new officials from the Bush administration. But Johnson says he doesn’t expect the matter to get too much attention, given the difficulty of the challenge, and so many other priorities.

“I’d be hard pressed to think of anything forthcoming out of it for the next five or six months.”