WASHINGTON, DC – The Council on Foreign Relations has published an explainer on global defense offsets, defining, examining, and analyzing the “range of compensation arrangements required by foreign governments as a condition of the purchase of defense goods and services from a non-domestic supplier.” The piece leverages two reports authored by Avascent, highlighting both the advantages and the concerns that these agreements pose to the international defense industry.
Analysis by Avascent suggests that offset obligations are worth about $250 billion today and could be almost $500 billion by 2016”
As U.S. defense budgets are shrinking, and global defense markets are becoming more competitive (see Avascent’s report on global competitiveness here), countries in Latin America, Europe, Asia and the MENA region are increasingly demanding that both direct and indirect offsets be written into defense contracts. These can involve anything from advancing foreign defense & aerospace industries through technology transfers and training, to projects unrelated to defense such as infrastructure.
The total number of countries that engage in such practices is over 100, and while there are economic benefits for both the vendors and the recipient nations, there are also significant concerns of corruption. Many defense firms have fought to keep their offset agreements proprietary so they don’t have to disclose them on their balance sheets. “The transparency concerns, therefore, are twofold: potential graft by the procuring government and the fiduciary duty of the contractor to its shareholders…(however) offsets could drive investment in non-defense sectors to advance public health and social welfare systems, promote agricultural development, and improve education systems.”