COMMERCE DRAFT TESTIMONY ON OFFSETS FOR JUNE 18, 1986, HEARING.

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90B01390R000801090030-9
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 12
• Document Creation Date: December 27, 2016
• Document Release Date: February 3, 2011
• Sequence Number: 30
• Publication Date: June 11, 1986
• Content Type: MEMO

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EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON. D.C. 20503
June 11, 1986
SPECIAL
LEGISLATIVE REFERRAL MEMORANDUM
W'Nk FILE
TO: Legislative Liaison Officer- IECPT i Chrono
Department of the Treasury (Carro 566-8523) 28
Department of Defense (Windus 697-1398) 06
Department of State (Berkenbile 647-4463) 25
National Security Council
Central Intelligence Agencyv'
Council of Economic Advisers
Federal Emergency Management Agency (Perry 646-4105) 10
Arms Control and Disarmament Agency (Christopher 647-3596) 34
United States Trade Representative (Holmer 395-3150) 23
Department of Labor (Zinman 523-8201) 18
SUBJECT: Commerce draft testimony on offsets for June 18, 1986,
hearing.
The Office of Management and Budget requests the views of your
agency on the above subject before advising on its relationship
to the program of the President, in accordance with OMB Circular
A-19.
A response to this request for your views is needed no later than
NOON, MONDAY, JUNE 16, 1986.
Questions should be referred to JOHN EIBENHOUR (395-3920),
or to TONY CHAVEZ (395-3664).
RONALD K. PETERSON FOR
Assistant Director for
Legislative Reference
Enclosures
cc: Al Burman
F. Picoult
SPECIAL
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STATEMENT OP DR. PAUL PREEDENBERG
ASSISTANT SECRETARY FOR TRADE ADMINISTRATION
BEFORE THE
U.B. HOUSE OF REPRESENTATIVES
SUBCOMMITTEE ON ECONOMIC BTASILISATION
OF TEE
COMMITTEE ON BANKING, NANCE AND URBAN AFFAIRS
JUNE, 1986
Good Morning. Mr. Chairman, I am pleased to have the opportunity to
appear before the subcommittee on Economic S1pbilization to discuss
the DPA 309 report on military:offeets.
The study's interagency coordinating committee, chaired by the
Office of Management and Budget, recently submitted to your
committee an analysis of the impact of offsets on O.S. defense
preparedness, industrial competitiveness, employment and trade. As
you know, the Commerce Department was assigned lead responsibility
in preparing the chapter evaluating the impacts of offsets on
'industrial competitiveness. Commerce also was active in designing
the offsets survey questionnaire for U.S. industry.
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In developing our chapter,'the Commerce Department relied
extensively on the aggregated industry survey data provided by the
International Trade commission through the Office of Management and
Budget. The international Trade Commission survey on offsets
provided the first aggregate base of data on the frequency and
extent of offsets in U.S. defense industry export trade during the
1980-1984 time period. The survey covered approximately 140 firms,
primarily aerospace prime contractors in the defense industrial
base. The study focused on the aerospace industry as it is the
dominant sector in the U.S. defense industrial base, representing
approximately 50 percent of the dollar value of DOD purchases of
manufactured products and 70 percent of U.S.,.defense hardware
exports. Survey coverage of the U.S. aerospace industry was
extensive and these firms encompassed the majority (in terms of
dollar values) of U.S. military export trade involving, offsets.
Commerce Department analysis of the results of the ITC survey
support several broad observations:
o Offsets are a major influence in military export trade,
involving over $22.4 billion in sales agreements as reported
by the companies surveyed in the period 1980-1984.
o over 75 percent of all military offset obligations incurred
are to the highly industrialized nations.
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o The majority of ail'military offset obligations - over q9
billion of the $12.4 billion reported - were incurred'by
industries of the O.S. aerospace sector.
o Almost 40 percent of, all military offset obligations are to
be fulfilled in the form of coproduction, licensed
production, direct subcontracting and technology transfer.
To supplement the ITC data in developing our chapter, my staff also
requested offsets information from 26 Department of Commerce, U.S.
Foreign Commercial Service Posts. The 26 posts queries included all /
of NATO Europe, Canada, Japan, Australia,,, ap. well as other friends
and allies of the United States,. In analyzing the cable responses
from our posts, we discovered several trends in foreign government
policies concerning offset trade:
o Military offsets have increasingly become a central factor in
awarding-military contracts,
o The range and magnitude of offsets demanded has increased
significantly in the last five years.
o The nature of military offsets demanded has increasingly
tensed toward arrangements which include targeted technology
transfer and production/management know-bow.
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o The technology obtained has often been applicable to
commercial industries selected by the purchasing government
for growth and development.
o Foreign governments. have begun to codify official policies
and procedures concerning offsets in military trade.
Foreign governments are increasingly using the offset concept as a
tool of trade management. Most foreign purchasing governments
devote significantly less money (as a percentage of GNP) to defense
than the O.S. does. Therefore, they try to obtain maximum leverage
from offset agreements in order to,minimis4.foreign exchange outlays
for costly defense system purchases. The trend on the part of
foreign purchasing governments is to use offsets to override
competitive advantages of other foreign industries, encourage growth
in targeted industries, and increase their standard of living.
Offsets are also used to assist developing export industries to
target desirable export markets, including the O.S. defense base.
The rise in government managed trade has also led to increased
competition and protectionism in O.S. export markets.
What are the benefits and costs associated with military offsets?
Analysis of the ITC industry data, the DOC cables and other
collateral sources indicates that offsets have a mixed impact on
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U.S. industrial competitiveness. The correlations that may be drawn
between offsets and potential positive and negative impacts on U.S.
industrial competitiveness are by no means exact, but analysis of
available data and literature supports several observations on the
effects of offsets. These include:
o To the extent that military offsets enable U.B. defense
contractors to achieve export sales that would not be
possible if we refused to offer offsets, they have made a
positive contribution to the marginal income of U.S. defense
contractors.
o Direct offsets, in the form of coproduction, licensed
production, direct subcontracting and technology transfers,
contribute to the competitiveness of foreign producing
nations and may have a negative effect on many sectors of the
U.B. defense industrial base. However, increased competition
can result in lower costs for defense production.
o The principal cost of increasing direct offset concessions
could be a loss in market share for U.S. subcontractors. The
? majority of direct offsets according to the ITC data were in
the area of electronics, aircraft parts and engine parts
industries composed primarily of high-technology subsector
industries. Over the long-term prime contractors may be
impacted as well.
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Direct offsets are of particular interest to the Department. After
an infrastructure is created in a purchasing nation, the foreign
government is usually committed to sustaining the industry, because
of the structural, economic and political implications of losing the
jobs associated with the infrastructure. The implication is that
the D.S. defense industrial base, particularly subcontractors, may
lose market share in the international and O.S. markets as foreign
subcontractors become more sophisticated-and their governments
become more committed to their development.
New competitors to O.S. firms have resulted due to offsets. For
example:
o The Dutch firm DAF is competing for new landing gear
contracts with the skills and technology transferred through
a coproduction arrangement with the O.S.
o Kongsberg Vapenfabrikk of Norway is entering the commercial
maritime gyrocompass market based on,experience and
technology transferred by O.S. corporations.
o The Netherlands, in part through the technology and skills
gained through offset agreements is committed to
participating in the announced European Fighter Aircraft
Program.
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We must keep in mind, however, that the United States requires
coproduction for foreign defense systems procured for U.B. forces.
Local production of the Italian 9mm sidearm for the Army and the
British-Harrier aircraft for the Marines are just two recent
examples. Through these arrangements the U.B. gains employment,
technology and, in some cases, increased competitive benefits which
may not have been possible without the U.S. mandated offset
agreement.
CONCLUSIONS
There are several general conclusions to be drawn on the effect of
6 r ?.
offsets on U.B. industrial competitiveness; These are necessarily
broad observations, due to the fact that most of the offset
obligations incurred by U.S. defense export firms between 1980-1984
have yet to be implemented. Consequently, their full effects cannot
yet be analyzed with a high degree of precision. Analysis of the
available data and coliateral sources supports the following general
conclusions;
o American defense base industries are often obligated to offer
offsets in order to participate in and remain competitive in
the international marketplace.
o Offsets are a major factor in the competition for
international defense sales, and are being used by foreign
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purchasing governments as a trade management tool for the
purposes of preservation of foreign exchange, the targeted
development of selected industrial sectors and the
enhancement of the capability of domestic industries through
technology transfer.
o Offsets are increasing foreign competition, and may be
contributing to the erosion of-the U.S. defense base,
particularly at the subcontractor level. Bowever, without
offsets U.B. industry faces the prospect of losing business
to our free world competitiors, with all the associated
immediate deleterious consequences.
o While offset related sales of defense systems contribute to.
the marginal income of defense firms, they are not the
principal determinant providing for the health of the U.S.
defense base. In fact, the health of the industry depends
upon U.S. government purchases.
The,Department believes there is a need for a more detailed analysis
of the competitiveness impacts of offsets on the U.S. defense
industrial base, particularly at the subcontractor level. The
report provided to the Committee was macro in its approach and did
not focus on an indepth sectoral analysis of this issue.
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The GAO Report on Offsets
The General Accounting Office recently completed their analysis of
the interagency study on trade offsets. The briefing report
highlights a number of issues of, contention with the overall study,
the survey instrument and the data collected. Interagency
disagreements with the study were also discussed.
The DPA interagency study team is composed of a diverse membership
who actively represented their respective agency viewpoints
throughout the reporting process. It has been my experience that,
with any study of this scope, there will be a number of technical
and methodological disagreements among the various participants.
These must be resolved by the coordinating agency. In this study,
OMs had the difficult job of bringing together all of the inputs and
editing material submitted by each agency.* The final report
reflects whit OMB considers to be a fair treatment of this subject.
That concludes my statement, Mr. Chairman. I would be happy to
answer any questions you may have.
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