Defense Industry Offsets: The President's Hands on Policy

Abstract

Defense industry offsets are negotiated benefits that exporters add to arms deals to satisfy importer desires for something beyond a basic exchange. They are estimated at 30%-40% of the total value of the worldwide arms trade, and while not commonly understood, offsets are so prevalent that most defense firms cannot compete internationally without them. The U.S. Government relies on the arms trade as a critical foreign policy tool, but rare U.S. Government support for offsets is handled inconspicuously. Rather than acknowledge government practice, government agencies, offset specialists, and scholarly publications tend to exaggerate the U.S. Government perspective by calling it the 'hands off' policy. This reinforces a misunderstanding that the U.S. Government completely abstains from promoting U.S. industry interests in offset projects. Although the president retains the discretion to authorize encouragement for offsets, the 'hands off' assumption is so strong that stakeholders and analysts do not anticipate or assume U.S. Government encouragement in practice.

This study addresses the question, "Why and in what circumstances does the president decide to go 'hands on' for offsets as a foreign policy tool?" This study argues that relative gains concerns in U.S. foreign policy and national security that are significant enough to overcome domestic political constraints can sometimes, but not always, influence the president to authorize encouragement for U.S. industry in offset projects. These concerns are more salient with offsets where defense companies from other countries are competing against U.S. industry to obtain major arms trade contracts. When choosing to promote offsets as a foreign policy tool, the president demonstrates a desire to build security partner capacity and improve U.S. bilateral relations with allies and partners. Simultaneously however, competing domestic U.S. stakeholders in Congress and their constituents among large defense contractors, labor unions, suppliers, and subcontractors may support or oppose offset policy based on their own primary interests and benefits. The president contends with these domestic constituent interests, where a few large defense contractors sometimes prefer more active government support for offsets, while opposing groups advocate for restrictions beyond the status quo to curtail competition and prevent job and technology losses.

This paper is among the first to explore U.S. Government offsets encouragement since policy implementation in 1992, at the end of the Cold War, highlighting a topic that continues to generate controversy between supporters and detractors. Research results will add to the body of knowledge and limited literature on U.S. offset policy. Understanding the causes and constraints for this unique and little-known U.S. Government practice builds understanding of national interests, the defense industrial base, the arms trade, domestic political constituent issues, and foreign policy interests shared with international security partners. Creating awareness beyond prohibitive assumptions will enable foreign policy leaders to expand their knowledge and perceptions of diplomatic alternatives, creating opportunities for success that most practitioners do not consider or acknowledge.