Offsets are compensatory trade agreements, reciprocal trade agreements, between an exporting foreign company, or possibly a government acting as intermediary, and an importing entity. Offset agreements often involve trade in military goods and services and are alternatively called: industrial compensations, industrial cooperation, offsets, industrial and regional benefits, balances, juste retour or equilibrium, to define mechanisms more complex than counter-trade. Counter-trade can also be considered one of the many forms of defense offset, to compensate a purchasing country. The incentive for the exporter results from the conditioning of the core transaction to the acceptance of the offset obligation.
The main difference between a generic offset and counter-trade, both common practices in the international defense trade, is the involvement of money. In counter-trade, goods are paid through barters or other mechanisms without the exchange of money, while in other generic offsets money is the main medium of exchange.
Definition
Offsets can be defined as provisions to an import agreement, between an exporting foreign company, or possibly a government acting as intermediary, and an importing public entity, that oblige the exporter to undertake activities in order to satisfy a second objective of the importing entity, distinct from the acquisition of the goods and/or services that form the core transaction. The incentive for the exporter results from the conditioning of the core transaction to the acceptance of the offset obligation.
Often, the proclaimed aim of this process is to even-up a country's balance of trade. However, some forms of offsets transactions do not represent trade flows going from the initial importer towards the initial exporter. Offsets are frequently an integral part of international defense contracts.
Offset as unfair burden
The U.S. government's definition of offset agreement is the most crucial, since the U.S. aerospace and defense industry is the biggest exporter of aerospace and defence products, and therefore engaged in the majority of the world's offsets. The U.S. has a Commerce Department Division, the Bureau of Industry and Security (BIS), that deals specifically with U.S. defense offset agreements with foreign nations as a main subset of U.S. industrial security. BIS - whose main task is protecting U.S. security from the point of view of export of high technology, fostering commercially acceptable U.S. foreign policy, and protecting U.S. economic interests - deals with U.S. aerospace and defense companies that export defense products, systems or services, involving "offset agreements," that is, those sales' collateral or additional agreements requested by purchasers. BIS defines offsets as "mandatory compensations required by foreign governments when purchasing weapon systems and services."
The U.S. government underlines the compulsory aspect of this trade practice, since the United States, with other weapons exporting countries, such as Germany and France, opposes offsets as forms of protectionism and harmful transgressions of free market rules. These governments frown on offset agreements, consider them to be both market distorting and inefficient. In 2002, U.S. companies had 49% of global defense industry export, EU% 35. Data from AECMA 2002 Facts and Figures.
Offset as partnership
In 2008 the Brazilian Minister of Strategic Affairs, speaking of a major defense purchase by his country, highlighted this key point: "We will not simply be buyers or clients, but partners." The competition by different companies “in offering comparable weapons to a country" is also on the level of "sharing" or "partnership" with the purchaser, Roberto Mangabeira Unger added.
Offset as marketing tool
In weapons trade, defense contractors are fully aware that offsets are powerful marketing tools to motivate the purchase, by showing and giving additional advantages for the purchasing country besides investing in military equipment. The U.S. defense industry position seems to be more practical, and somewhat quietly nonaligned with U.S. government economic or political assessment of defense offsets. Generally speaking, one can understand offsets as a widespread sales technique. As such, they are not restricted to weapons sale, they belong to commerce itself, in the same way that rebates, price-pack deals, or loyalty rewards programs do. Understanding "defense offsets" to be part of a sales technique helps to curb the justified yet excessive emphasis on their mandatory nature.