Trends and Challenges in Aerospace Offsets (1999) / Chapter Skim
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The Policy Context for Military Aerospace Offsets
The Policy Context for Military Aerospace Offsets
Pages 115-132
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From page 115... ...
The United States can do this without paying a great deal of attention to the increasingly competitive atmosphere for exports of advanced military capabilities that it will be reinforcing. Or, the United States might instead try to work with its allies' competitive armaments industries to work out some regime that restrains at least some elements in international competition for sales of advanced weapons systems so as to reduce the proliferation of the most advanced capabilities and reduce the urgency (and resource requirements)
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From page 116... ...
In the final section I identify policy issues tied to the use of offsets in global defense trade. THE CURRENT ECONOMICS OF THE DEFENSE INDUSTRY A key economic fact is that the cost structure in many key high-technology defense industries is dominated by various flavors of economies of scale in assembling and sustaining essential design capabilities, in systems research and development (R&D)
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From page 117... ...
It is even true in the United States, where, since 1995, formal conventional arms transfer policy for the first time has explicitly recognized the economic impact on the domestic industrial base as a considerable factor in decisions on arms exports. THE BIG PICTURE In even the medium run, lessened inhibitions on the export of advanced weapons and increased competition for these sales among the United States and its allies may have significant impacts on the political and military balance in many regions.
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From page 118... ...
Changes in the strategic balance may trigger even greater or wider interest in acquiring advanced systems, and ultimately, create more pressure to accelerate the pace of development of new systems by the most advanced military powers. One can dimly imagine two possible new equilibria: a regime with much higher levels of defense spending in which the economic pressure to export the most advanced capabilities has subsided to more manageable levels, or, alternatively, the construction of a more cooperative regime for arms sales in which a handful of military powers with any realistic potential to develop the most advanced military systems agree to some degree of mutual restraint on exports to third parties, perhaps in exchange for some program of industrial and technological cooperation that assures the survival of core defense industrial capabilities deemed essential to national security.
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From page 119... ...
THE POLICY CONTEXT FOR MILITARYAEROSPACE OFFSETS Japan (2.58%)
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From page 120... ...
Buying a U.S.-built radar design at only a modest premium over production cost and inserting it in a European fighter, for example, allows the European systems integrator to market a state-of-the-art platform without investing in an enormously costly development effort on the radar subsystem. Having an American defense contractor work as a joint venture partner on air-to-air missiles may provide access to technologies developed at great U.S.
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From page 121... ...
In principle, licenses are only granted when it is in the security interest of the United States; an explicit recognition of the role of arms exports in strengthening the U.S. industrial base was added by the 1995 Clinton administration conventional arms transfer policy.
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From page 122... ...
, State, Commerce, Energy, the Arms Control and Disarmament Agency, the intelligence community, and possibly the National Security Council can play significant roles. The agencies not infrequently have different views economic and trade interests versus security considerations versus proliferation concerns versus diplomatic issues and as the Nolan Commission recently observed, "Bureaucratic warfare rather than analysis, tends to be the modus operandi in what is often a protracted process of plea bargaining and political compromise that may not reflect long-term national objectives." The administration of the system is also very far from space age.
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From page 123... ...
U.S. defense contractors have lobbied successfully for some new financial supports for defense exports by arguing for a "level playing field."2 The two principal subsidy proposals that have attracted attention in recent years are a waiver of R&D recoupment charges on exports sales and an export loan guarantee facility similar to Exim Bank programs for non-defense exports.
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From page 124... ...
Doubts about the efficiency of general subsidies as a tool to promote defense exports are raised by an analysis of actual markets for defense systems. DoD's 1994 forecast of arms exports3 divided arms deliveries into two categories goods already under contract for future delivery and products not yet under contract.
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From page 125... ...
arms exports (1994-2000~. 125 Competitive- USG support may help win sales assumed lost Competitive - US assumed to have won Not on Contract- US is expected sole source On Contract to US
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From page 126... ...
. Offsets, if defined merely as the activities listed above, are not uncommon in purely private arrangements between private companies operating in today' s global markets.
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From page 127... ...
. Bargaining Power and the Terms of Transactions Offset requirements are imposed by foreign governments as a bargaining tool to influence the terms of transactions involving export sales of American defense technology and products.
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From page 128... ...
· In economies where government has a major influence on the behavior of certain non-defense sectors (because of public ownership or regulation) , governments are frequently tempted to impose formal or informal offset requirements on procurement from abroad that are linked to politically popular (though economically debatable)
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From page 129... ...
In commercial industries with limited numbers of international players, it is also possible to conceive of international arrangements that might benefit vendors facing buyer offset demands. Boeing and Airbus, for example, might in theory be sanctioned by their respective national antitrust authorities to set common maximal limits on co-production or technology transfer conditions attached to commercial sales deals to complement Euro-American national controls on defense aerospace technology exports.
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From page 130... ...
to encourage Japanese airlines to purchase Boeing aircraft in exchange for Boeing's increased use of components made by Japanese aerospace suppliers. (Japan Air Systems reportedly defied the government pressure and purchased Airbus jetliners at a very good price, at the cost of a considerable negative campaign in the press and elsewhere against it.)
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From page 131... ...
They offer a way for governments to insert themselves into private transactions to increase the bargaining power of domestic firms in international agreements or advance other government objectives. If successful, however, offset requirements may invite retaliation through a countervailing policy of organization of private or public cartels among suppliers.
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From page 132... ...
Third, use of offset requirements is a backdoor challenge to the GATT vision of open global markets. The obvious alternative in military aerospace that addresses both the big issue of unrestrained exports of advanced military capabilities and the smaller issue of offsets (one tool used to pry open greater technology transfer)
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