Introduction

Welcome

William A. Wulf

President, National Academy of Engineering

On behalf of the National Academies of Sciences and Engineering, and the Institute of Medicine, Dr. Wulf welcomed the participants to the National Academy and briefly described the origins of the workshop which the National Research Council convened at the request of the President's National Economic Council (NEC), which had asked the STEP Board to look into the issue of offsets in the aerospace industry. Broadly put, the goals of the workshop were to:

  • assemble a set of people with the expertise to provide a balanced examination of the issue;
  • encourage a dialogue among the participants to foster an improved understanding of the issue; and,
  • identify potential policy options, where appropriate.

While the scope of the issues covered in the program necessarily limited the time available for discussion, Dr. Wulf observed that the workshop had certainly achieved its first goal of bringing together a wide representation of stakeholders, including representatives from business, academia, labor, and government. In light of the controversial nature of some of the issues to be addressed by the workshop, Dr. Wulf stressed to the participants and the audience that the Academy has a strong tradition of dispassionate examination of the facts and a respect for the views of those with whom one disagrees. He expressed the hope that as a result of this meeting, we would discover areas of agreement as well as identify areas requiring further information and analysis.

After expressing his confidence that the group would have a productive and informative discussion, Dr. Wulf introduced the chairman of the workshop, Ambassador Alan Wm. Wolff, noting that the Ambassador had also chaired the most recent STEP report, Conflict and Cooperation in National Competition for High-Technology Industry, which provides a comprehensive review of the issues raised by the competition among nations for high-technology industry.

Opening Remarks

Gene Sperling

Director, White House National Economic Council

After an introduction by Ambassador Wolff, Mr. Sperling first emphasized the importance of the conference and described why the NEC had asked the Academy to convene a workshop on offsets. The issue of offsets has been the focus of an interagency working group, coordinated by the NEC, for some time. The Administration has found the question of offsets to be one of the more difficult issues to get a handle on and one on which it has been difficult to reach agreement, even internally within the Administration. Thus, having such a conference will be very helpful to the Administration's policymaking. Mr. Sperling encouraged participants to contribute to a ''hardheaded'' analysis of this very complex and complicated issue.

He cautioned, however, that the focus of the analysis should not be on one specific industry or union, but on the health of the entire U.S. economy and all U.S. workers. Mr. Sperling stressed that the goal of the Administration is to develop the best policy to create high-wage jobs for American workers. This focus on high-wage jobs naturally leads one to care about the aerospace industry because of its trade surplus and its higher-than-average wages. Job retention and job growth in the aerospace industry is important to achieving the overall goal of a more secure and higher-paid workforce. In that context, Mr. Sperling expressed concern over the decline in industry employment in



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Introduction Welcome William A. Wulf President, National Academy of Engineering On behalf of the National Academies of Sciences and Engineering, and the Institute of Medicine, Dr. Wulf welcomed the participants to the National Academy and briefly described the origins of the workshop which the National Research Council convened at the request of the President's National Economic Council (NEC), which had asked the STEP Board to look into the issue of offsets in the aerospace industry. Broadly put, the goals of the workshop were to: assemble a set of people with the expertise to provide a balanced examination of the issue; encourage a dialogue among the participants to foster an improved understanding of the issue; and, identify potential policy options, where appropriate. While the scope of the issues covered in the program necessarily limited the time available for discussion, Dr. Wulf observed that the workshop had certainly achieved its first goal of bringing together a wide representation of stakeholders, including representatives from business, academia, labor, and government. In light of the controversial nature of some of the issues to be addressed by the workshop, Dr. Wulf stressed to the participants and the audience that the Academy has a strong tradition of dispassionate examination of the facts and a respect for the views of those with whom one disagrees. He expressed the hope that as a result of this meeting, we would discover areas of agreement as well as identify areas requiring further information and analysis. After expressing his confidence that the group would have a productive and informative discussion, Dr. Wulf introduced the chairman of the workshop, Ambassador Alan Wm. Wolff, noting that the Ambassador had also chaired the most recent STEP report, Conflict and Cooperation in National Competition for High-Technology Industry, which provides a comprehensive review of the issues raised by the competition among nations for high-technology industry. Opening Remarks Gene Sperling Director, White House National Economic Council After an introduction by Ambassador Wolff, Mr. Sperling first emphasized the importance of the conference and described why the NEC had asked the Academy to convene a workshop on offsets. The issue of offsets has been the focus of an interagency working group, coordinated by the NEC, for some time. The Administration has found the question of offsets to be one of the more difficult issues to get a handle on and one on which it has been difficult to reach agreement, even internally within the Administration. Thus, having such a conference will be very helpful to the Administration's policymaking. Mr. Sperling encouraged participants to contribute to a ''hardheaded'' analysis of this very complex and complicated issue. He cautioned, however, that the focus of the analysis should not be on one specific industry or union, but on the health of the entire U.S. economy and all U.S. workers. Mr. Sperling stressed that the goal of the Administration is to develop the best policy to create high-wage jobs for American workers. This focus on high-wage jobs naturally leads one to care about the aerospace industry because of its trade surplus and its higher-than-average wages. Job retention and job growth in the aerospace industry is important to achieving the overall goal of a more secure and higher-paid workforce. In that context, Mr. Sperling expressed concern over the decline in industry employment in

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the recent past, but pointed to the increase of 40,000 jobs (25,000 in production) in the last year as a sign of renewal in this strategic industry. Mr. Sperling also underscored the importance of careful analysis of the role of public policy. This is clearly not an area where the market works perfectly, but one in which there is intrinsic government involvement. The market structure is oligopolistic, with significant government involvement in purchasing and supporting the development of technologies for strategic military and economic reasons. Thus, it is not so much an issue of whether government will be involved, but rather what form that involvement should take. One of the main questions facing the workshop should be to determine the appropriate policy of the U.S. government in order to balance the involvement of other governments in this important industry. However, Mr. Sperling pointed out that the policy cannot be a single-minded focus on simply the reduction of foreign-mandated offsets. It is important, he stressed, to examine the counterfactual situation—what would the world look like under an alternative scenario. Given a world where there will be some foreign government involvement, the Administration will look at a variety of strategies and compare alternative strategies. The goal is to promote a high-wage workforce given the hand that we have been dealt. In sum, the issue of offsets in aerospace is one that is already being discussed within the Administration and is likely to receive increased attention in the future. It is tied into a number of international economic issues, such as the Administration's China policy, hence the importance of this conference. He emphasized, however, that the workshop is not being convened to promote a particular viewpoint or a particular policy option. On the contrary, the conference is addressing an issue where the facts are in debate and where there is no clear policy direction. As a result, the workshop deliberations will feed directly into the Administration's policymaking process. Workshop Introduction Alan Wm. Wolff Board on Science, Technology, and Economic Policy Following Mr. Sperling's address, Ambassador Wolff opened the workshop deliberations with a brief review of the role of the National Research Council's Board on Science, Technology, and Economic Policy (STEP) within the Academy, relevant recent work, and the goals of this meeting. With regard to the STEP Board, Ambassador Wolff noted that it has the general mandate to provide timely information to policymakers on complex issues of science, technology, and economic policy—as its name implies. As an example of the STEP portfolio he cited the recent study, Conflict and Cooperation in National Competition for High-Technology Industry, now being translated into German, Korean, and Hungarian. This report gives a general analysis of the challenges posed to the multilateral trading system by the competition among nations for high-technology industry. Partly as a result of the analysis put forward in this report, along with other Academy work,1 the National Economic Council asked the STEP Board to convene this workshop and prepare a summary report. Ambassador Wolff also emphasized the timeliness of the workshop, noting the increased concerns over the issue of offsets expressed by representatives of organized labor, government officials, and parts of industry. These concerns include the worry over the transfer overseas of jobs for products that some believe could have been produced domestically, the possible negative impact on the aerospace industry's competitive position, and the loss of technologies important for maintaining military superiority. However, opinions on the impact of offsets differ sharply. Most of those who offered them see offsets as an opportunity, even an advantage, or, at a minimum, a necessity for doing business. They believe that offsets are in fact a means of maintaining the technology base through enhancing revenues and can be used as a sales advantage in the fiercely competitive global aerospace markets. Current government policy has largely been to take a "hands off" policy toward individual offsets, while addressing the issue in various trade agreements. Reflecting these concerns and these competing views, the NEC asked the STEP Board to convene this workshop in an attempt to address the gaps in our understanding of offsets in the aerospace industry. Specifically, the NEC has asked that the workshop address the following questions: What are the pressures on U.S. companies to grant offsets? What are the impacts of offsets on the suppliers of first- and second-tier components, particularly with respect to airframes and aircraft engines? What are the implications of technology transfer for the primary contractors and the U.S. supplier base? The conference agenda was structured to frame the key policy questions and bring together knowledgeable individuals with differing perspectives. The first panel presents an overview of the issue. The second 1   See National Research Council, Conflict and Cooperation in National Competition for High-Technology Industry. National Academy Press, Washington, D.C., 1996. See also National Research Council, High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft. National Academy Press, Washington, D.C., 1994.

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panel seeks an operational perspective, asking practitioners to give their views. The third panel looks at the technological and national security consequences of offsets. For the luncheon address, Senator Jeff Bingaman, a leading Congressional authority on offsets, presents his views. The fourth panel looks at the commercial consequences of offsets, and the fifth panel looks at the question of the impact of offsets on the supplier base. The sixth panel tackles the issue of employment, specifically whether offsets help maintain employment in an industry characterized by volatile demand, or whether offsets simply shift work overseas. In the final session, the chairman summarizes the day's proceedings.