Luncheon Address

The Policy Challenge of Aerospace Offsets

Senator Jeff Bingaman

Senator Bingaman was introduced briefly by Ambassador Wolff, who noted his responsibilities as a senior member on the Armed Services Committee and the ranking Democratic member on the Joint Economic Committee. Describing the Senator as perhaps the most knowledgeable Member of Congress on the issue of defense industry offsets, Wolff noted that the Senator is the author of language addressing offset requirements in the 1988 Defense Authorization Act.

At the outset, Bingaman observed that he would restrict his remarks largely to the issue of defense offsets, although he recognized that civilian commercial offsets were as important as those in the defense sector. He characterized offsets as one of foreign governments' tools to develop and protect their own defense-industrial base, and that they had become a recognized part of our allies' industrial and trade policies. Armaments and related defense purchases from the U.S. had to be viewed in the context of our customers' attempts to increase their own defense and technological capabilities. The use of offsets (and U.S. defense policy support of them) and other types of concessions had initially been designed to create jobs and upgrade capabilities on the part of our allies. However, this practice has continued and expanded. As an example, the Senator pointed to the recent efforts of Malaysia's Prime Minister to use his foreign business advisory group to encourage greater information technologies investment in Malaysia.

While recognizing that it is tough to gauge the negative and positive effects of offsets, Bingaman argued that their potential for weakening the long-term economic health of the U.S. economy makes it necessary to look more closely at offsets. He emphasized that it was crucial that they not be allowed to undermine high-wage job growth in the U.S., but he recognized that some degree of conflict existed with the needs of defense-industrial-base objectives that required foreign sales and, hence, tolerated offsets. The prime question was what could we actually do, effectively, to affect offset requirements? Government must not tie industry's hands in bidding for and concluding deals with foreign customers, but it was not sufficient for government to take a hands-off approach and do nothing. He noted that the issue has received relatively little attention, outside the aerospace industry, until now.

The situation was obviously changing, however, and had prompted a recent Department of Commerce report on offsets which contained a number of recommendations. Bingaman noted that, in defense sales opportunities where there is no foreign competition (i.e., the only bidders are U.S. firms), tighter restrictions could be imposed on allowable offsets. In addition, to better assess the impact of offsets, it would be desirable to have joint meetings of prime contractors, subcontractors, and government officials to discuss offset issues in a forum that would bring these issues into public view, rather than continue to minimize their public visibility. The 1996 National Export Strategy report also recommended more extensive consultations with U.S. trade partners to reduce the use of offsets, following those that have already taken place with European countries.

Bingaman further noted the proposed modifications to DoD policy on offsets to reflect the competing needs of different sectors of the U.S. industry. Countertrade and other non-defense-related investments and assistance by U.S. primes to foreign customers have potentially negative impacts on U.S. non-defense firms which need to be examined. Finally, he noted the recommendation for a review of DoD policy that encourages, or at least permits, foreign offset requirements by countries receiving foreign military sales assistance (FMSA) from the U.S. for military purchases. He emphasized that a serious effort must be undertaken to examine policies and actions taken by foreign customers with regard to offsets that were meant to strengthen their own industrial bases. In some cases, conclusions



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Luncheon Address The Policy Challenge of Aerospace Offsets Senator Jeff Bingaman Senator Bingaman was introduced briefly by Ambassador Wolff, who noted his responsibilities as a senior member on the Armed Services Committee and the ranking Democratic member on the Joint Economic Committee. Describing the Senator as perhaps the most knowledgeable Member of Congress on the issue of defense industry offsets, Wolff noted that the Senator is the author of language addressing offset requirements in the 1988 Defense Authorization Act. At the outset, Bingaman observed that he would restrict his remarks largely to the issue of defense offsets, although he recognized that civilian commercial offsets were as important as those in the defense sector. He characterized offsets as one of foreign governments' tools to develop and protect their own defense-industrial base, and that they had become a recognized part of our allies' industrial and trade policies. Armaments and related defense purchases from the U.S. had to be viewed in the context of our customers' attempts to increase their own defense and technological capabilities. The use of offsets (and U.S. defense policy support of them) and other types of concessions had initially been designed to create jobs and upgrade capabilities on the part of our allies. However, this practice has continued and expanded. As an example, the Senator pointed to the recent efforts of Malaysia's Prime Minister to use his foreign business advisory group to encourage greater information technologies investment in Malaysia. While recognizing that it is tough to gauge the negative and positive effects of offsets, Bingaman argued that their potential for weakening the long-term economic health of the U.S. economy makes it necessary to look more closely at offsets. He emphasized that it was crucial that they not be allowed to undermine high-wage job growth in the U.S., but he recognized that some degree of conflict existed with the needs of defense-industrial-base objectives that required foreign sales and, hence, tolerated offsets. The prime question was what could we actually do, effectively, to affect offset requirements? Government must not tie industry's hands in bidding for and concluding deals with foreign customers, but it was not sufficient for government to take a hands-off approach and do nothing. He noted that the issue has received relatively little attention, outside the aerospace industry, until now. The situation was obviously changing, however, and had prompted a recent Department of Commerce report on offsets which contained a number of recommendations. Bingaman noted that, in defense sales opportunities where there is no foreign competition (i.e., the only bidders are U.S. firms), tighter restrictions could be imposed on allowable offsets. In addition, to better assess the impact of offsets, it would be desirable to have joint meetings of prime contractors, subcontractors, and government officials to discuss offset issues in a forum that would bring these issues into public view, rather than continue to minimize their public visibility. The 1996 National Export Strategy report also recommended more extensive consultations with U.S. trade partners to reduce the use of offsets, following those that have already taken place with European countries. Bingaman further noted the proposed modifications to DoD policy on offsets to reflect the competing needs of different sectors of the U.S. industry. Countertrade and other non-defense-related investments and assistance by U.S. primes to foreign customers have potentially negative impacts on U.S. non-defense firms which need to be examined. Finally, he noted the recommendation for a review of DoD policy that encourages, or at least permits, foreign offset requirements by countries receiving foreign military sales assistance (FMSA) from the U.S. for military purchases. He emphasized that a serious effort must be undertaken to examine policies and actions taken by foreign customers with regard to offsets that were meant to strengthen their own industrial bases. In some cases, conclusions

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that these policies and actions are weakening the U.S. defense-industrial base might lead to a need for reciprocal actions in order to preserve U.S. industry. Following the Senator's presentation, one participant asked what the view on Capitol Hill is regarding offsets. Bingaman responded that there is never "one view" on Capitol Hill, but at the moment, there are not any strongly expressed views, other than those of several Members who, despite his efforts, continue to support the Buy American legislation.