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Policy Issues in Aerospace Offsets: Report of a Workshop (1997)

Chapter: DO OFFSETS COST OR KEEP JOBS?

« Previous: DIFFERING IMPACTS OF OFFSETS ON KEY SUPPLIERS AND SUB-TIER PRODUCERS
Suggested Citation:"DO OFFSETS COST OR KEEP JOBS?." National Research Council. 1997. Policy Issues in Aerospace Offsets: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/5832.
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Panel 6
Do Offsets Cost or Keep Jobs?

Moderator: Mortimer Downey,

Deputy Secretary, Department of Transportation

Following Dr. Wessner's introduction, Secretary Downey opened this panel with the observation that its task is to address the central issue of the impact of offsets on employment. The effects of offsets on jobs are a crucially important question because the aerospace industry contributes so much to total U.S. employment: 1.8 million, mostly high-skill, high-wage jobs, paying on average 45 percent more than manufacturing as a whole. The nation would benefit from more of them, and a priority policy question is how to generate them. One view holds that offsets generate or sustain jobs in the U.S. by increasing worldwide sales of U.S. products; another view is that offsets cost jobs by shipping production overseas and creating stronger foreign competitors. Even if the issue of jobs is subordinate to other concerns, such as national security, it is central to the discussion about offsets and certainly cannot be downplayed.

After introducing each of the panelists, Secretary Downey turned the floor over to Dr. Robert Scott.

Trends and Issues in Aerospace Employment

Robert Scott

Economist, Economic Policy Institute

Referring to the 1995 study carried out in collaboration with Randy Barber, Jobs on the Wing,12 Dr. Scott had updated the trends and analysis of aerospace employment for this workshop on the basis of the most currently available data. His first table showed a loss of approximately 500,000 U.S. jobs in aerospace over the past four years, with employment peaking in 1989 at 1.3 million workers and bottoming out in 1995 at just under 800,000—a decline of 41 percent. The decline had affected all subsectors of the aerospace industry, but has been particularly steep in military aircraft, missiles and space. Among European manufacturers, employment also fell by 28 percent during the period, from 486,000 in 1989 to 350,000 in 1995. In Canada and Japan, employment declined as well, although not as steeply. Thus it appears that, as a share of the world total, aerospace employment has shifted from the U.S. to Europe and other regions. The causes of the relative U.S. decline were shown to be falling revenues in all subsectors, rising imports, limited export growth, and productivity growth in the U.S.

Scott's next chart focused on revenues. Between 1990 (peak year) and 1995, U.S. aerospace industry revenues fell 30 percent, with the decline in the missile subsector reaching 61 percent. Since 1995, there has been a 63 percent recovery in civil aircraft, but revenues from military aircraft and missiles have continued to slide. Concurrently, imports have risen sharply in value, from $1.6 billion in 1979, to $11.8 billion in 1990 and a preliminary estimate of $13.6 billion for 1996. More importantly, imports as a share of the total U.S. aerospace market have continued to climb steadily, at about 0.5 percent yearly. The 1980s trend of sharply rising U.S. exports has flattened over the last few years.

The competitive challenges behind these figures include the rising Airbus market share. The European Union's share of aircraft deliveries to Europe exceeded 50 percent in 1995 for the first time, and rose to 40 percent worldwide. Deliveries have been rising steadily in the U.S. as well, with the Airbus share reaching 30 percent in 1994, before falling somewhat in 1995.

The U.S. has an export problem as well: aerospace exports to Europe fell by nearly half between 1990 and 1995, reflecting Airbus's growth there. Exports to Europe and Japan represent the vast bulk of American foreign shipments; sales to China, declining recently, represent a fairly small portion of the U.S. total.

The relationship of these trends to offsets is revealed in charts indicating that:

12  

Barber, Randy and Robert E. Scott, Jobs on the Wing: Trading Away the Future of the U.S. Aerospace Industry. Economic Policy Institute, Washington, D.C., 1995

Suggested Citation:"DO OFFSETS COST OR KEEP JOBS?." National Research Council. 1997. Policy Issues in Aerospace Offsets: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/5832.
×
  • the ratio of imports to domestic revenues is rising;
  • the ratio of imported parts and components to revenues is also increasing; and
  • U.S. employment in the category of Other Related Products (engines, components, parts), as a share of industry total employment, has declined steadily, from 28 percent of the total in 1983, to an estimated 23 percent in 1997.

In conclusion, Scott observed that the offsets problem represents a ''prisoner's dilemma." Both Boeing and Airbus have an incentive to give away more offsets than they would if they could cooperate or collude. Thus, both firms lose more jobs and output through offsets than they would prefer.

The total demand for commercial aircraft in the future will be limited by the amount of growth in airline travel which is expected to be outpaced by global growth in production capacity. In this context the problem with offsets, in a climate of intensifying competition, is that they encourage firms to increase outsourcing. For instance, the new Boeing 777 has about 30 percent foreign content, versus an average of 14 percent for all Boeing aircraft. There is some thinking that if the U.S. and the European Union were to conclude a bilateral agreement to restrict firms from engaging in offsets, the result would be increased domestic content of production for both.

Developing Competitors

Chip Block

Director, System Engineering Division, Veda, Inc.

With the caveat that he was speaking only for his own company and its experiences, Mr. Block said he would cover three areas: a medium-sized and small-business market overview; the move from full production programs to systems integration, or mod (modification) programs; and finally, how offsets affect the first two.

The biggest change in the market has been the trend to huge corporate mergers and consolidations by prime contractors. Combined with shrinking defense budgets, this has reduced the number of market opportunities for small firms. The primes have found new work in the international market, and small companies like Veda would like to make the same move. (Block noted that he was quite surprised at the sharp fall-off in suppliers shown in Dr. Bozdogan's presentation.)

A second major change is that, with few new airplane production programs scheduled in the future, both foreign military sales and commercial programs coming on line are mod programs. The issue is becoming not one simply of unit production, but one of services: workers and engineers providing testing and integrated logistics support. These servicing tasks are the most vulnerable at present because they involve the easiest types of tasks and jobs to move offshore; doing so generally does not affect a production line. Hence, with offset programs for training, the nature of the task becomes an important factor itself. Offsets have also migrated into other, non-aerospace defense programs, such as command and control programs, which Mr. Block found surprising, having worked in command-and-control.

From the perspective of small firms, another significant change is that offsets have made the normal "rules" of the aerospace business quite "fuzzy." The impact of terminating a program is quite large for a small business; indeed it can be devastating. Small firms must focus on a few programs, since they lack the financial ability to spread their investments; they cannot participate in many international programs. It is therefore critical that the portion of a program on which the small firm focuses is not subsequently shipped overseas as part of an offset. To the prime that business might be a small bargaining chip, but to the small supplier it represents an important investment. What the small supplier sector wants from the primes is a set of stable, understandable rules under which they can participate and which they can count on in committing their investments and marketing efforts. All the rules, right now, seem to be getting fuzzy, and those for offsets are just a part of the larger picture, in which all the rules are in flux.

Concluding, Mr. Block admonished the audience that closing off markets is not the answer to the offsets problem; shrinking markets are already difficult enough to cope with. Nevertheless, better communications from primes to the suppliers about the impacts of forthcoming program changes brought about by offsets, and about how the "rules" are changing, would make growing internationalism of their markets easier to manage.

Maintaining High Value-Added Exports Amidst Structural Change

Joel Johnson

Vice President, Aerospace Industries Association

Mr. Johnson reminded the audience that the "half-empty glass" described by some speakers is also "half full." He argued we should remember that the aerospace industry:

  • produced $112 billion in revenues in 1996;
  • employs over 800,000 workers and is hiring once again;
  • exported over $39 billion; and,
  • enjoys a net trade balance of $26 billion.
Suggested Citation:"DO OFFSETS COST OR KEEP JOBS?." National Research Council. 1997. Policy Issues in Aerospace Offsets: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/5832.
×

This, he suggested, is not "half-bad."

The downside is that there are about 40 percent fewer workers in the industry than there were in 1989. The only country in which aerospace employment fell faster was in the United Kingdom, the only European country which currently does not have a serious unemployment problem. The U.K. is the only other country to have followed the U.S. model with the development of a private aerospace industry; as in the U.S., the British market "went in the tank," and also—as in the U.S.—the British industry restructured.

Johnson observed that there had not been much discussion during the conference about the restructuring of the U.S. aerospace industry during the period of decline of both the airline industry and defense spending. Both the airlines and the government began to demand both performance and cost efficiency. As a result, employment began to drop, evidencing the beginning of restructuring, two years before shipments began to drop with the downturn in the market. The emphasis on lower-cost and higher quality has shown up in better quality control, faster and easier assembly, and less need for some categories of workers, like draftsmen and re-work men, that were previously necessary. As in autos and electronics, technological advances in production have now been incorporated into production programs and, as a consequence, fewer employees are required, which is why employment has risen more slowly than the rate of production in the industry during the recent market upturn. Import and production data for the 1990-94 period demonstrate that declining employment owes relatively little to offsets, as compared with restructuring and lower demand.

Virtually all growth in the future will be in foreign markets. If a foreign customer wants to deal in offsets, companies will have to listen and negotiate. That situation is not unique to the aerospace industry. The typical company response in other industries to offset requests is to put production offshore. In 1996, American companies invested $600 billion overseas, including $27 billion in chemicals, $51 billion in computers, and $21 billion in autos. The aerospace industry, by comparison, invested only $1 billion overseas, almost all in Canada. The aerospace industry instead has approached foreign markets with licensing, coproduction, and other forms of offsets.

Much of U.S. foreign production investment is far from voluntary; it is a requirement often imposed by foreign governments for doing business overseas. Aerospace offset demands pale by comparison with the vast array found in the automobile, chemical, electronics, and other industries. The aerospace industry finds that direct foreign investment, i.e., acquisitions or equity purchases, is generally not an option for several reasons: the industry is too security-related and thus governments do not seek such investment; there is already overcapacity in the industry; moreover, no single country's market outside the U.S. is large enough to justify U.S. aerospace investment, though in the future, the European Union may become the first such market.

In the interest of balance, Mr. Johnson also pointed out that the Europeans have a different perspective on U.S. practices. The U.S. government officially takes the position that it does not demand offsets. However, to the foreign firms engaged in defense sales, it seems clear that if they want to do defense business in the United States, they will have to grant a license for production by a U.S. prime, as in the case of the British Harrier jet, the Italian Bereta, or Swiss trainers. To the European suppliers, such requirements appear to be 100 percent offsets.

Responding to the idea that there is too much outward technology flow from the U.S., Mr. Johnson suggested that that is a good sign; it shows that the U.S. remains the technological leader in the industry. U.S. imports of process and machine tool technologies in the 1980s were indicative of serious U.S. weakness in these sectors. Exporting technology is always better than importing, and we should hope it stays that way for the United States. Johnson was dubious that there is a constructive role for government to play on the issue of international performance requirements and offsets. Instead, he recommended that the industry continue to focus on being competitive and moving quickly in markets.

What Level of Concern Should Government Have?

Owen Herrnstadt

Director, International Department, International Association of Machinists and Aerospace Workers

It is important to remember that, in talking about the effects of offsets on workers, we are talking about real people, individuals and families, communities. Sadly, ways to retrain and find new, high-wage, high-skill jobs for displaced aerospace workers is not a subject of much discussion currently in the aerospace industry. While there are many causes of declining employment in the industry, we must recognize that offsets are one identifiable cause. Calculations of the impact of these offsets, in terms of the costs of lost jobs for individuals and communities, are difficult to make. One major reason is a lack of information available to workers, from the companies or the government, about the exact nature, conditions, and requirements of offsets.

In such an environment, government has a strong role to play in developing a policy for offsets. In a

Suggested Citation:"DO OFFSETS COST OR KEEP JOBS?." National Research Council. 1997. Policy Issues in Aerospace Offsets: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/5832.
×

world where offsets are becoming more the norm—with the numbers, variety, and objectives of offsets increasing constantly—government must become the player that finds and puts together all the pieces of this jigsaw puzzle. Literally hundreds of variables exist in this policy matrix, and the issue is whether all the information necessary to deal constructively with offsets can be assembled and digested. For example, the 1996 National Export Strategy Report found that a "substantial" number of subcontractors had indicated problems stemming from offsets. The report also found that roughly a third of the offset transactions that year involved the aerospace industry. Of those, a third called for investments in production in the foreign customer's country, a situation leading rapidly to global overcapacity in the industry. If that translates to job losses in the U.S., or to the transfer of technology financed by public funds, workers and the public have the right to know.

However, information gathering is not enough. It must be followed by policy changes. This could include, for example, a program for workers who lose a job due to offsets. A task force or commission could be convened to provide a forum where the views of workers and the public could be voiced. Such a task force or commission might consider issues involving R&D, trade negotiations, WTO enforcement, export sales and financing, licensed production and coproduction, subcontractor production, countertrade, and others. Its effectiveness would depend on government's ability to gather and make available sufficient information, as well as to assure a "seat at the table" for all affected groups, not just the companies. As the Barber-Scott study pointed out, Herrnstadt emphasized that "every other serious aerospace nation has a coordinating body charged with nurturing and advancing aerospace manufacturing, technology acquisition, and of course, employment. The United States should do no less."

Discussion

Dr. Wessner, addressing Mr. Johnson, asked if a broad-based forum designed to discuss offsets would meet the expressed need for more information and greater transparency. Mr. Johnson replied that, after ten years of gathering data on the topic, we know a lot about offsets but are no closer to achieving a consensus about their relative importance. In a market that has declined from $140 billion annually to $110 billion, offsets represent about $2 billion of value, according to the Commerce Department. Johnson noted that perhaps labor should accord more importance to that $30 billion decline in the size of the market than to the vastly smaller sum represented by offsets. Exports, having held steady in adjusted value over the past two decades, are the only portion of the aerospace business doing well. In the macroeconomic context, offsets represent a very small portion of American total output, total trade, and even of aerospace trade. Offsets are trade distorting, even an annoyance, but they do not change the mathematics of trade. Every export has a corresponding import somewhere. Offsets may change who gets impacted, and they make it clearer which jobs are negatively affected by trade. But realistically, every U.S. import potentially hurts some U.S. worker. Government may have a responsibility to cushion the social effects of economic change, but that should not be confused with the idea that government ought to try to manage that change, with the risk that it would reduce the flexibility of the U.S. economy to deal effectively with change.

Another speaker raised the point that the American taxpayer, as a shareholder in U.S. technology, should benefit from future yields of having invested in that technology. Many companies are doing well on the fruits of technology that was originally financed through Congressional action, from public coffers. The private sector ought to show some accountability for how it uses that technology. He asked Johnson's response to that view.

In response, Johnson suggested one consider the likely situation without offsets, arguing that in the absence of offset-related exports, there would not be a single fixed-wing fighter production line in the U.S. today. The major investment made by the taxpayers in production lines, for the F-16 and F-15 fighters, along with the jobs it created, would no longer exist. Without the continuing revenues from exports, the public investment in those lines would have been lost entirely.

Moreover, Johnson noted that gearing up production would then be much more expensive for taxpayers, because new production lines would have to be built from scratch, and skilled workers would have to be recruited and probably trained in significant numbers. That is the other side of the offsets coin. The U.S. military bought only 20 planes last year, most of them C-17 transports. At a low point in U.S. defense procurement, and with a transition period between mature systems and new ones still in the development stage, it is exports that keep the defense aerospace business alive. That $10-12 billion in revenues keeps U.S. taxpayers from having to pay enormously greater amounts either to purchase unneeded aircraft for the U.S. military, or to restart closed production facilities or build new ones for the next generation of planes. In that sense, foreign sales provide a tremendous financial yield to the American public and the industry workforce.

Robert Scott responded that exports and their value

Suggested Citation:"DO OFFSETS COST OR KEEP JOBS?." National Research Council. 1997. Policy Issues in Aerospace Offsets: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/5832.
×

were not at issue. Rather it was a matter of other countries intervening in the market in ways that progressively cost more U.S. jobs and put the U.S. technological base and future industrial capabilities at risk. Is there a way to change the rules of the game to make it more equitable for U.S. producers and workers?

Another participant remarked that exports are, to some degree, independent of offsets in the sense that a buyer must want the exported product in the first place; otherwise there would be no offsets attached to them. In this sense, offsets and exports are not as inextricably linked as has been claimed.

Johnson responded by saying that no company sets out to do offsets, but rather is forced to grant them in order to make sales. All U.S. defense exports are, after all, to other governments; it is foreign governments that insist on offsets. Offsets are in a sense a bundling of a number of activities, which can be bought openly on the market from any number companies and would show up on the balance sheet as exports. Offsets simply bundle those activities in order to make them more palatable to foreign politicians. They are not alone; the U.S. government imposes many "domestic" offsets, $40 billion in fact. The aerospace industry is good at doing domestic offsets—for example, allocating production to ensure Congressional support for defense programs. The Congress also requires them of U.S. companies doing business in the U.S., in the form of minority set-asides, small business set asides, women-owned set-asides, etc. All of these requirements are market distortions placed on industry by government. In the case of offsets, it is just a foreign government introducing the distortion.

With the conclusion of the last panel, Dr. Wessner called on Ambassador Wolff for his summary of the day's discussion.

Suggested Citation:"DO OFFSETS COST OR KEEP JOBS?." National Research Council. 1997. Policy Issues in Aerospace Offsets: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/5832.
×
Page 32
Suggested Citation:"DO OFFSETS COST OR KEEP JOBS?." National Research Council. 1997. Policy Issues in Aerospace Offsets: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/5832.
×
Page 33
Suggested Citation:"DO OFFSETS COST OR KEEP JOBS?." National Research Council. 1997. Policy Issues in Aerospace Offsets: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/5832.
×
Page 34
Suggested Citation:"DO OFFSETS COST OR KEEP JOBS?." National Research Council. 1997. Policy Issues in Aerospace Offsets: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/5832.
×
Page 35
Suggested Citation:"DO OFFSETS COST OR KEEP JOBS?." National Research Council. 1997. Policy Issues in Aerospace Offsets: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/5832.
×
Page 36
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