scope for such policies to accomplish much. In imperfectly competitive markets, however, with small numbers of sellers or buyers, such policies can significantly affect the terms and consequences of final agreements.
In economies where government has a major influence on the behavior of certain 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 goals like jobs or export creation.
In all countries, defense purchases (closely linked to the aerospace sector) are undertaken by a single customer (the government) with a noneconomic goal (national security). Transactions involving domestic and foreign defense firms (and non-defense goods and services with defense applications) are scrutinized and shaped by all governments to reflect their perceived national security interests. In today's international system, national security often has an explicit economic component, such as protecting or stimulating the defense-industrial base. However, in many parts of the world, national security is seen as synonymous over time with industrial strength and national technological capability. Consequently, these broader economic goals are pursued with the sustained national commitment and breadth of policy mechanisms usually reserved in the United States for national defense.3
Government funds a major portion of the R&D going into defense, including the aerospace sector. While private firms are probably best equipped to secure the deals that capture the maximum return on private investments in new technology, the same may not hold true when it comes to securing the maximum national return on public investments in new technology.
For example, if $15 billion is invested in developing a new engine technology, a firm may logically consider its direct return from licensing the technology and $3 billion in lost profits on possible future sales won by its now more competitive foreign licensee, and decide that $4 billion in licensing fees is a good deal. If the company alone invested in the technology, that would be the end of the discussion. If the government funded the $15 billion, however, and made the resulting know-how available to multiple U.S. companies, it might reasonably want a U.S. company to consider the possible costs of future competition to other U.S. firms as well. If this future loss from the new competition to all U.S. firms were, say, $6 billion, the $4 billion licensing deal would be a whole lot less attractive from a national perspective. This is not a calculation that the U.S. company would normally make in evaluating the deal from its own purely private perspective, but might be the appropriate one in considering the transfer of know-how based on publicly funded R&D.
Offsets might be regarded as a form of subsidy to exports (since other goods, services, and commitments with some economic value are being bundled into a sales transaction). There are restrictions on subsidies and pricing behavior in international trade that discipline the use of such subsidies, and governments therefore are interested in offsets as a trade issue in sectors where they may be used to promote exports by national companies. The defense sector (including much of aerospace) is unique in this regard, in that the national defense exception written into the GATT exempts defense goods and services from some of the effects of these disciplines. The limits on "green-lighting" of R&D subsidies to product development in commercial sectors, for example, arguably do not apply to defense articles. Indeed, one might even argue that what might be labelled as "dumping" (sales of products at prices that do not cover the fully loaded—including R&D—cost of production) is routine practice in international sales of defense articles.
To what extent should U.S. policy attempt to unilaterally counteract foreign offset policies when these are designed to improve the terms of trade for foreign parties at the expense of U.S. economic interests? What tools could be used to this end? Is the U.S. government equipped to make the economic judgments needed to support an activist policy?
The special role of aerospace in discussions of offset policies is clearly related to its close linkages to defense, on the supplier side, and to procurement by government departments, and state-owned or -operated enterprises, on the demand side. Offsets are not a policy issue in other sectors where trade and investment are clearly covered by the GATT or by OECD investment codes. To what extent should the U.S. take the lead in discussions of some international agreement establishing rules of the game on offsets in defense-related trade and government procurement?