ment, 75 percent were exports. In the future, it is clear that the U.S. government share of sales is not going to go up. The only expansion will be to non-U.S. government buyers, most of which will be international. Given that U.S. government procurement is essentially protected, competition will be concentrated in this growing international market.

Two Trends

The industry has had to cope with two major trends over the past few years. The first has been the decline of the defense and airline markets. The airline market is recovering, but defense spending is unlikely to increase to previous levels. The second trend is the major restructuring within aerospace industry. The industry has dramatically increased productivity as customers have become more cost conscious. Of particular interest was the earlier analysis presented here showing that productivity gains accounted for twice as much employment loss as offsets. Extrapolating these losses forward, the industry will have a negative 100,000 workers by 2013—which makes one suspicious of such projections!

Mr. Johnson has seen little evidence of increased foreign penetration in aerospace parts. Imports over the past few years have held relatively constant at 5.5-6 percent of production. Problems facing the supplier base seem to be more the result of a decline in business and a rationalization of the supplier base rather then increased foreign penetration.

He reminded participants that the United States essentially has a 100 percent offsets requirement. Contracts for almost every major weapons systems require 75-100 percent production in the United States. The question becomes what the United States would be willing to lay on the table in negotiations with its allies on offsets. He suggested that negotiations limiting the United States' ability to demand production here would be politically unpopular.

Concerning the data, Mr. Johnson commented that the three sectors in the Commerce Department report on offsets—gears, machine tools, and shipbuilding—have all been either government subsidized or protected by Section 301 trade actions. In those sectors, offset performance was less than 1 percent. Another concern was that the Commerce Department data did not show the degree to which one foreign supplier was being substituted for another. Given that in these three sectors there is a lot of substitution of one foreign supplier for another to gain offset credits, the 1 percent is probably an exaggeration. Thus, he argued, there is no "smoking gun" as to the negative effects of offsets.

He suggested that a better way to conduct the analysis would be to look at the problems facing the subsectors, rather than start with offsets. Offset managers tend to circle around the subsectors in trouble—those subsectors that are not providing performance, are not cost competitive, do not provide quality, have not taken care of the customer, and have sought government protection in the past. In many cases, the offset is not the sector's problem; the sector has problems that

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