Downloaded by [Mr david coopor] at 01:30 03 July 2016 Downloaded by [Mr david coopor] at 01:30 03 July 2016 THE ECONOMICS OF OFFSETS Studies in Defence Economics Edited by Keith Hartley and Nicholas Hooper, Centre for Defence Economics, University of York, UK Downloaded by [Mr david coopor] at 01:30 03 July 2016 This monograph series adopts a wide definition of defence economics to cover all aspects of the political economy of defence, disarmament and peace Volume European Armaments Collaboration: Policy, Problems and Prospects Ron Matthews Volume Military Production and Innovation in Spain Jordi Molas-Gallart Volume Defence Science and Technology: Adjusting to Change edited by Richard Coopey, Matthew Uttley and Graham Spinardi Volume The Economics of Offsets: Defence Procurement and Countertrade edited by Stephen Martin This book is part of a series The publishers will accept continuation orders which may be cancelled at any time and which provide for automatic billing and shipping of each title in the series upon publication Please write for details The Economics of Offsets Defence Procurement and Countertrade Stephen Martin The Centre for Defence Economics University of York, UK LONDON Downloaded by [Mr david coopor] at 01:30 03 July 2016 Edited by ~ ~~o~!~:n~~~up LONDON AND NEW YORK Copyright © 1996 by OPA (Overseas Publishers Association) Amsterdam B.V Published by Routledge Park Square, Milton Park, Abingdon, Oxon, OX14 4RN 270 Madison Ave, New York NY 10016 Downloaded by [Mr david coopor] at 01:30 03 July 2016 Transferred to Digital Printing 2007 All rights reserved No part of this book may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying and recording, or by any information storage or retrieval system, without permission in writing from the publisher British Library Cataloguing in Publication Data Economics of Offsets: Defence Procurement and Countertrade - (Studies in Defence Economics, ISSN 1062-046X; Vol 4) I Martin, Stephen II Series 382 ISBN 3-7186-5782-1 Publisher's Note The publisher has gone to great lengths to ensure the quality of this reprint but points out that some imperfections in the original may be apparent Contents vii Downloaded by [Mr david coopor] at 01:30 03 July 2016 Acknowledgements Introduction and Overview Stephen Martin Countertrade and Offsets: An Overview of The Theory and Evidence Stephen Martin 15 The Defence Offsets Policy in Australia Stefan Markowski and Peter Hall 49 Offsets and Weapons Procurement: The Belgium Experience Wally Struys 75 In Search of a Strategy: The Evolution of Canadian Defence Industrial and Regional Benefits Policy James Fergusson 107 Offsets and French Arms Exports Jean-Paul Hibert 139 Offset Benefits in Greek Defence Procurement Policy: Developments and Some Empirical Evidence Nicholas Antonakis 163 Defense Industrialisation Through Offsets: The Case of Japan Michael W Chinworth and Ron Matthews 177 Saudi Arabia and Offsets Abdulla M Al-Ghrair and Nick Hooper 219 10 The Teeth of the Little Tigers: Offsets, Defense Production and Economic Development in South Korea and Taiwan Dean Cheng and Michael W Chinworth 245 11 From Offsets to Industrial Cooperation: Spain's Changing Strategies as an Arms Importer Jordi Molas-Gallart 299 12 US - Swiss F-5 Transaction and the Evolution of Swiss Offset Policy Bernard Udis 321 13 The UK Experience with Offsets Stephen Martin and Keith Hartley 337 v Downloaded by [Mr david coopor] at 01:30 03 July 2016 vi CONTENTS 14 US Offset Policy Bernard Udis and Keith E Maskus 357 15 The Business of Offset: A Practitioner's Perspective Case Study: Israel Alon Redlich and Maison Miscavage 381 16 Concluding Remarks Stephen Martin 407 Index 411 Downloaded by [Mr david coopor] at 01:30 03 July 2016 Acknowledgements The preparation of this volume was funded by the Economic and Social Research Council (R000233146) The editor would like to thank all those who have assisted in the publication of this book Thanks are due to Professor Keith Hartley, who read and commented upon the manuscript, and to Roberta Blackburn and Margaret Cafferky, who provided excellent secretarial and editorial assistance in the final stages of publication vii Downloaded by [Mr david coopor] at 01:30 03 July 2016 This page intentionally left blank List of Contributors Downloaded by [Mr david coopor] at 01:30 03 July 2016 Abdulla M AI-Ghrair, BS King Faisal Air Academy, MDA Cranfield, Brigadier General, Royal Saudi Air Force, pilot His research interests include economic offsets, Saudization and conflict resolution Nicholas Antonakis has a PhD in Defence Economics from the University of Athens He is an expert economist in the Greek Ministry of Industry, Energy and Technology His research interests include the determinants and growth effects of military expenditure, and the structure and performance of defence industries Dean Cheng has worked for several years as a researcher and writer on Asian defence and foreign affairs He is completing his dissertation, which examines Asian perceptions of the United States and Japan in the post-World War II era He lives in Washington, DC Michael Chinworth is the Senior Analyst of Asian Technology for The Analytic Sciences Corporation of Arlington, Virginia He has published widely on the technological capabilities of the Far East, including Inside Japan's Defence: Economics, Technology and Strategy (published by Brassey's (US) in 1992) He writes a monthly column on Asian science, technology and business trends in Automotive Engineering (published by SAE International) Dr James Fergusson is the Deputy Director of the Centre for Defence and Security Studies at the University of Manitoba, Winnipeg, Canada He has written extensively on issues related to Canadian defence industrial policy and practices, and is currently examining the defence industrial implications of Canadian participation in Ballistic Missile Defence Peter Hall has a long standing research interest in industry economics and, in particular, in the economics of technological innovation This culminated in his book Innovation, Economics and Evolution, published in 1994, which has also led to specialist work in defence industry economics He has recently been one of the leaders of a major government inquiry into R&D activity and policy in Australia ix Downloaded by [Mr david coopor] at 01:30 03 July 2016 A PRACTITIONER'S PERSPECTIVE 403 companies highlighted in the basket of opportunities, and pursue discussions as to potential modes of co-operation It should be noted that though the technology capabilities of the potential partners were extremely important, other factors such as the management teams of the companies, and their experience with international ventures, were no less crucial to this partnering process ITS complemented this technology-oriented work with a detailed review of Israel Our presentations to the client included a detailed review of the top thirtyplus decision makers in Israel, an analysis of decision makers versus influencers, and careful descriptions of the priorities, goals, and "pet projects" of each Furthermore, as said the theatre of operations analysis provided in depth assessment of Israeli government criteria for evaluating offset proposals, and set forth recommendations to the client company to function as criteria for its opportunity selection This analysis also included a detailed mapping of the Israeli government, including the Ministries of Defence, Finance, Industry and Trade, and the relevant arms of the Israeli Defence Forces The theatre of operations analysis was designed to set the stage for the company's pursuit of offset ventures in Israel As in all campaigns, it was critical that both senior management and the project team feel confident in their understanding of the environment, and develop an appreciation for the unique circumstances of the given target country One of the recommendations ITS submitted was to carry a major technology seminar in Israel to facilitate communication and contact between relevant Israeli entities, and the technical, as well as the business development, representatives of the client contractor Of the 340 Israeli entities reviewed up to that time, 110 were identified as possessing potentially valuable contributions and were invited to attend this seminar, which ITS orchestrated in mid-1993 The delegation from the client company consisted of 40 subject-matter experts from different divisions of the company These individuals were interested in exploring how Israeli entities might assist them in better achieving their technological and business goals Unlike other seminars, which tend to focus on what the local companies wish to sell, this seminar was structured to focus on what the client company wanted to buy: i.e., what are the strategic needs and issues the company needs to address and resolve Though the seminar was obviously connected to the client's offset interests in Israel, it was conducted with the interest of finding business opportunities that the company would want to pursue regardless of any offset credit they might receive The technology seminar, combined with on-site facility visits, yielded over 100 potential opportunities for co-operation The overall assessment of the team was that Israel is a hotbed of innovation and technology, and a country that should be monitored and assessed regardless of offset commitments The success of the seminar also scored a victory for the client company's offset group Downloaded by [Mr david coopor] at 01:30 03 July 2016 404 THE ECONOMICS OF OFFSETS Members of the client company recognised that by acting as a catalyst to bring representatives from numerous parts of the corporation to Israel, the need to develop offsets opened up opportunities that otherwise would have gone unnoticed, or still worse, gone to the competition Of the 100 potential projects identified, over 30 were rated as top priority initiatives Several were signed and executed towards the end of 1993, prior to any selection of the plane or the engine, due to their enormous relevancy and contribution to the needs of the company On the basis of the information gathered by the ITS teams, the client company was presented with a strategy recommending four basic thrusts for the company's offset activities in Israel The first called for aggressively pursuing co-operation with government-owned defence entities, responding to the government's priority to address the defence industry crisis The second called for the company to target strategic co-operation with leading Israeli high-tech companies, ensuring that the client company and its divisions benefit from business activities pursued in Israel The seminar exemplified this thrust The third recommendation was to develop added-value, people-intensive initiatives which would address Prime Minister Rabin's mandate to generate jobs immediately Fourth, ITS recommended that the company team-up with in-country technology investment and holding companies to leverage its own investments with those of experienced local partners This four-pronged strategy formed the basis for the basket of opportunities Each recommendation was accompanied by a set of entities most suited to the needs of the client Furthermore, ITS presented specific projects for the client company to carry out with each of the entities it recommended 15.4.5 Procurement Selection Analysis There was never a clear favourite between the F-16 and the F/A-18 The IAF was familiar with the Lockheed aircraft, already in possession of over 200, and the planes had performed well Indeed, the plane had attained a special significance to Israelis because the IAF used it in numerous combat missions, including the successful surprise bombing of an Iraqi nuclear plant in 1981 Additionally, ordering more F-16s would provide savings in infrastructure, maintenance, and training costs However, a sizeable contingent in the MOD and IAF backed the F/A-18 The aircraft uses two engines instead of one, giving it a possible survivability advantage; was perceived as more capable than the F-16 in night attack; and offered the advantages of fleet diversification The contest between GE and P&W was viewed similarly; either engine was deemed up to the task However, the MOD appeared to be on-schedule in its decision-making process and nearing final determinations in the later part of 1993 But it then Downloaded by [Mr david coopor] at 01:30 03 July 2016 A PRACTITIONER'S PERSPECTIVE 405 stalled over rumours that the US Administration would let Israel purchase the F-15E, a plane that the Israelis had expressed great interest in but that had never been available for export Congress' approval of the F-15E for export to Israel paved the way for the IAF's acquisition of the aircraft Industrial co-operation initiatives are important to Israel However, it is our assessment that offsets, as a rule, will not sway the decision of the IAF or any other branch of the Israeli military unless the various systems under consideration are perceived to be of equal value Thus the choice of the F-15E/I A shift in strategic and operational priorities for Israel made the F-15I preferable over the F-16 or FIA-18 In the past, most of the lAP's procurements stressed interception and peripheral air superiority However, the now low probability of a conventional war on Israel's borders and the introduction of missiles into the Middle East military balance transformed several basic tenants of national security Israel would now have to be able to operate against long-range targets, countries such as Iran, Iraq, and Libya And it might have to so at night, and avoid detection in severe weather The F-15I possesses night flying, all-weather, and long-distance strike capabilities at a higher level than that of either the F-16s or the F/A-18s originally offered Lockheed responded to the change in the competition, offering a thoroughly updated version of the F-16, the F-16ES The F-16ES would have been a very capable aircraft, and substantially cheaper than the Eagle However, the plane was still in the design stages, a fact that may have fundamentally weakened Lockheed's position The order was a major victory for McDonnell Douglas It also sweetened a recent Saudi order for 72 F-15s (a procurement Israel protested) Of the two engine companies, Pratt & Whitney was selected to power the Eagle with the F-I00-PW-229 engine Israel's first F-15Is are to be delivered by 1996-97 Over the three years in which ITS supported this offset initiative, we learned several important lessons First, while of great importance for IAF procurements, offsets will not sway a decision to buy any particular system unless the various systems being considered are perceived to be of equal value Second~ we found Israel to hold great promise in diverse areas of technology, from expert systems for composite repairs and fibre optic lasers, to solid modelling/simulation technologies, to adhesive bonding, to multimedia/training, all activities highly relevant to most companies pursuing offset initiatives in Israel Third, Israeli entities are enormously interested in co-operation with foreign companies, and very aware of the role and ramifications of offset obligations Lastly, we developed an appreciation for the activities and support provided by the ICA, and have found them to be in principle open to innovative initiatives and uncommon methods for fulfilling offset commitments 406 Downloaded by [Mr david coopor] at 01:30 03 July 2016 15.5 THE ECONOMICS OF OFFSETS Conclusion The ITS motto is "offset fulfilment through global technology initiatives" This chapter was written to provide a practitioner's insight into the current offset environment and demonstrate how technology initiatives can play a significant role in the formation and pursuit of offset strategies It is our hope that the reader has gained insight into our company's philosophies and methodologies, and that the review of Peace Marble IV/Peace Fox VI has provided a tangible example of the philosophies and principles discussed in this chapter As the demand for offset increases, so will the challenges of pursuing it It is our sincere hope that fulfilment of offsets through technology initiatives will be adopted as a primary mode of fulfilment by both defence contractors and governments alike, paving the way to long-term, mutually beneficial relationships crossing geographic and national boundaries Chapter 16 Concluding Remarks Downloaded by [Mr david coopor] at 01:30 03 July 2016 Stephen Martin Centre for Defence Economics, University of York, UK The aim of this chapter is to identify any common themes that emerge from the case studies and the associated lessons that can be drawn for public policy towards offsets Given that the analysis has focused on a variety of countries, often with very different defence, economic, industrial and political backgrounds, it might be anticipated that few, if any, such points would materialise Indeed, given the various forms of offset (such as co-production, licensed production, direct and indirect offset) and the different policy objectives, the task of identifying any common themes might have proved an onerous one On the contrary, though, there appear to be a number of findings which, whilst not readily apparent in all of the case studies, come through sufficiently strongly to warrant discussion Perhaps the first point to make - and one which applies to virtually all countries - is that the absence of a reliable and consistent body of data makes any evaluation of offset programmes incredibly difficult Indeed, in some cases the only publicly available data was the financial size of the offset together with a very brief description of the type of work which was considered to be eligible towards the vendor obligation This data deficiency is all the more surprising given the substantial financial sums that are often involved and the fact that the offset package has sometimes proved the decisive factor in a purchaser's choice of vendor Indeed, the US is the only country where regular and rigorous attempts have been made to track the impact of offsets in terms of jobs, technology and international competitiveness Here, of course, the focus is on the domestic impact of offsets associated with US exports, rather than that associated with US imports (which is the more relevant scenario for most countries) Typically, the impact of a direct/indirect offset is measured in financial terms (e.g $500 million over a five-year period) and, in these circumstances, the success or failure of the offset depends on whether the vendor meets its obligation within the specified time period However, the usefulness of this approach towards the evaluation of any offset programme depends on whether the work which is eligible towards an obligation actually occurred as a result of the offset, or whether it merely reflected existing business relations If it is the 407 Downloaded by [Mr david coopor] at 01:30 03 July 2016 408 THE ECONOMICS OF OFFSETS latter case, then the impact of any offset, no matter how large financially, is likely to be rather trivial Also relevant for the evaluation of any offset is information on the programme's cost That is, how much more does the offset cost compared with an off-the-shelf purchase? Many, but not all, states seem wedded to the idea that offsets are free goods and are reluctant to publicly admit that an offset costs more than an off-the-shelf purchase Once this is recognised, though, further issues arise concerning the cost effectiveness of the offset programme and whether there are any other policy instruments which could obtain similar benefits for a smaller outlay Aside from the lacuna of data, the case studies reveal a number of interesting themes First, offsets have involved a learning experience for both the vendor and purchaser and, as with any new initiative, both parties probably made mistakes in the early days Vendors might have underestimated both the cost and the degree of difficulty with meeting their offset commitments Initially, offset agreements were often on a 'best endeavours' basis but, as a number of countries learnt, financial penalties for the non-fulfilment of offsets proved a better incentive than the much vaguer 'best endeavours' Firms in a number of purchasing countries initially, and quite erroneously, believed that an offset obligation guaranteed them orders irrespective of their cost and quality performance and, when such sales did not materialise, it led to widespread disenchantment with offsets Also, firms with an obligation would, understandably, seek offset credit for as many purchases as it could lay claim to, irrespective of whether they met the necessary criteria Consequently, administering offset programmes, particularly large ones, proved an onerous task Inevitably disputes will arise over whether work is new work, generated by the offset, or whether it reflects established business patterns Similarly, there will be debate as to whether the work meets the necessary technological standards and, where there is no obvious market price, there might be difficulty attaching a mutually agreeable value to, say, technology transfers These teething troubles are inevitable although experience suggests that they decline as both parties become more familiar with each other The only way around many of these problems is to agree a package of offset work in advance rather than wait for the vendor to place work with domestic industry However, this is simply not practical for, say, a $1 billion worth of indirect offset! Second, there seems to have been a move away from rather general offset programmes with broad eligibility criteria, and towards more focused measures This might reflect the recognition that offsets cost more than an off-the-shelf purchase and that purchasers wish to concentrate their scarce resources in specific areas rather than provide a general subsidy to all of industry Downloaded by [Mr david coopor] at 01:30 03 July 2016 CONCLUDING REMARKS 409 Third, the time horizon of those seeking offset seems to have lengthened, particularly in countries with a developing defence industry One of the criticisms of offset is that once a vendor has fulfilled its obligation it will transfer its business to another state where it has an outstanding commitment To overcome this, many countries allow a firm to bank offset credit in anticipation of a future obligation and this provides an incentive for the firm to continue placing work with domestic manufacturers Of course, many countries are seeking the production work that this can bring and so the banking arrangement is the appropriate response to this form of short-termism However, developing defence industries often want more than just production work, with technological and marketing skills being particularly attractive To induce foreign manufacturers to share these assets, a number of countries now seek to draw foreign firms into the domestic economy through either equity investments in existing domestic firms or the establishment of joint ventures Both approaches provide the foreign firm with an incentive to continue to place work in the domestic economy and to share other skills as this increases the profitability of its overseas investment The interpretation of this move away from broadly defined short-term offset work and towards a more focused long-term investment strategy is, by no means, clear cut It could be that it reflects what is perceived to be the failure of the former approach and that, as alleged, foreign suppliers cease placing work in the domestic economy once their offset obligation is complete An alternative interpretation would emphasise the success of the offset strategy in laying the foundations on which future joint ventures could be built By encouraging foreign firms to place work with domestic manufacturers, both parties become familiar with doing business with each other The foreign firm is made aware of the capabilities of domestic manufacturers who, in tum, become aware of the cost and quality requirements for sales to the foreign firm In this scenario, offsets force domestic manufacturers to become more efficient and, once this has occurred, make the foreign manufacturer more willing to invest in the local firm The move away from offsets and towards joint ventures does not reflect the failure of the former; rather, the reverse Of course, this form of offset is likely to be more attractive to those countries with a developing defence industrial base than to states that have less of a need for new technologies Finally, none of the country studies provide any evidence to suggest that offsets are likely to disappear in the foreseeable future Certainly, the US has unilaterally sought to limit the size of offset that American firms can offer and Congress has passed a bill that limits the steps that US firms can adopt to fulfil any offset obligation As part of a Code of Conduct for defence trade, the US has also sought multi-lateral agreement with its NATO partners to limit and eventually eliminate all offsets, which it, views as a barrier to defence trade However, 410 THE ECONOMICS OF OFFSETS Downloaded by [Mr david coopor] at 01:30 03 July 2016 since an initial draft in 1992, the Code of Conduct has made little progress towards being a more substantive document and thus the prospect for a mutual elimination of all offsets, within this forum at least, remains remote Elsewhere, as long as purchasers continue to require offsets, and there is no reason why they should cease to so, competitive pressures will force vendors to meet such demands Index Downloaded by [Mr david coopor] at 01:30 03 July 2016 Each country's main entry (usually a complete chapter) is in bold For the reader's convenience, particular areas of interest may also be included as a subheading AACC (Aircraft Accessories and Components Company) 238 abolition of offsets: Australia 58 Abu Dhabi 142, 150 access to overseas markets see international marketing acquisition programmes 10-11,312-3, 315,317 administration costs 68, 368-9, 391 administration of programmes 87-8, 307-9,316,323-4,332-3 Advanced Electronic Company (AEC) 236-8 advantages of offsets 84-5 Aerospace Industries Association of America (AIAA) 32, 42 aerospace products 34-5, 37-8 AGECO (Trading Offsets Association) 155 agricultural commodities: countertrade deals 26-7 AIFV (Armoured Infantry Fighting Vehicle): Belgium programme 96-9 Aircraft Accessories and Components Company (AACC) 238 Al Salam Aircraft Company (ASAC) 238-9 Al Sawary II programme 233 Al Yamamah I and II programmes 3, 228,233-6,240-2 analysis of client nation: Israel 398-401 arms proliferation 275, 367 AT&T 232 austerity programmes 25 Australia 4, 6-7, 41, 49-70, 143,389 evaluation of programmes 58-69 history of programmes 50-8 policy goals and offsets 69-70 Australian Production 55-6 Austria 145,149,154,387 AV-8B Harrier: Spanish programme 10 AWACS aircraft: UK programme 338-48,352,387 8, balance of payments 40 banking industry: offset organisations 155 barter 28-31,140,390 definitions 15, 32 economic motives 19-21,24-6 French exports 140-1 Barter, Office of (US) 371 barter/counterpurchase model 30 basic commodities: countertrade deals 26-8 "basket of opportunities" 385 Israel 397, 402-4 Belgium 4,35-6,75-103, 146-7, 152, 154 AIFV programme 96-9 appraisal of offset policy 99-101 economic constraints 75-83 F-16 programme 2, 87, 89, 91-5, 100,139-40,359 future of offsets 101-3 offset policy and federalisation 5, 88-91, 154 offset requirements 143, 353 offsets and the economy 7,83-8 birth of offsets 139-40 Boeing Corporation 387 Peace Shield programme 231 UK AWACS programme 8, 338-48, 352,387 Brazil 144, 151, 154 British Aerospace Al Yamamah I and II programmes 233-4,235-6,241,242-3 Taiwan Aerospace Corp co-production 267 buy-back 28-31 definitions 16, 32 economic motives 19-20,22-6 411 Downloaded by [Mr david coopor] at 01:30 03 July 2016 412 INDEX Canada 4-7,41,107-30,147 defence issues 108-12 EH-lOI programme 124-7 industrial and regional benefits policies 112-24, 127-30 capital equipment: countertrade deals 27 capitaVtechnology packages: and buy-back 22-4 cash payments: immediate reduction 141-4 CF-18 Hornet: Canadian agreement 112-7 China, Peoples' Republic of 154, 246-7,248,261,268 China, Republic of see Taiwan civil reciprocity see countertrade civil-sector procurements 387 civilian sales: US offset policy 370-1 clearing arrangements 15-6 collaborative development/production programmes 1-2 comparative volume 3-4 competition 43, 121-2, 375 conlpetitors: development of 9,204-9, 274-5,389 conflict: between contractor and client nation 384 construction projects 26-7 control of programmes 87-8, 307-9, 316,323-4,332-3 co-operation: between contractor and client nation 7, 383 co-operative programmes 204-9,313-7 co-production Belgium 80, 146 benefits 330 definitions 2, 31-2 European trends (1950-1990) 33-7 Greece 167-8 US-Japan 200-4 cost premiums 408 Australia 6, 67-8 Belgium 7, 86, 95, 99 Japan 203 Spain 310 Switzerland 12, 332-3 UK 353-4 United Kingdom counter-contracts, deferred 144-5 countergifts 152 counterpurchase 28-31 definitions 16, 32 economic motives 19-21,24-6 French exports 140-4 counterpurchaselbarter model 30 countertrade 390 Al Yamamah programme 233 definitions 15-6, 32 economic motives 17-26 empirical overview 26-31 US policy 370-1 volume 16-7 credit, offset see offset credit Credit Deeds 54 credit-worthiness: and barter 30 credits 151-2 cross arms contracts 144 current trends: in offset practice 386-92 Daewoo Heavy Industries 278-9 DassaultAviation 140,142-3, 149 data on offsets: lack of 3,40-1,407 deception counterpart 152 declarations of intent 144 defence environment: downsizing 389 defence forces: development of 273-4 defence industrial base (DIB): development of 9, 39-40, 275-6 Defence Offsets 55-6 defence preparedness: OMB report 42 deferred counter-contracts 144-5 deferred payment 150-1 definitions countertrade 15-6, 32 offsets 2, 6, 31, 83-4, 140-1 Democratic People's Republic of Korea (DPRK) 246-8 Denmark European F-16 programme 2, 87, 89, 91-5,100,139-40,359 offset requirements 353 dependence on offset work 7, 86 Designated Work 55-6 DIB see defence industrial base direct investment 390 INDEX Downloaded by [Mr david coopor] at 01:30 03 July 2016 direct offsets 6, 32-3,41,235, 386, 388-9 definitions 2-3,6,83-4 disadvantages of offsets 85-7, 99-101, 365 DPRK (Democratic People's Republic of Korea) 246-7, 248 dumping 20-1 Eastern bloc: countertrade deals 26 economic compensations 83 economic motives countertrade 17-27,29 offsets 37-40 economic rent 38 Egypt 147-9 EH-101 programme: Canada 124-7 empirical overview countertrade 26-31 offsets 40-4 employment: US 43-4, 373 employment policies 39-40, 100 energy products: countertrade deals 26, 28,30 equity investments 8, 10-11, 315, 409 Europe: procurement trends (1950-1990) 33-7 European Union (EU): common defence policy 101-2 evaluation of programmes 3-4, 407-8 export levels: and countertrade 24-5 exporters survey: UK 342-7, 351-2 exports see international marketing F-5 aircraft: Swiss programme 12, 322-9,359-60 F-15 aircraft: Israel programme 392-3, 405 F-16 aircraft: European programme 2, 87,89,91-5,100,139-40,359 F-16C aircraft Greek programme 11, 170-1 Israel tender 392-3, 404-5 F-18 aircraft Israel tender 393,404-5 Spanish programme 9-10,299, 300-11 F-86 aircraft 34 413 F-104 aircraft 34 FIA-18 aircraft: Finnish programme 366-7 Federal Republic of Germany (FRG) 35-6, 148 finance packaging 12, 150-2 financial offsets 141-4 financial penalties 98, 408 Finland 142-3,145,149,155,390 F/A-18 programme 366-7 focusing of measures 408 foodstuffs: countertrade deals 26-7 foreign direct investment (FDI) restrictions: and countertrade 21-2,24-5,30 foreign exchange payments: to reduce 19-20, 144-8 forms of defence procurement 1-3 forward markets: absence of 24-5 France 4,11-2,35-6,139-56,392 Al Sawary II programme 233 clauses equivalent to offsets 150-4 offsets and exports 140-50, 154-6 offsets and imports 156 FRG (Federal Republic of Germany) 4, 35-6, 148 fuels: countertrade deals 30 fulfilment of offset obligation 10, 152-3,307-9,323-5,408 future markets: absence of 24-5 future of offsets 409-10 Belgium 101-3 Europe 101-2 Japan 209-11 GAIT treaty 391 General Dynamics 11 F-16 aircraft 2, 87, 89, 91-5, 100, 139-40,359 General Electric 11-2 F-5 aircraft 12, 322-9, 359-60 Germany 4,35-6,148 GIDC (Greek Investment Development Company) 11,170 gifts 152 givers of offset work Glaxo Saudi Arabia 240-1 goods: types, OMB report 41 Downloaded by [Mr david coopor] at 01:30 03 July 2016 414 INDEX goods offsets 2-3 governmental regulation 386, 388, 391, 409 grant aids: US 367-8 Greece 5,11,35-6,163-75 critique of offset policy 172 offset agreements 141, 143, 146-7, 149 offset benefits policy 164-9 Greek Investment Development Company (GIDC) 11,170 Gulf countries 141, 149-52, 386, 390 high value agreements 387-8 Hughes Aircraft Company: Peace Shield programme 232 Hyundai Precision and Industrial Corporation 279 ICA (Industrial Cooperation Authority) 394-5 impact of offsets: OMB report 42 importance of offsets 12, 154-6, 387 importers survey: UK 342-3, 347-52 incentive payments: US 366 India 141, 143, 148-51, 154-5 indirect offsets 32-3, 41, 381, 386, 388-90 Al Yamamah programme 235 Australia Belgium 84-7 definition 2-3 Indonesia 389 industrial competitiveness: OMB report (US) 43 Industrial Cooperation Authority (ICA) 394-5 industrial equipment: countertrade deals 28 industrial offsets 142 industrial policy 7, 8, 100 infant-industry 39, 85 information asymmetries: in technology markets 22 infrastructure: countertrade deals 28 Inglis Review (1984) 52-3, 57 international marketing 11,21, 30, 39 International Systems Engineering (ISE) 239 International Technology Sourcing (ITS) 5,7,381-2,406 Israel campaign 382, 392 4, 396 405 offset philosophy 382-6 international trading system: impact of offsets 374 investment, overseas 32 Iran 142 Iraq 142 ISE (International Systems Engineering) 239 Israel 5, 7,41,381-406 offset policy 394-6 Peace Fox VI/Peace Marble IV competition 382, 392 4, 396 405 Italy 2, 35-6, 152, 195 ITS see International Technology Sourcing Japan 5,8-9,13,177-211 benefits of co-production 200-3 co-operative programmes and competition 204-9 cost of programmes 204 defence-industrial strategy 180-8 defence industry and foreign technology 195-200 defence issues 177-9 future of offsets 209-11 postwar offset developments 188-95 Japan-US technology transfer 9, 182, 187,208-9,247 joint development and production 10, 313-6 joint ventures 8, 222-3, 234-5, 240, 315,409 Kanaris system: Greek upgrading agreement 11, 172 kokusanka 181-3 Korean Air 278 Kuwait 387 Leopard MBT: Canadian programme 112-3, 115-6 licensed production 3, 274 Belgium 80 benefits 330 Downloaded by [Mr david coopor] at 01:30 03 July 2016 INDEX licensed production (cont) definitions 2, 31-2 European trends (1950-1990) 33-7 France 147-8 Japan 8-9,187-8,195-6,206-7 Saudi Arabia 227-8 limits on offsets: by US 12-3, 363 4, 368,388,391,409-10 liquidated damages 57, 384 Little Tigers see South Korea; Taiwan loans, financial 12 local assembly agreements 147 local content 6, 55, 64 local-contracting 145-6 local manufacturing 145-8 local production: spin-offs 183 Lockheed: Peace Fox VI/Peace Marble IV competition 382, 392 4, 396 405 long-term strategy 409 M113 Armoured Personnel Carrier: Belgium programme 96-9 McDonnell Douglas Corporation (MDC) 266-7,391 CF-18 Hornet 112-7 Peace Fox VI/Peace Marble IV competition 382, 392 4, 396 405 see also F-18 aircraft maintenance sub-contracts 146 Malaysia 141,389-90 management of programmes 87-8, 307-9,316,323 4,332-3 manufactures: countertrade deals 26-30 market entry 39 Matra 140, 142-3 MDC see McDonnell Douglas Corporation Meko-200 frigates: Greek programme 11,171-2 Middle East Propulsion Company (MEPC) 239 40 Mirage 2000 aircraft: Greek purchase agreement 11, 143, 168-70 NATO Code of Conduct 364,409-10 weapons standardisation policy 163 Netherlands 35-6, 146, 363 415 European F-16 programme 2, 87, 89, 91-5,100,139 40,359 offset requirements 353 Nigeria 142 1990s: offset environment 386-92 non-tariff barriers 232, 243 North Korea (DPRK) 246-8 Northrop Corporation F-5 aircraft 12, 322-9, 359-60 F/A-18 aircraft 366-7 Norway 142-3, 390 European F-16 programme 2, 87, 89, 91-5,100,139 40,359 offset requirements 353 OECD: competition conditions 375 off-the-shelf purchases Office of Barter (US) 371 Office of Management and Budget (OMB) definitions of offsets 31-2 offset reports 41 4, 360-1, 365-6, 373 Offset Advisory Service 392 offset credits 12, 39, 87, 234, 390, 408-9 offset executives 385 oil offsets 142 oligopolies 37-8 OMB see Office of Management and Budget opposition to offsets: US 366-7 organisations, offset 155 overcapacity 7, 90, 100 overseas investment 32 P-3 Aurora aircraft: Canadian agreement 112-3, 115-6 Pakistan 143 payment, deferred 150-1 payment conditions 150-1 Peace Alps programmes see F-5 aircraft Peace Fox VI/Peace Marble IV competition 382,392 4,396 405 Peace Shield programme 8, 228, 230-2, 236 40,242 penalties, financial 98, 408 People's Republic of China (PRC) 154, 246-8,261,268 Downloaded by [Mr david coopor] at 01:30 03 July 2016 416 INDEX petro-chemical offsets 142 plants: supply and construction 22-4 policies, offset political objectives 40, 153-4, 268-70 Portugal: offset requirements 353 PRC see People's Republic of China price cutting 20-1, 30 price discrimination 21, 30-1 price reductions 151 prior offsets 155 product quality 22 Project Deeds 54 proliferation of arms 275, 367 protectionism 39-40, 68-9, 85-6 quality of product: and buy-back 22 R&D: Japan 186-7 raw materials: countertrade deals 26-7, 30,141,390 receivers of offset work 4-5 reciprocal purchase deals see counterpurchase regional policies 6-7, 40, 88-91 see also Canada regulation, governmental 386, 388, 391, 409 relationship between client nation/contractor 7, 383 reliance on offset work 7, 86 reporting requirements: US 360-2, 391 Republic of China (ROC) see Taiwan Republic of Korea (ROK) see South Korea Rome Treaty: Article 223 101-2 Russia 148, 269-71, 390 Sammi Group 279 Samsung Aerospace 277-8 SaudiArabia 5,141-2,151-2,219-43 Al Sawary II programme 233 Al Yamamah I and II programme 3, 228,233-6,240-2 development of the Kingdom 220-1 joint ventures 222-3, 234-5, 240 offset programme 8, 225, 228-9, 390 offsets in the economy 242-3 Peace Shield programme 8, 228, 230-2,235-40,242 Saudi Economic Offset Committee 229-30 Saudi-US Joint Economic Commission 224-5 technology transfer 149-50, 222, 225-8 Saudi Development and Training Company 240 search costs: and countertrade 21 second-best outcomes 38 semi-direct offsets 84 services offsets 2-3, 143 Singapore 152 size of programmes 310-11,316,383, 386-8 South Korea (Republic of Korea) 5, 9, 195,245-60,268-79 defence industrial sector 249-56 economic data 280-4 role of offsets 256-60, 268-76 Spain 5,9-11,35,41,299-317 F-18 programme 9-10,299-311 industrial agreements 313-16 offset deals (1983-1993) 10, 144-7, 152-3,311-3 offset requirements 353 strategy, offset 385 sub-contractor production 32-3,42, 146-7 definitions 31-2 success factors: countertrade 28-9 surveys, UK exporters 342-7,351-2 importers 342-3, 347-52 Sweden 142-3, 145, 148, 151-2 switch traders 16 Switzerland 4-5, 12,41, 145, 149, 152, 321-33 F-5 programme 12, 322-9 offset policy 329-33 Taiwan 5,9,146,148,195,245-8, 260-77 defence industrial sector 262-5 economic data 280-4 role of offsets 265-9, 270-6 Tate & Lyle 241 technological diffusion 38, 199, 201, 274,374 Downloaded by [Mr david coopor] at 01:30 03 July 2016 INDEX technology markets: information asymmetries 22-4 technology transfer 38-9, 141, 390 definition 32 France 148-50 Saudi Arabia 222, 225-8, 243 South Korea 9, 247, 258, 274-5 Taiwan 9, 274-5 US 13,374 US-Japan 9,182,187,208-9,247 Thailand 148 third-party companies 143,390 Thomson-CSF 140, 143, 146, 150-1, 233,387 time scales of programmes 54, 310, 409 tourism offsets 11, 143, 173 trade-related investment measures (TRIMs) 374 Trading Offsets Association (AGECO) 155 transaction costs: and countertrade 21 transfer of technology see technology transfer TRIMs (trade-related investment measures) 374 Turkey 41,99,146,150-1,153-4,389 United Arab Emirates (UAE) 142, 150, 388,390-1 United Kingdom (UK) 2, 4, 7-8, 35-6, 41,151,337-54,389 Al Yamamah programmes 233-4,242 AWACS programme 8,338-48,352, 387 exporters survey 342-7,351-2 implication for policy 352-3 importers survey 342-3, 347-52 Offset Advisory Service 392 417 United States of America (USA) 4, 68-9,145-6,357-75 assessment of offset policy 372-5 co-operative programmes and competition 204-9 downsizing of defence environment 389 history of offset sales 12-3, 357-60 Japanese co-production 9,200-4 Military Offsets Policy statement 279-80 offsets policy (purchases) 371-2 offsets policy (sales) 360-71, 391 regulation of offsets 12-3,363-4, 368,388,391,409-10 Saudi-US Joint Economic Commission 224-5 state offset policies 372 technology transfer 9, 13, 182, 187, 208-9,247,374 see also Office of Management and Budget USSR 148, 150 value of countertrade deals volume of offsets 3-4 27 weapons standardisation policy: NATO 163-4 Westinghouse 11 winding down of programmes: Australia 58 work-sharing 3, 6, 185 see also co-production; licensed production World Trade Organization: competition conditions 375 ... Introduction and Overview Stephen Martin Countertrade and Offsets: An Overview of The Theory and Evidence Stephen Martin 15 The Defence Offsets Policy in Australia Stefan Markowski and Peter Hall 49 Offsets. .. Industrialisation Through Offsets: The Case of Japan Michael W Chinworth and Ron Matthews 177 Saudi Arabia and Offsets Abdulla M Al-Ghrair and Nick Hooper 219 10 The Teeth of the Little Tigers: Offsets, Defense... billing and shipping of each title in the series upon publication Please write for details The Economics of Offsets Defence Procurement and Countertrade Stephen Martin The Centre for Defence Economics