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The Nature of Offset Agreements in Defense Industries

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Offset agreements are mostly and frequently used in defense industry for certain beneficial contributions in return for a defense procurement contract. It is mainly an agreement conducted between two parties -the defense vendor and a foreign government- as a condition to the aforementioned defense contract. The various impacts of offset agreements should be deliberated in order to acquire a clear understanding regarding the nature of these agreements. Therefore, the principle elements along with a comprehensive definition and the nature and qualifications of the agreement’s purpose and outcome should be thoroughly clarified and analyzed.

There may be three points asserted as the elements of offset agreements. First of all, offset agreements are regarded as tools of compensation that appears in a non-monetary form. The compensation encompasses the economic and cost-related conditions of the foreign country which intends to purchase defense hardware and military goods and services. Secondly, the motive of the agreement is to atone the expenditure of the procured country. Lastly, it emerges as a prerequisite for the transaction to be conducted in terms of military goods and services.  Based upon this explanation, the offset agreements can be defined, as; “industrial compensation practices required as a condition of purchase in either government-to-government or commercial sales of defense articles and/or defense services” The industrial compensations mentioned in the definition points out the industrial and commercial benefits provided to the foreign country under the offset agreement. The benefits appearing as various industrial and commercial compensation agreements are presented by the procuring government/entity, which surfaces as a non-domestic outsource to the procured country.

Apart from being a condition to the defense contract, offset agreements are also perceived as tools to maintain and conduct businesses in the foreign country that is to be provided with the related defense products. The defense vendor’s business intentions can be reflected through a direct or an indirect offset agreement. When direct offset agreements are taken into consideration, the business that will be conducted by the vendor should be related to the subject of the defense contract. On the other hand, indirect offset agreements involve businesses that are unassociated with the said subject of the defense contract. For instance, an offset agreement signed between country Y and defense company X, which involves the demand of company X regarding country Y’s production of certain parts of the aircraft -that is subject to the defense procurement contract between X and Y- is regarded as a direct offset agreement. If company X decides to invest in a business, in country Y, other than the subject of the procurement contract, then it is regarded as indirect offset agreement.

The numerous benefits that came along with the business conducted under the offset agreement can be cited as; “co-production, licensed production, subcontracting, technology transfer, purchasing, and credit assistance”. Actually the benefits arose as the consequences of the mentioned application types. The most evident advantages revealed when the procured country undertakes the previously specified execution forms, are the enhancement of the employment opportunities and the technology transfer that the country will mostly benefit form. The domestic aerospace and defense substructure will be fostered and developed together with the technology transfer. Associated with the offset agreements, the money and the labor force of the related country stays within the procured country. Therefore the economic impacts are being eased for the buyer. For both of the parties offset agreements also represents a sign of alliance. On the other hand, employment actually becomes more limited in the procuring country because the production activities are maintained in the foreign country. Moreover, the technology transfer may also pose a threat for the vendor in terms of the risk of transference of the technology to a possible enemy. Therefore the downsides of the offset agreements mainly concern the vendor party. Nevertheless, the procuring party also benefits form the agreement by establishing a global development and accessing to rising markets.

Consequently, offset agreements, tools for conducting business, and means that ease the burden of the procured country is now attributed as “sophisticated commercial partnership agreements”. This attribution is associated with the offset agreements as a result of years of implementation. Therefore it is a notion that is still developing and bending throughout the process. Hence, the globalization observed in the economic domain and the approach towards nationalism will shape the future of the offset agreements in a broad scale.

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