The 16th Annual Report to Congress on the Impact of Offsets in Defence Trade has the following to say:
- Between 1993-2010, US firms agreed to $78.08 billion worth of Offsets out of defence exports worth $111.59 billion, or nearly 70%. Technology transfer was among the top 3 offset categories.
NEGATIVES FOR US:
- The report however warned that Offsets would “limit future business opportunities for U.S. subcontractors and suppliers, with negative consequences for the domestic industrial base. Other kinds of offsets, such as technology transfers, may increase research and development spending and capital investment in foreign countries for defence or non-defence industries, thereby helping to create or enhance current and future competitors to U.S. industry….”
Which is exactly the point of Offsets, that they should help in boosting the defence industrial base and wean developing countries off the need to keep importing in perpetuity.
POSITIVES FOR US:
- However the report also notes – ‘anecdotal information obtained from industry suggests that “cutting edge” or nascent technologies under development in the United States are less likely to be transferred to foreign companies in fulfillment of offset obligations than are mature technologies’.
- Also, Offsets involving technology transfers were only $985.0 million, equivalent to only 0.24% of total US R&D spend.
- The report further notes “Despite the capabilities that may accrue to foreign firms resulting from offset agreements signed with U.S. industry, purchases from foreign firms do not represent a significant share of DOD’s total purchases. Purchases of defence manufactures from US sources by DOD totaled $102.46 billion out of total purchases of $106.80 billion in 2010, with purchases from foreign entities only $4.34 billion, or 4% of the total.
- Moreover, the US recorded ‘an overall net gain … a positive $7.2 billion in added “input” opportunities for the U.S. industrial base, and a net gain of 22,553 in employment opportunities created or sustained during the 2009-2010 period’.
POINTS OF INTEREST FOR POLICYMAKERS
- Interestingly, one discovered that the analytical report is written in pursuance of a US Defence Production Act, whose existence one was unaware of. The Defence Production Act has helped the US develop a number of new technologies and composite materials and has also hand-held startups to commercially produce technologies they could not have done on their own.
- The Defence Production Act also enjoins on the government to very closely scrutinise foreign investment proposals in the United States. It is under the provisions of this Act that some Chinese Investments have been denied in the US.
- The point is, even as many countries have benefited from leveraging Defence Offsets, India is probably not among them. This has to change.
- The above also imply that negotiating defence offsets is a tough business, but other countries have succeeded and India too needs to stick it out.
- The other point is, the US, the quintessential free marketer, has a wide variety of industrial promotion policies to help maintain its technological and industrial edge and fend off foreign competition. All countries follow policies that are conducive to promoting their own domestic industrial base. As this Livemint article (“An economic roadmap for India”) points out – it is not healthy that India has failed to nurture its manufacturing base: “The fact that India has moved from an agricultural economy to a service-driven economy with almost no growth in industry is not a virtue; it is an outcome of policies that have hampered manufacturing and mining. With production costs rising in China, international buyers are looking for alternative sourcing destinations for manufactured products. If India, with its large labour force, is to seize this opportunity, it must nurture its industrial sector”.
Other factoids that it would be useful for our policymakers to be aware of:
- “DOD is willing to use reliable foreign suppliers when such use offers comparative advantages in performance, cost, schedule, or coalition operations. DOD has negotiated bilateral Reciprocal Defence Procurement Memoranda of Understanding (RDP MOUs) with 21 countries” – based on these MOUs, the US has made blanket public interest exceptions to the Buy American Act for 20 of these countries, as a result of which, their “products are evaluated on the same basis as domestic products in competitive DOD procurements.”
- The US also conducts a Dialogue with other countries on Limiting the Adverse Effects of Offsets in Defence Procurement. It has set up an interagency team to study the issue and report to Congress. The team concluded that other industrialized nations are also very concerned about offsets in defence procurement.
- The European Union (EU) Defence Procurement Directive in August 2011 was a very significant event in defence offsets. But even in Europe the Code states that offsets will not exceed the value of the procurement contract (100 percent offset limit).
- 100% is way above the highly diluted 30% offsets provided in India, and even this we have been unable to implement.
TIME TO LAUNCH AND IMPLEMENT OFFSETS IN DEFENCE PRODUCTION AND THE AEROSPACE INDUSTRY!