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Money for Nothing? Offsets in the U.S.–Middle East Defense Trade

Published online by Cambridge University Press:  26 October 2009

Shana Marshall*
Affiliation:
Department of Government and Politics, University of Maryland, College Park, Md.; e-mail: marshall.shana@gmail.com

Extract

In December 2008, the U.S. Bureau of Industry and Security (BIS) released its thirteenth annual report on offsets in the U.S. defense trade. This chart displays numbers for the BIS category Middle East/Africa, taken from these reports beginning in 1993. Offsets are a variety of industrial and commercial incentives that defense firms provide to foreign governments to facilitate purchases, from coproduction of particular weapons systems to overseas investment. They have become such big business in the Middle East that a system has evolved to allow defense contractors to bank and trade offset credits like any other investment. Unlike ordinary investments, however, offsets represent transfers of substantial resources to authoritarian governments under conditions of near total unaccountability. Because offsets are usually a percentage of the overall contract value, regimes that spend more on weapons get more in offsets.

Type
Quick Studies
Copyright
Copyright © Cambridge University Press 2009

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References

NOTES

2 In 1993, regional values were first reported directly by BIS or could be determined from information provided in annual reports. The “Middle East and Africa” category in the BIS database includes Egypt, Israel, Kuwait, Saudi Arabia, Turkey, the United Arab Emirates, and South Africa (the sole sub-Saharan African country), so I focus on the Middle East here. Individual country values are not reported.

3 GAO, “Issues Concerning the Use of Offsets in International Defense Sales” (GAO-04-954T), 8 July 2004.

4 “Military Offsets to Grow?” Jane's Intelligence Review, 1 December 1998. This estimate excludes the years 1990–93, but BIS statistics add additional years from 1998 to 2005. Jane's estimate also includes offsets from European contractors, but it is unlikely Europe provided $24 billion in offsets while the United States provided less than $6 billion given what is known about U.S. market share and the value of specific U.S. offset programs. Furthermore, Jane's estimate excludes non-Gulf countries that are cited in the BIS report, including Israel—which BIS numbers indicate received over $2 billion in offsets for the 1993–2005 period. This would leave only the remaining $3.4 billion for the entire Gulf and other Middle East states.

5 “Survey of Offset/Coproduction Requirements,” U.S. Department of the Treasury Report, 1983, 60, www.disam.dsca.mil/pubs/Indexes/Vol%205-4/Treasury.pdf (accessed 1 June 2009).

6 John H. Eisenhour, then director of the Office of Management and Budget, told the members of the Defense Industry Offset Association's 9 May 1989 meeting that “Egypt has also been authorized to use FMS financing for directed offsets.” John H. Eisenhour, “Offsets in Military Exports: U.S. Government Policy,” remarks presented to the spring meeting of the Defense Industry Offset Association in Scottsdale, Ariz., 9 May 1989, http://www.disam.dsca.mil/pubs/vol%2012-1/Eisenhour.pdf (accessed 11 August 2009).

7 GAO, “Military Exports: Concerns over Offsets Generated with U.S. Foreign Military Financing Program Funds” (GAO/NSIAD-94-127), 22 June 1994.

8 Core country offset reports: Egypt, February 2009, Epicos.com (accessed 30 June 2009).

9 “Reporting of Offsets Agreements in Sales of Weapon Systems or Defense-Related Items to Foreign Countries or Foreign Firms,” Federal Register 74, no. 81 (2009): 19466–471. The potential change also clarifies that companies must report offset agreements even if the offset does not include defense articles, suggesting underreporting in previous annual figures.

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