Defense Offsets and Countertrade

By

ACKNOWLEDGEMENT

I am most thankful to my family colleagues and instructor for providing me assistance and guidance throughout the tenure of this research project. This research would not have been completed without their undue support. ABSTRACT

The aim of this research is to understand and explore the practices and alternatives of offsets in defense industry, specifically focusing on indirect methods. Analyzing the importance of defense industry and how it is one of the significant industries in USA. The research will facilitate the scholarly work by providing insights into the evolving world of offsets, that is the industrial participation and how it can support the small and medium size companies in opening new markets abroad. Given the descriptive nature of the study, this research employed a secondary research methodology by collecting relevant data from online journals, books and articles. It was found that there is no comprehensive defense offset policy in the United States; however this trade accounts significantly to support the U.S economy. For a better trade process and success of the small and medium industries in overseas operation, a better collaboration with the trading partners is required by the U.S defense organization.

ACKNOWLEDGEMENTII

ABSTRACTIII

CHAPTER 1: INTRODUCTION1

1.1 Background1

1.2 Study Purpose1

1.3 Research objectives1

1.4 The Theory of Military Procurement Today2

1.5 Research Questions3

1.6 Terminologies of Offset3

1.6.1 Offsets3

1.6.2 Direct Offsets4

1.6.3 Co-Production4

1.6.5 Indirect offsets (More details)5

1.6.7 Foreign Direct Investments (FDI)5

Fig 1: Offset transaction categories Source: http://beta-www.bis.doc.gov/index.php/forms-documents/doc_view/127-tenth-report-to-congress-1-066

1.7 Possible Limitations of the Study6

CHAPTER 2: LITERATURE REVIEW7

2.1 Origins of the Offset7

2.2 The Global Defense Offset industry7

2.3 The Current State of Defense Offset in USA8

2.4 The Defense and Security Industry Trends10

2.5 Countries and Regions Requiring Offsets11

Fig 2: Countries and regions acquiring offsets from USA, Source: http://beta-17www.bis.doc.gov/index.php/forms-documents/doc_view/127-tenth-report-to-congress-1-0612

2.6 Offset Transactions in Terms of Industrial Sector12

Fig 3: Offset Transactions by Industry Sector, source: 2http://www.bis.doc.gov/defenseindustrialbaseprograms/osies/offsets/17th%20Offset%20Report.pdf13

2.7 Global Defense Offsets14

Fig 4: Global Offsets 201215

2.8 Condition of the Industry and Affordability of the Offsets15

2.9 The Business of Small Arms17

2.10 Offsets to Grow18

2.11 Measures20

CHAPTER 4: FINDINGS AND ANALYSIS22

4.1 Main Practices in the Indirect Offset Methods22

4.2 Support to the U.S Economy22

4.3 Industrial Participation and the Issue of Affordability23

4.4 Is the Demand for Offset Increasing?27

4.5 Recommendations on Method to Use Indirect Offsets27

4.6 Advantages and disadvantages to be gained in using military procurement offset, for military procurement without offset28

4.7 The Challenges29

4.8 Summary of the Findings31

CHAPTER 5: DISCUSSION AND CONCLUSION33

5.1 Offsets and Fair Competition34

5.2 Off treaty37

5.3 Operations and Opportunities "Offset"38

5.4 Offset Opportunities and Challenges for U.S.A39

5.5 Considerations for Future Compensation40

5.6 Recommendations for the Future Research41

5.7 Conclusion42

List of Figures

Fig 1: Offset transaction categories6

Fig 2: Countries and regions acquiring offsets from USA12

Fig 3: Offset Transactions by Industry Sector13

Fig 4: Global Offsets 201215

CHAPTER 1: INTRODUCTION

1.1 Background

For as long as the United States has existed, it has been a key contender in international trade. Its various transactions in the global market have placed it at the forefront of international trade and foreign relations. However, some of its transactions have elicited less than favorable reactions and have been flagged for unethical exchange of business in the past.

1.2 Study Purpose

The purpose of this paper is to ...