Defense Trade: Data Collection and Coordination on Offsets
(Correspondence, 10/26/2000, GAO/GAO-01-83R).

Defense offsets are the full range of industrial and commercial benefits
that firms give to foreign governments as conditions for the purchase of
military goods and services. They have gained attention because of the
potential impact they may have on the economy and national security. In
1984 and 1999, data collection and reporting requirements were levied by
Congress to obtain information on the impact of offsets on the U.S.
industrial base; the Departments of Commerce, State, and Defense are all
required to report to Congress on defense offsets. GAO found that
although coordination of data collection is limited, it may not be
significant because the agencies collecting offsets cover different time
periods or situations. Additional coordination may occur after the
National Commission on the Use of Offsets begins its work.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GAO-01-83R
     TITLE:  Defense Trade: Data Collection and Coordination on Offsets
      DATE:  10/26/2000
   SUBJECT:  Reporting requirements
	     Data collection
	     International trade
	     Interagency relations
	     Foreign military sales policies

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GAO-01-83R

Defense Trade United States General Accounting Office

Washington, DC 20548

October 26, 2000 The Honorable John L. Mica Chairman, Subcommittee on
Criminal Justice, Drug

Policy and Human Resources Committee on Government Reform House of
Representatives

Subject: Defense Trade: Data Collection and Coordination on Offsets Dear Mr.
Chairman: Defense offsets have gained increasing attention in recent years
because of the potential impact they may have on the U. S. economy and
national security. Defense offsets are the full range of industrial and
commercial benefits that firms provide to foreign governments as inducements
or conditions for the purchase of military goods and services. They include,
for example, coproduction arrangements and subcontracting, technology
transfers, in- country procurements, marketing and financial assistance, and
joint ventures. Views on the effects of offsets are divided between those
who believe they are an unavoidable part of doing business overseas and
those who believe they negatively affect the U. S. industrial base.

In 1984 and again in 1999, the Congress placed data collection and reporting
requirements on the administration in an attempt to obtain information as a
basis for an analysis of the impact of offsets on the U. S. industrial base.
On June 29, 1999, you chaired a hearing to discuss concerns raised by
opponents of offsets and explore both sides of the issue. 1 As a result of
that hearing, you asked us to review the administration's data collection
and policy coordination efforts concerning offsets. Accordingly, you asked
us to determine (1) the number of federal agencies collecting data on
offsets and the type of data they collect and (2) the extent of coordination
among federal agencies for data collection and policymaking related to
offsets.

RESULTS IN BRIEF

Three federal agencies are required by law to report to the Congress on
defense offsets, although other agencies may collect related data. The
Department of

1 “Defense Offsets: Are They Taking Away Our Jobs?” Hearing
before the Subcommittee on Criminal Justice, Drug Policy, and Human
Resources of the Committee on Government Reform, House of Representatives,
June 29, 1999.

GAO- 01- 83R Defense Trade Page 2

Commerce, the primary agency collecting data on offsets, is required by the
Defense Production Act of 1950 to submit an annual report to the Congress on
offsets. The Department of Defense is required by the Arms Export Control
Act to report offset information to the Congress as part of the information
it reports on Foreign Military Sales of defense items to foreign
governments. Similarly, the Department of State is required by that Act to
report on offset information related to commercial sales of defense items.
The Department of Defense also maintains databases that collect data related
but not specific to offsets. For example, Defense's Office of Foreign
Contracting maintains a record of the extent of foreign participation in
defense contracts.

Coordination of data collection on offsets is limited. This lack of
coordination, however, may not be significant because the agencies charged
with collecting offsets data collect different data covering different time
periods or about different offset situations. For example, Commerce collects
data on offset activity whereas Defense and State collect information on
prospective offsets based on proposed sales. Commerce does, however,
coordinate its congressional report with a variety of other agencies.
Further, Department of Defense agencies have coordinated on policy changes
affecting offsets such as the recent clarification on cost recovery for
costs incurred to implement offset agreements. Additional coordination may
occur once the National Commission on the Use of Offsets, established by the
Defense Offsets Disclosure Act of 1999, begins its work.

BACKGROUND

The rising cost of defense equipment, limited defense budgets, concerns
about employment levels, and the importance of industrial competitiveness in
a global economy have led governments to leverage their imports of major
weapon systems so as to yield benefits for their domestic economies. Offsets
are one way to achieve these benefits. Such programs are often an essential
part of weapons procurement and allow the purchasing government to build
public support for large expenditures of public funds.

Foreign governments can obtain military equipment through the foreign
military sales program operated by the Department of Defense (DOD) or
directly from defense contractors through commercial sales. These
transactions are often accompanied by offset agreements between U. S.
defense contractors and purchasing governments. Companies may undertake a
broad array of activities such as co- production and subcontracting,
technology transfers, in- country procurements, marketing and financial
assistance and joint ventures to satisfy offset requirements. Offset
agreements may specify a level of offset required and the types of
activities that are eligible for offset credit. An offset may relate to the
defense item being sold (direct offset) or to some other defense item or
even non- defense goods or services (indirect offset). Using offsets,
foreign governments can reduce the financial impact of procuring U. S.
defense products, obtain technology and manufacturing knowledge, support
domestic employment, and create or expand their own defense and commercial
industries.

The value of an offset obligation can exceed 100 percent of the value of the
export contract. However, countries can grant offset credit that is greater
than the dollar

GAO- 01- 83R Defense Trade Page 3

value of the activity to encourage companies to undertake highly desirable
offset activities. For example, a country may grant offset credit for
advanced technology or training activities based on what the country would
have paid to procure or develop the training or technology. Countries may
also offer large multipliers to encourage desired activities. 2

AGENCIES COLLECTING DATA ON OFFSETS

Three federal agencies collect data specifically on defense offsets to
support reports to the Congress that are required by law. These are the
Department of Commerce, the Department of Defense, and the Department of
State. Other agencies may collect data related to offsets but the purpose
and use of the data is generally not related to offsets.

The Department of Commerce has the primary data collection role. The Defense
Production Act of 1950, 3 requires the Department of Commerce to report
annually to the Congress on the impact of offsets on the U. S. defense
preparedness, industrial competitiveness, employment, and trade. The
regulations 4 implementing the law require companies to annually report such
information as the names of the country purchasing the defense item or
service for which the offset is required, the credit value of the offset,
the actual dollar value of the offset, and a description of the type of
offset. Specifically, Commerce requires companies to report (1) offset
agreements entered into during the previous year that are valued at more
than $5 million and are associated with sales of defense articles or
services and (2) completed offset transactions being used to meet existing
offset commitments that have a credit value of at least $250,000. A complete
list of the information Commerce collects is included in enclosure I.

The Departments of Defense and State report offset information to the
Congress pertaining to individual sales of defense items. The Arms Export
Control Act 5 requires the President to notify the Congress of any
agreements to sell defense articles or services over a certain amount. The
President delegated this reporting function to the Secretary of Defense for
foreign military sales agreements and to the Secretary of State for
commercial sales of defense items that require an export license.

Prior to November 29, 1999, the law required that the congressional
notification contain only a statement of whether or not an offset agreement
was associated with the sale, if that fact was known. The Defense Offsets
Disclosure Act of 1999 6 amended the Arms Export Control Act to require a
description of the offset agreement. The Defense Security Cooperation
Agency, which is responsible for preparing notification packages for the
Secretary of Defense, has not provided guidance on what specific information
industry is to report. The State Department is

2 A multiplier is used to increase the value of an offset project when
determining offset credit. For example, if a company helped facilitate a
$10,000 export of a product with particular importance, the country could
offer a multiplier of 5, thereby increasing the amount of offset credit to
$50,000. 3 50 USC app. sect.2099, as amended.

4 15 CFR Part 701. 5 22 USC 2776, as amended. 6 22 USC 2776 (b)( 1) and (c)(
1) as amended by section 1245 in appendix G of P. L. 106- 113.

GAO- 01- 83R Defense Trade Page 4

drafting guidance that it plans to issue late in 2000 to respond to the
increased reporting requirement.

In addition to the information needed to comply with requirements of the
Arms Export Control Act, the Department of Defense collects data potentially
related to offsets. Through its Office of Foreign Contracting, the
Department collects information from U. S. contractors on the extent of
foreign participation in its contracts. 7 The information is collected to
assess matters related to defense trade balances and domestic industrial
base capabilities. Prior to 1995, companies were required to state whether
the subcontract would apply toward fulfillment of an offset agreement and to
what program or offset agreement it was related. DOD officials told us that
the requirement for this information was discontinued because many companies
did not correctly report the information and it generally was not used in
DOD's analyses. The information the Office of Foreign Contracting collects
is included in enclosure II.

FEDERAL AGENCY COORDINATION EFFORTS RELATED TO OFFSETS

Federal agencies generally have not coordinated defense offset data
collection efforts. This lack of coordination, however, may not be
significant because the data being collected by each of the reporting
agencies differs or the required reporting time period differs. However,
agencies have coordinated on reporting and some policy issues. Coordination
has included (1) Commerce's annual report to the Congress on offsets and (2)
policy changes incorporated into the Defense Federal Acquisition Regulation
Supplement concerning cost recovery for implementing offsets.

As stated above, Commerce collects specific information on transactions that
have taken place in relation to a specific effort. For example, companies
report to Commerce the name of the entity fulfilling the offset transaction
and the dollar value of the offset both with and without any multipliers.
State and Defense, on the other hand, have historically reported the
existence of a proposed offset connected to the sale of a defense item or
service but not the specific transaction undertaken to fulfill the offset
requirement. Further, the time periods covered by the reporting differ.
Commerce data covers the prior year, whereas State and Defense report
prospective offsets without a specific time frame. For example, companies
were required to report offsets activities that occurred during calendar
year 1998 to Commerce by June 15, 1999, for inclusion in its annual report.

The Department of Commerce is required by section 309 of the Defense
Production Act to coordinate its report with other federal agencies, namely
the Secretaries of State, Defense, and Treasury, and the United States Trade
Representative. In practice, the report is also coordinated through the
Office of Management and Budget with the Department of Labor and with
several other agencies. Commerce Department officials told us that most
agencies perform only a cursory review of the report and provide limited
comments. However, some agencies, particularly the Department of Defense,
perform a detailed review.

7 We reported on problems with this database in Defense Trade: Weaknesses
Exist in DOD Foreign Subcontract Data, (GAO/ NSIAD- 99- 8, Nov. 13, 1998).

GAO- 01- 83R Defense Trade Page 5

Recent clarifications to the Defense Federal Acquisition Regulation
Supplement (DFARS) also involved coordination among the relevant defense
agencies. Section 225.7303 of the DFARS permits U. S. companies to recover
all costs associated with implementing offset agreements. However, U. S.
companies and the individual military services have interpreted the new
section in various ways. These differing interpretations have resulted in
confusion over what costs could be charged and how they should be charged.
In September 1999, the language in the DFARS was revised to provide
clarification that a U. S. defense contractor may recover all costs incurred
for implementing offset agreements with a foreign government. This revision
was coordinated among various defense agencies and military services.

Federal agencies also have the opportunity to coordinate on policies
pertaining to offsets through the Interagency Offset Steering Committee
chaired by the Department of Defense. In 1992, Public Law 102- 558 directed
the Secretary of Defense to lead an interagency team to consult with foreign
nations on limiting the adverse effects of offsets. As of September 1, 2000,
the interagency committee has met with representatives of the governments of
Canada, France, Great Britain, and the Netherlands. They also have sent
letters to other nations with which the U. S. government has memoranda of
understanding requesting meetings to discuss offsets. The committee recently
has also begun to consult with industry.

The Defense Offsets Disclosure Act of 1999 established a National Commission
on the Use of Offsets in Defense Trade. The law directs the President to
appoint commission members by the end of March 2000 to study the effects of
offsets and report back to the Congress one year later. The Commission is to
be comprised of members from government as well as industry and academia,
and the Office of Management and Budget is to chair the commission. As of
September 22, 2000, the commission has not met. However, potential members
have been identified subject to congressional approval. This body, once it
is established, may provide an impetus to greater coordination of U. S.
government data collection and policy efforts concerning offsets.

AGENCY COMMENTS

We requested comments on a draft of this letter from the Departments of
Commerce, Defense, and State. The Department of Defense provided technical
comments, which were incorporated as appropriate. The Departments of
Commerce and State did not provide comments.

SCOPE AND METHODOLOGY

To identify which federal agencies collect data on offsets, we reviewed
legislation pertaining to offsets to identify those agencies that have a
legislative requirement to collect offset related data. In addition, we
contacted various agencies to determine whether they were involved in
collecting information on offsets. We also interviewed officials at defense
contractors that have offset obligations to determine what kind of data on
offsets they are required to submit to federal agencies, as well as to
identify the data collecting agencies.

GAO- 01- 83R Defense Trade Page 6

To determine the extent of coordination among federal agencies, we reviewed
legislation to determine what coordination is required, interviewed
officials at the relevant agencies, and reviewed data on coordination
efforts provided by those agencies.

We conducted our work from February through September 2000 in accordance
with generally accepted government auditing standards.

*** *** *** We are sending copies of this letter to the Honorable Norman Y.
Mineta, Secretary of Commerce; the Honorable William S. Cohen, Secretary of
Defense; the Honorable Madeleine K. Albright, Secretary of State; and the
Honorable Jacob J. Lew, Director, Office of Management and Budget. We will
also make copies available to others upon request.

Please contact me on (202) 512- 4841 if you or your staff have any questions
concerning this letter. Major contributors to this letter were Thomas J.
Denomme, Paula J. Haurilesko, Lauri A. Kay, and Richard Burrell.

Sincerely yours, Katherine V. Schinasi Director Acquisition and Sourcing
Management

GAO- 01- 83R Defense Trade Page 7

Enclosure I Enclosure I Information Pertaining to Offsets that Industry

Reports to the Commerce Department For offset transactions completed during
the previous year:

ï¿½ Name of country or entity purchasing the weapon system, defense item or
service subject to offset requirement

ï¿½ Name or description of weapon system, defense item or service subject to
offset requirement

ï¿½ Name of entity fulfilling the offset transaction

ï¿½ Name of entity receiving benefits from the offset transaction

ï¿½ Dollar value of offset credit claimed by entity fulfilling the offset
transaction, including any intangible factors or multipliers

ï¿½ Actual dollar value of offset transaction without any intangible factors
or multipliers

ï¿½ Description of the type of offset (e. g., co- production, technology
transfer, subcontract activity, etc.)

ï¿½ Broad classification of the industry in which the offset transaction was
fulfilled (e. g., aerospace, electronics, chemicals, etc.)

ï¿½ Direct or indirect offset

ï¿½ Name of country in which the offset was fulfilled. For offset agreements
entered into during the previous year:

ï¿½ Name of country or entity purchasing the weapon system, defense item or
service subject to offset requirement

ï¿½ Name or description of weapon system, defense item or service subject to
offset requirement

ï¿½ Names and titles of the signatories to the offset agreement

ï¿½ Approximate value of the export sale subject to offset requirement

ï¿½ Total value of offset agreement

ï¿½ Term of offset agreement (in months)

ï¿½ Description of performance measures (e. g., “best efforts,”
liquidated damages)

GAO- 01- 83R Defense Trade Page 8

Enclosure II Enclosure II Information Collected by the Defense Department's
Office of Foreign Contracting

ï¿½ Prime contract number

ï¿½ Program identification

ï¿½ Name and division of prime contractor

ï¿½ Address of prime contractor

ï¿½ Name of subcontractor or foreign division of prime contractor

ï¿½ Address of subcontractor or foreign division of prime contractor

ï¿½ Value of effort performed outside the United States

ï¿½ Country of origin of actual producer or service provider

ï¿½ Description of supplies or services obtained outside the United States

ï¿½ Name of company submitting report (707447)
*** End of document ***