Military Exports:

Concerns Over Offsets Generated With U.S. Foreign Military Financing Program Funds

NSIAD-94-127: Published: Jun 22, 1994. Publicly Released: Jun 22, 1994.

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Pursuant to a congressional request, GAO reviewed foreign military sales offset arrangements financed through the U.S. foreign military financing (FMF) program, focusing on: (1) the extent to which FMF recipients have used offsets to purchase U.S. military goods and services; (2) whether government funds have been used to pay for the offsets; (3) the impact of offsets on U.S. business, trade, and competitiveness; and (4) whether the offsets complied with applicable laws, policies, and regulations.

GAO found that: (1) U.S. regulations do not prohibit offsets when recipients make purchases with FMF funding; (2) the four largest recipients of FMF funding have used this funding to obtain billions of dollars in offset obligations; (3) offset obligation agreements have allowed FMF recipients to produce certain parts of weapon systems they purchase, U.S. contractors to buy parts from FMF recipients, and U.S. contractors to link commodities buyers and sellers with FMF recipients; (4) although FMF funding programs generally support U.S. foreign policy and security objectives, certain offsets reduce U.S. employment, the defense industrial base, and other economic benefits that normally accrue from foreign military sales; (5) some FMF offsets require U.S. contractors to enter into coproduction agreements with FMF recipients which has resulted in the loss of U.S. prime and subcontractor production work, the displacement of U.S. subcontractors, and the creation of new competitors in the world market; (6) the FMF aid program is unique, since no other arms supplier has a program that provides grant aid and allows offsets; (7) it is unlikely that U.S. contractors would lose sales to foreign competitors if they could not provide offsets funded with U.S. grant aid; and (8) the 1990 offset policy allows the use of U.S. government funds to pay for offsets in security assistance transactions.

Matters for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: An amendment was proposed to prohibit the use of Foreign Military Financing grants to generate offsets. This proposed amendment was withdrawn after objections were raised concerning its impact on recipients of Foreign Military Financing grants. While GAO continues to believe that action is merited, it is unlikely that action will be taken.

    Matter: Congress may wish to consider amending the Foreign Assistance Act and the Arms Export Control Act to prohibit the use of FMF grants to pay for or request, require, obtain or provide offsets in connection with sales of U.S. military goods and services. Case-by-case exceptions could be made for specifically justified compelling U.S. national security or foreign policy reasons.

  2. Status: Closed - Not Implemented

    Comments: Congress has not initiated action on this recommendation. Furthermore, congressional action during this session has focused on assisting industry in making sales overseas through, for example, export financing. As discussed in the report, other competitor countries offer concessional loans and offsets in supporting arms sales.

    Matter: Congress may wish to apply the prohibition to purchases made with FMF loans made at concessional rates.

  3. Status: Closed - Not Implemented

    Comments: Because Congress is unlikely to prohibit the use of both Foreign Military Financing grants and concessional loans to generate offsets, this recommendation is no longer appropriate.

    Matter: Congress may wish to amend section 123(a)(2) of the Defense Production Act by eliminating the exception that allows U.S. government funds to finance offsets in security assistance transactions.

  4. Status: Closed - Not Implemented

    Comments: This recommendation was contingent on Congress amending the Foreign Assistance Act and the Arms Export Control Act to prohibit the use of Foreign Military Financing grants to generate offsets. As noted above, GAO no longer believes that this action will be taken.

    Matter: Congress could make a condition of the FMF grant aid that the recipients agree not to request, require, or obtain offsets. To help with enforceability, Congress could require contractors to certify that they have not and will not provide offsets in connection with such sales.

 

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