What are offsets in Foreign Military Sales?

An offset is a package of additional benefits that a contractor agrees to provide to the purchasing country in addition to delivering the primary product or service. Offsets generally apply only to acquisitions of major systems. In the international marketplace, there are numerous armaments producers competing to sell their systems to prospective international partners. When a country makes the decision to procure a major foreign system, significant amounts of national funds flow out of that country’s economy. Given the cost of today’s modern systems, the cash outflow may involve hundreds of millions or even billions of dollars. As a result, purchasing countries often desire to leverage this huge foreign expenditure to obtain additional benefits for their nation in addition to acquiring the weapon system itself. This package of additional benefits, which is intended to compensate for the huge financial outflow, is referred to as an offset. The term “offset” is derived from the concept that the additional benefits received in association with the procurement create an “offset” effect that counteracts the consequences of the large outflow of national funds for the foreign procurement.

Offsets are recognized as a legitimate, legal business arrangement found in international acquisitions. Today, offsets continue to be an important element in defense trade with the majority of offsets involving aerospace industry sales. Offset requirements may be established in conjunction with either FMS or DCS acquisitions.

Various terms are used to describe different types of offset arrangements, including “offsets,” “coproduction,” “buy-backs,” “barter,” “counter-purchase,” “compensation,” and “counter-trade.” However, all offsets can fundamentally be categorized into two types: direct offsets and indirect offsets.

A direct offset involves benefits, including supplies or services that are directly related to the item being purchased. For example, as a condition of sale, the contractor may agree to permit the international partner to produce, in its country, certain components or subsystems of the item being sold.

An indirect offset involves benefits, including supplies or services that are unrelated to the item being purchased. For example, as a condition of a sale, the contractor may agree to purchase some of the international partner’s manufactured products, agricultural commodities, raw materials, or services.

International partners electing to conduct their defense procurement via DCS may also choose to require industry to provide an offset in association with the sale. The limitation is that DCS contracts funded by USG FMF, or other non-repayable funds, cannot include an offset agreement.