The Use of Offsets in Foreign Military Sales

United States defense firms have increasingly encountered demands from their foreign buyers to provide compensation for selecting U.S. suppliers. These quid pro quo transactions also known as offsets compensate the buyers for the economic damage caused by purchasing costly U.S. defense equipment. While these offsets may appear to be solely a form of price cuffing the motives of the foreign buyers can be varied. The behavior of these buyers can be explained by economic incentives ranging from labor market distortions and desires for foreign investment to the need for international financing. In most cases it appears that offset transactions are a form of commercial policy that the buying governments use to address domestic problems. Defense industry personnel will likely encounter offset transactions and will benefit from a better understanding of the buyers motivations.