San Diego Union Tribune

July 5, 2004

Rep. Hunter targets side deals in defense sales
'Offsets' called threat to U.S. security, jobs

By OTTO KREISHER
COPLEY NEWS SERVICE

WASHINGTON Less than a year after losing a bitter fight to tighten "buy American" requirements on purchases of military equipment, Rep. Duncan Hunter and his allies have launched a new attack against activities they see as a threat to national security and defense industry jobs.

But like last year, Hunter, R-El Cajon, is facing opposition from the Bush administration, Senate Republicans and leading defense industry officials who argue that the House Armed Services Committee chairman's approach would hurt the companies he wants to help and weaken national defense.

Hunter's target this year is "offsets," a factor in nearly every sale of U.S. defense products overseas.

Offsets require the American seller to buy a package of goods and services from the customer nation or to provide other considerations that, on the surface, often exceed the value of the defense products being sold.

Although these side deals typically require U.S. defense companies to make concessions such as transferring sensitive defense technology or assigning subcontracts to the buying country's companies, they often involve somewhat bizarre arrangements.

Past examples include major U.S. aerospace companies buying large quantities of Polish hams, promoting Spanish tourism in the United States and helping to establish a Domino's Pizza franchise in Barcelona, Spain.

Industry and administration officials say offsets are a necessary and often beneficial part of international defense trade.

But Hunter says they result in a transfer of U.S. defense jobs and critical technology to foreign countries and have become "a strategic threat to the U.S. defense industrial base."

What once was a small problem, Hunter said, "has now reached a level that demands that it be brought under control."

In an effort to impose that control, Hunter inserted into his committee's version of the 2005 defense authorization bill a provision called the "Defense Trade Reciprocity Act." The provision effectively would bar the Pentagon from buying products from any nation that requires offsets.

To illustrate the problem, Hunter cited the sale of 48 F-16 fighters to Poland, for which Lockheed Martin charged $3.9 billion but agreed to a bundle of offsets valued at $9.7 billion.

The offsets included the purchase of aircraft parts, material and services from multiple Polish companies, the transfer of technology for manufacturing turbines and support for Polish sales of helicopters in the Americas.

Those deals would shift jobs from U.S. suppliers to Poland and could lead to future competition for U.S. aerospace companies, Hunter said.

But he was particularly disturbed by a provision that required the purchase from a Polish shipyard of the kind of cargo ships that have been built by National Steel and Shipbuilding Co. in San Diego.

"The free-trade mantra is for free and open competition," Hunter said. "Does anyone really think that American shipyards had fair and open competition for the ships included in this deal?"

A recent Commerce Department report said "virtually all" of the U.S. defense trading partners "impose some type of offset requirement." U.S. defense exports in 2000, the most recent year for which figures were available, were $5.7 billion, of which $5.1 billion required offsets, the department reported.

Those exports produced 41,666 U.S. jobs and 9,688 jobs overseas, the report said.

A fact sheet from Hunter called that data "highly suspect."

The American Shipbuilding Association and the International Association of Machinists and Aerospace Workers supported Hunter's offset ban, citing a loss of jobs they attributed partly to increasing foreign competition and offsets.

But the Aerospace Industry Association opposed the proposed offset restrictions.

"We believe such an approach would ultimately reduce U.S. foreign sales and the U.S. jobs and supplier base that benefit from those sales," association President John Douglas said.

Perhaps more powerful opposition came from the Defense Department, which told congressional leaders that the offset ban "would deny U.S. forces access to best-value products available from our allies and trading partners, negatively impacting U.S. and coalition war-fighting capabilities."

International trade experts said the offset issue is not as one-sided as Hunter and his supporters contend.

With the post-Cold War cutback in Pentagon weapons buys, foreign sales are increasingly important to keeping the U.S. producers in business, said Joel Johnson, vice president for international issues at the aerospace association.

He noted that from 1997 to 2003, Lockheed produced 526 F-16s, but the Air Force bought only 31.

Without those foreign sales, "that (production) line would have shut down years ago." The same could be said about the Pratt & Whitney and General Electric plants that produce engines for the F-16s, Johnson said.

Every country that bought F-16s required offsets, he noted.

Johnson said the stated values of offsets are greatly inflated, because "offsets provide the political cover for a government spending taxpayers' dollars for offshore purchases."

Richard Aboulafia, aerospace and defense business analyst for the Teal Group consulting firm, agreed and said the foreign government officials who demand offsets and the U.S. lawmakers who oppose them both are trying to improve their political images.

The two experts also pointed out that although the United States does not seek offsets, it requires that any significant defense system it buys from a foreign producer be assembled in this country.

That requirement "is the ultimate form of offset," Aboulafia said.

Although Hunter's anti-offset language met no opposition in the House, it has run into a stone wall in the Senate, just as his "buy American" provisions did last year.

The Senate actually went the opposite way, adopting an amendment by Sen. John McCain, R-Ariz., that would allow the Pentagon to waive the existing "buy American" requirements for the closest U.S. allies.

That sets up conditions for a repeat of last year's prolonged battle between the House and the Senate during the negotiations to reconcile the differences in the two versions of the defense bill.

The battle is expected to start next week when Congress returns from recess.