Get set for offsets

11 October 2006

The European Defence Agency (EDA) is pressing ahead with an investigation that is likely to be highly sensitive for many European Union countries – in particular the UK, writes Stephen Gardner. The Agency, which has the unenviable task of trying to get the notoriously protected defence industries in EU member states to work more together, is to examine the question of offsets. These are quid pro quo deals required by countries purchasing arms from overseas.  Typically, foreign suppliers will be obliged to subcontract or make purchases in the buying country, or to provide their technologies to its defence firms.  Offsets may also relate to investment in sectors totally unrelated to defence. Offsets in Europe are a notorious grey area and no-one really knows the extent to which they are used.  The US, however, publishes an annual report on the offsets required from US contractors by foreign governments. This shows that the British can justifiably claim to be offset world champions.  Between 1993 and 2004, the latest year for which figures are available, US defence contractors provided $6 billion worth of offsets to the UK, more than went to any other country, including Israel.  The UK extended a further $6 billion in credits to US suppliers, thus encouraging future offsets. This is despite US government policy, which is that offsets are “economically inefficient and trade distorting.”  The EDA is of a similar view – thus the investigation.   An EDA spokesman told Eurocorrespondent that the Agency was investigating the potential of offsets to distort the single European defense market it is trying to build. The US also notes in its most recent report that “in a growing number of cases, defense purchases are being driven by the competitiveness of the offset package rather than the quality and price of the weapon system purchased.” Enthusiastic about promoting the arms trade This hasn't curbed the UK's enthusiasm for offsets either as a way of promoting the British arms trade abroad, or as a means to bring investment into the country.  The vast Al-Yamamah arms deal with Saudi Arabia was accompanied by a £1 billion offset package under which the UK government promotes investment in the desert kingdom via a taxpayer-subsidised office. The latest sale of 72 BAE Eurofighters to Saudi Arabia, concluded in summer 2006, will also have an offset programme attached.  A spokesman said the details had yet to be concluded but the deal is “likely to be more related to the equipment” sold to the Saudis, rather than to indirect offsets as under the current programme.  In other words, the British taxpayer may find himself subsidising the Saudi defence industry, or providing training and military technologies to the Saudi regime.  How's that for an ethical foreign policy! In the meantime, the scope of the EDA study will be limited to offset deals between EU countries.  However, a spokeswoman told Eurocorrespondent that the EDA is seeking a “common view” on offsets.  If this common view reflects the US line that offsets do more harm than good, the UK may have little option but to reconsider its approach internationally, as well as within Europe.