The Role of the United States Government in Setting Offset Policy

Owen E. Herrnstadt1

International Association of Machinists and Aerospace Workers

Introduction

Many countries force U.S. aerospace companies to transfer high-skilled jobs and valuable technology to them in return for the purchase of U.S. aerospace products. In order to gain market access in countries with "direct" offset requirements, U.S. based contractors compensate these countries in some form "directly related to the system being exported".2 For example, in return for purchasing jet fighters or commercial airplanes, U.S. contractors agree to produce part of the jet fighter or the commercial airplane in the purchaser's country. In addition to direct offset requirements, countries are increasingly requiring U.S. contractors to satisfy "indirect" offset requirements that include compensation in forms that are "unrelated to the exported item''.3 Under this scheme, for example, instead of forcing a transfer of defense production, U.S. contractors would rely on the commercial aerospace industry to satisfy military offsets. In some cases, non-aerospace industry products, are also relied on to satisfy offset arrangements.

Although offset arrangements are traditionally linked with a country's trade practices, similar arrangements are becoming more common through voluntary

1  

Director for the International Affairs Department, International Association of Machinists and Aerospace Workers. This paper is based on a presentation made at a National Research Council Workshop on offsets held on June 9, 1997, in Washington, D.C. The views expressed herein are those of the author and do not necessarily reflect the views of the IAM. It should be noted that while this paper focuses on offsets in the aerospace industry, offsets in other industries require similar attention.

2  

Trade Promotion Coordinating Committee, National Export Strategy: Toward the Next American Century: A U.S. Strategic Response to Foreign Competitive Practices, U.S. Government Printing Office, Washington, D.C. 1996, p. 155.

3  

Ibid.



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--> The Role of the United States Government in Setting Offset Policy Owen E. Herrnstadt1 International Association of Machinists and Aerospace Workers Introduction Many countries force U.S. aerospace companies to transfer high-skilled jobs and valuable technology to them in return for the purchase of U.S. aerospace products. In order to gain market access in countries with "direct" offset requirements, U.S. based contractors compensate these countries in some form "directly related to the system being exported".2 For example, in return for purchasing jet fighters or commercial airplanes, U.S. contractors agree to produce part of the jet fighter or the commercial airplane in the purchaser's country. In addition to direct offset requirements, countries are increasingly requiring U.S. contractors to satisfy "indirect" offset requirements that include compensation in forms that are "unrelated to the exported item''.3 Under this scheme, for example, instead of forcing a transfer of defense production, U.S. contractors would rely on the commercial aerospace industry to satisfy military offsets. In some cases, non-aerospace industry products, are also relied on to satisfy offset arrangements. Although offset arrangements are traditionally linked with a country's trade practices, similar arrangements are becoming more common through voluntary 1   Director for the International Affairs Department, International Association of Machinists and Aerospace Workers. This paper is based on a presentation made at a National Research Council Workshop on offsets held on June 9, 1997, in Washington, D.C. The views expressed herein are those of the author and do not necessarily reflect the views of the IAM. It should be noted that while this paper focuses on offsets in the aerospace industry, offsets in other industries require similar attention. 2   Trade Promotion Coordinating Committee, National Export Strategy: Toward the Next American Century: A U.S. Strategic Response to Foreign Competitive Practices, U.S. Government Printing Office, Washington, D.C. 1996, p. 155. 3   Ibid.

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--> agreements reached between private parties. These "offset-like" arrangements may include a direct or indirect type of offset arrangement. While for policy purposes, a distinction as to what kind of offset is involved may be important, for workers who face their negative effects, distinctions are of little relevance. For purposes of discussion in this paper, the term "offsets" is used broadly, to include both direct and indirect offsets and offset-like arrangements "voluntarily" agreed to by private parties. While these sophisticated offset policies and marketing schemes are increasingly utilized by other nations to promote the development of foreign aerospace industries, the United States demonstrates little interest in developing a comprehensive policy of its own. But the U.S. government can no longer afford to leave the world of offsets to the actions of other nations and private parties. The stakes are too high. Offset arrangements in the defense and commercial aerospace industry result in the loss of U.S. jobs and technology to other countries. In some cases, they can pose a threat to our national security. Consequently, government must play a strong role in developing policies that address the rapid acceleration of offsets in the aerospace industry and their negative effects on U.S. aerospace workers. In addition to the projected loss of thousands of jobs, over time the effects of these arrangements could result in the decline of the U.S. aerospace industry, one of our greatest remaining export industries. This paper examines why the federal government must take a leadership position in setting offset policy in the U.S. aerospace industry by reviewing the health of the aerospace industry from the view of the aerospace worker; the increasing threat offsets pose to aerospace workers and the national interest; the serious lack of current and accessible information on offsets, the need for coordination of offset policy within government, and the need for coordination of offset policy between the numerous private parties that are involved either directly or indirectly with offsets. THE PROBLEM The U.S. Aerospace Industry Worker Faces a Gloomy Future The impact that offsets have on the U.S. work force receives little attention from public policy makers. Periodically various labor statistics are quoted in articles about offsets. However, few people have focused on the effects that offsets are having, and will increasingly have, on the lives of real workers, their families, and the communities where they reside. The condition of these workers is especially important for a number of reasons. First, U.S. aerospace workers are in large part responsible for building the U.S. aerospace and defense industries and for making them the leaders that they are in the world today. U.S. aerospace workers are loyal and proud of the companies they work for and the communities that they live in. They share common

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--> desires to have secure employment, earn reasonable wages, and receive decent benefits. They also want to work in a safe and healthy environment and spend quality time with their families. We owe our allegiance to them, just as they have given their allegiance to us. In addition, preserving and expanding decent jobs in the aerospace industry makes good economic sense. These jobs are generally high-skilled, high-wage jobs. Consequently, the Clinton Administration has recognized their importance in today's economy. In his opening remarks to a National Research Council workshop on offsets, Gene Sperling, Director, White House National Economic Council, "stressed that the goal of the Administration is to develop the best policy to create high-wage jobs for American workers . . . Job retention and job growth in the aerospace industry is important to achieving the overall goal of a more secure and higher-paid workforce."4 Although the Administration's goal is highly laudable, much work needs to be done in order to ensure that it is achieved. Employment Prospects and Income Effects Employment prospects for U.S. aerospace workers are troubling. One estimate concludes that between 1990 and 1994, the U.S. lost roughly 500,000 jobs in the U.S. aerospace industry and roughly I million other jobs which are "dependent" on the U.S. aerospace industry.5 This represents a staggering decline of almost 40% of U.S. aerospace employment for the five year period. For aerospace workers who have lost their jobs and for those who risk losing their jobs in the coming years, the decline in employment is painful. The International Association of Machinists and Aerospace Workers, (IAM) the labor organization which represents the largest number of workers in the aerospace industry, conducted a 1996 survey of its members who had lost their jobs in the aerospace industry.6 The survey involved displaced workers from two large aerospace and defense companies, Lockheed-Martin in Marietta, Georgia and the Boeing Company in Seattle, Washington. The results indicated that at the time of the survey only a small group of aerospace workers who were laid off remained employed in the aerospace industry (16.8 percent).7 The average displaced aerospace worker reported earning nearly $3 less per hour than they earned in their 4   Summary of Comments of Gene Sperling, Director, White House National Economic Council. Policy Issues in Aerospace Offsets: Report of a Workshop (hereinafter referred to as "Workshop"). National Academy Press, Washington, D.C., 1997, p. 1. 5   Randy Barber and Robert E. Scott, Jobs on the Wing: Trading Away the Future of the U.S. Aerospace Industry, Economics Policy Institute, Washington, D.C. 1995, p. 1. 6   IAM Strategic Resources Department, IAM Survey of Displaced Aerospace Workers, November 1996. 7   Ibid., p. 2.

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--> previous aerospace job.8 Nearly half of the respondents to the survey indicated that they were earning less than 75 percent of their previously hourly rate.9 Not surprisingly, this dramatic decline in income has had a substantial impact on workers' families. In some cases, it has significantly changed the family structure. An increasing proportion of the spouses of respondents were forced to find employment. Approximately one-third of spouses who were not working prior to the layoff were working at the time of the survey.10 In addition to their drastic reductions in income, displaced workers also lost valuable benefits. For example, roughly 75 percent of respondents lost health insurance coverage when they were laid off.11 The majority of respondents indicated that when they finally obtained new employment, their health care coverage was worse, or much worse than the coverage they previously had.12 Even more troubling was the finding that laid-off workers suffered from an increasing number of physical ailments. A growing number suffered from increases in high blood pressure, heart problems, digestive tract problems, and sleep disorders.13 The trauma of suffering a loss of job, particularly in a high-skilled, high-wage industry like aerospace was poignantly conveyed by the words of IAM members who were laid off. One respondent in the IAM survey reported, "[A]fter being laid off, my self-worth has gone to zero. Our financial outlook is bleak. It's very hard to make ends meet, even with two working."14 Another member explained, "The thing that was so bad, was [losing] the hope of having the chance of gaining anything for old age . . ."15 Indeed, opportunities for decent employment in the U.S. aerospace industry are gloomy. Researchers predict that approximately 250,000 jobs are in jeopardy in the aerospace and related industries by the year 2000, and almost 500,000 jobs at risk by 2013.16 "Direct jobs lost in 2013 would represent 25.6 percent of the total jobs in aircraft production in 1995."17 The Impact of the Asian Crisis That some aerospace companies are currently hiring high-skilled workers does not lessen the impact that offsets are having and will increasingly have on 8   Ibid. 9   Ibid. 10   Ibid. 11   Ibid. 12   Ibid. 12   Ibid. 13   Ibid. 14   Ibid., p. 3. 15   Ibid. 16   Barber and Scott, Jobs on the Wing, p. 2. 17   Scott, "The Effects of Offsets, Outsourcing, and Foreign Competition on Output and Employment in the U.S. Aerospace Industry," presented to National Research Council Symposium on Trends and Challenges in Aerospace Offsets, January 14, 1998.

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--> the U.S. aerospace worker. The recent hiring frenzy in the commercial aerospace industry is taking place in the midst of a booming economy. What will happen when the economy takes a downturn? Moreover, the number of aerospace workers that have recently been hired does not even begin to make up for the massive job losses that have occurred over the last several years. Nor will these recent hirings be able to minimize the negative impact that offsets will have on the U.S. workforce in the future. In addition, claims that there are not enough aerospace workers to fill current job demands may be, in part, due to decisions by former aerospace workers laid off prior to the boom to seek employment in more stable industries. Lastly, what will happen in the aerospace industry if the ripple effect from the Asian financial crisis turn into a Tsunami? Sub-tier producers and their employees in the U.S. may especially feel the brunt, as prime contractors face cancellations and manufacturing costs drop even lower in Asian countries, making bids for remaining work even more competitive. The increasing reliance on offsets is one factor that is contributing to the gloomy picture of aerospace employment in this country. While no one would argue that the huge layoffs that have occurred in the U.S. aerospace industry were caused solely by the practice of using offsets, it is irresponsible to ignore the serious effects that offsets can have on such an essential industry—an industry that is key to the economic health and prosperity of our country. Consequently, every possible cause for the sharp decline in employment that has occurred or that may occur in the future must be explored. Offset Arrangements are Becoming a Standard Way To Do Business The use of offsets as a marketing tool is increasing in both defense and commercial aerospace industries. In fact, since the 1980's, indirect offsets have grown even faster than direct offsets.18 As offsets take new forms, their effects are blanketing the commercial aerospace industry: "Current information leads to the conclusion that indirect offsets are increasingly the norm."19 In the defense industry, the use of offsets has undergone "a substantial increase in new obligations over previous years, both in value and as a percentage of export contracts."20 Although some people contend that offsets open certain markets, their effects can be negatively felt by other areas of the economy. Indirect offsets may have 18   Department of Commerce, Offsets in Defense Trade: A Study Conducted Under Section 309 of the Defense Production Act of 1950, as amended , Bureau of Export Administration, Washington, D.C., 1996, p. 71. 19   Summary of Comments of William Reisch, Workshop, p. 20. 20   Department of Commerce, Offsets in Defense Trade: A Study Conducted Under Section 309 of the Defense Production Act of 1950, as amended , Bureau of Export Administration, Washington, D.C., 1997, p. i.

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--> "unfavorable consequences for subcontractors and increased risks for a wide range of companies throughout the U.S. economy."21 The U.S. Department of Commerce, Bureau of Export Administration Defense Diversification Needs Assessment Survey program covering the period 1993-1994, found that 83% of subcontractors who responded to the survey that they were "positively or negatively impacted by offsets" had been "harmed" rather than helped by offsets.22 Furthermore, one-third of the 1,100 transactions examined involved " partial or full production" of the items sold in the country which purchased them.23 '' In many cases, this has led to the creation of redundant or excess defense manufacturing facilities."24 In other words, these offsets have resulted in over-production capability in the defense industry. To the extent that over-production in the defense industry negatively affects production in the commercial aerospace industry, sub-tier producers that employ thousands of aerospace workers are also affected. New Entrants Pose Risks to the U.S. Supplier Base Dr. Kirk Bozdogan of the Massachusetts Institute of Technology also sees the danger of the increased use of offsets. He explained during an NRC workshop that the use of offsets will increase and warns that they "will pose serious risks for the U.S. supplier base."25 Indeed, he reports that the U.S. supplier base has decreased drastically (by 50%) in the aerospace industry over the period 1991-1995.26 He also concludes that foreign programs in offset requirements will lead to too much production capability and warns of increasing costs and competitive pressures on U.S. companies that provide components and other items that support the major aerospace companies.27 These findings are consistent with the observations of those who report that numerous countries around the world have well-developed strategies to build their own aerospace industries through offsets. "A number of these competitors have the goal of developing a full-service commercial aerospace industry. China is assembling entire Western designed jetliners . . . Japan is mounting a systematic effort to become a first-tier aerospace manufacturing power . . . Even only 21   Offsets in Defense Trade, 1996, p. 71. 22   Ibid, p. 63; Cited in Trade Promotion Coordinating Committee, National Export Strategy, 1996, pp. 162-163. 23   National Export Strategy, 1996, p. 163. 24   Ibid. 25   Summary of Comments of Dr. Kirk Bozdogan, Workshop, pp. 27-28. 26   Ibid., p. 28. 27   Ibid.

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--> recently industrializing countries . . . have joined over thirty other participants in the global contest for a share of aerospace."28 In their 1995 study, Jobs on the Wings, Barber and Scott document the strength of the growing Chinese aerospace industry and its close ties to U.S.-based aerospace manufacturers: "China is already working closely with McDonnell Douglas assembling Western-designed commercial aircraft as part of a co-production arrangement to manufacture 40 MD-82s and recently finalizing an agreement for the production of 20 MD-90 'Trunkliners' in China, with dramatically increased Chinese content (reportedly 85% by the end of the production run)."29 Aerospace industries are also burgeoning in Japan, South Korea, Indonesia, and Taiwan. Among other activities, the South Koreans have attempted the development of an "Asian Airbus", and have had a number of production contracts with U.S.-based aerospace companies.30 Taiwan has also been advancing toward the establishment of a viable aerospace industry with advantageous offset requirements that insist "that U.S. companies 'promise to allow Taiwan to build aircraft and engine parts, acquire U.S. technology, and receive training and other support for its developing aeronautics industry'."31 Indonesia's entry into the world's budding aerospace industries is also growing. Its state-owned aerospace company already "produces numerous military and commercial aircraft under licensed production agreements".32 It also "makes significant parts for all three major aircraft manufacturers."33 Insufficient Information About the Effects of Offsets In general, there is a serious lack of information about offsets and their effects on workers. While the government has limited knowledge of military offsets, it has little knowledge about the nature, extent, and impact of offsets in the commercial aerospace industry. Unfortunately, under the current situation, this type of information is next to impossible to obtain. First, the corporate culture which relies on confidentiality to maintain competitive advantage makes it difficult for workers to obtain information about offsets. If workers were aware of the impact that specific offsets were having or were going to have on them, they could work with the company in an attempt to either avoid or minimize their 28   Conflict and Cooperation in National Competition for High-Technology Industry, National Academy Press, Washington, D.C., 1996, p. 88. 29   Barber and Scott, Jobs on the Wing, p. 62. 30   Ibid., p. 66. 31   Ibid., p. 67. 32   Ibid. 33   Ibid.

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--> negative effects. However, if workers are not made aware of the offsets, let alone their effects on the workforce, they cannot offer their expertise in alleviating the harmful effects that offset arrangements can have on their jobs. One of the consequences of a company's failure to inform its workers fully about their offset arrangements is that it fosters distrust and other forms of ill-will. If workers are not told the truth about corporate marketing schemes they may assume that the company is not protecting worker interests. This is especially true if a company moves production overseas as part of a lucrative transaction that is the result of an offset arrangement. Distrust is also generated by false employer claims that job reductions are a result of business downturns when they are really a consequence of offsets. An arrangement that was made by one company in the early 1990's illustrates these problems.34 It had entered into a co-production deal for F-16's with South Korea. "This deal provided for South Korea to purchase a total of 120 aircraft, of which 72 would be manufactured and assembled in South Korea, 36 would be assembled from kits in South Korea, and only 12 would actually be made by [the company's] workers in Fort Worth."35 From the workers point of view this offset arrangement was bad enough, but how the company sought to fulfill its offset arrangement made things worse. According to the union which represented workers at the company, the company wanted to bring 500 South Koreans into the plant to train them while at the same time, approximately 3,000 union members at the facility were on lay off.36 The union objected. "The protest put a stop to this scheme . . . we thought. But then we learned that [the company] simply arranged for these . . . workers [from Korea] to be trained at the F-16 plant in Turkey!"37 Information about offsets is also difficult to obtain because the fundamental nature of offsets makes information difficult to track. The mere fact that offsets are spread throughout the world taking a multitude of forms makes it extremely difficult to gather complete information. While offsets can have immediate impact on prime contractor production, their effects on sub-tier producers may be harder to trace. When indirect offsets, that affect a multitude of aerospace and non-aerospace companies, are involved it becomes even more difficult to track the offset's effects. This is especially true if companies who are engaged in offsets do not make the effort to monitor the direct and indirect effects of their own arrangements.38 34   See, Barber and Scott, Jobs on the Wing, p. 37-38. 35   Ibid., 36   Ibid. 37   Ibid., p. 38. 38   See, Summary of Comments of Carol Evans, Workshop, p. 14.

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--> Offsets Can Lead to Conflicts Critics of a strong government role in setting policy on offsets and similar marketing schemes often contend that government intervention is unnecessary because corporate interests do not conflict with public interests. They fear that unless they are permitted to freely engage in offsets, markets will remain closed, and overseas competitors, who are eager to meet offset demands, will displace U.S. aerospace companies as the leading suppliers of aerospace products throughout the world. They argue that this can only result in harm to the United States aerospace industry and the U.S. economy. They argue that threats of massive job losses and threats to national security because of offset arrangements are unfounded. Job losses, they say, will be made up by increased market share in the world economy. Moreover, they claim that national security will not be threatened because they are careful not to transfer sensitive technology abroad. In today's global economy, multinational companies know no boundaries.39 In fact, this is precisely why they are multinational companies. Consequently, the loyalty of U.S.-based multinationals to the U.S. may not be as strong as some would have us believe. After all, numerous U.S.-based corporations have moved production facilities to other countries in the search for lower labor costs as well as other perceived "advantages" available in other countries, leaving workers who devoted their careers to them without jobs and the communities which fostered their growth empty. Market access is essential, especially in high technology trade. Offsets, which enable companies to gain access to other markets, might in some cases be necessary compromises. However, where possible, the U.S. government should eliminate these market restraints. In any event, offsets must be limited when the public interest is jeopardized. There has already been a prior discussion regarding the public's interest in minimizing the social and economic effects from job losses that occur as the result of offset arrangements in the aerospace industry. Two other issues resulting from the aerospace industry's growing reliance on offset arrangements concern the public's essential need for national security and the necessity of balancing the impact of one corporation's offset arrangements against the interests of another corporation. National Security Impacts Offsets threaten the national security by fostering proliferation of defense systems abroad and by shrinking the essential sub-tier defense production base at home.40 The use of offsets increase the capability of developing countries to 39   See, William Greider, One World Ready or Not: The Manic Logic of Global Capitalism, Simon & Schuster, 1997. 40   Summary of Comments of Carol Evans, Workshop, pp. 14-15.

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--> produce their own weapons systems. Even seemingly minor kinds of aerospace offsets can aid in the development of a weapons system by such things as enhancing "the platforms used for the delivery of chemical or biological weapons."41 Thus offsets can help to expand the defense capabilities in developing countries thereby creating a greater military threat to the U.S.42 In addition, assisting the development of a defense industry in other countries may have the "spiraling" effect of encouraging these countries to seek additional offsets to further supplement their defense production capabilities.43 "Offsets adversely affect the U.S. supplier base by aiding foreign competitors at the same time that the supplier base is being hit by shrinking defense budgets. Shrinking budgets then lead to a further squeeze on suppliers to give even more offsets."44 Examples of national security problems that have been caused, at least in part, from offset arrangements abound. Technology transferred to Brazil through an offset resulted in an improvement of targeting capability of the Iraqi Scud missile system.45 Under another offset arrangement, McDonnell Douglas sold machine tools to the China National Aero-Technology Import and Export Corporation to be used for production of commercial aircraft.46 Some of the tools, however, were transferred to the Nanchang Aircraft Company which produces Chinese military equipment.47 Domestic Impacts Offsets also harm other U.S. domestic companies that operate in the industry participating in the transaction. For example, prime contractors trying to expand their access to international markets are unlikely to be concerned by the effects on domestic sub-tier producers whose sales might be substituted for foreign goods as part of offset arrangements. Transferring production of one piece of a defense system to a producer in another country may be inconsequential to a prime contractor, but to a subcontractor, who is able to concentrate on only a few programs, it could be fatal.48 The following comments which were received when the Defense Diversification Needs Assessment Survey was conducted illustrate how the offsets which "benefited" one aerospace company affected another aerospace or aerospace-related company:49 41   Ibid. 42   Ibid. 43   Ibid. 44   Ibid. 45   Ibid. 46   U.S. General Accounting Office Report to Congressional Requesters, Export Controls: Sensitive Machine Tool Exports to China, November 1996. 47   Ibid. 48   See Summary of Comments of Chip Block, Workshop, p. 33. 49   Offsets in Defense Trade, 1996, pp. 63-64

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--> A world-class aerospace and naval forging manufacturer in the Midwest stated that they had "lost significant amounts of work due to prime contractors utilizing foreign sources to satisfy offset requirements." A northeastern precision aerospace machine shop reported, "[W]e've lost 20 percent of our business to mandated offset agreements. In the future this will grow substantially. This is our number one problem." A manufacturer of rolled rings for aerospace applications stated, "[O]ur company has been significantly affected by [prime engine contractor's] offset agreements to Asia and Europe. I estimate that our company has lost more than 50 percent of our business due to offset agreements." A west coast machine shop reported, "[W]e've lost processing work on the jobs that went overseas as a result of aircraft and military hardware sales." Another aerospace machine shop stated, "[T]he aerospace prime contractor we supply] participates in an offset program which seems to have introduced increased competition and possible lost orders to American manufacturers." A midwest company that designs and manufactures pumps and valves for aircraft applications reported, "[N]ew competitors created as a result of offsets. Foreign countries now designing indigenous aircraft using this technology." A western producer of castings for commercial, aerospace, and defense industries reported, "[N]ew competitors were created or strengthened due to an offset program, hence, we lost the contracts." The Impact of Indirect Offsets The growing and innovative use of offsets also creates conflicts between corporations in different industries. In one situation, "Northrop Corp. offered $1.5 million to persuade a U.S. company to buy a $50 million papermaking machine" from a Finnish company.50 A competitor, based in the U.S. who also makes papermaking machinery, had wanted the sale. "The offer followed a promise by Northrop to the government of Finland to produce American customers for Finnish goods if Finland would purchase F-18 fighter jets from the U.S."51 Afterwards, a 1994 law was enacted regulating such transactions, by prohibiting "certain types of incentive payments related to offsets".52 Last year U.S. Senator Russell Feingold (Wis.), who authored the 1994 law, asked the U.S. Department of Justice to investigate an alleged violation by McDonnell-Douglas.53 He was specifically concerned that McDonnell-Douglas may have used a tactic similar to the one used by Northrop to satisfy an offset 50   As reported in Aerospace Daily, Justice Dept. to investigate if McDonnell Douglas broke offset law, January 3, 1997, p. 15. 51   Ibid. 52   Ibid. 53   Ibid.

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--> arrangement.54 He feared that a U.S. company lost out on a sale.55 Senator Feingold summarized the conflict: "It is difficult to be competitive when you are being outbid by foreign competitors assisted by huge defense firms. . . "56 It is not just lack of coordination between private entities that are of concern. There also appears to be a serious lack of coordination between public entities. For example, while the Administration seemingly grapples with this issue, the Federation Aviation Administration (FAA) issued regulations concerning "Fees for Providing Production Certification-Related Services Outside the United States." Basically, the FAA's regulation makes it possible for it to sell its services to facilities located outside the United States. The FAA noted in its proposed regulations that some of the "advantages" received by engaging in production of "complex parts, sub-assemblies, or products" outside the United States include: Taking advantage of lower labor costs; and Fulfilling certain aircraft purchasing requirements that require a production approval holder to produce a percentage of the aircraft within the purchasing country.57 Somehow the FAA, believes that such a rule would not impose a significant cost impact "on a substantial number of smaller entities." It also dismisses concern that implementation of the proposed rule could have a serious negative impact on U.S. aerospace workers. The FAA's conclusion flies in the face of studies which conclude the danger of relying on offsets. And while in its final rule, the FAA claims the new rule itself "takes no position on the use of offsets,"58 the FAA also clearly states that it "recognizes that the indirect effect of this rule may increase the use of facilities and suppliers outside the United States."59 A Framework for Providing a Solution. Given the negative and growing effects of offsets on U.S. aerospace employment, the lack of accessible information on offsets, the lack of coordination within the U.S. government, conflicts between corporate interests and public interests, a comprehensive national policy on the use of this trade mechanism is needed. Current efforts are inadequate. While the government, though its Trade Promotion Coordinating Committee (TPCC) Report should be commended for acknowledging that offsets are growing and that there is a woeful lack of informa 54   Ibid. 55   Ibid. 56   Ibid. 57   U.S. Federal Register, Volume 62, Number 135. 58   U.S. Federal Register, Vol. 62, Number 207. 59   Ibid.

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--> tion about offsets in the commercial aerospace industry, it is simply not enough to merely note that offsets are increasing and that there is a lack of information about them. The Administration must also acknowledge the serious threats that offsets have on producers, U.S. workers, and the communities in which they reside. And, of course, the Administration must also accept that it has a strong role to play in developing a national policy on offsets. A stronger role for the Administration means much more than what is called for in the 1997 Trade Promotion Coordinating Committee report. In that report the TPCC describes its meager plan for 1998, which is centered on more ad hoc consultations involving affected groups with the somewhat vague notion of establishing "mechanisms that will both encourage a consensus among the various interests on this issue and provide TPCC agencies with an inventory of information that could be used as a basis for determining the impact of offset requirements and whether any U.S. government action is warranted."60 But the government must acknowledge now that offsets are a serious problem and immediately begin to develop an effective framework for resolving it. The United States requires a solid policy on offsets, not least because "every other serious aerospace nation has a coordinating body charged with nurturing and advancing domestic aerospace manufacturing, technology acquisition, and, of course, employment. The United States should do no less."61 How should we begin to formulate this policy? To begin with, the U.S. government must acknowledge the serious effects that offsets are having and will have on the aerospace industry. It must recognize the current utilization of offsets must be better understood. A Commission In order to gather information on offsets, a formal commission should be established by the President. The idea for such an entity is not new.62 Several reputable studies have recommended it. Such an entity would bring together representatives from industry, labor, government, and academia to facilitate the gathering of information and to engage in meaningful dialogue over what can be done to establish a real policy on offsets—a policy which would promote the U.S. aerospace industry and its workers. The commission would recommend policy and coordinate activities through efforts that would include a review of: 60   The National Export Strategy Trade Promotion Coordinating Committee 5th Annual Report to the United States Congress, October 1997, p. 63. 61   Barber and Scott, Jobs on the Wing, p. 78. 62   See. e.g. High Stakes Aviation, U.S.-Japan Technology Linkages in Transport Aircraft, National Academy Press, Washington, D.C., 1994, p. 94; Barber and Scott, Jobs on the Wing, p. 3.

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--> transfer of jobs, transfer of technology, research and development, export sales and financing, review of license production and co-production agreements, subcontractor production, counter trade, and foreign investment. The commission would also advise the Administration in negotiating relevant agreements and understandings with our trading partners. A priority should be given to negotiating restrictions on debilitating offsets that lead to arrangements that hurt U.S. aerospace workers. The commission could also develop a program to train and re-employ displaced aerospace workers. This program should allow workers who lose their jobs because of offsets to receive retraining and be eligible for trade adjustment assistance. The commission could also develop concrete methods for facilitating the collection of data on offsets from both the public and private sectors. One approach is to require that any contractor directly or indirectly receiving federal monies identify and report specific information regarding offsets. Importantly, this information should also be accessible to the public. The public has the right to know how its money is being spent. It has the right to know if its money is going to retain and create good jobs at home as or is being used to subsidize the creation of jobs in other countries. The public should also know if technology that was developed by their tax dollars is being transferred abroad. Conclusion Offsets create serious questions for policy makers concerned with the public interest. As discussed in this paper, offsets will have a growing negative impact on the lives of working Americans, particularly those whose livelihoods depend on the maintenance and expansion of the U.S. aerospace and related industries. Offsets can also have a very serious impact on the national security as valuable technology finds its way into other nations' defense-related activities. Furthermore, offsets have pit one group of private corporate interests against another as prime contractors sacrifice their relationships with sub-tier producers to satisfy offset arrangements. Responsibility for creating a framework for resolving the issues that offsets raise lies with the U.S. government. Among other things, only the U.S. government has the resources and the authority for determining how we should proceed. Unfortunately, the U.S. government has yet to make any serious efforts in setting offset policy. While our government continues "dabbling" with the issue-meet-

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--> ing with interested parties on an ad hoc basis and encouraging "further discussion" on this topic—other nations have well-established policies on offsets and are moving rapidly toward utilizing their policies for their own benefits. We can no longer idly sit by and relegate to U.S. private interests the sole responsibility of negotiating with other nations' governments over offset issues. To do so would be to abandon the role that government must play in protecting the public interest. As the stakes get bigger and the pieces to the offset puzzle become more difficult to identify, we, as a nation, can no longer sit back and let other countries and the hundreds of private parties that are involved in the offset game set our course. It is time for the U.S. government to take a strong leadership role in developing our long over-due policy on offsets.

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