Sun, Feb 16, 2003 page12

• Foreigners exact trade-offs from US military contractors

  While bribes are outlawed under the Foreign Corrupt Practices Act of 1977, arms producers have created a clever little loophole called `offsets'

  • By Leslie Wayne / NY TIMES NEWS SERVICE
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  A decade ago, when the ruling sheiks in the United Arab Emirates decided to expand the local economy after the gulf war, they turned to American military contractors like Boeing, Northrop Grumman and Lockheed Martin for a helping hand.

  In return for buying military gear, the emirates pressed the contractors to spend millions of dollars to create jobs and to improve the lives of citizens in their desert outposts: financing a medical diagnostic center linked by satellite to the Mayo Clinic, building a shipyard that has created thousands of jobs, helping with oil-spill cleanups, starting a laser-printer recycling business and even bringing Berlitz schools to Abu Dhabi and Dubai.

  In another era, these gifts might be considered bribes. Now they are called offsets. Bribes were outlawed under the Foreign Corrupt Practices Act of 1977, which barred payments to foreign officials in exchange for business. But offsets, while little known, are a legal and, companies say, necessary part of the international arms trade not only in the emirates but around the globe.

  "Offsets are the equivalent of what we used to do when we bribed foreign officials," said Robert E. Scott, an economist at the Economic Policy Institute, a liberal research group in Washington. "It's a tragedy, and it's a race to the bottom. The best way to avoid these kinds of competitive and disruptive games is to outlaw the practice."

  Instead, offsets are growing. For American and European arms makers, lavish packages have become the key to closing deals. The Czech Republic has said that when it next buys fighter jets, the offsets will be more important than the jets' price or performance.

  "It's an essential part of doing business overseas," said Kent Kresa, chief executive of Northrop Grumman. "I'm not negative on it."

  Although the ramp-up to potential war with Iraq and President Bush's request for a record US$380 billion Pentagon budget would suggest that military contractors have it easy, the contractors say they must scramble for overseas sales. The Pentagon has stockpiled so many F-18 and F-16 fighter jets and other weapons that it is only through overseas sales that many aging production lines are kept running.

  If the public knows little about this corner of the military industry, that is by design. Most contractors refuse to talk about offsets. They disclose little about them to shareholders or regulators and grumble privately that they are a "necessary evil." Yet they have done little to halt the practice.

  "One reason it is hard to get people to talk about this is that it encourages people to ask for more," said Pierre Chao, an industry analyst at Credit Suisse First Boston.

  Extra-wide leeway

  Offsets can be any form of aid -- direct investments, agreements to help countries export their goods, pacts to use more foreign components in the weapons sold, even transferring subassembly jobs overseas.

  American arms makers have helped the Dutch to export yarn and missile parts, the Finns to sell rail carriers and passenger ferries, the Swiss to sell machine tools and ball bearings, and the Norwegians to market power-generating equipment. Lockheed had to use British-made Rolls-Royce engines instead of ones made by General Electric to power Apache attack helicopters sold in Europe. And, in a sale of F-16s to Poland, Lockheed agreed to have the jets' engines built there.

  Military contractors say they have been brokers for imported figs, tomato paste and wine; for years, McDonnell Douglas, now part of Lockheed, provided Christmas hams to its employees under a fighter-jet offset deal with Denmark.

  "The whole system is mad," said Kevin L. Kearns, president of the US Business and Industrial Council, which represents small businesses, many of them military subcontractors. "Everything about offsets is totally counter to a free-trade philosophy. If we have the world's best armaments, other countries should buy them free and clear. The mice here are in charge of the cheese."

  So complicated are offsets that most major contractors have entire departments to devise them and to twist the arms of suppliers into participating as well. Contractors usually agree to pay damages if they fail to deliver on a deal; in practice, though, offset agreements that run into trouble are often renegotiated.

  Officially, the federal government frowns on offsets as economically inefficient and bars the use of taxpayer dollars to finance them. They are negotiated directly by American contractors with foreign governments, though the Commerce Department keeps data on them.

  Those statistics show that more than 120 countries require offsets in military sales. In 1998, the last year of available figures, American contractors signed 41 agreements with 17 countries. From 1993 to 1998, they provided US$21 billion in aid to foreign countries under 279 agreements. Lockheed has entered into more than 300 offset arrangements in more than 30 countries in the last two decades. New data, as yet unreleased, will show increases across the board, said Daniel O. Hill, director of the Commerce Department's office of strategic industries.

  Aside from obvious distortions they cause in global trade, offsets have cost the United States thousands of precious manufacturing jobs, unions say.

  A 2001 presidential commission on offsets found that they led to an annual loss of 4,200 manufacturing jobs in the 1990s, mostly among subcontractors.

  "The government does not know the full impact of these deals because there is such a lack of information," said Owen E. Herrnstadt, director of the international department of the International Association of Machinists and Aerospace Workers.

  "It's a puzzle that policy makers have yet to put together, and the threat is growing. Workers are being sacrificed."
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