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Single Article: Economic Orthodoxy v Market Pragmatism: A Case Study of Europe?s ?Abandonment? of Defense Offset

Author: RON MATTHEWS and IRFAN ANSARI
Published in PFM, Vol. 15 No. 4

Defense offset represents a demand by the arms purchasing state for reciprocal benefits: if we buy your expensive weapon systems, what will you do for us? Although offset may resemble blackmail or coercion, it is not illegal. Also, because the primary contract is military-related, the offset arrangement lies outside the scope of international trade agreements, such as the World Trade Organization. Yet whilst, offset is legal, it is nevertheless controversial. It is alleged, for instance, that reciprocal trade facilitates corrupt practices and represents a distortion of trade, in the sense that the offset package may influence purchasing decisions more than the price and quality of the primary defense product, but notwithstanding such criticisms, offset is a global phenomenon. Until recently it was almost impossible for defense contractors to sell military equipment without being hit by demands for offset, primarily technology transfer of the underlying production process. In 2009, circumstances began to change, when the European Commission issued a Defense and Security Directive aimed at increasing economic efficiency through competitive procurement. In the process, defense offset would be eradicated, except where national security was threatened, and this would need to be evidenced by the member country seeking exemption from open competition. The Directive, 2009/81/EC, is a manifestation of the EC?s intent to liberalize Member States? traditionally sovereign defense sectors in favor of pan-European procurement. Offset was expected to become the exception, rather than the rule, but the evidence thus far appears to suggest reluctance on the part of Member States to abandon offset. A significant minority of EU States continue to interpret defense acquisition as being synonymous with national security and offset as a mechanism for accelerating sovereign defense-industrial capacity. In the face of legal sanction, such market pragmatism, driven by political opportunism to exploit economic benefit, carries the danger that offset will be driven underground, becoming less transparent and manageable, only to reappear in arms deals under different wrappers via separate, but linked, ?wink and nod? arrangements.

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