Defense Offsets and Public Policy: Beyond Economic Inefficiency

Abstract

Defense offsets are a form of countertrade whereby arms importing countries demand some form of compensation for the lost opportunity for domestic production. Both the United States and the European Union (EU) maintain that offsets are economically inefficient and trade distorting. Accordingly, free-trade advocates seek to prohibit offsets. Building on a previous article published in the Public Contract Law Journal – where he argued that offsets may be a “second-best” solution to the arms trade’s market failures – the author turns to a wider array of policy considerations. He concludes that closer analysis of the questions catalogued here is necessary before an outright ban should be pursued. He contends that the question is multifactorial and, thus, should not be decided on the basis of efficiency alone. Meanwhile, the author proposes both public and private measures for mitigating any harm that offsets may cause and for coming to a better understanding of their effects.