Offset Agreement - EU Position On Defense Offsets

EU Position On Defense Offsets

The most recent common European Union quasi-agreement on defense offsets is The Code of Conduct on Offsets, signed by all EU countries (with the exception of Romania and Denmark) in October 2008. The primary purpose of the voluntary and non-binding Code is to promote a "European Defense Technological and Industrial Base" and to outline a road map to arrive to a complete elimination of offset practices within the domestic EU market. In other words, to open to competitive bids the EU Defense and Security market and to overcome competition restrictions of EU Treaties of Rome and Lisbon, art. 346. The ideal goal is “competition in the EU Defense Market” and “Government-to-Government off-the-shelf sales.” The realistic target is humbler, though: to self-restrain and limit the offset quantity to 100% of the contract value.

The actual situation in EU is described in detail in a study on defense offsets in the Union countries commissioned by the European Defense Agency and published in 2007. According to this study the volume of EU offset agreements in 2006 was above 4-5 billions euro. The distribution of these offsets is as shown in the diagram: Direct Offsets, Military Indirect Offsets, Civilian Indirect Offsets.

European policy on offsets is still regulated by the Treaty establishing the European Community. Art. 223 of the Treaty of Rome (1958), then article 296 of the EU Treaty of Amsterdam (1999); since December 2009, the Treaty of Lisbon (art. 346) protects member States weapons production and trade from competition rules of the common European market. In spite of 50 years of European history Article 223 (Rome) and Article 346 (Lisbon) are practically identical. Today the hinge of EU policy on offsets is still the same article, that is, Art. 346 of the Lisbon Treaty. This article preserves the national right to the secret of state related to it own security and military production and procurement. This is the relevant part of Article 346:

1. The provisions of this Treaty shall not preclude the application of the following rules:

(b) any Member State may take such measures as it considers necessary for the protection of the essential interests of its security which are connected with the production of or trade in arms, munitions and war material; such measures shall not adversely affect the conditions of competition in the common market regarding products which are not intended for specifically military purposes.

— Art 346 Treaty of Lisbon

The first part of the article states that European Union has no authority over national states policies and decisions on their defense/security choices. In other words, EU has no saying about domestic preference for homemade planes or tanks, or for preferred military offsets choice. The second part, however, asserts a shared principle by all EU states regarding the non military/indirect offsets, that is, EU reserves its right to supervise and regulate indirect-non-military offset effects, so that they do not “adversely affect the condition of competition” in the internal common EU market.

Any civilian-indirect-offset has distortion effects in the common market, and this distortion is amplified by the ignorance about specific offset agreements outside the circle of defense contractors and national authorities. U.S started monitoring offsets adverse effects in United States when a small paper-making equipments company in Wisconsin (Beloit Corporation) got in trouble without understanding that the reason was an hidden cause, that is, an indirect offset by Northrop (now Northrop Grumman) with the Finnish Ministry of Defense. Only a concerned Wisconsin politician, Sen. Russell D. Feingold, discovered the real reasons in 1992, after being informed that a tender for supply of machinery of the value about 50M USD was not awarded to the Wisconsin company, but to a Finnish company (Valmet Corporation) as part of an offset deal with the Finnish Government.

This U.S. offset story brought to light the issue of the impact of confidential agreements by defense companies on U.S. non military business, in some instances with devastating effects. Feingold's discovery is enlightening for the EU common market as well, where interferences and adverse impacts on EU companies are allowed by an unjustified national attitude for confidentiality or secrecy on indirect, non military, offset deals. Art. 346 of Lisbon Treaty, written more than 50 years ago, is there to wisely avoid disruptive effects caused by unjustified military secrecy in civilian offsets in the common European market. In EU market of Defense, approximately of the size of $250B, with 27 sovereign state authorities that can claim secret of state -from Germany to Cyprus and Luxembourg-, there is a potential for indirect non-military offsets of $60B, that is, more 1000 times the distortion problem caused by Northrop (and the Finnish Ministry of Defense) to Beloit.