Offset Agreement - Types of Offset

Types of Offset

There are two types of offset. "Direct offset" is when the compensation offered to the buyer is directly related to the initial transaction. For example, a buyer of military equipment may be given the right to produce a component of a related technology in the buyer's country. The right is usually for a limited period.

"Indirect offset" is when the supplier is expected to purchase goods from the buyer, which are unrelated to the initial product being supplied. These could include raw materials, agricultural commodities or other products.

One of the ways to legally compensate for the high-price purchase of military equipment or systems is to offer services, investments, counter-trade and/or co-production as offsets. For instance, Greek companies produce part of the Lockheed C-130 that they bought from U.S. The Greek co-production is a U.S. direct offset. Or, in a more sophisticated form of offset involving three countries, Portugal is in charge of the maintenance of Kuwaiti Lockheed Martin aircraft. This is a Portuguese “direct offset"', since Portugal bought the aircraft, and is partner in charge for their maintenance. An investment in a security software company of Romania, or in assisting the export and marketing in difficult areas of a Belgian environmental company are other forms of actual indirect offsets.

The most common distinction in offset proposals is between direct and indirect offset.

Direct offset is a side agreement that has to do with the main product/service that is bought/sold, that is military equipment, systems, or services. They may be also called military offsets. Indirect offsets are side agreements that are not directly related to the product/service that is bought/sold. Most people refer to such category of offsets as civilian offsets, though there are many indirect offsets that are not civilian offsets.

The most common types of direct/indirect offsets are:

The most complete and accurate list of form of actual offsets can be found in BIS Annual Reports to Congress, where all forms of registered offset are codified, according to the old Standard Industrial Classification.