Add another weapon to the arsenal in trade deficit fight

When foreign governments shop around for defense contracts, they are not solely motivated by price and quality.

In light of the trade balance effects of major acquisitions, such as aircraft or defense products, international customers often require U.S. vendors to purchase goods from them in order to “offset” the trade balance effects large purchases have on their trade flows.

{mosads}In light of enormous U.S. trade deficits, it is time for the United States to reciprocate with offset demands of our trading partners. Frequently, we find ourselves in conditions where foreign sales to us are major and our sales to importers and their nations are minor, leading to trade relations that are out of kilter. 

U.S. firms have accommodated foreign offset demands for decades. This is the time when some give-back by our trading partners is the right medicine to improve world trade imbalances. 

Offsets are industrial compensation arrangements demanded (so far only) by foreign governments as a condition for making major purchases, such as military hardware. Sometimes, these arrangements are directly related to the goods being traded.

For instance, the Spanish Air Force’s planes — American-made McDonnell Douglas F/A-18 Hornets — use rudders, fuselage components and speed brakes made by Spanish companies. U.S. sellers of the planes have provided the relevant technology information so that Spanish firms are now successful new producers in the industry.

Under offset conditions, U.S. companies often help export a client country’s goods or even support the performance of tourism services. For example, the “Cleopatra Scheme” allowed foreign suppliers to Egypt to meet their agreed upon offset obligations through package tours for foreign tourists.

In 2015, U.S. firms entered into 38 new offset agreements where they agreed to cause purchases with 15 countries valued at $3.1 billion. In 2017, the total U.S. trade deficit was $566 billion after it imported $2.895 trillion of goods and services while exporting $2.329 trillion.

No country has a bigger trade surplus with the United States than China. In 2017, the U.S. deficit with China climbed to its highest level on record, amounting to a gap of $375 billion.

Eliminating imbalances is a core component of the Trump administration’s international economic policy. One approach has been the threat of tariffs against China, an effective supplemental strategy could be the instigation of offset agreements with major trade surplus nations.

For instance, many American imports that contribute to the trade deficit are capital goods, such as computers and telecom equipment.

An offset agreement between China and the United States could require China to use American-made components, perhaps even from Chinese-owned plants. Another example could be the export of Smithfield ham from the U.S. to be served in company cafeterias in China.

The American trade deficit is not easily resolved. Government would be well served to explore non-traditional options in order to develop more than one fulcrum for leverage.

New use of offset agreements — which have provided our trading partners with past success at our expense — could help revitalize American industries and bring a new sense of balance to trade relationships.

Our government should encourage offset commitments by foreign firms and countries who sell a lot to us. America deserves to reap the benefits!

Michael Czinkota (czinkotm@georgetown.edu) teaches international business and trade at Georgetown University’s McDonough School of Business and the University of Kent, U.K. He wrote (with Ilkka Ronkainen), “International Marketing” (10th ed., CENGAGE).