Offsets in Military Exports

DEPARTMENT OF COMMERCE

Bureau of Export Administration

15 CFR Part 701

[Docket No. 940364-4064]

RIN 0694-AA91

Offsets in Military Exports

AGENCY: Bureau of Export Administration, Commerce.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Bureau of Export Administration (BXA) is amending the

National Security Industrial Base Regulations to require U.S. firms

entering into offset agreements associated with the sale of defense

articles and/or defense services to foreign governments or foreign

companies to provide BXA certain information regarding those agreements

when they exceed $5,000,000 in value. This new regulation is being

promulgated pursuant to the Defense Production Act of 1950, as amended.

DATES: This rule is effective December 2, 1994. Annual reports must be

submitted on or before June 15 of the succeeding year, except that the

report for calendar year 1993 must be submitted on or before March 15,

1995.

ADDRESSES: Annual reports should be sent to Brad Botwin, Director,

Strategic Analysis Division, Office of Strategic Industries and

Economic Security, Attention: Offset Regulation Report, Room 3878, U.S.

Department of Commerce, 14th Street and Pennsylvania Avenue N.W.,

Washington, DC 20230.

FOR FURTHER INFORMATION CONTACT: Erin Finn, Offsets Program Manager,

Strategic Analysis Division, Office of Strategic Industries and

Economic Security, Room 3878, U.S. Department of Commerce, 14th Street

and Pennsylvania Avenue N.W., Washington, DC 20230. Telephone 202-482-

2322 or Fax 202-482-5650.

SUPPLEMENTARY INFORMATION:

Background

The Defense Production Act Amendments of 1992 amended the Defense

Production Act of 1950 (the Act). The Act now requires that U.S. firms

entering into contracts for the sale of defense articles or defense

services to foreign countries or foreign firms that are subject to

offset agreements exceeding $5,000,000 in value to furnish information

regarding such sales to the Secretary of Commerce (the Secretary). The

Act also now requires the Secretary to establish regulations to collect

this information and to protect it from public disclosure unless public

disclosure is specifically authorized by the firm furnishing the

information. The Act further requires the Secretary to serve as the

President's executive agent in preparing an annual report to Congress

on the impact of offsets on the United States.

This report will include an aggregated summary of information

provided to the Secretary by U.S. industry pursuant to the regulation

provided here. It will address the impact of offsets on the defense

preparedness, industrial competitiveness, employment, and trade of the

United States.

On April 26, 1994, BXA published in the Federal Register (59 FR

21678) a proposed rule on reporting of offsets in military exports

designed to elicit comments, suggestions, information, or advice

relative to the proposed regulation. 20 responses were received

commenting on the proposed rule. The two major comments concerned the

requirements to submit semi-annual reports and to report each

individual transaction undertaken to fulfill an offset commitment. The

rule has been amended to address these concerns.

Rulemaking Requirements

1. This rule has been determined to be ``significant'' for purposes

of Executive Order 12866.

2. This rule involves collections of information subject to the

Paperwork Reduction Act of 1980 (44 U.S.C. 3501 et seq.). These

collections have been approved by the Office of Management and Budget

under control number 940364-4212. Public reporting burden for this

collection of information is estimated to be 5 to 60 hours per

response, with an average of 10 hours, including time for reviewing

instructions, searching existing data sources, gathering and

maintaining the data needed, and completing and reviewing the

collection of information.

3. This rule does not contain policies with Federalism implications

sufficient to warrant preparation of a Federalism assessment under

Executive Order 12612.

4. The General Counsel of the Department of Commerce has certified

to the Chief Counsel for Advocacy of the Small Business Administration

that this rule will not have a significant economic impact on a

substantial number of small entities. It is anticipated that the rule

will primarily affect large defense contractors that engage in offset

agreements with foreign governments. Moreover, the rule is not expected

to pose a burden because firms engaging in offset transactions already

must prepare periodic accounts of progress toward fulfillment of offset

obligations for the foreign entity that is party to the offset

agreement. The information to be collected pursuant to these

regulations is less than that required by these foreign parties. With

regard to new offset agreements entered into, the information requested

is readily available and will take a minimum amount of time to assemble

by the parties involved.

List of Subjects in 15 CFR Part 701

Administration practice and procedure, Arms and munitions, Exports,

Offsets, Reporting requirements.

Accordingly, the National Security Industrial Base Regulations (15

CFR parts 700-709) are amended by adding part 701 to read as follows:

PART 701--REPORTING OF OFFSETS AGREEMENTS IN SALES OF WEAPON

SYSTEMS OR DEFENSE-RELATED ITEMS TO FOREIGN COUNTRIES OR FOREIGN

FIRMS

Sec.

701.1 Purpose.

701.2 Definitions.

701.3 Applicability and Scope.

701.4 Procedures.

701.5 Confidentiality.

Authority: Title I, sec. 124, Pub. L 102-558, 106 Stat. 4207 (50

U.S.C App. 2099).

Sec. 701.1 Purpose.

The Defense Production Act Amendments of 1992 require the Secretary

of Commerce to promulgate regulations for U.S. firms entering into

contracts for the sale of defense articles or defense services to

foreign countries or foreign firms that are subject to offset

agreements exceeding $5,000,000 in value to furnish information

regarding such agreements. The Secretary of Commerce has designated the

Bureau of Export Administration as the organization responsible for

implementing this provision. The information provided by U.S. firms

will be aggregated and used to determine the impact of offset

transactions on the defense preparedness, industrial competitiveness,

employment, and trade of the United States. Summary reports will be

submitted annually to the Congress pursuant Section 309 of the Defense

Production Act of 1950, as amended.

Sec. 701.2 Definitions.

(a) Offsets--Compensation practices required as a condition of

purchase in either government-to-government or commercial sales of

defense articles and/or defense services as defined by the Arms Export

Control Act and the International Traffic in Arms Regulations.

(b) Military Export Sales--Exports that are either Foreign Military

Sales (FMS) or commercial (direct) sales of defense articles and/or

defense services as defined by the Arms Export Control Act and

International Traffic in Arms Regulations.

(c) Prime Contractor--A firm that has a sales contract with a

foreign entity or with the U.S. Government for military export sales.

(d) United States--Includes the 50 states, the District of

Columbia, Puerto Rico, and U.S. territories.

(e) Offset Agreement--Any offset as defined above that the U.S.

firm agrees to in order to conclude a military export sales contract.

This includes all offsets, whether they are ``best effort'' agreements

or are subject to penalty clauses.

(f) Offset Transaction--Any activity for which the U.S. firm claims

credit for full or partial fulfillment of the offset agreement.

Activities to implement offset agreements may include, but are not

limited to, coproduction, licensed production, subcontractor

production, overseas investment, technology transfer countertrade,

barter, counterpurchase, and buy back.

(g) Direct Offset--Contractual arrangements that involve defense

articles and services referenced in the sales agreement for military

exports.

(h) Indirect Offset--Contractual arrangements that involve defense

goods and services unrelated to the exports referenced in the sales

agreement.

Sec. 701.3 Applicability and scope.

(a) This rule applies to U.S. firms entering contracts for the sale

of defense articles or defense services (as defined in the Arms Export

Control Act and International Traffic in Arms Regulations) to a foreign

country or foreign firm for which the contract is subject to an offset

agreement exceeding $5,000,000 in value.

(b) This rule applies to all offset transactions completed in

performance of existing offset commitments since January 1, 1993 for

which offset credit of $250,000 or more has been claimed from the

foreign representative, and new offset agreements entered into since

that time.

Sec. 701.4 Procedures.

(a) To avoid double counting, firms should report only offset

transactions for which they are directly responsible for reporting to

the foreign customer (i.e., prime contractors should report for their

subcontractors if the subcontractors are not a direct party to the

offset agreement).

(b) Reports should be delivered to the Offsets Program Manager,

U.S. Department of Commerce, Office of Strategic Industries and

Economic Security, Bureau of Export Administration, Room 3878, 14th

Street and Pennsylvania Avenue, N.W., Washington DC 20230. The first

industry reports should be submitted to the Bureau of Export

Administration not later than March 15, 1995 and should cover offset

transactions completed during the calendar year 1993, as well as

information regarding unfulfilled offset agreements. After this initial

submission, companies should provide information once yearly not later

than June 15 covering the preceding calendar year. All submissions

should include a point of contact (name and telephone number) and

should be by a company official authorized to provide such information.

(c) Companies may submit this information in computerized

spreadsheet/database format (e.g., Lotus 1-2-3, Quattro Pro, dbase IV)

using a 3.5 inch 1.44 megabyte diskette, accompanied by a printed copy.

(d) Offset Transaction Reporting.

(1) Reports should include an itemized list of offset transactions

completed during the reporting period, including the following data

elements (Estimates are acceptable when actual figures are unavailable;

estimated figures should be followed by the letter ``E''):

(i) Name of Country--Country of entity purchasing the weapon

system, defense item or service subject to offset.

(ii) Name or Description of Weapon system, Defense Item, or Service

Subject to Offset.

(iii) Name of Offset Fulfilling Entity--Entity fulfilling offset

transaction (including first tier subcontractors).

(iv) Name of Offset Receiving Entity--Entity receiving benefits

from offset transaction.

(v) Offset Credit Value--Dollar value credits claimed by fulfilling

entity including any intangible factors/multipliers.

(vi) Actual Offset Value--Dollar value of the offset transaction

without multipliers/intangible factors.

(vii) Description of Offset Product/Service--Short description of

the type of offset (e.g., coproduction, technology transfer,

subcontract activity, training, purchase, cash payment, etc.).

(viii) Broad Industry Category--Broad classification of the

industry in which the offset transaction was fulfilled (e.g.,

aerospace, electronics, chemicals, industrial machinery, textiles,

etc.). Firms may request a list of the Standard Industry Classification

(SIC) codes to assist in identifying an appropriate industry category.

Forward such requests to the Offsets Program Manager, U.S. Department

of Commerce, Office of Strategic Industries and Economic Security,

Bureau of Export Administration, Room 3878, 14th Street and

Pennsylvania Avenue, N.W., Washington, D.C. 20230 or Fax 202-482-5650.

(ix) Direct or Indirect Offset--Specify whether the offset

transaction was direct or indirect offset.

(x) Name of Country in Which Offset was Fulfilled--United States,

purchasing country, or third country.

(2) Offset transactions of the same type (same fulfilling entity,

receiving entity, and offset product/service) completed during the same

reporting period may be combined.

(3) Any necessary comments or explanations relating to the above

information should be footnoted and supplied on separate sheets

attached to the report.

(e) Reporting on Offset Agreements Entered Into. (1) In addition to

the itemized list of offset transactions completed during the year as

specified above, U.S. firms should provide information regarding new

offset agreements entered into during the year, including the following

elements:

(i) Name of Country--Country of entity purchasing the weapon

system, defense item, or service subject to offset;

(ii) Name or Description of Weapon System, Defense Item, or Service

Subject to Offset;

(iii) Names/Titles of Signatories to the Offset Agreement;

(iv) Value of Export Sale Subject to Offset (approximate);

(v) Total Value of the Offset Agreement;

(vi) Term of Offset Agreement (months);

(vii) Description of Performance Measures--(e.g., ``Best Efforts,''

Liquidated Damages, (describe)).

(2) [Reserved]

Sec. 701.5 Confidentiality.

(a) As provided by Sec. 309(c) of the Defense Production Act of

1950, as amended, BXA shall not publicly disclose the information it

receives pursuant to this Part, unless the firm furnishing the

information subsequently specifically authorizes public disclosure.

(b) Public disclosure must be authorized in writing by an official

of the firm competent to make such an authorization.

(c) Nothing in this provision shall prevent the use of data

aggregated from information provided pursuant to this part in the

summary report to the Congress described in Sec. 701.1.

Dated: November 28, 1994.

Sue E. Eckert,

Assistant Secretary for Export Administration.

[FR Doc. 94-29645 Filed 12-1-94; 8:45 am]

BILLING CODE 3510-DT-P