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: Proposed rule with a request for comments.

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SUMMARY: The Bureau of Export Administration (BXA) is proposing to

amend the National Security Industrial Base Regulations to require U.S.

firms entering into offset agreements associated with the sale of

weapons systems or defense-related items 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. Interested parties are invited to submit written comments,

suggestions, information, or advice relative to these proposed

regulations.

DATES: Comments must be submitted on or before May 26, 1994.

ADDRESSES: Written comments (six copies) should be sent to Brad Botwin,

Director, Strategic Analysis Division, Office of Industrial Resource

Administration, Attention: Offset Regulation Comments, room 3878, U.S.

Department of Commerce, 14th Street and Pennsylvania Avenue NW.,

Washington, DC 20230.

FOR FURTHER INFORMATION CONTACT: Karen Swasey, Offsets Program Manager,

Strategic Analysis Division, Office of Industrial Resource

Administration, room 3878, U.S. Department of Commerce, 14th Street and

Pennsylvania Avenue NW., Washington, DC 20230. Telephone 202-482-3795.

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 weapons systems or defense-

related items 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

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

preparedness, industrial competitiveness, employment, and trade of the

United States.

Rulemaking Requirements

1. This proposed rule has been determined to be ``not significant''

for purposes of Executive Order 12866.

2. 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. Send comments regarding

this burden estimate or any other aspect of this collection of

information, including suggestions for reducing this burden to Brad

Botwin, Director, Strategic Analysis Division, Office of Industrial

Resource Administration, Attention: Offset Regulation Comments, room

3878, U.S. Department of Commerce, 14th Street and Pennsylvania Avenue

NW., Washington, DC 20230; and to the Office of Information and

Regulatory Affairs, Office of Management and Budget, Washington, DC

20503.

3. This proposed 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 proposed 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.

5. The provisions of the Administrative Procedure Act, 5 U.S.C.

553, requiring notice of proposed rulemaking, the opportunity for

public participation, and a delay in the effective date, are

inapplicable because this regulation is specifically exempt pursuant to

the Defense Production Act of 1950, as amended. (50 U.S.C. app. 2159).

Further, no other law requires a notice of proposed rulemaking to be

issued for this proposed rule.

However, because of the importance of the issues raised by this

regulation, this rule is being issued in proposed form. Pursuant to the

Act, comments will be considered in the development of final

regulations. (50 U.S.C. app. 2159(b)(1)). Accordingly, the Department

encourages interested persons who wish to comment to do so at the

earliest possible time to permit the fullest consideration of their

views.

The period for submission of comments will close May 26, 1994. The

Department will consider all comments received before the close of the

comment period in developing final regulations. Comments received after

the end of the comment period will be considered if possible, but their

consideration cannot be assured. The Department will not accept

comments accompanied by a request that a part or all of the material be

treated confidentially because of its business proprietary nature or

for any other reason. The Department will return such comments and

materials to the person submitting the comments and will not consider

them in the development of final regulations. All comments on these

regulations will be a matter of public record and will be available for

public inspection and copying. In the interest of accuracy and

completeness, the Department requires comments in written form. Oral

comments must be followed by written memoranda, which will also be a

matter of public record and will be available for public review and

copying. Communications from agencies of the United States Government

or foreign governments will not be made available for public

inspection.

The public record concerning these regulations will be maintained

in BXA's Freedom of Information Records Inspection Facility, room 4525,

Department of Commerce, 14th Street and Pennsylvania Avenue, NW.,

Washington, DC 20230. Records in this facility, including written

public comments and memoranda summarizing the substance of oral

communications, may be inspected and copied in accordance with

regulations published in part 4 of title 15 of the Code of Federal

Regulations. Information about the inspection and copying of records at

the facility may be obtained from Margaret Cornejo, BXA's Freedom of

Information Officer, at the above address or by calling (202) 482-5653.

List of Subjects in 15 CFR Part 701

Administrative practice and procedure, Arms and munitions, Exports,

Offsets, Reporting requirements.

Accordingly, the National Security Industrial Base Regulations (15

CFR parts 700-709) are proposed to be amended by adding part 701 to

read as follows:

PART 701--REPORTING OF OFFSET 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 weapons or defense-related items to foreign

countries or foreign firms that are subject to offset agreements

exceeding $5,000,000 in value to furnish information regarding such

sales. 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 to 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. Types of

offsets include, but are not limited to, coproduction, licensed

production, subcontractor production, overseas investment, technology

transfer, countertrade, barter, counterpurchase, and buy back.

(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 in paragraph (a) of

this section 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

receives credit for full or partial fulfillment of the offset

agreement.

Sec. 701.3 Applicability and scope.

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

of weapons systems or defense-related items (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 part applies to all offset transactions completed in

performance of existing offset commitments since January 1, 1993 for

which offset credit has been received 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 Industrial Resource

Administration, Bureau of Export Administration, room 3878, 14th Street

and Pennsylvania Avenue, NW., Washington DC 20230. The first industry

reports should be submitted to the Bureau of Export Administration not

later than (date to be provided) and should cover offset transactions

completed during the calendar year 1993, as well as information

regarding all unfulfilled offset agreements. After this initial

submission, companies should provide information twice yearly not later

than August 15 covering the first six months of a calendar year and

February 15 covering the second six months of a 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 are encouraged to 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 awarded by

international customer's offset agency 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.).

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

transaction was a direct offset (defined as any product or service

directly related to the defense systems procured/sold) or indirect (any

other transactions).

(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.

(e) Reporting on offset agreements entered into. (1) In addition to

the itemized list of offset transactions completed during the year as

specified in paragraph (d) of this section, 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) For the first reporting period only, U.S. firms will be asked

to provide this information for all offset agreements currently in the

fulfillment process (i.e., those with uncompleted offset obligations).

Sec. 701.5 Confidentiality.

(a) As provided by section 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 part 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: April 20, 1994.

Sue E. Eckert,

Assistant Secretary for Export Administration.

[FR Doc. 94-9994 Filed 4-21-94; 11:52 am]

BILLING CODE 351-DT-P