Offsets as industrial policy: Lessons from aerospace

Since 1975 “offsets” have begun to appear frequently in contracts covering international sales of aircraft and other products incorporating advanced technology. Offsets involve reciprocity beyond that normally found in an exchange of goods for money. They may involve co‐production or co‐design of the principal item to be exchanged, or acceptance by the seller of goods or services unrelated to it as partial payment (indirect offsets or countertrade).

The United States has become the major provider of offsets and anti‐offset sentiment has grown. Economists interpret them as trade diverting. Politicians from regions suffering loss of employment view them as bestowing unfair advantage to foreign competitors.

The authors examine offsets from both theoretical and policy perspectives and conclude that in such noncompetitive markets, second‐best considerations dominate, requiring case‐by‐case evaluation of impacts and rendering across‐the‐board determinations of welfare loss suspect.