oversight

Defense Production Act: Offsets in Military Exports and Proposed Amendments to the Act

Published by the Government Accountability Office on 1990-04-19.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                   United    States       General   Accounting       Office
                   Report to the Honorable
GAO                Alan J. Dixon, U.S. Senate



April   1990
                   DEFENSE
                   PRODUCTION ACT
                   Offsets in Military
                   Exports and Proposed
               i   Amendments to the s
                   Act




                       :    RESTRiCTED---No*      to be released outside the
                            General Accounthg OfTice unless specifically
                            approved by the Office of Congmssional
                       D    iI9 ~n’~O i I:.                      4            A




 GAO/W&AD-90-164
               United States
GAO            General Accounting  Office
               Washington, D.C. 20548

               National Security and
               International  Affairs Division

               F-238025

               April 19, 1990

               The Honorable Alan .I. I )ixon
               I Jnited States Senate

               Dear Senator Dixon:

               In response to your February 20, 1990, request and discussions with
               your Office, we revicwctl:

             a The Administration’s 1988 report to the Congress, Offsets in Military
               Exports. Specifically, w(’ addressed the interagency process used to pre-
               pare the report, the oxtclnt of factual analysis, the use of economic mod-
               els to measure the impact of offsets, and differing agency views on
               assessing the impact of offsets1
             . Certain provisions of Section 114, Annual Report on Impact of Offsets,
               of Senate bill 1379. entitled Defense Production Act Amendments of
                1989. Specifically, we
               (1) commented on provisions that relate to including differing agency
               views in the offsets report and
               (2) provided information that might indicate the degree of burden on
               industry in responding to t,he bill’s proposed reporting requirements on
               agreements involving offsets exceeding $5 million.


               The Defense Production Act of 1950, as amended, requires an annual
Background     report on the impact of offset,s on defense preparedness, industrial com-
               pc’titivrness, employmcxnt , and trade of the I Jnited States. Section 309(b)
               of the Defense Prodrlcl If)n Act requires each offsets report to be based
               on interagency studies clcsigned to show the short- and long-term effects
               of offsets, including those resulting from technology transfer to other
               countries, and the ditwt and indirect effects of offsets on lower-tier
               defense subcontractors and on non-defense industry sectors that may be
               adversely affected hy offsc~ts. According t,o the Office of Management
               and Budget (OMII), i ntc~ragc~nc~y
                                                studies are those conducted by more than
               one agc’ncy participating in preparing the report,. Further, the Defense
               Production Act rcquiros t hta offsets report to summarize the findings




               Page I                            GAO/NSIABW-164   Defense Production   Act and OPTsets
B238025




impact on lower-tier defense subcontractors and non-defense industry
sectors. However, the results of the methodology used are of limited
value because they do not identify the effect on more specific industry
sectors critical to defense. Moreover, the use of differing significant
assumptions in the application of that methodology makes the analyses
of the two sections inconsistent and appears contradictory.

The 1988 offsets report summarizes new data on prime contractors col-
lected during 1988 for the Interagency Coordinating Committee from
LJ.S.firms involved in defense sales featuring offsets. However, the 1988
report does not contain any analysis of the new data, which OMB attrib-
uted mainly to delays caused by the uncertainty of statutory action on
related legislation in 1988. The report basically restates analyses and
findings of the three prior annual offsets reports to the Congress that
were based on data collected in 1985.

The interagency process for drafting the 1988 report was mostly infor-
mal, allowing the Interagency Coordinating Committee to complete the
report by the statutory deadline. However, the Defense Production Act
provides a formal mechanism for reflecting differing agency views in
the report. According to the OMH representative who chairs the Commit-
tee, including differing views in the report requires an interagency
study, and because no such studies had been prepared, differing views
have not been included in t,hrboffsets reports. We found that for the
 1988 and previous reports, adopting such differing views may have sig-
nificantly affected the reports’ conclusions.

Senate bill 1379’s proposed amendments to the Defense Production Act,
as well as the Defense Production Act itself, need to be changed to better
provide for disclosing in the annual report significant differing agency
views. That is, an agency involved in preparing the report should not be
required t,o perform an independent study, as Senate bill 1379 proposes,
Or an interagency study, as the act, provides, as a precondition to be met
before its significant differing views must be included in the report.




Page 3                        GAO/NSlADM-164   Defense   Production   Act and Offsets
                    5238025




                    reviewed the comments and decided which revisions would be made for
                    the final report. The Committee members did not vote in the meetings
                    held to discuss the report. When a consensus could not be reached at the
                    Committee meetings, differing comments were set forth in letters to OMB
                    by senior officials in the agencies. (Significant differing agency views
                    are discussed on page 8.)


Data and Analysis   The 1988 report summarizes new data on prime contractors collected
                    during 1988 by the Bureau of Economic Analysis. The survey extended
                    and expanded a 1985 International Trade Commission data base to
                    include information on sales and offsets through 1987. However, the
                    1988 report does not contain any analysis of these new data. OMB offi-
                    cials explained that (1) they postponed the Bureau’s data collection pro-
                    cess while awaiting final congressional action on new legislation that
                    would have added an offset reporting requirement and may have
                    changed the data collection effort and (2) by the time the survey results
                    were obtained from industry and the Bureau prepared preliminary sum-
                    mary tables of the data in late December 1988, there was insufficient
                    time to analyze the new data and include the analysis in the report.

                    The 1988 report basically restates the analysis and findings of the three
                    prior reports to the Congress on the impact of offsets using data col-
                    lected in 1985 for the Coordinating Committee by the International
                    Trade Commission. This earlier data base covered calendar years 1980-
                    84 and contained narrative responses to selected questions, sales data,
                    information on military export sales with related offset obligations of
                    over $2 million, and summary information on offsets of $2 million or
                    less. These restated analyses include the effect of offsets on defense
                    preparedness, industrial competitiveness, employment, and interna-
                    tional trade.” The 1988 report also reproduces previous analyses based
                    on case studies and contains a new case study on the offsets related to
                    the sale of the F-16 aircraft to Greece.

                    The industrial competitiveness, employment, and international trade
                    sections in the 1988 report were primarily reiterations of previous
                    reports with some modification. However, the defense preparedness sec-
                    tion, according to OMH. contains new analysis done by Data Resources,



                    i.SW our earlier report Military Experts: Analysis of an Interagency Study 011Trade Offsets (GAO/
                    NSIAD 86.SRRR.Apr. lRA6 )       -



                    Page 6                                   GAO/NSIAB90-164      Defense Production Act and Offsets
B238026




imports over the period studied, which was 1980-84. Based on this anal-
ysis, the report concluded that offsets have had little effect on the levels
of employment, either 11,s. or foreign, although they have affected the
distribution of employment across industries.

Based on the use of an input-output model to analyze the impact of off-
sets on defense preparedness, the offsets report provided an assessment
of the overall effect of offsets on the top 30 defense industries.’ Such an
aggregated analysis, however, does not result in identifying the impact
of offsets on particular suppliers or industry segments critical to
defense. For example, this model can be used to estimate the aggregate
impact of offsets and their associated exports on the ball and roller
bearing industry. However, it does not provide information on the
impact on specific segments of that industry, such as superprecision ball
bearings, which are important to DOD. Moreover, an input-output-model
is subject to limitations that affect its predictive accuracy. For example,
it does not allow for adjustments in the demands for industry outputs to
changes in prices. While showing the impact of offsets on industry seg-
ments is an inherently difficult task methodologically, there is no obvi-
ously superior alternative to the input-output model.

Although the defense preparedness and employment analyses both used
input-output models, the defense preparedness analysis did not employ
a balance of trade assumption such as the one used in the employment
analysis. The general result of such an assumption was essentially to
eliminate the estimated positive effect of offset agreements on the level
of U.S. employment. If a similar assumption were applied in the input-
output analysis of defense preparedness, the result would be to reduce
any estimated increases in output of the overall economy due to the off-
set agreements. With regard to the 30 industries reported on, the result
of such a balance of trade assumption would also be to reduce the esti-
mated increases in output due to the agreements, but. this effect may be
small.

The assessment of the impact of offsets based on the use of economic
models in the two report sections is highly dependent on strong assump-
tions employed in the analysis. Specifically, the implicit assumption in
the defense preparedness section that the reported offsets were neces-
sary for the reported exports and the assumption in the employment

‘The Data Resources, Incorporated. lntenndustry Model contains 432 Industries. Motors and genera-
tors, ball and roller bearings and iron and steel forgings are examples of the lowest level of detail
represented by the manufarturing mdustries in the model



Page 7                                    GAO/NSIAlMl-164      Defense Production    Act and Offsets
                     R-238025




                     In addition, another agency official said that OMR consulted with private
                     industry on the amount of effort that would be required to respond to
                     such a survey and industry objected, saying that such a survey would be
                     burdensome, complicated, and expensive.

                     Conversely, the Federal Emergency Management Agency, Commerce,
                     and Treasury officials said t,hat surveying only prime contractors does
                     not provide sufficient subtier visibility. These officials said such a sur-
                     vey would limit the precision of the analysis at all tiers. Although the
                     survey provides an aggregated analysis, it does not identify the effect
                     on lower-tier subcontractors, including particular types of suppliers and
                     segment.s of the industrial base critically important to defense needs.


                     Section 309 (b) of the Defense Production Act current,ly provides a for-
Comments on          ma1 mechanism for reflecting differing views. That is. the act requires
Proposed             the annual offsets report to contain a summary of the findings and con-
Amendments to the    elusions, including differing views of the agencies involved in the requi-
                     site interagency studies that formed the basis of the offset report.
Defense Production   However, OMl3 officials said that including differing views in the report
Act’s Offsets        requires an interagency study, and since no such studies had been pre-
Reporting            pared, differing views have not been included in the offsets reports.
Requirements         Senate bill 1379 would make the Department of Commerce the new lead
                     agency responsible for preparing the offsets report. The bill would also
                     provide that the Secretary of Commerce may include alternative find-
                     ings or recommendations in the report if the Secretary has been given,
                     during report preparation. an independent study or analysis on which
                     such views are based.

                     We believe that Senate bill 1379’s proposed amendments to section 309
                     of the Defense Production Act should be changed to better provide for
                     the inclusion of significant differing views in the annual offsets report.
                     For the 1988 and previous offsets reports, differing agency views
                     regarding such basic matters as study methodologies and assumptions
                     that may have significantly affected the reports’ conclusions were not
                     included in the reports. We believe that an agency involved in preparing
                     the report should not be required to perform an independent study, as
                     Senate bill 1379 propost’s, or an interagency study, as the act provides,
                     as a required precondition to have its significant differing views
                     included in the report.




                     Page 9                         GAO/NSIAD-90-164   Defense Production   Act and Offsets
                         B-238026




                         reported such sales with offset agreements valued at more than $2
                         million.

                         We have no basis to assess the other aspect of the reporting burden, that
                         is, the average time required for firms to respond to the proposed
                         requirement. OMI3 has estimated that the reporting burden for the 1988
                         collection of information varied from 5 to 60 hours per response, with
                         an average of 20 hours. This estimate included time for reviewing
                         instructions, searching existing data sources, gathering and maintaining
                         the data needed, and complet,ing and reviewing the information. If the
                         information Senate bill 1379 and implementing regulations would
                         require is similar to the 1988 survey, then the average response time
                         may be similar to OMI(‘Sestimate.


                         The Congress may wish to consider amending section 309(b) of the
Matters for              Defense Production Act to better provide for the disclosure of signifi-
Congressional            cant differing agency views. Specifically, the Congress may wish t,o pro-
Consideration            vide t,hat agencies participating or consulting in developing the offsets
                         report will have their significant differing views included in the report
                         without performing addit,ional studies or analyses. The formal studies
                         that have actually been done are not of such obvious merit as to warrant
                         the exclusion of less formally derived views.


                         In response to your February 20, 1990, letter, and subsequent discus-
Objectives, Scope, and   sions with your Office. the objectives of our review were to (1) provide
Methodology              the results on the 1988 offsttt,s report and [2) provide our comments and
                         information relating to section 114 of Senate bill 1379.

                         Our review of the 1988 offsets report was done for the Subcommittee on
                         Legislation and National Security, House Committee on Government
                         Operations. On October 17, 1988, the Subcommittee requested that we
                         evaluate a broad range of issues relating to the adequacy of information
                         on the U.S. defense industrial base. As requested, we provided the Sub-
                         committee a report in November 1989 on several of these issues.” As
                         agreed with the Subcommlttct~, we did not include the results of our
                         review on offsets reporting, but did provide a briefing to the Subcommit-
                         tets on April 12: 1989.


                         “lndustnal Baw: Adequacy of Infomlatwn on the ITS Defense Industrial Raw (GAO/NSIAIHO-48,
                         ?&IX 15. 1989 )



                         Page 1 I                              GAO/NSIADSO-164    Defense Production   Act and Offsets
E-238025




Please contact me at (202) 275-8400 if you or your staff have any ques-
tions concerning this report. Other major contributors to this report are
listed in appendix II.

Sincerely yours,




Paul F. Math
Director, Research, Development,
  Acquisition, and Procurement Issues




Page 13                       GAO/NSIAD90-164   Defense   Production   Act and Offsets
Page 15   GAO/NSIAB9@164   Defense Production   Act and Offsets
  Appendix I
  Excerpts of Agency Comments on the 1988
  Report on Offsets in Military Exports




  “The material with which WCdo concur would include mainly the historical reviews
  of ITS. Government actions and policy statements related to offsets, the presenta-
  tion of data from this year’s survey, and the summary of Greek offset programs.”

* DOD’S January 4, 1989, letter, signed by the Assistant Secretary of
  Defense for International Security Affairs, stated that:

  “DOD concurs with the draft fourth annual report to Congress on Offsets in Military
  Exports subject to the changes outlined on the attached markup.”

- The Department of Labor’s January 5, 1989, letter, signed by the Dep
  uty Secretary of Labor. stated that:

  “We have reviewed the draft report and find that except for some required editorial
  changes which will be submitted to your staff it is satisfactory and responsive to
  the Congress. Therefore. we ha\‘<. no objection to its being transmitted to the
  Congress ”




  Page 17                             GAO/NSIAD-90-164   Defense Production   Act and Offsets
Requests for copies of     GAO   reports   should be sent to:

U.S. General Accounting      Office
Post Office Box 6015
Gaithersburg,  Maryland      20877

Telephone   202-275-6241

The first five copies of each report       are free. Additional   copies are
$2.00 each.

There is a 25% discount     on orders for 100 or more copies mailed to a
single address.
Appendix II

Major Contributors to This Report


                            Michael E. Motley, Associate Director
National Security and       Kevin Tansey, Assistant Director
International Affairs       Rosa M. Johnson, Evaluator-in-Charge
Division,     Washington,   Michele Mackin, Evaluator
                            Charles W. Perdue, Economist
D.C.                        Celia Thomas, Economist


                            William T. Woods, Assistant General Counsel
Office of General           Nina Fantl, Attorney Advisor
Counsel




                            Page 18                       GAO/NSIAB90-164   Defense   Production   Act and Offsets
Excerpts of Agency Comments on the 1988
Report on Offsets in Military Exports

                   On December 12, 1988, OMBforwarded to all of the agencies on the Coor-
                   dinating Committee the final draft of the 198X military offsets report.
                   The following excerpts are responses to OMB’S request for comments by
                   the agencies that drafted major segments of the report.

             l     Commerce’s December 30, 1988, letter, signed by the IJnder Secretary
                   for Export Administration, stated that:

                   “This Fourth Report for Congress consists mostly, but not exclusively, of informa-
                   tion and analysis already presented in the three previous annual reports and in the
                   three year summary report. As you are aware, the Department of Commerce was
                   dissatisfied with these earlier reports and did not concur with their original submis-
                   sion to the Congress. Since we are on record as non-concurring with these previous
                   reports, we regretfully cannot accept the submission of the same information this
                   year.

                   “Moreover, I believe that resubmission of the same information will have the unde-
                   sirable effect of obscuring the new data and analysis that is contained in the report,
                   including the new survey data collected this year by the Department of Commerce/
                   Bureau of Economic Analysis, the Case Study of the F-16 Aircraft Sale to Greece, as
                   well as the portions of the report responding to the new Defense Authorization Act
                   reporting requirements

                   “ln conclusion, 1 recommend that OMB, as editor for the DpA report, make the nec-
                   essary changes to make this document acceptable to all agencies concerned.”

                 - Treasury’s January 9, 1989, letter, signed by the Deputy Assistant Sec-
                   retary, Trade and Investment. stated that,:

                   “Treasury did not comer in the earlier reports pursuant to Section 309 of the
                   Defense Production Act, due primarily to the procedures adopted for handling the
                   survey data and secondarily to the tone of parts of the reports, which could have
                   been read as justifying other governments’ offset practices. But with this year’s
                   change in procedures for collecting and analyzing the data and with an eye toward
                   the international negotiating effort required by the Defense Authorization Act, we
                   hope such differences can bc put behind us.

                   “Our drafting changes in the main are aimed at deleting the recapitulations of previ-
                   ous reports. This principally would affect Section IV and the first three case studies
                   in Section V. Our primary concern is that these passages may be read as sympathetic
                   to other countries’ offset practices and hence may prejudice the impending IJ.S.
                   negotiating effort. If specific discussions of the defense, competitiveness, employ-
                   ment and trade effcc,ts (if offsets arc considered necessary. additional preliminary
                   analysis of the new data could be inserted.




                   Page 16                             GAO/NSlAD.SO-164   Defense   Production   Act and Offsets
Contents


Letter                                                                                                          1

Appendix I                                                                                                 16
Excerpts of Agency
Comments on the 1988
Report on Offsets in
Military Exports
Appendix II                                                                                                18
Major Contributors to
This Report




                        Abbreviations

                        WD        Department of Defense
                        OMB       Office of Management and Budget


                        Page 14                     GAO/NSIAD-90-164   Defense   Production   Act and Offsets
  B238025




  This review included analyzing the 1988 interagency report, Offsets in
  Military Exports, and the interagency procedures used to draft the
  report. In response to the Subcommittee’s request,

. we analyzed the 1988 report to determine whether the report included
  an analysis of facts related to offsets and attempted to assess the effects
  of these offsets on the defense industrial base and
. we discussed the contents and analysis of the 1988 report, the proce-
  dures used to draft the report, and the participants’ views on the
  assumptions and methodologies used with various interagency
  participants.

  In response to your request for comments on section 114 of Senate bill
  1379, we analyzed relevant legislation, including the reporting require-
  ments related to military offsets and the proposed amendments to these
  legislative requirements. Reviews related to the 1988 report were per-
  formed from January 1989 through March 1989 and our review of the
  legislation was performed during February 1990 and March 1990.

  The views of responsible agency officials were sought during the course
  of our review and are incorporated where appropriate. As requested, we
  did not obtain official agency comments on this report.

  Our review was lx,rformed in accordance with generally accepted gov-
  ernment auditing standards.


  llnless you publicly announce its contents earlier, we plan no further
  distribution of the report until 30 days from the date of the report. At
  that time, we will send copies to the various agencies that participated
  in the interagency process and other interested parties and make copies
  available to others on request.




   Page 12                       GAO/NSIAB90-164   Defense   Production   Act and Offsets
                        B233025




                        We believe Senate bill 1379 should provide for authorizing the inclusion
                        of significant differing agency views in the report if the Secretary of
                        Commerce has been given, during the preparation of the report, the
                        basis for such views. Further, instead of merely giving the Secretary the
                        discretion to include such views, as Senate bill 1379 currently provides,
                        we believe that Senate bill 1379 should amend the Defense Production
                        Act to require the Secretary to include such differing views in the report
                        if an agency has provided Commerce with the basis for its views.


Offsets Reporting-the   Section 114 of Senate bill 1379 would also amend section 309 of the
                        Defense Production Act by adding an offsets reporting requirement. IIS.
Burden                  firms entering into a contract for the sale of a weapon system or
                        defense-related item to a foreign country or firm, if such a contract is
                        subject to an offset agreement exceeding $5 million, would be required
                        to furnish information concerning the offset agreement to the federal
                        government.

                        Our analysis of the data collection efforts related to the annual 1988
                        offsets report tends to suggest that the reporting burden in terms of the
                        number of corporations affected may be limited. For instance, as prcvi-
                        ously stated, the Bureau of Economic Analysis’ 1988 survey question-
                        nairtl was sent to 52 corporations selected from the top 100 DOD
                        contractors. According to the Arms Control and Disarmament Agency.
                        the total value of 1I.S. military exports for the years 1980-85 amounted
                        to $58.7 billion. This amount appears to approximate the universe of
                        contracts “for the sale of a weapon system or defense-related item to a
                        foreign country or firm” referred to in Senate bill 1379. The 1988 offsets
                        report states that almost, 90 percent of this amount, or approximately
                        $52.4 billion, reprc~sc~ntt~d the value of military exports, with or without
                        offsets, for the 52 corporations surveyed.

                        The Bureau’s survey included military export sales contracts that were
                        signed between .January 1, 1980, and December 31, 1987, and involved
                        offset agreements. For the sales with offsets over the 8 years covered in
                        the survey, the report states that 36 of the 52 corporations reported
                        approximately $35 billion in sales exceeding $500,000. The report,ed
                        value of these offset agreements was approximately $20 billion.

                        In addition, the 1985 survey done by the International Trade Commis-
                        sion reported that relatively few corporations accounted for a high per-
                        centage of the valucb I bf military exports and that only eight companies



                        Page 10                        GAO/NSIAD-W-164   Defense   Production   Act and Offsets
                             R-238025




                             section that military exports must be balanced by equivalent imports
                             over the 5-year period considered, strongly influenced the results
                             obtained. Further. we believe that using the balance of trade assumption
                             in the employment sect,ion of the report and not in the defense prepared-
                             ness section appears to make the two analyses inconsistent. This
                             appears to be a significant contradiction and should have been
                             addressed in the report.

                             The report’s discussion of the effect of offsets on industrial competitive-
                             ness and on international trade was not based on quantitative models.
                             The industrial competitiveness section concludes that the effect of off-
                             sets on U.S. competitiveness is mixed. The international trade section
                             concludes that the effect of offsets is unknown due to unobservable
                             facts about other governments’ behavior.


Agency Views Differ on       The report used data collected from prime contractors as a substitute
                             for developing subcontractor data to measure the impact of offsets on
Methodologies Used t;0       the lower level tiers of production. The views of agency officials on the
Assess the Impact of         Coordinating Committee differed on whether or to what extent the 1988
Offsets                      report assessed the effect of offsets at the subtier levels of production.
                             E-Iowever, the differing views were not discussed in the report. The Com-
                             mittee considered three options for obtaining information on subcontrac-
                             tors: sending a questionnaire to (1) prime contractors, (2) subcontractors
                             and suppliers. and (3) prime contractors, subcontractors, and suppliersR

                             OMH  and DOD officials said that the best approach was to survey prime
                             contractors and use the input-output model to estimate subcontractor
                             and supplier information because this method is consistent, systematic,
                             and provides a measure of economywide effects. The officials cited the
                             following disadvantages to surveying subcontractors and suppliers (the
                             alternative usually proposed):

                         l   no master list from which to generate a representative sample of sub-
                             contractors and suppliers and
                         l   difficulty in obtaining proprietary information and questionable
                             responses from subcontractors and suppliers based on an estimated
                             value of contracts lost from prime contractors due to offsets.


                              ‘According to OMB dwumrnts. the Bureau of Economic Analysis estimated costs ranging from
                              $122.000 to 51i3,OOO.for- a wrwg of prime contractors and $350.000 if subcontractors were also
                              included



                              Page 8                                  GAO/NSIADW-164       Defense Production Act and Offsets
                            E238025




                            Incorporated. This analysis used an input-output                   model.” (See next sec-
                            tion for details. )

                            According to OMH,there have been no interagency studies designed to
                            show the effects of offsets on lower-tier defense subcontractors and on
                            non-defense industry sectors that may be adversely affected by offsets,
                            including effects resulting from technology transfer. The OMB represen-
                            tative stated that these matters have eluded serious analyses because of
                            the difficulties in developing a valid research design for measuring both
                            technology transfer and lower-tier impacts and the probable large cost
                            of such studies.

                            OMB’S  representative stated that the 1988 report would be a baseline for
                            the new Administration and reiterations of previous reports were appro-
                            priate. Treasury and Commerce had previously objected to prior annual
                            reports and, therefore, objected to these reiterations. For example, Trea-
                            sury’s Deputy Assistant Secretary for Trade and Investment sent a let-
                            ter to OMB noting the Department’s disapproval of the report’s tone and
                            the inclusion of data to which the agency had strongly objected in the
                            past. (See app. I.)


Economic Models Used to     Analyzing the effect of offsets on defense preparedness in the 1988
Measure Effect of Offsets   report was based partly on a model of the ITS. economy developed by
                            Data Resources, Incorporated, in conjunction with data obtained from
                            surveying prime contractors. In this input-output model, the economy is
                            represented by a set of equations intended to describe the linkages
                            among industries in producing goods. Such models can be used to esti-
                            mate the amount of output from each industry needed to produce a
                            given set of final products. The analysis of defense preparedness implic-
                            itly assumed that the offsets reported were necessary to make the sales
                            with which they were linked. The analysis used the input-output model
                            to compare the output of major defense industries with and without
                            exports accompanied by offset agreements. Based on this analysis, the
                            report concluded that export sales increased the top 30 U.S. defense
                            industries’ real output after factoring out the related offsets effect.

                            The analysis of that impact of offsets on employment was also based on
                            an input-output model. This analysis included a balance of trade
                            assumption; that is, military exports must be matched by equivalent

                            “An input-output model pwvldcs a conceptional framework that helps to analyze the interwlation-
                            ship among the res~~~rc~s~lsedand goods produced by various industries



                             Page 6                                  GAO/NSIAD-W-164     Defense   Production   Act and Offsets
                               B-238026




Offsets in Military
Exports-1988      Report

Interagency Process            The process for preparing the 1988 offsets report was mostly informal
                               because there were generally no guidelines or written procedures to fol-
                               low.:’ However, the informal process allowed the Coordinating Commit-
                               tee to proceed from discussing OMB’S proposed draft report outline to
                               completing the final report quickly enough to be responsive to the statu-
                               tory deadline.

                               The OMB representative proposed a draft report outline and a timetable
                               for developing the 1988 report to the Coordinating Committee. The time-
                               table began in May 1988 with a discussion of the outline and ended in
                               December 1988 with the distribution of the final report to the Commit-
                               tee members. The following Coordinating Committee members did the
                               analyses and proposed a draft of the report segments indicated:

                           l Department         of Defense (DOD): defense preparedness;
                           l Department         of Labor: employment;
                           l Department         of Commerce: industrial competitiveness; and
                           . OMR: trade,’      introduction, and summary.

                               Commerce’s Bureau of Economic Analysis collected information on mili-
                               tary equipment export sales and related offsets from 1980 to 1987. The
                               Coordinating Committee developed a questionnaire for the Bureau’s use
                               in collecting such information. The questionnaire was sent to 52 U.S.
                               corporations selected by the Committee from the top 100 defense con-
                               tractors The questionnaire provided information on military export
                               sales contracts signed between January 1, 1980, and December 31, 1987,
                               valued at over 5500,000, and involved offset agreements,

                               A first draft of the report was ready by November 1988 and the OMB
                               representative requested written or oral comments from all the agencies
                               represented on the\ Coordinating Committee. OMB’S representative


                               “Thls discussion of the mt~wgcncy process refers primarily to the 1988 report. The procedures for
                               the 1989 rqxrt are slmdat although the timing of the rqxxt as well as smne aspects of its organiza-
                               tmn. differ slightly.
                               lLkpartment of Labor ustomanly has been respanslble for drafting the trade sectmn. The Depart-
                               ment of Treasury W’OWII” parallels between trade-related investment mea.wre~ and offsets but this
                               mformation was not iw1udt.d m the report



                               Page 4                                   GAO/NSL4Lb9O.l64     Defense   Production   Act and Offeeta
                   B-238025




                   and conclusions, including differing views, of the agencies that partici-
                   pated in the requisite interagency studies that formed the report’s basis.

                   The National Defense Authorization Act, Fiscal Year 1989, also requires
                   reports on offsets. Section 825(d) of the Authorization Act requires
                   reports on the progress of international negotiations related to offsets
                   and a report relating to the appropriate actions to be taken by the
                   IJnited States when other countries require offsets as a condition for a
                   military sale. Section 825 (d)( 1) requires the President to submit to the
                   Congress a comprehensive report on contractual offset arrangements
                   required of U.S. firms for the supply of weapon systems or defense-
                   related items to foreign countries or foreign firms.

                   The 1988 offsets report was submitted to the Congress by OMB to fulfill
                   reporting requirements of the 1950 act, as amended, and section
                   825(d)( 1) of the National Defense Authorization Act.

                   Senate bill 1379 was introduced on July 24, 1989. Section 114 of this
                   bill, Annual Report on Impact of Offsets, would make amendments relat-
                   ing to the substance of the report and the manner in which it is
                   prepared.

                   Executive Order 1252 1, *June 24,1985, names OMB as the coordinating
                   agency for the Executive Branch in preparing the offsets reports. OMB
                   completes the report in December of each year and submits it to the
                   Congress. Accordingly, OMR chairs the Interagency Coordinating Com-
                   mittee,” which prepares the report.


                   Although section 309(b) of the Defense Production Act requires each
Results in Brief   annual offsets report to be based on interagency studies, OMB states that
                   no such studies have been done because of problems in developing a
                   valid research design to accomplish the statutory purposes of the stud-
                   ies and the probable large costs of such studies.

                   The methodology used to prepare the defense preparedness and employ-
                   ment sections of the 1988 report provided an assessment of the overall
                   impact of offsets on 1J.S.industries, including the overall aggregated

                   “The organizations representrd on the Committee include OMB, the Departments of State, Treasury,
                   Commerce, Labor, and Defense (including the Office of the Secretary of Defense, the Office of the
                   Assistant Secretary for lntwnational Security Affairs, and Defense Security Assistance Agency); the
                   E’ederal Emergency Management Agency; the Arms Control and Disarmament Agency; the Central
                   [ntelligence Agency. the 11S Trade Representative; and the National Security council.



                   Page 2                                   GAO/NSIALHO-164      Defense Production    Act and Offsets