Unconventional Trade: Bartering for Weapons

UNCONVENTIONAL TRADE: BARTERING FOR WEAPONS Jan Feldman B•arter has been an element of international trade for centuries. In the 1980s it has captured a significant portion of the international arms market. The growth of barter further complicates the already delicate issue of foreign arms sales. In a new and literal version of the traditional "guns and butter" trade-off, purchasing countries seek to reduce the cost of procuring weapons either by participating in the production of the weapon or by negotiating reciprocal trade agreements as a condition of purchase. Brazil, for example, is now requiring that 50 percent of the value of a weapon purchase be "offset" through trade or co-production. Countries such as Saudi Arabia, Iran, Nigeria, and Iraq are insisting that weapons be offered in exchange for oil. Canada demanded and received from McDonnell Douglas Corporation an offset package valued at more than 100 percent of the deal for F-18 fighterjets that it recently negotiated in 1980. Promotion of tourism in Canada was also part of that offset agreement. The trend toward barter in the arms market involves nations of the "First" and "Second" as well as "Third" Worlds; sales negotiated by governments and private firms are subject to it. The few policies that do exist to regulate these sales are fragmentary and often contradictory. Information about the economic, political, and strategic impact of offsets is equally scarce. Jan Feldman is assistant professor of political science at the University of Vermont. She has written on collaborative weapons production and technology transfer for TheJournal ofStrategic Studies and Washington Quarterly. 201 202 SAIS REVIEW While the direct sale of weapons arguably boosts the gnp of the selling nation and creates or protectsjobs, offsets are a mixed blessing for both sellers and buyers. For the seller, offsets through co-production raise concerns about the transfer of technology, with the attendant danger of allowing critical military technologies to pass into the hands of adversaries. Similarly, the economics of co-production implies the creation of future competitors for market-share, erosion of the seller's industrial base, and the loss ofjobs to foreign producers. The proliferation of more and more domestic arms industries worldwide may contribute as well to international militarization. In light of all these potential and real hazards, why have offsets and other forms of barter become a fact of life in the international weapons market? Obviously weapons purchasers want to get the best deal possible, and they find themselves increasingly in a position to dictate terms and conditions to the seller firms and nations. For political or economic reasons, many of these countries are unable or unwilling to make lump sum cash payments and are availing themselves of these sophisticated new ways of avoiding direct purchase of completed, off-the-shelf weapons . As competition for market share increases among the seller nations, they each try to raise the ante by offering the most enticing terms. Offsetting takes a number of different forms. The Department of Defense task force assigned to study offsets uses the generic term "international collaborative programs" to cover all forms of "teaming" or nondirect sales. Under this heading fall co-production, licensed production , technology transfer, and countertrade. Co-production, the most common form of offset, means that participating parties agree to divide and distribute workshares of production or assembly of a system developed by one of the governments or its national firm. The F-16 fighter, developed by General Dynamics, is an example of a large and generally successful multinational co-production program set up by the United States and nato nations. Direct licensed production in one country of a second country's design is another common form of collaboration, in which the manufacturing government acquires from another nation or its firm the necessary technology and know-how, as well as production rights. This strategy is particularly appealing to such countries as Japan, which possess most of the technological and labor resources needed to proceed with production of a complex system. Technology transfer, which ordinarily occurs as a part of such collaborative ventures as licensed production or co-production, may also take the form ofjoint research and development or of technical assistance through subsidiaries...