What Is an Offset Agreement?
An offset agreement is a stipulation made between a foreign supplier and a company which requires the supplier to purchase a certain amount of goods from that country in exchange for a contract. These agreements can be direct or indirect, depending on what raw materials the country may have. These agreements are often required in order to award a foreign contract to a large company producing valuable goods.
A direct offset agreement means that the supplier has agreed to buy something from the country awarding the contract that is directly related to the product the company providing. For example, if Boeing, an American aircraft company, is awarded a contract from France, the company may agree to use steel from France in order to produce the aircraft. The fact that the steel is being used to produce the product that is going back to the country makes the agreement a direct one.
An indirect offset agreement is one where the company agrees to purchase a certain amount of products from the foreign country that may not be directly related to the product being manufactured. Often, because companies have no need for certain products from the foreign nation, they may make deals with other companies. For example, Boeing may not need the type of steel produced in France, but a fast food company could use beef produced from France. Boeing could make a deal with that fast food company to purchase French beef. Often, to entice the fast food company into the contract, something else may be offered, such as exclusive rights to serve that company's food in the Boeing cafeteria.
An offset agreement is often required when foreign nations enter a contract with a large-scale industry, such as a major manufacturer. Due to the fact that these agreements often see a substantial amount of wealth leaving the country, the foreign countries would like something else in return, in addition to the products being received. Therefore, an offset agreement is negotiated.
In addition to helping the country get a return on its investment, offset agreements can be used to bolster burgeoning economies. In some cases, an agreement, or a series of them, may help an industry within a developing country get the footing it needs to succeed. These companies can help improve the quality of life for the entire country by spreading the wealth around and spawning spin-off industries. In such situations, an offset agreement can become a valuable tool for economic development.
Are these legal within the UKs Bribery Act?
A more common arrangement in trade between manufacturers of like-products (aircraft engines, aircraft, etc.) would be for the offset to include "use" of the factory services of the foreign country for some other interest related to the U.S. company (but not related, necessarily) to the original trade.
For instance, Company X could have KorTaiChina Industries assemble an aircraft engine, including some locally produced parts from that company, then brought back into the U.S. That way the KorTaiChina Industries and its home country gets the labor and parts revenue, along with technology knowledge. Many variations are possible.
Does anybody know how common offset agreements are? This article make them seem pretty common but I am just trying to get an idea of how often this sort of thing actually goes on. Does a single company make multiple agreements every day or are these more rare. The whole idea of it seems so strange that it really has my curiosity peaked.
I find it really interesting that offset agreements serve a dual purpose. They can be used to keep wealth in a country or they can be used to distribute wealth to developing countries. It is not often that the same kind of contract and agreement can serve opposite purposes in an economy.
@backdraft - You might not be as far off the mark as you realize. Often times a companies stated business is not their only business.
I once worked for a large multi -national company whose name I will not mention and we were involved in several offset arrangements. One of these involved importing massive quantities of cheap Russian vodka to be bottled and sold in the US by a liquor distributor. Needless to say, our pirmary business had nothing to do with vodka.
Wow, who would have ever thought that a company like Boeing would get involved with importing French beef for American fast food companies. I realize that this is just a hypothetical situation but maybe there are all kinds of real goofy agreements like this one.
Imagine if Microsoft agreed to import pecans made in Brazil to sell to a cookie company for inclusion in their recipes.
Or maybe Ford would agree to import horse hair to sell to an American wig maker. I realize that these are silly but maybe they are not far off the mark.
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