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.