Despite the many knitted brows (or perhaps only a great deal of bombast) over how the international arms market enabled Iraq's aggression against Kuwait, it is nearly three and a half years later (and with conventionally-armed chaos raging in Afghanistan, Angola, Bosnia, Burma, Cambodia . . . ) and little progress on controlling weapons transfers has been made.

In fact, since Operation Desert Storm, U.S. weapons sales and marketshare have soared to record levels. (In Fiscal Year 1993 the government negotiated $33 billion of arms exports to countries around the world, likely representing 60-70 percent of all sales.) And the arms transfer limit negotiations initiated after the war collapsed when China withdrew in September 1992, in protest against the United States' sale to Taiwan of 150 F-16 jets (See FAS Public Interest Report Nov/Dec 1992).

Although events have chronicled a gloomy record, some more circuitous approaches to limiting arms sales may succeed where direct efforts have floundered. One of these approaches involves limiting "offsets.

Offsets are side deals negotiated along with and tied to weapons sales. They help the purchasing country recoup part (or all, or even more than all) of the cost of the sale, or otherwise make the sale more attractive. Given the surfeit of weapons on the market today, buyers are able to demand more and more offsets. Not only do these ''deal sweeteners'' come at considerable cost to U. S. industries and workers affected by countertrade and other such commitments, but the offset of choice, the transfer of military production capability to the buying country, is one of the most dangerous and short-sighted aspects of the international arms trade.

The Clinton Administration is currently formulating a policy on conventional arms transfers. New policies on offsets should be included. Here are some suggestions:

• The United States should strictly limit the export of military production technology. A move in this direction would not be unprecedented. President Carter, as part of his conventional arms transfer policy in 1977, included a ban on co-production of major military equipment to most non-NATO countries. The policy gave way to Cold War pressures, but times have changed.

• As a corollary to unilateral restraint, the United States should negotiate with the other producers of major military equipment (primarily Europe, Russia, China) to restrain the proliferation of production capabilities to countries that do not already have them. This would force some countries either to purchase weapons off-the-shelf, or put up the massive expenditures needed for research and development to go it alone.

• To provide greater oversight, co-production and licensed production programs should be negotiated as government-to-government sales by the Department of Defense, and not be licensed by the State Department under its Direct Commercial Sales program. Currently there are two channels within the Pentagon's sales program for transferring production technology: Memoranda of Understanding and Letters of Offer and Agreement, each with its own set of directives and procedures. To facilitate oversight, it may be helpful to consolidate these separate procedures.

• The Pentagon should be required to notify Congress of co-production or licensed production of major weapons systems or components with any country, no matter what the dollar value, and, at a minimum, to explain why it is in the interest of national security to provide that country with an independent arms production capability. Michael T. Klare of Hampshire College has suggested that an "impact statement" be required for each co-production deal, examining consequences for regional security, U.S. trade and employment.

• Quarterly reports by the Pentagon, already required by the Arms Export Control Act, should be expanded to include information on all government to-government co-production agreements valued at $1 million or more. The report would detail the articles to be produced (how many and by whom), list the restrictions on third-country transfers and spell out the controls that have been incorporated into the agreement to ensure compliance. The reports should be available to the public, so that co-production trends can be monitored by independent analysts.

• DOD should assume full responsibility for enduse verification, production limits and assurance that technology is not being unlawfully incorporated into "indigenous" weapons programs. The State Department, which currently is responsible, has a poor track record in this area; the need for vigorous investigation and enforcement of compliance often conflicts with imperatives of diplomacy.

• Rights of inspection of co-production or arms production that incorporates U. S. technology should be a condition to the license agreement. Mandatory prior approval by the State and Defense Departments should be required before exports incorporating U. S. technology or produced under a U.S. Iicense may proceed. Current law calls for cutting offarms sales to a country found violating license provisions; yet this has never been invoked. Meaningful, but realistic, sanctions for violations should be devised and enforced.

• The government should negotiate with European governments to limit indirect offsets, with a goal toward banning them. These negotiations would have two thrusts: they would try to limit offset demands from European buyers and also seek agreement with European suppliers to limit offsets provided to developing countries.

  The government held bilateral consultations with NATO allies to discuss "measures to limit the adverse effects of offsets on the defense industrial base of each country," but with little apparent effect thus far. No effort to cooperatively limit offsets to developing countries has been disclosed.

• Offsets should be disclosed when Congress is notified of proposed weapons sales, in order to gauge their effect on the "jobs" equation. They should also be compiled in a data base so that the cumulative effect may be assessed. The reporting requirement introduced by Sen. Feingold should become law (See page 7), and both it and the Commerce Department's reporting requirement (the law since 1992) should be implemented and overseen rigorously. Senator Russell Feingold (D-WI) recently succeeded in getting legislation through the Senate that would require Congressional notification of offset agreements related to arms sales. Another provision in the hill prohibits "third-party incentive payments" in connection with offsets.

• The government should limit or ban offsets when it is only U. S. arms manufacturers who are competing for a sale to either European or developing countries. This, too, is not without precedent. In Summer 1989, the Administration intervened in offset negotiations for the Korean Fighter Program. General Dynamics and McDonnell Douglas were competing for the sale and were driving offsets up into the 100 percent range, on top of a major co-production license. The government cal~ed offsets at 30 ~ercent of contract value.

  It is true that verifying the absence of "indirect" offsets would be difficult. However, if subcontractors or other segments of U.S. industry are hurt by deals that involve buying or marketing products unrelated to weapons, they should, at a minimum, be able to ensure that the government has been duly notified of such deals. If offsets have not been reported to Commerce, as required by law, punitive measures could be taken.

• Ban all offsets on arms sales funded or financed by U.S. military aid. The Arms Export Control Act currently mandates such a ban, but an exception for Israel during Fiscal Years 1984-92 has meant that the United States gave away $1.2 billion in offsets, on top of $16.2 billion in grant military assistance. Such "double-dipping" should stop, and not be repeated.
  -Lora Lumpe

Now imagine that, instead of cars, you sold tanks and guns and airplanes and bombs. How far would you be willing to go in sweetening deals with "gifts" on the side? Well, in 1987, the last year for which data is publicly available, U.S. arms manufacturers included a total of $2.987 billion worth of such goodies---called "offsets" in arms business parlance---in $3.037 billion of weapons sales.

Arms sales offsets may seem an esoteric topic, but they afford a glimpse into the real world of billion-dollar corporate/government dealmaking in the international arms market. Moreover, the effects of these little-known side deals on domestic employment, international relations and national security are profound.

What are Offsets and Why Do They Exist?

Offsets come in two basic varieties. "Direct" offsets involve transfer of military technology, typically by granting a license to the recipient country to produce the weapon system being purchased, its components or subcomponents. "Indirect" offsets---not directly connected to military goods---may involve the counter-importation of some unrelated product into the arms-selling country, investment in the buying country, or commercial technology transfer to the buying country.

A prime example of direct offsets is the $5.2 billion Korean Fighter Program (KFP) deal of 1991. South Korea contracted to purchase twelve off-the-shelf F-16C/D fighters and thirty-six aircraft kits for assembly in Korea. In addition, Korea---which is seeking to develop an indigenous fighter aircraft production capability---purchased the right to manufacture seventy-two F-16s under license. Through previous offsets, Korean Air Lines and Daewoo Corp.? already produced some F-16 parts, and Samsung Aerospace produced parts for the F/A-18 fighter. But that level of experience was nothing "compared to the level of manufacture and production line management contemplated under the KFP," according to the General Accounting Office (GAO). On top of the transfer of manufacturing and assembly know-how, Korea received 30 percent of the contract value, more than $1.5 billion, in undisclosed indirect offsets.

A Bizarre Bazaar

Indirect offsets may be what Rep. Ron Wyden (D-OR) had in mind when, in a 1985 Congressional hearing, he called offsets "just bizarre." For example, in order to clinch a $1.8 billion sale of F/A-18 fighters to Spain in 1982, McDonnell Douglas Corporation (MDC) undertook $1.5 billion of offset commitments. MDC marketed a wide range of Spanish products in the United States, including steel coils, chemicals, sunflower seed oil, sailboats, "slime," paper products, zinc, and marble. The corporation helped publish and distribute a picture book on Spanish lifestyles, designed to promote American tourism in Spain, and in perhaps one of the oddest offsets ever recorded, MDC helped establish a Domino's Pizza franchise in Barcelona as part of the fighter deal.

As a 1990 report by the Office of Management and Budget (OMB), Offsets in Military Exports, noted: "It is hard to conceive... a U.S. corporation that is an efficient producer of aircraft or aircraft engines being equally efficient in the selling of furniture, shoes, tourist packages, or education and training services." Indeed, the recognition that offsets are economically inefficient and that they foster foreign competition with U.S. manufacturers seems to be shared among industry, labor, the Executive Branch, Congress, and the cognizant public. They also appear to be a vehicle for pork-barrel politics and petty corruption on a grand scale.

A Trapped Industry

Nevertheless, governments permit, and even promote such deals, because, as Undersecretary of State Lynn Davis noted recently, "The demand for offsets is growing, with practically every arms purchaser demanding some form of offset." Industry, for its part, dislikes having to provide production technology offsets which run counter to long-term business interests, but it feels trapped by the system. If they do not provide the technology transfer, someone else will do so and will get the sale.

The policy of promoting or ignoring offsets was born out of Cold War efforts to build up allied defense and commercial industries. With economic competitiveness among the Clinton Administration's stated foreign policy priorities, and with the Pentagon citing regional instability and militarism as a primary threat to U.S. national security and interests, it is time to reassess U.S. policies on offsets.

Offset Requirements Increasing

Beginning in the 1950s, in addition to supplying the European and Japanese militaries with American equipment, the United States sought to rebuild its allies' arms industries through licensed production and co-development of weapons systems. In the 1970s, as the burden of financing increasingly fell on the recipients of American weapons, European countries began to exact a fee through offsets for foreign access to their markets.

Rather than bargain for the lowest possible prices, offset agreements allow the buyers to advertise non-defense gains associated with their weapons purchases from abroad: domestic job creation, investment, acquisition of new technologies, a foothold in a new market. In the convoluted logic of the OMB, camouflaging top-dollar weapons purchases with these side deals "thereby make[s] the monetary outlays on military equipment appear lower than they actually are and therefore more acceptable to both politicians and the public." Prime contractors have been willing to play along, since under these arrangements their products can be sold at high price levels, while the immediate burdens often fall on subcontractors (who lose business to coproducers in the recipient countries) and on those in unrelated industries (who lose business to indirect offsets).

Following the industrialized countries' lead, and seeing that the competitive market would bear it, in the late 1970s and 1980s many developing countries began to routinely require some raw percentage of the contract value be reinvested in their economic development through offsets. Some Congressional observers have likened this practice to a massive foreign aid program being run by defense contractors. Kuwait, Saudi Arabia, South Korea, and Turkey, to name a few, have established offset guidelines for arms imports. And with the increasingly competitive state of the arms market in the 1990s, countries that in the past were satisfied simply to buy sophisticated American weaponry are now demanding offsets as well.

Even An After-the-Deal Bargain

The Taiwanese legislature, for example, retroactively demanded Taiwan's first ever offset from an American firm for the September 1992 sale of F-16 combat aircraft to Taiwan. After the U.S. and Taiwanese governments completed the $6 billion deal, the Taiwanese legislature blocked payments unless the manufacturer of the plane, Lockheed, provided Taiwan with technology and production contracts related to the aircraft. In July 1993 Lockheed signed a 10-year "Industrial Cooperation Agreement" worth $1.1 billion which ensures production of some of the aircraft parts in Taiwan and the creation of depot maintenance centers there.

In the current buyer's market, U.S. manufacturers are engaged in an offset bidding war with each other and with European competitors. Israel has just decided on a $2 billion purchase of combat aircraft. Two American arms manufacturing giants----McDonnell Douglas and Lockheed---were in fierce competition for the deal, each trying to outbid the other in terms of price, technology, and offset packages. To cinch the Israeli sale, McDonnell Douglas will provide offsets benefitting Israeli industry for up to 100 percent of the sale's value. At the same time, Israel will purchase the F-15E aircraft with U.S. military aid, which is restricted to purchases from the United States. In this way, U.S. taxpayers subsidize twice-over the development of foreign militaries and foreign industries, at the expense of our own manufacturing base.

On some occasions, offset agreements extracted have been worth more than the actual value of the weapons sold. The $2.3 billion sale of F/A-18 fighters to Canada in 1982 included offsets which could total, according to the OMB, 150 percent of the contract value. The accompanying box shows several countries---predominately NATO allies---which have received 100 percent or greater offset obligations on U.S. arms sales during 1980-1987.

Government Policy: Laissez-Faire

Since they generally involve the transfer of military capabilities, direct offsets by U.S. vendors must be approved, and usually are negotiated by, the government. Indirect offsets, however, are not controlled or even routinely monitored. As a matter of policy---enunciated by President Bush in April 1990---the government leaves these deals entirely up to industry's judgment.

The Clinton Administration has thus far endorsed the Bush policy. Deputy Secretary of Defense William Perry said in a 15 April 1993 letter to a U.S. Senator: "We view decisions regarding offsets as matters best left to U.S. industry to negotiate and implement as part of their ongoing business activities. The principal objective of the current policy is to give U.S. companies the flexibility to structure arrangements that allow them to compete effectively for foreign sales. If U.S. defense manufacturers were unable to provide offsets, foreign governments would often be unable to raise domestic political support for defense purchases from the U.S., and U.S. industry would lose sales to foreign competitors willing to provide offsets."

Two Surveys--Little Real Action

Congressional concern about the effect of offsets on the U.S. economy erupts sporadically, generating what limited information and government oversight does exist. At Congress' direction, the government has undertaken two surveys of the U.S. arms industry's offset commitments, one in 1985 and the other in 1988. The 1988 data show that for the period 1980-1987, nearly $35 billion in arms exports entailed $20.1 billion in offset obligations. If Undersecretary Davis' assertion that offsets are increasing is true, then they now account for more than 60 percent of total arms sales contracts.

Industry Wants Offsets Protected from Public Eye

Congress has also established requirements that industry routinely report offset obligations. The National Defense Authorization Act of Fiscal Year 1989 required contractors to notify the Pentagon of offsets exceeding $50 million. But, over two years later, the Pentagon had not yet developed regulations for implementing the requirement and had received only three voluntary notifications from industry. As an excuse for its non-compliance, the Pentagon argued that additional reporting requirements then being pursued in Congress would displace the Defense Department requirement. Indeed, the Defense Production Act Amendments of 1992, signed into law in October of that year, directs that any firm which makes an arms sale subject to an offset agreement for $5 million or more must notify the Commerce Department. As of December 1993, Commerce was still awaiting the issuance of an Executive Order to implement the reporting requirement, and the drafting of guidelines on what information is required and how it is to be reported.

While much remains to be filled in, the law was clear on one point: "Such regulations shall provide protection from public disclosure for such information, unless public disclosure is subsequently specifically authorized by the firms furnishing the information." Nevertheless, industry---prime contractors anyway---strongly opposes the law, on the grounds that through notification "confidential business information" will be disclosed.

Industry lobbyists argue that if country X sees that country Y got a better deal, then country X will up its demands. However, purchasing countries for the most part publicly disclose the percentage of contract that they require in offsets, and it is unclear why this information by itself has not stimulated rising demands. Moreover, foreign governments frequently disclose detailed information on offsets they have received for their own political purposes. In fact, this is currently the only source of public information on specific offset deals.

More likely, the industry fears that notification will lead to regulation of offsets. "No one believes this is just notification," groused an unidentified industry source to the military trade paper Inside the Pentagon (16 March 1990). "Once the offset is reported, they're going to want to know much more. It will be notification and justification." And industry does not want to have to justify its actions. James McInerney, Jr., then Executive V.P. of the American League for Exporting Security Assistance, intoned at a government-industry conference in July 1991 that "Those things [offsets] need to be business deals among business men....Government has no business overseeing offsets."

The Defense Industrial Offset Association, representing prime contractors, works to prevent unilateral U.S. offset limits and forced disclosure. However, the group would welcome government intervention in pressuring American allies to limit their offset demands through bilateral trade agreements, such as NAFTA, and through negotiations among NATO member countries.

Freshman Senator Russell Feingold (D-WI) added an amendment to this year's State Department Authorization Act which would require "real time" notification to Congress of information on any direct or indirect offset agreements under negotiation or consideration as part of the sale of weapons or services subject to Congressional approval. The information would be included in the notifications required under the Arms Export Control Act, which provide Congress with 30 days in most cases to consider the pending sale. For all unclassified arms sales---the vast majority---the information on offsets would be available to the public.

Secrecy, Jobs, Smoke & Mirrors

Sen. Feingold became interested in offsets when a Wisconsin heavy machine manufacturer nearly lost a contract for paper-making equipment in an offset connected to the 1992 sale of F/A-18 fighters to Finland. Northrop Corporation, a subcontractor involved in the deal, offered an "incentive payment" to a U.S. firm to purchase the machine from Valmet Corporation, a Finnish company.

If American workers realized that American arms firms were underwriting their foreign competition, public opposition to arms sales would likely increase. In its 1990 report, the OMB conducted case studies of F/A-18 aircraft sales to Australia, Canada and Spain to assess the short- and potential long-term economic impacts of both direct and indirect offset transactions. "Certainly, a substantial short term gain in business was achieved through direct offsets....Canadian firms were particularly successful in turning what was originally offset work into long term, business opportunities....The total impact that offsets have on U.S. industry is complex and intertwined with other economic factors. However, it appears that offsets have contributed to the strengthening of foreign competitors in Australia, Canada and Spain," OMB concluded.

Industry lobbyists contend that offsets are essential to making foreign sales, and they have masterfully played up the argument that arms exports support American jobs and the defense industrial base. The arms-sales-for-jobs frenzy peaked in 1992, when McDonnell Douglas claimed that if the United States did not sell 72 F-15E fighter-bombers to Saudi Arabia, 40,000 jobs would be lost. The highly controversial sale was pushed through Congress largely on the strength of this claim. McDonnell Douglas did not advertise the fact that Saudi Arabia requires a 30 percent offset to all major contracts, and accordingly $2.7 billion of business would benefit Saudi workers and the Saudi economy, possibly at the expense of American workers in defense and other industries.

Real time reporting of offsets is needed if false or exaggerated claims of employment benefits are to be answered, and constituencies that may be negatively impacted are to be alerted before arms sales are finalized. In a July 1993 fact sheet on his proposed amendment, Sen. Feingold said: "Foreign military sales are often justified on the basis of the employment produced for the defense industry by such sales. If, however, such sales are accompanied by offset agreements that result in the loss of American jobs and business in defense and other sectors, that information ought to be made available to Congress at the time the sale is being considered."

Exporting Military Know-How

Countries which are industrially advanced enough prefer military technology transfers to indirect offsets. Arms sales are now routinely accompanied by co-production or commercial licensing arrangements, whereby a production line for the weapon system or its components is set up in the recipient country. Where the buyer cannot absorb such technology transfer, a depot for servicing and maintenance of the weapon system might be established.

Currently, United States law, as codified in the Arms Export Control Act, encourages the transfer of production technology to NATO and "major Non-NATO allies." This law treats the transfer of military production technology no differently than the sale of armaments, merely requiring that Congress be notified of contracts of $14 million or more. Congress is then given thirty days within which to contest the arrangement (fifteen days for NATO member countries).

Complexes, Not Cottage Industries

The result is what might be termed the proliferation of military-industrial complexes around the world. In the 1950s, only five developing countries produced major military equipment (aircraft, armored vehicles, missiles or naval craft), small arms, and/or ammunition. By the early 1980s this number had risen to 54, with 36 of these countries producing major military equipment. Brazil, India, Israel, Singapore, South Africa, South Korea, Taiwan and Turkey are among those developing countries with significant arms industry.

In a seminal 1991 study (Global Arms Trade), the Congressional Office of Technology Assessment chronicled the coproduction phenomenon. The report noted that "in 1988 the United States was engaged in transferring the production technology for approximately 70 major weapons systems to foreign countries, about the same number as its NATO allies and the former Soviet Union combined." Productiion of top-line equipment---such as M1A1 tanks, MiG-31 fighters, and advanced diesel submarines---is being licensed. "Over the past two decades, these arrangements have contributed to the emergence of new centers of advanced defense industry and technology, first in Europe, next in the Western Pacific, and increasingly in developing nations around the globe," OTA testified last June.

Glenn Rudd, Deputy Director of the Defense Security Assistance Agency (DSAA)---the Pentagon's sales department---defended the direct offset policy in a 1989 House Armed Services Committee hearing: "Selective use of coproduction has facilitated the achievement of U.S. goals of enhanced cooperative defense. It's helped to rebuild NATO and Japan....It has helped standardization of equipment with friends and allies and promoted regional stability through the improvement of industrial capabilities of certain countries."

Because of the added costs of building the necessary infrastructure and the requirement to pay licensing, royalty and technical assistance fees, licensed production or coproduction costs much more than buying weapons off the shelf. The added cost propels coproducers to seek to enter the export market, in order to reduce the unit cost for their militaries and to recoup investment costs.

The decision to help establish a new military industry is now made on business terms; no longer are the security implications the primary consideration. But at the same time, arms production and exports by our allies are increasingly viewed as a security threat, as well as being unwanted economic competition. The chief of Naval Intelligence, Rear Adm. Edward Sheafer, Jr., testified before Congress in February 1992 that "Western Europe, our closest military partner and one of our largest economic partners, poses no military threat to the United States except through export of arms that are roughly equal to ours in overall lethality and technical sophistication."

Arms Control Implications

The expanding numbers of arms suppliers profoundly complicate efforts to achieve limits on international arms transfers through negotiated arms control or multilateral arms embargoes. Opponents of global arms sales limits today rather self-servingly cite the technologically sophisticated and commercially oriented European industry as the primary obstacle---"If we don't sell, the Europeans will."

A frequent justification for U.S. arms transfers has been that the withholding of parts, servicing or ammunition provides a mechanism for control over the recipients' use of the weaponry; however, the increasing number of suppliers of the same weapons and components is eroding any such leverage. For example, sixteen countries now produce parts for, or assemble F-16 fighters. Thus, it was no surprise when the Pakistani Defense Minister said in February 1993 that, although the United States government had cut off sales of spare parts for Pakistan's F-16s (because of concerns about Pakistan's nuclear weapons program), "no plane has been grounded due to that reason." Pakistan, he said, was "acquiring necessary spare parts from the open market, though they were quite expensive." (Indeed, Pakistan was even acquiring spares directly from U.S. manufacturers.)

Perhaps the most important security implication of coproduction deals is the irrevocable transfer of industrial technologies and manufacturing know-how needed not only in conventional weapons production, but also for the possible development of long-range missiles and weapons of mass destruction. American sales of production technology to the Shah lie at the heart of Iran's current military industry, and licensed production from the Soviet Union, China, Brazil and others, provide the foundation of Iraqi weapons industry today.

Violations Undermine U.S. Policies

Coproduction contracts usually contain a provision to limit production levels and prohibit sales or transfer to third countries without prior U.S. government consent. However, numerous cases of overproduction and illegal transfer have been reported.

Japan Aviation Electronics Industry (JAE) was fined $10 million in 1992 for illegal sales of weapons components produced under an American license. JAE was authorized to manufacture gyroscopes and accelerometers for the Japanese military's F-4 fighter jets, but from 1984-1987, JAE transferred more than $7 million worth of the navigational components to Iran, in contravention of the United States declared policy against arms sales to that country.

In 1988 GAO disclosed that South Korea had violated the terms of a license for the manufacture of M-16A1 submachine guns, producing them in excess of the licensed quantities and exporting them without U.S. approval. The State Department classified the names of the recipients, but Rep. Larry Hopkins (R-KY) disclosed that they were "hostile countries." The Pentagon maintained it had been unaware of any violation. According to the DSAA's Glenn Rudd, the K-2 rifle is a "Koreanized" version of the M-16, "but different enough according to our Army people that it could not be considered the same rifle." This points to another problem stemming from licensed production: the difficulty of controlling "indigenous" production that is based on licensed designs.

Allegations have long persisted that Israeli arms manufacturers have illegally incorporated U.S. designs and technology into their weapons and exported them to countries the U.S. would not sell to for human rights or foreign policy reasons (China, South Africa, Chile, Ethiopia...). [See the April 1992 report by the State Department Inspector General.]

In a 1989 report, the GAO examined eighteen coproduction programs and found at least five cases of unauthorized transfer. In addition, GAO examined five supposedly closed-out programs, four of which continued some production.

These examples and others point to a lack of enforcement of license terms. The DOD is responsible for negotiating most major coproduction agreements and managing their implementation, although military technology transfers are licensed under the State Department's Direct Commercial Sales program, as well. The State Department is responsible for oversight of resale of U.S.-supplied defense equipment, including all coproduction output, and for resolving issues of non-compliance. However, former Rep. Nicholas Mavroules stated at a 1989 House Armed Services hearing that "there is virtually no ability of our government to monitor or enforce compliance."

At the same hearing, the GAO reported that, "With few exceptions, no coproduction programs were directly monitored to ensure compliance with MOUs [Memorandum of Understanding---the contract governing the coproduction deal] either by the responsible military services or by government personnel overseas. Although 15 of the 18 MOUs we examined contain restrictions on both production quantities and third-party sales, they do not require or permit U.S. monitoring or oversight. With the exception of the recent Stinger agreements, which give the United States the right to inventory missiles produced abroad, DOD coproduction guidance and MOU provisions do not include monitoring for compliance with restrictions...."

Time for a Change

After World War II, liberal coproduction and licensed production of weapons was justfied as needed to rebuild European arms industries, and to standardize NATO and other allied forces. But, today, the United States is rigthfully more worried about regional instability than the spread of communism. Coproduction deals have the effect of fomenting regional militarism through the proliferation of conventional weapons, while eroding suppliers' control over transferred military capabilities. They foster a more competitive arms market, which will lead to less discriminate sales and still more technology transfer in the future.

A laissez-faire policy on offsets makes less sense now than ever before. The government should be working to aid conversion of the U.S. economy away from Cold War-level military production toward more competitive commercial production. But by assisting foreign industries with U.S. commercial technology and access to the U.S. market, indirect offsets have the effect of supporting jobs in the arms industry at the cost of commercial employment over the long haul.

U.S. Congress, Office of Technology Assessment, Global Arms Trade: Commerce in Advanced Military Technology and Weapons, OTA-ISC-460 (Washington, DC: U.S. Government Printing Office, June 1991).

U.S. Congress, Subcommittee on Oversight and Investigations of the Committee on Energy and Commerce, House of Representatives, Federal Securities Laws and Defense Contracting---Part 3 (see in particular hearing held on 10 October 1985, "Offsets Associated with Foreign Military Sales") (Washington, DC: U.S. Government Printing Office, 1986).

U.S. Congress, Subcommittee on Investigations of the Committee on Armed Services, House of Representatives, Review of Arms Coproduction Agreements, hearing held 22 March 1989 (Washington, DC: U.S. Government Printing Office, 1989).

Executive Office of the President, Office of Management and Budget, "Offsets in Military Exports," December 1988 and 16 April 1990.

Richard A. Bitzinger, The Globalization of Arms Production (Washington, DC: Defense Budget Project, December 1993).

Michael T. Klare, "License to Kill," In These Times, 10-23 January 1994.

Philanthropist George Soros Receives Public Service Award

Talk about a Man for All Seasons! George Soros, a political economist, author, and self-made billionaire, is parlaying his financial success into a sustained effort to make philanthropy work for democracy and science-not only in his birthplace, Hungary, but throughout the entire former Soviet bloc and beyond.

While nation states averted their eyes, Soros's $25,000,000 loan to Macedonia held it together. While philanthropists dithered, Soros funded an innovative International Science Foundation to get Russian scientists through a transitional crisis.

And as the industrialized world turned inward, Soros formed Open Society foundations, with 35 offices in 22 countries, and agendas touching every relevant issue. Meanwhile, 14 regional programs address such problems as health, media, contemporary arts, management training, publishing, scholarships, etc. An entire Central European University was created.

In all these detailed, layered and catalytic efforts, Soros philanthropy has unique advantages of being overseen: by a single knowledgeable person, rather than a committee; by a person who is a philosopher manque, with a native understanding of Europe; by an economist with a related incisive understanding of people and events; and by a person of proven enterprise and reinforced self-confidence who combines sophisticated idealism with pragmatism.

His philanthropy keeps him uncommonly well informed. And his personal standing, as a man of great wealth and high-level experience, make him a significant player in European events. Thus he is well positioned to make a real difference in a crucial era.

It was with this in mind that we invited George Soros tonight; to thank him for what he has already accomplished, to exchange ideas with him and, above all, to encourage him to persist.

Before and after dinner, Soros led seminar discussions of the problems associated with continuing the International Science Foundation (ISF), once his $100 million contribution is spent. Soros volunteered that he would continue grants to ISF on a matching basis if the U.S. and Russian governments would participate.

FAS volunteered to help achieve this goal to the extent ISF needed help and sought, on behalf of the international scientific community, to accept the generous offer to continue funding the project. p During the award ceremony, in his response, Mr. Soros said that, to his surprise, he was accumulating enemies in the course of his philanthropy but that, so long as his work was appreciated by groups like FAS, he would be encouraged to continue. Since this was the goal of the award-to encourage George Soros to "persist" in the abrasive and difficult task of choosing, working with and sometimes terminating benefactions-his response was much appreciated.

The Federation is indebted to Senator Claiborne Pell, Chairman of the Senate Foreign Relations Committee, for sponsoring the use of the Capitol facilities for the event.

Extending the Comprehensive Test Ban Treaty (CTB), cutting off production of fissile material, exchanging data on nuclear stockpile and disposing of plutonium were discussed at a two-day workshop in Washington, December 15 and 15.

Co-sponsored by the FAS Fund, Natural Resources Defense Council (NRDC) and the Moscow Physical-Technical Institute (MPTI), Richard Garwin, Chairman of the FAS Fund, Thomas Cochran, Senior Scientist at NRDC, and Anatoli Diakov, Director of the MPTI Center from Arms Control, Energy and Environmental Studies, moderated the sessions for fifteen American and eight Russian participants.

Group Divided on Design Programs

On the question of whether or not the U.S. and Russia needs to keep nuclear weapons design programs active, most of the Russians and some Americans (particularly weapons designers) who participated in the workshop favor continuation. Their argument is that a core of experience must be maintained to counter now-unknown circumstances and that only by designing weapons can that experience be assured.

Richard Garwin, Director of the FAS Project on the Technical Basis for Disarmament, however, believes weapons design capability can be safely archived. "We do not have to keep the pot of stew hot," he said. "We can put it in the deep freeze and stick it in the microwave later, when it is time to eat." Christopher Paine of NRDC said "Some of these American weapons labs proposals come perilously close to what might be characterized . . . as a deliberate program to offset and thereby evade the intended restrictive effect of a CTB on the ability to design and certify the performance of new nuclear weapons."

"Moreover, a divisive U.S. public debate over the requirements for 'stockpile stewardship' will only serve to highlight the differences in technical capabilities, and feed speculation by non-weapon and nuclear threshold states that the U.S. is now finally agreeing to drop its opposition to a CTB precisely because it no longer regards it as a serious impediment to further nuclear weapons development.

The December workshop was the sixth time U.S. disarmament experts, government officials and nuclear program directors have met with their Soviet, now Russian and Ukrainian, counterparts under the sponsorship of FAS and NRDC. As a consequence of the end of the Cold War the composition of both U.S. and Russian participation has changed, with more and higher level representatives from governmental entities playing active roles.

For the first time since the inception of the FAS project in 1987, Frank von Hippel, now in the White House Office of Science and Technology Policy, represented the U.S. government. Richard Garwin, FAS Fund Chairman and noted scientist and inventor, assumed direction of the project in September 1993.
-Dorothy Preslar

GARWIN REPORTS ON MEETING

Indeed, although a nominal 40 kg of HEU from one of them has an agreed value of some $1 million, a few such quantities would probably bring one hundred or more times that amount on the black market. There is no agreement on the value of weapons grade plutonium. In the U.S., plutonium for use in reactors of current type has a negative value: the plutonium would require a greater expenditure to turn it into nuclear fuel than is required for the purchase of conventional uranium fuel. Many of the Russians at the December workshop persist, however, in making the evident error of valuing plutonium at the cost of production, which is said to be at least six times the cost of HEU-hence the terms "blood plutonium" or the "national patrimony."

The working relationship created in the five pervious workshops and extended by this latest one, provides a basis for understanding the Russian positions and for affecting both U.S. and Russian policy. In particular, the question of incentives at all levels, including that of MINATOM to retain control of potentially valuable materials and to receive collaboration and investment of value from the U.S., must be understood in the context of the overall national benefit to Russia and potential benefit to specific organizations and individuals, to the structural reform, and to the future of nuclear energy and an improved environment in Russia and the other former Soviet republics.
-Richard L. Garwin