Industrial Research Institute: "To Become a Top 4 Defense Exporting Nation, the Status of Offset Trade Must Be Reestablished"

A report has been released stating that the reestablishment of the status of K-defense offset trade (hereinafter offset trade) is necessary for South Korea to enter the ranks of the world’s top four global defense export powers. Offset trade refers to a type of trade in which the purchasing country demands countermeasures such as technology transfer or reverse export of parts from the selling country (or seller) as a prerequisite for purchasing weapons.

[Image source=Yonhap News]

On the 7th, the Korea Institute for Industrial Economics and Trade (KIET) revealed in its report titled “Development Tasks for Entering the World’s Top Four Global Defense Export Powers” that South Korea’s recent defense industry offset trade has been on a sharp decline. While the government is actively supporting countermeasure demands from major weapon purchasing countries, including Poland, the promotion of offset trade for large-scale weapon procurement projects such as the U.S. F-35 fighter jet second phase project (4 trillion won) is significantly low.

Over the past 40 years (1983?2022), South Korea has achieved approximately $23.2 billion in offset trade performance. However, since the late 2010s, offset trade performance has drastically decreased. In the recent five years (2016?20), the scale was only about $800 million, a sharp drop to about 10% compared to $7.99 billion in the previous five years (2011?15).

The offset trade system, utilized by more than 130 countries worldwide as a prerequisite for weapon purchases, is increasingly important as a major channel for advanced technology transfer, parts export, local production, and securing maintenance capabilities. In particular, model countries for offset trade such as T?rkiye, the Netherlands, Norway, Taiwan, and the UAE have achieved significant results in strengthening their domestic defense industry capabilities, creating jobs, joint development and production, and SME exports through active promotion of offset trade in U.S. Foreign Military Sales (FMS) projects. This contrasts sharply with South Korea’s recent poor offset trade performance.

The main factors behind South Korea’s offset trade slump include ongoing controversies over the abolition of the offset trade “obligation” clause since the 2018 Board of Audit and Inspection audit, the lack of establishment of a “pre-value accumulation” system (a system that pre-fulfills offset trade obligations for purchasing countries) which is already common in major countries, the absence of an integrated inter-ministerial offset trade negotiation plan considering national interests, and continued debates within the responsible ministry about the necessity of offset trade between departments.

In the report, KIET emphasized that for South Korea to enter the “top four global defense export powers” by 2027, it is necessary to actively promote offset trade for U.S. FMS projects to the level of major countries, as this is one of the fundamental causes of the sharp decline in offset trade performance. Researcher Jang Won-jun stated, “The status of K-defense offset trade, a major channel for global defense exports, must be reestablished,” and added, “Along with maintaining the ‘obligation’ clause for offset trade demands, which are the basic rights of weapon purchasing countries, offset trade for U.S. FMS weapon procurement projects, one of the fundamental causes of the recent sharp decline in offset trade performance, must be actively promoted.”

He particularly argued that “the difficulties in promoting offset trade for large-scale FMS and non-competitive projects should be resolved by preparing an integrated inter-ministerial offset trade negotiation plan and fully switching to a pre-value accumulation system.” He also added, “Efforts should be concentrated on strengthening offset trade organizations, expanding professional personnel, and attracting overseas defense companies linked to major local government defense innovation cluster projects.”

This content was produced with the assistance of AI translation services.