[Yang Nak-gyu's Defence Club] Offset Trade Benefits Decreased During Weapon Procurement

Only 1 Trillion Won in Offset Trade Value Acquired Over the Past 5 Years... About 10% Compared to the Previous 5 Years
DAPA Faces Challenges in Technology Selection and Value Negotiation, "No Offset Trade for Additional FX Procurement"

The value of offset trade conducted when importing overseas weapons has sharply declined over the past five years. Offset trade refers to reciprocal trade demands such as technology transfer when purchasing weapons from the selling country.

Various fighter jets, including the F-35A, are on display at 'Seoul ADEX 2021' held at Seoul Airport in Seongnam, Gyeonggi Province on the 19th.
Seongnam - Photo by Kang Jin-hyung aymsdream@

According to the report "Recent Trends and Development Tasks of K-Defense Offset Trade" published by the Korea Institute for Industrial Economics and Trade on the 7th, the total value of weapons imported by South Korea from overseas over the recent five years (2016?2020) reached 13.6 trillion won, but the value obtained through offset trade was only about 1 trillion won. This accounts for about 7% of the total weapons import value. Considering that the offset trade value in the previous five years (2011?2015) was 10.4509 trillion won, it has decreased to about 10% of that level.

The Korea Institute for Industrial Economics and Trade stated, "130 countries worldwide secure defense capabilities through offset trade," and argued, "To enter the ranks of the top four global defense exporters, offset trade should also be conducted in projects such as the U.S. FMS (Foreign Military Sales) program."

However, the Defense Acquisition Program Administration (DAPA) has taken the position of further reducing offset trade. Article 20 of the Defense Acquisition Program Act was amended to state that "offset trade may not be pursued if it harms national security or efficiency."

Offset trade will not be conducted starting with the additional procurement project of the F-35A stealth fighter jets. On March, Eom Dong-hwan, the head of DAPA, appeared at the National Assembly’s National Defense Committee plenary session and responded to related inquiries from Assemblyman Seol Hoon of the Democratic Party of Korea, saying, "Considering the characteristics of the ‘F-X Phase 2’ project and precedents of offset trade with the manufacturer (Lockheed Martin), the practical benefits are not significant." The purchase cost for 20 F-35A units is about 3.75 trillion won, and offset trade worth about 1.2 trillion won, corresponding to 30% of that amount, could be requested from the U.S. side.

DAPA’s stance against conducting offset trade is based on the difficulty of selecting technology items to demand from the selling country and the differences in technology evaluation values, which only delay the overall project schedule.

In fact, the implementation rate of offset trade is low. The Air Force introduced four A330 MRTT aerial refueling aircraft starting from November 2018 through the KC-X aerial refueling project. Airbus, which supplied the aerial refueling aircraft at that time, agreed to provide offset trade worth $662.6 million (technology transfer $84.3 million, SME exports $536.3 million, military support $6.3 million) to South Korea. However, last year, the technology transfer implementation rate was 92.6%, SME exports were only 10%, and military support was just 1%. Airbus is required to fulfill offset trade by 2024, but the industry believes 100% fulfillment is practically impossible.

The same applies to the U.S. defense company Lockheed Martin. The South Korean Air Force invested about 7.77 trillion won in budget and introduced a total of 40 F-35A units starting with the first unit in March 2018. Through this contract, Lockheed Martin agreed to provide offset trade including military communication satellites ($2.1 billion), KF-X technology transfer ($1.4 billion), and SME exports ($300 million) to South Korea. However, Lockheed Martin is reported to have refused to transfer four core technologies including radar. Last year, the SME export implementation rate was only 23.4%. Although the Ministry of SMEs and Startups recommended 246 items from 73 domestic SMEs to Lockheed Martin, actual purchases were limited to 30 items from 12 companies.

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