Offset agreements require foreign suppliers to purchase goods from the country awarding the contract. Direct offset agreements involve using raw materials related to the product, while indirect agreements involve purchasing other products. These agreements compensate for wealth leaving the country and can support developing economies.
An offset agreement is a stipulation between a foreign supplier and a company that obliges the supplier to purchase a certain quantity of goods from that country in exchange for a contract. These deals can be direct or indirect, depending on the raw materials the country may have. These agreements are often necessary 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 that the company supplies. For example, if Boeing, an American aircraft company, is awarded a contract from France, the company can agree to use French steel to produce the aircraft. The fact that steel is used to make the product that is returning to the country makes the deal straightforward.
An indirect offset arrangement is one in which the company agrees to purchase a certain amount of product from the foreign country that may not be directly related to the product being manufactured. Often, since companies don’t need certain products from the foreign nation, they can make deals with other companies. For example, Boeing might not need the kind of steel made in France, but a fast food company might use beef made in France. Boeing could make a deal with that fast food company to buy French beef. Often, something else can be offered to lure the fast food company into the contract, such as exclusive rights to serve that company’s food in the Boeing cafeteria.
An offset agreement is often required when foreign nations contract with a large industry, such as a large manufacturer. Due to the fact that these agreements often see a significant amount of wealth leave the country, foreign countries would like something else in return, in addition to the products received. Therefore, a compensation agreement is negotiated.
In addition to helping the country get a return on its investment, offset agreements can be used to support growing economies. In some cases, an agreement, or series thereof, can help an industry within a developing country get the foundation it needs to be successful. These companies can help improve the quality of life for the whole country by spreading wealth around and spawning spin-off industries. In such situations, an offset agreement can become an invaluable tool for economic development.
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