Second-Best Markets: On the Hidden Efficiency of Defense Offsets
44 Public Contract Law Journal 369 (2015)
48 Pages Posted: 1 May 2015 Last revised: 8 Jun 2015
Date Written: September 13, 2014
Offsets are a form of countertrade associated with the defense industry. It has been the United States’ position since 1990 that they are “economically inefficient and trade distorting.” Free traders are rallying for a ban on these grounds. Data are scarce, but anecdotal evidence suggests that defense offsets rarely serve the purposes for which they are demanded. Yet some economists argue that offsets may be a rational or private-ordered response to imperfect markets; in a second-best world, offsets may indeed create efficiencies and facilitate trade. This paper would propose gathering better data, abolishing mandatory offsets, and broadening the aperture of policy analysis beyond mere efficiency. Meanwhile, the move to ban defense offsets, at least on narrow grounds of efficiency alone, should be put on hold until more information is available for better decision making.
Keywords: Defense Offsets, Government Procurement
Suggested Citation: Suggested Citation