Report Result
South Korea needs to strengthen its import-export trade with the United States through the Foreign Military Sales (FMS) program in order to become one of the top four global defense export powers, according to a Korea Institute of Industrial Economics and Trade (KIET) report titled “Recent Trends and Development Tasks of K-Defense Trade for Entering the Top Four Global Defense Export Powers” released on Aug. 7.
Import offset trade is a trade in which an arms purchasing country demands benefits in return such as technology transfers or the reverse export of parts from a selling country or vendors as a prerequisite for purchasing arms. The report said that in recent years the South Korean government has been actively responding to giving benefits in return such as export finance support for major South Korean arms buyers, including Poland.
On the other hand, the report pointed out that when it comes to South Korea’s large-scale arms purchases from major countries such as the second batch of F-35 fighter jets from the United States, South Korea does not promote offset trades, which is a basic right of a purchasing country.
“In order for South Korea to become one of the top four global defense exporters by 2027, it is necessary to promote offset trade with the U.S. FMS project, which is one of the root causes of a recent steep decline in offset trades like major countries,” the report asserted.
From 1983 to 2022, South Korea enjoyed about US$23.2 billion in offset trades. This included technology acquisition (US$10.67 billion), parts manufacturing and export (US$7.14 billion), and equipment acquisition (US$5.36 billion) for the development of South Korea’s weapons systems.
However, since the late 2010s, the value that South Korea obtained through offset trades has been on a sharp decline. In 2016-2020, it stood at only about US$800 million, about 10 percent of the US$7.79 billion won during the 2011-2015 period.
The report cited a controversy over the abolition of an offset obligation clause, which has been ongoing since a 2018 audit by the Board of Audit and Inspection, as one of the main reasons for the decline in South Korea’s offset trades. The Defense Acquisition Program Administration (DAPA) of South Korea is promoting an amendment to the Defense Acquisition Program Act, including a provision about the abolition of a mandatory provision in promoting offset trades in accordance with the results of the DAPA’s offset trade audit.
In this regard, some South Korean defense contractors and experts criticized the move, saying, “Changing an offset obligation clause, which is a basic premise for promoting offset trades into an optional one, goes against the trend of major countries’ revitalization of offset trades and gives up the future value of South Korea’s offset trades, which is not in line with the national interest.”
The report pointed out that the point is that South Korea does not promote offset trades in reference to the U.S. FMS arms purchase project, which has accounted for more than 70 percent of South Korea’s arms purchases since 2016.
“While maintaining an obligatory provision on demand for offset trades, which are a basic right of arms purchasing countries, South Korea should actively promote offset trades with regard to the US FMS arms purchase project, which is one of the root causes of a recent sharp decline in South Korea’s offset trades,” said Jang Won-jun, a research fellow at KIET.