Korea's leading defense exporters such as Daewoo Shipbuilding & Marine Engineering (DSME), Hanwha Land Systems and Korea Aerospace Industries (KAI) have hit a snag due to the wall of "offset trade," seeing their export blocked. Offset trade, a common practice in international arms deals, means that a nation which sells a weapon offer benefits such as technology transfers or orders for parts in return to the other nation which buys the weapon. It is pointed out that even though offset trade necessarily requires strong cooperation among many government ministries such as the Ministry of National Defense and Ministry, the Defense Acquisition Program Administration (DAPA) and the Ministry of Trade, Industry and Energy, there is no control tower for that matter, giving damage to Korean defense companies only.
According to the Korean defense industry, DSME has become highly likely to suffer loss as the company failed to comply with its trade agreement on the export of a military supply ship worth 250 billion won (US$225 million), which is scheduled to be delivered in February of next year. DSME accepted a condition that the company will implement offset trade when it received the order from the Norwegian Navy in 2013.
However, the DAPA did not cooperate, stamping out the offset trade. Norway, for the sake of trade, initially demanded that Korea purchase its guided missile from Kongsberg Defense & Aerospace, a Norwegian arms contractor. But the DAPA turned it down and did not go further in negotiations with the Norwegian defense company.
This incident backfired and unexpectedly hit Hanwha Land Systems. Hanwha Land Systems trying to export its K9 Self-Propelled Gun to Norway has been having such a hard time to persuade Norway which says, “We cannot trust Korean defense companies anymore.” Although K9 gun export was nearly concluded, Norwegian Parliament rejected the import of K9, citing the example of DSME, bringing the negotiation to a standstill.
KAI was about to land an order for 12 domestic advanced trainers (T-50) worth 500 billion won from the Argentine Air Force earlier this year but the contract has been postponed for one year. Argentina had requested guarantees and financial support from the Korean government but there were no Korean ministries that actively responded. When KAI exports a basic trainer (KT-1) to Turkey in 2012 and Peru in 2014, the Korean government did not even lift a finger to respond to demands for offset trade from the two countries so KAI had to address the matter with its own funds.
Experts pointed out that if Korean companies abandon offset trade common in international defense export, Korean defense companies will lose ground on the international stage. "Buyers of South Korean weapons are mostly emerging countries in Southeast Asia, the Middle East and South America and all of them demand offset trade,” said Ahn Jung-soo, a senior research fellow at the Korea Institute of Industrial Economics and Trade. “High barriers among government ministries are hampering the Korean government’s meeting such demands. In 2014, the only year when Korea’s offset trade statistics were made public, only 0.03% (210 billion won or US$189 million) of Korea’s total exports (626.3 trillion won or US$563 billion) were based on offset trade. Overseas orders to the Korean defense industry have been steadily dropping since they hit US$3.6 billion in 2014.
The Korean defense industry points out that Korea is devoid of a control tower which can meet various demands from arms purchasing countries such as offset trade, guarantees and finance. It is also a hindrance Korea’s arms export for Korean government officials to hesitate to make decisions due to concerns over preferential treatment controversy. The DAPA which has been suffering from the prosecution’s investigations and audits by the Board of Audit and Inspection due to arms procurement and acquisition-related corruption is showing a lukewarm attitude in order not to take legal responsibility in offset trade, too.