Trends in Korean Defense Offsets and Policy Implications: Toward Making Korea One of the Four Largest Defense Exporters

The South Korean government has been more willing as of late to accommodate demands for export financing and other support from Poland and other major buyers of Korean defense products. But it has at the same time avoided pursuing similar offsets in large import deals with the United States and other countries, for example in the second phase of the F-35 fighter jets acquisition program, despite being well within its rights to maximize its position in such deals. Over the five years from 2016 to 2020, South Korea managed to win nearly USD 800 million in offsets against defense contracts, or about 10 percent of what the country used to reap from 2011 to 2015. Reasons for this rapid decline include domestic conflict over whether or not to abolish the legal offset requirement following a 2018 audit by the Board of Audit and Inspection, a reluctance to request offsets against large-scale foreign military sales (FMS) contracts with the US, the absence of a well-established offset banking policy compared to other countries, the lack of a consistent and comprehensive strategy applicable across the government and the military that prioritizes the national interest, and ongoing interdepartmental disputes and infighting regarding the necessity of offsets. Turkiyë, the Netherlands, Norway, Taiwan, and the United Arab Emirates (UAE) actively pursue offsets against weapons deals, including in their FMS contracts with the United States, and have achieved successes in enhancing the capabilities of their own defense industries, creating jobs and supporting the growth of their own R&D, production, and small and medium enterprises (SMEs) exports. For Korea to achieve its vision of becoming one of the four largest global defense exporters, the Korean government needs to reinforce the status and importance of offsets. Korean lawmakers should ensure that the legal requirement stays in place and actively encourage offsets against FMS contracts with the United States. Moreover, the government needs to tackle resolve existing difficulties in seeking offsets against large-scale FMS and non-competitive contracts by establishing a comprehensive, pan-government offset negotiation strategy and also by adopting an offset banking scheme. Finally, the organization in charge of handling the offset program must be expanded, and the government should redouble efforts to host divisions of leading foreign defense contractors at local governments’ defense innovation clusters domestically.