Foreign corporations that sold weapons worth more than $10 million (about 14 billion won) to Korea have been found not to properly carry out offset trade, in which they transfer technology to domestic companies or purchase parts from them. Some corporations delayed fulfilling their offset trade obligations for three years before completing them belatedly. In the defense industry, there are criticisms that tug-of-war over technology transfer between domestic and foreign corporations repeats, and that the scale of offset trade should be reduced. Reducing offset trade could also lower the purchase price of weapons.
On the 21st, data on offset trade performance for the past five years submitted to Rep. Yoo Yong-won of the People Power Party by the Defense Acquisition Program Administration (DAPA) show that of a total of 28 cases, five were completed past their deadlines.
British Rolls-Royce in 2020 agreed to supply gas turbine engines worth $109.2 million (about 152.2 billion won) when it participated in South Korea's Ulsan-class Batch II escort ship project. At the time it agreed to fulfill offset trade worth $11.6 million (about 16.2 billion won) by Nov. 2022, but it completed it only in July of this year.
In 2023, U.S. L3Harris, which participated in South Korea's second ground laser target designator project ($35.8 million), agreed with Korea to fulfill $17.9 million in offset trade by Dec. 2024 but performed it only in April of this year. In 2023, Germany's DRM also sold AIM-9L/1-1 missiles domestically and agreed to fulfill $6.6 million in offset trade by July of this year, but it completed it past the deadline. U.S. L3 and British AEUK also missed deadlines and are currently reported to have fulfilled more than 90%.
Normally when offset trade performance is delayed, the corporation is penalized. A corporation that misses the deadline signs a memorandum of agreement (MOA) with DAPA to extend performance by one year. At that time, 50% of the original offset trade amount is added as a penalty. If a corporation agreed to perform 1 million won in offset trade but missed the deadline, the amount it must perform becomes 1.5 million won. If it remains difficult to perform despite several extensions, it must repay 50% of the offset trade amount imposed so far in cash.
Offset trade can also stall because foreign governments are reluctant to have their domestic corporations transfer technology. In the past, the United States did not approve technology transfer under offset trade. In such cases, it is difficult to select technical items to request from the selling country, and foreign corporations also find it hard to locate parts worth purchasing domestically. An industry official said, "Because it may not be easy to fulfill offset trade, some overseas corporations say 'paying the fine is cheaper.'"
Some argue that the scale of offset trade should be reduced because it can raise the price of weapon purchases. A defense industry official said, "Because offset trade increases both project duration and acquisition cost, we should consider reducing its scale." Offset trade is an international practice that automatically becomes mandatory when the contract amount exceeds $10 million.
On the other hand, there are voices that the scale should be maintained for the sake of small and medium enterprises, since Korea's defense industry has developed through technology transfer via offset trade.