As the Donald Trump administration in the United States criticized South Korea's trade barriers regarding offset trading, there are concerns in the defense industry that medium and small enterprises could be impacted if offset trading is eliminated.
The United States Trade Representative (USTR) noted on Jan. 31 that the South Korean government has been pursuing a policy that prioritizes South Korean technology and products through offset trading in the defense sector. Offset trading refers to the practice of requiring the contracting party to provide technology transfer or to purchase domestic products in return for the purchase of large-scale weapons or military supplies from abroad.
The Defense Acquisition Act stipulates that offset trading should be promoted for military supplies purchased for $10 million (approximately 14.7 billion won) or more. According to the regulations, the offset ratio must be at least 50% of the base contract amount when competitive conditions are established, and at least 30% when competitive conditions are not established. Under this regulation, South Korean officials must request technology transfer or domestic product purchases from the foreign country when purchasing weapons, and the USTR has viewed this as a trade barrier.
After purchasing American weapons, the remaining scale of offsets that South Korea must fulfill is approximately $5.8 billion (8.54 trillion won). The United States must purchase South Korean products to match this amount.
There are projections that medium and small enterprises supplying components or engaging in technology transfer production will be negatively impacted if offset trading is abolished. Technology transfer production refers to the domestic production of products from foreign defense companies. Currently, a domestic company plans to import American drones, but if offset trading is abolished, technology transfer production may be hindered. The Defense Acquisition Program Administration held an event on Jan. 11 to inform Lockheed Martin about available items for purchase under offset trading, with over 100 small and medium enterprises participating and showcasing drones and semiconductor sensors.
An industry insider said, "If offset trading disappears, there will be no opportunity to introduce products from small and medium enterprises," adding that "it will be a significant blow to companies that gained export opportunities through offset trading."
Korea Aerospace Industries (KAI) also supplied the forward fuselage and wings of the F-15K produced by Boeing in the United States in 2005. This was part of the offset trading arranged when the South Korean government purchased Boeing's F-15. Hyundai's first export of the Pony was also thanks to offset trading. Korea requested offset trading when it purchased air traffic control radar from Canada in 1984, leading Canada to buy 1,000 Hyundai Pony-2s.
There are also opinions suggesting that if the United States demands the elimination of offset trading, South Korea should consider introducing European weapons. An insider from a defense company noted, "South Korea is a major customer of American weapons systems, and if European countries offer larger scale offset trading, it could be beneficial."
There are also analyses suggesting that the elimination of offset trading could lower the prices of American weapons, potentially reducing the demand for domestic weapons systems. A military official commented, "(If offset trading is abolished), it could have a negative impact on the defense industry." The Defense Acquisition Program Administration plans to continue discussions on offset trading in the process of establishing mutual defense procurement agreements with the U.S. government in the future.