المشاركة الاقتصادية

Economic Offset

Economic offsets have become crucial to financial development globally and have evolved from an outmoded trading system to a strategic and normalized trade mechanism. Leading economies characterized the emergence of economic offsets in the 1980s to finance trade incomes and turnovers with developing economies. This evolved to profit-sharing ventures through developing infrastructural and industrial projects by developed countries in exchange for or by utilizing local resources and capital in developing countries in the 2000s.^[1]

Monetary and financial institutions worldwide, like International Monetary Fund (IMF), World Bank, and World Trade Organization (WTO), have highlighted the importance of adopting policy measures that reduce the risk of global recession and curb inflation.^[2] With greater financial uncertainties, associated risks, and volatility in the global market, economic offsets, countertrade, and industrial participation agreements can be prime key mechanisms in curbing global inflation and recession risks. These offsets deliberately improve the trade imbalance in terms of developmental needs, trade surplus goods, establish promising future markets, save the foreign exchange reserves, resolve the balance of payment problems, improve international relations, and overcome international sanctions.^[3]

The terms of a countertrade agreement can include various forms of local content requirements, such as subcontracting to local companies, establishing joint ventures, or investing in local research and development.^[4] They maximize value-proposition in volatile financial markets. This form of trade boosts productivity and generates income by employing local content, in terms of resources and people, to improve the capital and growth avenues^[5], resulting in extensive economic development via infrastructure or the creation of economic entities that create more employment opportunities and transfer technology and knowledge skills, uplifting local communities.^[6] With 60% of low-income countries under global debt and at risk for default as per IMF, countertrade and industrial participation agreements can lead to a sustainable and viable solution in form of infrastructural and technological innovation, followed by sustainable financial and economic development.^[7] The offset trade has shown promise in its execution, reaping countless successful results internationally. In 2019, the International Offset Corporation (IOC), with an extensive portfolio of designing and implementing advanced economic offsets for developing countries, crossed the $1 billion credit retirement mark, onset for further successes post-2020.^[8]

Globally, many countries resort to offset trading mechanisms to improve the trade imbalance between two economies. As seen in the case of India and Malaysia, the countries indulged in bidding Malaysian palm oil for Indian military equipment and commodities like rice and sugar. With 60% of imports of edible oil consumption in India, palm oil comprises 60%. To combat the food security problem for India’s domestic edible oil consumption, the additional import of Malaysian Palm oil will be catered via exporting Indian military equipment as the vital countertrade component, projecting successful bilateral relations between the countries.^[9]

Similarly, Turkey has emphasized the training and transferring of knowledge and technology skills through offset trade policies by focusing on military capability building by being a high-priority defense equipment purchaser from Western firms. The partnership of Sikorsky Aircraft, an American aircraft manufacturer, with Turkey is an example. A US$3.5 billion contract was signed to supply 109 S-70 Black Hawk military utility helicopters to Turkey, built with local specifications and modifications as the T-70 by state-owned Turkish Aerospace Industries (TAI) under the license of Sikorsky Aviation. Sikorsky Aviation augmented its global supply chain by adding Turkey. It expanded Alp Aviation, a joint venture with Turkey’s Alpata Group, dynamic components manufacturing facility, while providing training and maintenance of over $1 billion to TAI for 10 years.^[10]

The modern-day exchange of arms and military equipment trade, as in the case of Turkey, involves certain offset agreements that reduce risks and costs and transfer knowledge and technology, avoiding the imbalance of economies for the parties involved. The bilateral nature of these contracts ensures long-term commitment that benefits both economies in the partnership. The U.S. military firms reported 651 offset transactions with 26 countries at US$5 billion and offset credit value of US$5.3 billion in 2016.^[11] As an exporter of defense and military equipment, the U.S. Department of Defense sustained technological expertise, and defense equipment production facilities, contributing positively to the economy and geo-political positioning with its allies.

Economies frequently indulge in non-military trade agreements. In 2018, the Abu Dhabi National Oil Company (ADNOC) signed a countertrade agreement with Italy’s Eni to trade crude oil for technology and expertise in the energy sector. Under the agreement, Eni will provide ADNOC with advanced technology and expertise to help increase production capacity and improve efficiency.^[12]In 2021, Iran and Sri Lanka entered a barter trade agreement to avoid the risk of sanctions, exporting tea as a commodity. This will help Sri Lanka settle $251 million oil imports debts with Iran.^[13]

The Gulf States have prominently evolved their economic turnovers through significant economic offsets. Egypt has benefited economically by employing this model for its foreign trade initiatives. Through this model, it has promoted exports of commodities such as Egyptian cotton, recessed the negative effects on producer and consumer demand, and maintained the value of the Egyptian pound by improving the balance of trade and payment problems.^[14]Kuwait, the third-largest economy in the Gulf Cooperation Council (GCC) after Saudi Arabia and the UAE, deliberately initiated the globalization of several parts of its economy in 2013. A new Foreign Direct Investment (FDI) and a Commercial Companies regulation were among the pieces of legislation enacted in 2013 to remove impediments to trade offsets and business ventures in Kuwait, creating a one-stop-shop solution to assist businesses in establishing operations there.^[15]

Saudi Arabia holds the biggest consumer market in the Gulf Cooperation Council (GCC), transforming the trade and business investments landscape. The pronounced potential of trade investments in Saudi Arabia stems from the government strategy and flexibility of the legislative framework. As per the vision of Saudi Arabia’s National Investment Strategy (NIS) in 2021, the country will aim to introduce new investment opportunities for foreign economies making Saudi Arabia a global investment hub.^[16] Saudi Arabia has diversified economic development areas through its demographic expansion, and gross domestic product (GDP) increases. In alignment with Vision 20230, it has strategically targeted the macroeconomic avenues by increasing the share of foreign direct investment from 3.8% to 5.7%, the contribution of the private sector by 65%, and non-oil exports to 50% in the GDP.^[17]Increasing openness to trade options results in a trade-led growth strategy, defining sustainable access to foreign markets, eliminating trade barriers, efficiently transferring knowledge and skills in the local content, and efficiently allocating resources.^[18]The government’s focus on initiatives such as National Transformation Program^[19] (NTP), a detailed plan to implement the goals of Vision 2030 with specific targets and initiatives in various sectors, such as education, healthcare, housing, and infrastructure; Privatization^[20] to sell state-owned assets and attract private investment in various sectors, such as energy, transportation, and healthcare; Special Economic Zones^[21] (SEZs) offering incentives, streamlined regulations, and other benefits established to attract foreign investment and promote economic development in specific regions.

China, the world’s biggest energy consumer, majorly partners with Saudi Arabia, expanding the region’s technological and infrastructural avenues through bilateral ties that are predominantly strengthened by energy trade.^[22] 18% of China’s crude oil supply is from the Kingdom of Saudi Arabia, and KSA’s Aramco has annual supply deals with Chinese refiners. As part of Vision 2030 to build and employ local content, goods and services, core assets, Intellectual Property (IP), and technology, mega manufacturing, and technological projects in KSA have presented major opportunities for Chinese firms to invest in the economy as a major stakeholder.^[23]

Saudi Arabia’s Industrial Participation Policy^[24] (IPP), governing activities and practices for Military Industries in Saudi Arabia, and published by the General Authority for Military Industries (GAMI), aims to utilize existing local capabilities, develop strong technological capabilities in the country through research and technology, establish and strengthen local supply chain to develop Military and Security Entities, and develop human capital capability. IPP is the key component that guides the contractual process of defense and military agreements for business entities with GAMI in Saudi Arabia. Economic Participation Policy (EPP), managed by the Local Content & Government Procurement Authority (LCGPA)^[25], guides the practices through which investments, of non-military nature, aim to improve the local content capabilities by utilizing procurement through localization of services, derive sustainability of businesses in Saudi Arabia, alleviate the global competitiveness of local companies, and strengthen human capital capabilities. Economic Participation puts focus on the sustainability of the business in the long term, the profitability of the business, and the establishment of new or expansion of existing facilities in the country.

Both policies facilitate business agreements that seek to promote local content, transfer technology and training capabilities, enhance employment opportunities, and improve the sustainability of different business ventures in Saudi Arabia to foster economic growth. Together, these policies aim to create a more diversified and sustainable economy in line with Vision 2030^[26].

The terms of the offset agreements must be aligned with GAMI, LCGPA, and the Vision 2030 goals by prioritizing partnerships with companies committed to investing in Saudi Arabia, encouraging the transfer of technology and knowledge from foreign companies to local Saudi partners through training programs and other initiatives, ensuring transparency in the implementation of agreements, and investing in infrastructure and human capital development.