Taiwan’s Purchases of U.S. Defense Equipment and the Impact of Offset Agreements

Abstract

The government of Taiwan has an obligation to provide security from international threats. The credibility of security deterrence relies on the acquisition of modern defense equipment. Taiwan does not possess the resources and capital to support an industry capable of producing modern multi-domain (air, land, sea, space) defense equipment. It relies heavily on equipment from the United States. To limit the drain of foreign currency reserves, promote domestic employment, and increase technical knowledge, Taiwan requires offset programs to accompany significant purchases of foreign defense equipment. For Taiwan, offsets are an opportunity to develop the local economy despite the sunk cost of maintaining national security. However, economists mainly argue that offset programs have negative economic impacts. This study examines offset theory to determine a set of characteristics that allow offsets to have a positive economic impact. It looks at Taiwan’s current socio-economic data and offset program specifics to assess how efficiently the country is able to incorporate the agreements into a strategy for economic development. In addition to documentary sources, this research is based on interviews with former U.S. defense industry executives, Taiwan policy experts, and relevant government personnel of both Taiwan and the United States. Ultimately, in the case of Taiwan, I disagree with the overall negative perception presented by the literature. I demonstrate that many of the pre-requisites described in the literature which impact the efficiency of offsets are visible in Taiwan, and from a strict economic perspective the island nation is relatively well-situated to convert offset programs into long-term economic development. Furthermore, there are several non-quantifiable characteristics Taiwan possesses that the literature fails to recognize in its assessment of the benefits of defense procurement offsets. Taking these factors together (and with a few prescriptive comments), I argue that offsets are a net benefit to Taiwan.