Korea baffled by US listing of defense offsets as trade barrier

F-35A and KF-16 squadrons of the Republic of Korea Air Force conduct flight training in an undisclosed location in the southern area of the no-fly zone between the two Koreas, May 27, 2024. Courtesy of Joint Chiefs of Staff

Officials in Seoul seem perplexed by the U.S. government's inclusion of Korea's offset trade program in the defense sector in its report on foreign trade barriers, released just two days before the Donald Trump administration is set to impose reciprocal tariffs.

This marks the first time the U.S. Trade Representative (USTR) has included Korea’s defense offset policy in its annual National Trade Estimate Report on foreign trade barriers. Defense offsets are agreements in the defense sector whereby the selling country provides benefits, such as technology or export deals, to the purchasing nation. The report identifies obstacles faced by U.S. exporters in the global market.

"The Korean and U.S. governments are closely cooperating through discussions based on a reciprocal defense procurement agreement aimed at easing barriers in defense acquisition," Cho Yong-jin, spokesperson for the Defense Acquisition Program Administration, said during a briefing Tuesday. "We believe further analysis is needed to fully understand the U.S. position."

The comment came in response to the USTR report on Monday (local time), which said, "The Korean government has pursued policies that prioritize local technology and products over foreign defense technology through its defense offset program. An offset obligation may arise for a foreign contractor if the value of the defense contract exceeds $10 million."

Several procurement projects are currently designated as offset trade program, including the second batch of the E-7 Airborne Early Warning and Control program, upgrades for the F-35A and F-15K fighter jets.

Cho also explained that, through the offset policy, Korea developed the T-50 trainer jet based on technology acquired during the introduction of the KF-16 fighter jet, and has also exported aircraft fuselage components to the U.S.

U.S. President Donald Trump speaks during an executive order signing in the Oval Office of the White House in Washington, Monday (local time). UPI-Yonhap

While the USTR report could provide a hint at what the Trump administration believes are trade barriers just before the reciprocal tariff scheme, the lack of specific cases in the report has led to questions about the reasoning behind the offset program's inclusion.

When asked if the latest USTR report could negatively impact Korea in acquiring U.S. weapons systems, Cho replied, "We believe necessary discussions will take place within the broader negotiation framework."

However, local defense industry insiders view this could be a potential warning sign that the Trump administration may be seeking to gain the upper hand in future defense contracts with Seoul, especially as it eyes a potential collaboration on Korean warships.

"The offset trade program is a long-standing practice not just between Korea and the U.S., but among many other countries. It’s unclear what the U.S. wants to do about it, but if it seeks to use it as leverage in future negotiations, it could deal a blow to the two nations' arms cooperation," a defense industry official said on condition of anonymity.

Some have pointed out that the listing is somewhat unexpected, given that Korea’s offset policy, which ranges from 30 percent to 50 percent of the total contract value, is not considered excessive in the industry, and thus there is little reason for the U.S. to view it as unfair.