The dynamics of the international arms trade system are significantly influenced by the practice of defence offsetting. Defence offset is a form of countertrade whereby states maximise on defence expenditure by requesting foreign suppliers to undertake industrial and commercial transactions in the domestic economy as a condition to award a procurement contract. Offset enables the demand side to deliberately distort trade patterns and generate economic activity for local industry. Defence offset is therefore widely employed by governments in both developed and developing countries as a policy instrument to achieve technological and industrial development in sectors deemed of strategic importance. This paper conceptualises offset in the context of the contemporary international trade system and develops a comprehensive explanatory “second-best” model to conceptualise the rationale behind the use of offset in defence trade.
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