Defence Offset in the New Industrial Strategy Era: Balancing National Interest with Global Supply Chains?

On 23 October 2025 the Minister for Defence Readiness and Industry, Luke Pollard MP, launched a 12-week consultation into a new “Back British” offset approach in UK defence procurement, a proposal first set out in the Defence Industrial Strategy earlier this year. Marking a significant shift in how the UK approaches defence procurement, the announcement states “The Government is launching a significant consultation with industry on a ‘Back British’ offset approach to ensure that defence import contracts benefit British businesses, jobs and skills.  The proposals mean that when the UK buys from international partners, the winning contractor would be required to create jobs, know-how and investment opportunities here in the UK – strengthening the UK economy.”

As global tensions rise and defence budgets expand, a challenge lies in balancing national industrial interests while cutting-edge defence capabilities increasingly depend on international partnerships and expertise. This tension creates a fundamental policy dilemma in defence procurement: whilst accessing the best available capabilities often requires engaging foreign suppliers, substantial payments to overseas companies can result in significant value extraction from the UK economy and industry. 

The UK Ministry of Defence (MoD)'s consideration of offset requirements represents an attempt to ensure foreign suppliers provide compensatory value to the UK economy. But is offsetting a pivotal tool to realise the UK Government’s desire to ensure defence spending is an “engine for growth”? 

This article explores the benefits and challenges of offset looking at the varying approaches in some different countries alongside the relative benefits and pitfalls, particularly from a legal and commercial perspective. It considers how the industry might respond to the consultation inviting views on how different organisations will formulate their responses. 

What is offset?

Defence offsetting (sometimes call “industrial participation”) refers to requirements imposed on a foreign defence contractor to provide compensation (in the form of specific economic or industrial benefits) in return for securing major defence contracts. The offset is distinct from its supply contract obligations and is often split into two categories:

Direct Offsets: Activities directly related to the defence product being purchased, such as local manufacturing, assembly, or maintenance. 

Indirect Offsets: Economic activities unrelated to the defence product itself, such as investment in civilian industries, technology transfer, or training programs.

The Defence Industrial Strategy and the consultation invitation makes clear that the focus of any offset policy will be to boost regional growth, SME participation, economic activity and national expertise through international partnerships. The UK proposal is inspired by the incentive-based regime in Australia, which seeks to encourage local industry participation while avoiding fixed offset quotas, and (particularly in terms of robust governance) other regimes in Norway and South Korea. 

Legal and Historical Background: EU Directive (2009/81 EC) and the UK's Restrained Approach to Defence Offsetting

Historically, the UK has stood apart from several of its allies by not requiring formal offset arrangements in defence procurement. When a member of the European Union, the UK considered offset largely unlawful (with some exceptions). Whilst EC guidance is clear that traditional offset is unlawful under Directive 2009/81 EC  there is a potential exemption on national security grounds which has been explored in other members states (such as Poland – see below). However, the UK government’s position (perhaps based on policy as well as procurement law) was that offsets were not part of its defence procurement approach and, instead, it operated a voluntary scheme focused on broad industrial participation[3] with the largest foreign defence contractors. 

In the past decades, the UK has instead focused on open competition and value-for-money-driven defence procurement and nationality-neutral methods of achieving broader societal benefits through procurement spend including the introduction of the Social Value Model. The model's central requirement is that contracting authorities must allocate a minimum of 10% of the total evaluation score to economic, social and environmental objectives. This mandatory weighting ensures that all suppliers, regardless of nationality, must demonstrate measurable UK economic and social benefits to compete effectively for public contracts.

In contrast, Poland has developed a legal framework for offset that permits offset within the derogations to general public procurement law set out in Article 346(1)(b) of Treaty on the Functioning of the European Union (TFEU) permitting offset in a country’s national security interests. Offset in Poland is permitted provided it is justified on a case-by-case basis in accordance with a set legal framework that requires the proposed offset to be proportionate and  not distort the internal market. This approach has seen significant offset deals – particularly Poland’s Wisla Programme: contracts with Raytheon and Lockheed Martin have established local production and support for the Patriot missile system, including technology transfer and the creation of new R&D facilities.

Post-Brexit Implications: resetting the legal landscape

Brexit theoretically freed the UK from EU constraints on offset requirements, but the Procurement Act 2023 has reimported key limitations through "treaty state supplier" provisions. These clauses require non-discriminatory treatment of suppliers from countries with which the UK has trade agreements involving procurement commitments (e.g. WTO Government Procurement Agreement), effectively recreating many of the EU law constraints that previously limited offset arrangements.

However, the UK has strategically excluded most defence-related contracts from the scope of its international commitments. This means that foreign suppliers generally lack the legal standing to challenge UK procurement decisions, including offset requirements. Consequently, the UK has greater legal freedom to implement offset requirements.

Complementing the Social Value Model, the Procurement Act 2023 creates a mechanism that functions very similarly to traditional offsetting requirements, but in a nationality-neutral manner. Contracting authorities must have regard to the National Procurement Policy Statement (NPPS) in the exercise of their procurement functions as required by section 13 of the Procurement Act 2023. This might result in requirements for suppliers to provide UK economic benefits including SME engagement, skills development, and innovation partnerships. 

The MoD is, however, exempt from NPPS and Social Value Model obligations, giving them maximum policy flexibility for defence procurement and the platform to create a specialist offsetting regime.

Contrasting Global International Approaches

Offset policies vary significantly across jurisdictions and a “map” of global offset arrangements demonstrates the current patchwork of arrangements even between allies. Whilst we canter through some examples of differing approaches taken by UK allies below it helps most to consider some of the different reasons that may have informed these approaches – for examples scale of defence budget, reliance on foreign defence technology, relative strength of domestic defence industry and policy appetite for some of the risks associated with offset. Considering where the UK falls on some of these characteristics, alongside the strategic rationale considered below helps consider how effective a tool offset might be to achieve the Government’s objectives to use defence spending to drive growth. 

The USA does not require offsets in its own defence procurement or consider that the benefits outweigh the risk of market distortion but permits American exporters to enter offset agreements when demanded by foreign buyers, with mandatory reporting but no direct government involvement. 

Australia, while cited in the Defence Industrial Strategy and consultation invitation as a primary offset example, does not strictly speaking operate a traditional offset regime. Instead, it uses the Australian Industry Capability (AIC) Program, which contractually incentivises local industry participation but avoids fixed offset quotas.  The advantage is the Australian Government Defence “buyer” creates a bid competition on how much Australian content primes can source locally.  For established primes with mature local supply chains, this can sometimes expand to export opportunities thereby further growing local industry.  AIC has also recently been an intra-governmental policy instrument to de-risk supply options in regional hotspots.  For example, some countries in the ASEAN region have had government backed commercial bids for Australian defence programs to duplicate production facilities. This gives the ASEAN country a geostrategic advantage as loss of local production in a crisis can be supplemented or replaced from the duplicated assets.  This is a “win-win” scenario for all participants.

South Korea maintains a formal, mandatory offset regime focused on technology transfer and local production to strengthen sovereign capability. 

France uses offsets selectively and strategically primarily to secure export contracts, tailoring each agreement to the buyer’s needs, as seen in the Rafale deal with India. India, by contrast, has one of the most structured offset regimes globally: under its Defence Acquisition Procedure (DAP), foreign suppliers must reinvest a percentage (typically 30–50%) of the contract value into India’s defence or aerospace sectors, supporting local manufacturing, R&D, and skill development – although actually realising this investment has often been challenging for the defence buyers and DAP is under review by the Indian Government.

The MoD's Offsetting Proposal and Strategic Rationale

Key benefits and challenges of offset include: 

• Industrial Development: Stimulating domestic industry (especially for SMEs and non-traditional suppliers), creating jobs, and fostering technology transfer. In the UK limited markets/sole supplier procurements for required capacity are common and offset may be a further way to unlock value for the public sector. 

• Strategic Autonomy: Building sovereign capabilities over time and reducing reliance on foreign suppliers.

• Political Support: Making large defence imports and large multi-contract spend with some major international suppliers more politically acceptable by demonstrating local benefits – in the context of the UK – job creation across the regions is likely to be a key focus. 

• Long-term industrial planning: for industry a clear offset framework alongside a strong procurement pipeline should help the international defence industry make strategic investment decisions in the long term. 

The Double-Edged Sword: Potential Unintended Consequences

Whilst offset objectives are understandable particularly given the high value of major defence procurements and anticipated spending increases, stringent requirements can risk counterproductive effects including:

• Deterrent Effect on International Partners: Complex offset requirements may discourage international defence companies from bidding for UK contracts, particularly innovative smaller firms that lack resources to establish significant UK operations. This could reduce competition and limit access to cutting-edge solutions.

• Economic Inefficiency: Critics argue that offset may distort markets, increase costs, and reduce value for money. In some countries it has been associated with accusations of corruption and uncompetitive behaviour. 

• Confusion of Procurement Goals: a purist view might argue that the greatest benefit a defence procurement can deliver is the timely satisfaction of a critical strategic need and that offset incentives may complicate operational objectives. 

• Reciprocal Measures: Other countries may respond with their own offset requirements, potentially limiting UK defence companies' access to international markets and undermining the UK's significant defence export industry. 

• Potential for Displacement: Offset can displace existing domestic suppliers or create dependencies on foreign technology.

• Favouring “new entrants”: if overly focused on new investment offset regimes may take insufficient consideration of established major contractors long embedded in the national economy – particularly in the UK there are several examples of large defence contractors with a significant history and established presence. 

Striking the Right Balance: Recommendations for Implementation

Offset vs. Social Value in UK Defence Procurements

It is important to distinguish offset from the concept of social value, which has become a central feature of UK defence public procurement, expected to account for at least 10% (and sometimes more) of a bidder’s score. 

While offset arrangements are focused on securing economic or industrial benefits—such as local manufacturing, technology transfer, or investment in the defence sector—social value traditionally encompasses a broader set of outcomes. Social value generally requires suppliers to deliver additional community, environmental, or societal benefits as part of their contracts, such as creating apprenticeships or reducing carbon emissions. 

The Defence Industrial Strategy clearly views offset as a distinct policy tool intended to compliment a reformed defence social value model. However, there is clearly a “bleeding edge” between recent social value commitments, e.g. skills centres, and the type of commitments that might be included in future offset deals. This poses questions about how major defence procurements will avoid overlap or “gaming” of social value and offset commitments – especially given the wider commitment to achieve more streamlined and faster defence procurement. It also raises the challenge around whether, in many cases, offset will be the right tool to achieve the growth outcomes from defence spending or if these are actually likely to be secured through a strengthened defence-specific Social Value Model. 

Conclusion: Looking to the Future

The UK’s move towards a formal offset regime represents a major policy shift, bringing it closer to international practice in a number of locations. The challenge will be to balance the potential economic and industrial benefits of offsets with the need for value for money, transparency, and open and fair competition. As the new regime is developed, there will be opportunities—and risks—for both government and industry.

The consultation invitation stresses that any regime must be proportionate to the desired outcome and flexible to decide what kind of procurements will fall into its scope and what the specific objective of an offset requirement will be (e.g. growth or capability development). The regime can be expected to be robust, favour explicit measurable obligations and have “teeth”: including penalties for underperformance. 

Any response to the upcoming consultation (deadline 23 December 2025) will want to consider the risks and opportunities in the context of the respondent’s specific market position and strategy. Key areas for consideration might include a value threshold for offset requirements, sector specific approaches recognising industry dynamics, interaction with social value requirements and how the regime might incentivise (rather than deter) long term investment and partnership in innovative technologies. These responses, and engagement with the wider Defence Industrial Strategy, will be an opportunity for the industry to set the tone for the next generation of defence procurements.  

Do you intend to respond to the MoD’s offset consultation? Bird & Bird will be holding an industry round table discussion to consider possible responses and hear from colleagues in other countries that already use offset. To attend please email Eleanor Kerslake. Alternatively, please contact the authors of this article to discuss further.