NAFTA Procurement: Capping Access?

In the renegotiations of the North American Free Trade Agreement (NAFTA), Politico’s Morning Trade reported that the United States proposes to cap Canadian and Mexican access to U.S. procurement at the level of the combined procurement that the two NAFTA partners open to the U.S. This would drastically alter the approach that the U.S. has used successfully for more than 35 years in negotiating trade agreements that have opened procurement markets in over 60 countries. This post examines U.S. negotiations of reciprocal procurement commitments, the procurement cap proposed by a non-profit organization (NGO) that has long been highly critical of opening procurement in trade agreements and the ramifications of restricting access to U.S markets by applying a dollar-for-dollar approach.

To implement U.S. commitments under the first international procurement agreement, the GATT Code on Procurement, and subsequent agreements, including the WTO Government Procurement Agreement (GPA) and free trade agreements (FTAs) with procurement commitments, Congress enacted the Trade Agreements Act of 1979. It authorizes the President to open U.S. procurement to a foreign country where that country provides “appropriate reciprocal competitive government procurement opportunities” for U.S. goods and services. Complying with this standard has been the guiding principle of U.S. market access negotiations under the GPA and FTAs.

In negotiating reciprocal procurement commitments, the U.S. has not sought a dollar-for-dollar match in procurement covered by the U.S. and its trading partner(s) under agreements. Rather, its aim has been to open comparable procurement by negotiating common thresholds (monetary values at and above which procurement is open), coverage of similar types of entities, coverage of all goods purchased by those entities with limited exceptions, commitments to open comparable services and minimal exclusions.

In its agreements, the U.S. has protected U.S. domestic purchasing requirements through exclusions and restrictions in its commitments. They include exclusions for set-asides for small and minority-owned businesses, goods covered by the Berry Amendment, transportation services and Buy America requirements attached to federal funds for transportation projects. It has waived only two domestic preferences.

Where a trading partner has not been willing to open comparable procurement, the U.S. has withheld access to procurement from that country. For example, under the GPA, the U.S. applies a reciprocity condition to its procurement of services, providing access to a particular service only if its trading partner opens the same service to the U.S. It also withholds procurement of the National Aeronautics and Space Administration from Japan because it does not cover its space agency. Similarly, the U.S. does not provide Canada with access to its electric utilities because Canada has not opened its hydro utilities to the U.S.

Public Citizen, a non-profit consumer group, advocates a cap on access to U.S. procurement. In its recent response to the Administration’s request for comments on implementation of the Buy American and Hire American Executive Order, the NGO advocated limiting access to U.S. procurement. Its preferred course is to renegotiate the procurement rules in trade agreements to remove the national treatment obligation. If that is not possible, it recommends limiting access by applying a procurement cap. It wants the U.S. to provide national treatment to foreign firms for a set amount of procurement “that reflects the limited opportunities in each prospective trade agreement partners’ procurement markets and the history of the amount of contracts actually obtained by U.S. firms”.

In the NAFTA negotiations, a procurement cap would only affect Mexico’s access to U.S. procurement since Canada is a party to the GPA and the NAFTA negotiations could not take away its GPA rights. It is difficult to imagine either country accepting the U.S. proposal, and if they did, Mexico could be expected to restrict U.S. access. For example, it could close its procurement to U.S. goods and services at the point where the U.S. determines its procurement has hit the NAFTA cap. That would mean loss of significant opportunities for U.S. goods and services.

If Canada and Mexico were to accept a procurement cap, its implementation would likely create an administrative nightmare for federal agencies and the nearly 30,000 contracting officers in the federal procurement system. One has to wonder whether the procurement cap was one of the U.S. proposals that, reportedly, did not have an interagency sign-off.

U.S. limitations of its procurement obligations in the NAFTA renegotiations will likely set the precedent for the U.S. aims in renegotiations of other agreements. This week, the U.S. Trade Representative Robert Lighthizer pointed to the need to modernize other Latin American FTAs.

Limiting access to U.S. procurement to the value of the procurement opened by other parties would reverse U.S. efforts over decades to expand international procurement markets. The U.S. would no longer be a champion of opening procurement markets and U.S. firms would stand to lose as other trading partners negotiate better and broader deals, such as the European Union’s recent FTA with Canada. A more restrictive NAFTA would also likely give Mexico a strong incentive to hasten the conclusion of its FTA negotiations with the EU.

Jean Heilman Grier

October 4, 2017

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