This week, the United States and the European Union embark on their latest round of negotiations of the Transatlantic Trade and Investment Partnership (TTIP), where on government procurement they remain far apart. One of the ongoing points of contention is the baseline of the TTIP negotiations – the amount of procurement that each opens under the WTO Government Procurement Agreement (GPA). This post considers the comparable level of procurement reported to the WTO by the two sides, the imbalance in procurement coverage and the EU proposal to expand what is counted as international procurement, as well as the effects of the British vote to exit the EU. It concludes by questioning the continuation of the data debate.
When the U.S. and the EU concluded negotiations on the GPA in the 1990s, they had reached what Patrick Messerlin, a French economist, termed “almost a perfect balance” in the value of the procurement that each opened. Since then, the EU has expanded its procurement base with the addition of 13 member states.
Despite its expansion, the EU has continued to insist that the U.S. should open the same amount of procurement as the EU, and has repeatedly charged that U.S. is lagging. In a recent speech to the Atlantic Council, the EU Trade Commissioner Cecilia Malmström, while acknowledging that procurement is a sensitive issue in the U.S., stressed “it’s essential that the US fully understands that in Europe it’s the current imbalance that’s the highly sensitive issue”.
The EU claim of imbalance is not supported by the latest reports that the U.S. and EU filed with the WTO on the procurement that each covers under the GPA. Those reports point to almost equivalent coverage. An analysis of the U.S.’s latest report – for 2009 — by Inside U.S. Trade (Apr. 28, 2016) pointed out that the U.S. covered $326 billion in federal and state procurement. That is only slightly more than the EUR 286 billion (approximately $316 billion) in procurement that the EU covered in 2012, according to its June report.
The U.S. gives the EU its best coverage, access to all the procurement that it covers under the GPA, but the EU does not reciprocate. It denies the U.S. rights to approximately 200 central government entities and all of its utilities, except in the electricity sector, as well as services purchased by its sub-central entities. U.S. Trade Representative Michael Froman summarized the situation in a statement to Politico (Apr. 25, 2016): “European firms are actually guaranteed access to twice the procurement opportunities in the U.S. as American firms are in the EU – and that’s using the EU’s own numbers and excluding any procurements covered by Buy America or other restrictions.”
The EU will open even less procurement to U.S. firms after the United Kingdom leaves the EU, based on its June 23 Brexit vote. According to the EU’s latest WTO report, the UK accounts for 25% of EU procurement.
Recently, the EU has sought to add another dimension, and greater complexity, to the procurement debate by arguing that the traditional classification of procurement, such as under the GPA, does not adequately capture all the means by which foreign firms win contracts. Lucian Cernat, the Chief Economist for the European Commission’s trade unit, asserts that direct cross-border procurement (a foreign company wins a public contract from abroad) is only “the tip of the procurement iceberg”. He maintains that the assessment of the size of procurement markets should also include “commercial presence procurement” (a domestic subsidiary of a foreign company wins locally a public contract) and “value-added indirect international procurement” (a foreign company supplies goods and services to a domestic or foreign company that wins the contract).
According to Cernat, foreign subsidiaries established in Europe win more contracts in “commercial presence procurement” than do foreign firms in traditional cross-border procurement. The low number of contracts won by foreign firms in the EU was noted in the recent U.S. trade barriers report. It drew attention to a 2011 EU report that member states awarded only 1.6% of their contracts to firms from another member state or a non-EU country, and U.S. firms, not established in the EU, received only 0.016% of total EU contracts.
Requiring procurement officials to determine the country of origin of goods and services in “commercial presence procurement” would make procurement accounting even more difficult than it is currently. The GPA parties recognized that they have not been very successful in determining the origin of goods and services in cross-border procurement, and to address that deficiency, they established a work program on procurement statistics.
But, a more basic question in the TTIP context is whether taking into account “commercial presence procurement” in the U.S. would be consistent with a key EU request – to curtail the application of Buy American requirements to EU firms.
The Buy American requirements in transportation and water projects funded by the U.S. federal government generally require the use of U.S.-produced iron, steel and manufactured products. If foreign firms want to participate in such procurement, they have to establish manufacturing or assembly facilities in the U.S. to meet the requirements. Where EU firms have established U.S. subsidiaries for that purpose, procurement awarded to them would be considered “commercial presence procurement”. Thus, under the EU approach, the U.S. could increase its international procurement through the implementation of Buy American requirements. Would that be in the EU interest?
Continuing the debate on procurement numbers would be unproductive. As a leaked EU-memo on procurement in the TTIP concluded in March, the data debate should be “put aside” and the negotiations should focus on how to improve market access in both the EU and the U.S.
Jean Heilman Grier
July 12, 2016
2016 Trade Barriers Report: Government Procurement
Buy American Requirements: A Djaghe White Paper
TTIP Procurement Negotiations: A Djaghe White Paper