NAFTA Procurement: What’s at Stake?

As discussed in a recent post, the United States proposes, in the negotiations of the North American Free Trade Agreement (NAFTA), to limit Canadian and Mexican access to the U.S. procurement market at the level of their combined procurement. This is one of several proposals tabled by the U.S., which could derail the negotiations. In addition, President Trump continues to threaten to withdraw the U.S. from NAFTA. This post explores the consequences for government procurement if the negotiations break down or President Trump carries out his threat.

Unlike Canada, Mexico is not a party to the WTO Government Procurement Agreement (GPA). As a consequence, without the procurement provisions in NAFTA, U.S. firms would face a 15% price preference in Mexican government procurement. The WTO Secretariat, in the 2017 Trade Policy Review of Mexico, pointed out that Mexico still gives preferences to Mexican bidders over bidders from countries with which it has no trade agreement on government procurement in open international bidding. The margin of preference is 15% of the lowest price in the domestic market for Mexican-origin goods in comparison with imported goods.

Mexico’s price preference was one of the concerns expressed by the U.S. Chamber of Commerce and other members of the business community in responding to the administration’s request for comments on its implementation of Trump’s Buy American executive order. Without NAFTA, Mexico could freely apply the preference to U.S. imports. The Security Industry Association (SIA) emphasized the importance of Mexico’s treatment of U.S. firms “just like Mexican firms” under NAFTA.

SIA also described Mexico as “one of the most significant export markets for U.S. security manufacturers, importing roughly $1 billion in safety and security equipment annually”. In 2016, the U.S. exported $42.9 billion in tech products (manufactured goods) to Mexico. While the value of the goods sold to the Mexican government is not known, the sales of those products to the Mexican government would have to overcome the 15% price preference if NAFTA disappears.

Several U.S. companies also responded to the administration’s solicitation. MetLife described Mexico as its third largest market, after the U.S. and Japan, and emphasized that government procurement is a “critical part” of its business in Mexico, with more than 80% of its earnings derived from its government-related business. The CS-Group, which produces construction material, expressed its concern that the failure of the NAFTA negotiations could have “reciprocal effects” on its business in Mexico. It cited specifically its possible exclusion, as “a retaliatory action”, from bidding on the Mexico City Airport project, the largest project on which it has bid in its 75-year history.

Nucor Corporation, the largest U.S. steel manufacturer and a strong advocate of Buy American preferences, recognized the need for U.S. government action to reduce foreign procurement barriers. It cited the local content requirements in current tenders for oil and gas pipeline projects issued by Mexico’s National Hydrocarbons Commission. The Commission requires a Mexican local content requirement of 25%, which is set to rise to 35%; in practice the requirement is 50% local content. Nucor also pointed to preferential treatment for Canadian-origin products by several Canadian provinces, including Ontario and Quebec. None of these entities are covered under NAFTA currently.

Without NAFTA, U.S. firms would still have access to Canadian government procurement, under the GPA – assuming the president does not withdraw from that Agreement. The GPA provides broader coverage than NAFTA as it extends to Canada’s provinces and territories and 37 U.S. states.

If NAFTA were terminated, Canada and the U.S. could revive the U.S.-Canada Free Trade Agreement (CFTA), which was in force from 1988 until 1994 when it was replaced by NAFTA. The NAFTA implementing legislation “suspended” CFTA during the time that the two countries remain parties to NAFTA.

CFTA includes a procurement chapter, in which Canada and the U.S. reaffirmed their rights and obligations in the GATT Agreement on Government Procurement (GATT Code), the predecessor to the GPA. Like the GATT Code, CFTA only applied to the procurement of goods by listed federal entities. CFTA also set the lowest threshold that the U.S. applies in any trade agreement: $25,000.

Without NAFTA, U.S. firms would have to overcome Mexico’s price preference for goods and any other barriers Mexico might erect. Also, expansion of U.S. domestic preference programs could result in limitations on access for U.S. firms to foreign procurement markets, such as the Province of Alberta suggested might be necessary, in its response to the administration’s invitation for comments.

Jean Heilman Grier

November 16, 2017

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