2019 Government Procurement: Prospects

This post considers the prospects for developments relating to government procurement in the international arena in 2019. They include the Trump administration’s aims to obtain approval of the replacement of the North American Free Trade Agreement (NAFTA) and to negotiate new trade agreements with Japan, the European Union and the United Kingdom. The post also looks at developments relating to the WTO Government Procurement Agreement (GPA) in 2019, in particular China’s accession negotiations and the need for more extensive transitional measures to attract developing countries to its membership.

U.S.-Mexico-Canada Agreement (USMCA): For the Trump administration, gaining congressional approval of the USMCA, signed on November 30, will be a centerpiece of its 2019 trade policy. However, with the Democrats taking control of the House of Representatives, congressional approval is by no means certain. The USMCA modernizes the NAFTA procurement text, but falls short of NAFTA with respect to market access by omitting Canada from the procurement obligations and replicating existing coverage for Mexico and the United States.

If the president carries out his threat to withdraw the U.S. from NAFTA as a means of pressuring Congress to approve its replacement, U.S. suppliers would lose rights to participate in Mexico’s procurement and face price preferences. However, they would still have access to Canadian procurement under the GPA, but subject to higher thresholds.

U.S. Trade Negotiations: In October, the U.S. Trade Representative (USTR), following Trade Promotion Authority (TPA) requirements, notified Congress of the administration’s intent to enter negotiations with Japan, the EU and the UK. It then took the next step required by TPA when it published in mid-December a 17-page summary of its negotiating objectives for a Japan agreement. Those negotiations could begin by mid-January (30 days after publication).

While the administration has set out objectives for a comprehensive agreement, it is not at all certain that Japan will agree to such an agreement. It holds out the hope that the U.S. will eventually rejoin the renamed Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), from which President Trump withdrew the U.S. on his third day in office.

Major trade organizations want the administration to include government procurement in a comprehensive agreement with Japan. USTR’s procurement objectives mirror the U.S. objectives for the renegotiation of NAFTA, in calling for increased opportunities for U.S. firms to sell U.S. products and services to Japan and ensure reciprocity in market access opportunities for U.S. goods, services and suppliers. However, the U.S.’s acceptance of limited procurement outcomes in the USMCA (updated text, but exclusion of Canada and no new access to Mexican procurement) provide little assurance that the U.S. will press for increased access to Japanese procurement.

As in the NAFTA revision, the U.S. objectives carve out a wide swath of U.S. procurement: they exclude state and local governments and keep in place domestic preferential purchasing programs such as U.S. small business set-asides (comprising almost a quarter of federal procurement), as well as “Buy America” requirements on federal assistance to state and local projects and key Department of Defense procurement.

With the exclusion of sub-central procurement, the U.S. will hardly be in a position to seek the expanded coverage that Japan is giving the EU under their bilateral agreement. When that agreement enters into force on February 1, EU suppliers will be able to participate in the procurement of Japan’s local independent administrative agencies (51 universities and colleges, 25 hospitals or medical centers and 11 technical or industrial research centers) and 48 “core cities”, with populations of approximately 300,000.

The U.S. negotiations with Britain are expected to be comprehensive and include procurement. However, until the terms for Britain’s exit from the EU are worked out, the U.S. negotiations are unlikely to move forward.

With respect to the US-EU negotiations, the two sides remain at odds on the scope of a potential agreement, in particular with the U.S. insistence that agricultural issues be addressed. The talks are unlikely to include government procurement, as that was one of the issues that led to the break-down of the negotiations of the Transatlantic Trade and Investment Partnership at the end of the 2016, and the Trump administration has yet to demonstrate that it would be willing to open new procurement. Moreover, its exclusion of sub-central procurement in the NAFTA negotiations and in its Japan agreement objectives, as well as its insistence on maintaining “Buy America” preferences, would exclude from the discussions key EU procurement interests.

CPTPP: On December 30, six parties (Australia, Canada, Japan, Mexico, New Zealand and Singapore) implemented the CPTPP, with Vietnam to follow in mid-January. The Agreement will become effective for the other CPTPP signatories (Brunei Darussalam, Chile, Malaysia and Peru) 60 days after each completes the ratification process. With its implementation, the CPTPP is open to accession by any member of Asia-Pacific Economic Cooperation (APEC) and “any other State or separate customs territory as the Parties may agree”. Even before it was implemented, Colombia formally indicated its interest in joining the CPTPP. Thailand, Korea and Britain have also expressed interest in it.

EU FTAs: With the agreement that it is about to implement with Japan (and the one it implemented with Canada in 2017), the EU continues its robust agenda of opening procurement that exceeds its partners’ GPA commitments. That approach is likely to continue in its negotiations of free trade agreements (FTAs) with Australia and New Zealand, initiated in 2018.

The EU’s 2018 FTA with Mexico, which is undergoing a legal scrub, includes a new Mexican commitment to seek coverage of the procurement of its states. The EU is continuing FTA negotiations with Chile and with Mercosur, the South American trade bloc comprised of Argentina, Brazil, Paraguay and Uruguay. It is also taking steps to ratify agreements with Singapore and Vietnam.

Brexit: Britain’s exit from the EU, set for March 29, will affect government procurement when Britain is no longer subject to the EU’s international trade obligations. Britain has applied for membership in the GPA in its own right after it is no longer under the EU’s schedules. The GPA parties have approved its final market access offer but must still approve the terms of its accession. The U.S. and the UK can negotiate a FTA, but could not implement it until after Brexit and the expiration of any transition period. Until the timing and terms of Brexit are determined, its effects on procurement will be uncertain.

GPA Accessions: In 2019, Australia will complete its domestic approval procedures and become the 19th GPA party (and 47th WTO member to be covered by the plurilateral agreement). The WTO procurement committee in its 2018 annual report expressed the hope that the accessions of the Former Yugoslav Republic of Macedonia, Kyrgyz Republic and Tajikistan would be completed in 2019, and that further progress could be made on the accessions of China and the Russian Federation. Russia submitted an edited initial market access offer in 2018.

China, which applied for GPA accession in 2007, tabled its most recent offer in 2014. It reaffirmed in 2018 its intention to submit a revised market access offer that would include comprehensive improvements, in particular relating to its coverage of sub-central government entities and state-owned enterprises but did not indicate when it would so do.

China recently proposed legislation that could open its procurement to foreign firms. On December 26, the Standing Committee of the National People’s Congress, issued a second draft of its Foreign Investment Law for public comments (by February 24). It provides that the Chinese government will guarantee foreign-invested enterprises fair participation in government procurement activities and that the products manufactured by such enterprises in China will receive equal treatment under its procurement regime.

GPA Transitional Measures: The WTO procurement committee noted in its annual report in 2019 that it will conduct its first review, as mandated by the GPA, of the operation and effectiveness of the Agreement’s provisions on developing countries. The 2014 revision of the GPA expanded transitional measures available for developing countries to encourage their accession. However, in the past five years, the committee has made sparse use of such measures, only authorizing Moldova’s application of higher thresholds for two years after its 2016 accession to the GPA.

The WTO committee should examine the more liberal use of transitional measures in regional trade agreements, such as U.S. FTAs, and consider whether an expansion of the GPA measures could attract developing countries. For example, both the CPTPP and an EU bilateral agreement allow Vietnam to apply more extensive measures than those provided for under the GPA. Would Vietnam and other developing countries be encouraged to join the GPA if they could apply the same type of transitional measures that they are accorded under other agreements?

GPA Work Programs: The GPA committee is preparing reports on three work programs established in 2014: they address the treatment of small and medium-sized enterprises, the collection and dissemination of statistical data and the treatment of sustainable procurement. When finalized, those reports should be made public.

In its annual report, the procurement committee pointed to two areas in which it would not be meeting deadlines set out in GPA. It is deferring action on the mandate that it initiate negotiations to improve the GPA by “progressively reducing and eliminating discriminatory measures, and achieving the greatest possible extension of its coverage among all Parties on the basis of mutual reciprocity”. The committee commented that it would take up that requirement “when it is considered useful and timely to do so, in the light, inter alia, of progress achieved in the Committee’s Work Programmes”. The committee similarly deferred action on the requirement that it adopt indicative criteria and criteria for determining the level of compensatory adjustment to complement the its adoption of arbitration procedures in 2016.

Jean Heilman Grier

January 8, 2019

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