2016 Trade Barriers Report: Government Procurement

In the recently released annual National Trade Estimates (NTE) report, the U.S. Trade Representative identifies major foreign barriers to U.S. exports. Government procurement is one of the 10 categories covering “government-imposed measures and policies that restrict, prevent, or impede the international exchange of goods and services”. The NTE’s examination of trade barriers in 63 economies includes both barriers that may be consistent with international rules, as well as those that may not be consistent. This post highlights salient procurement barriers addressed in the Report for the European Union, the BRICS (Brazil, Russia, Brazil, India, China and South Africa) and several other countries.

European Union: The NTE notes that “the lack of quality EU statistics” indicating the country of origin of winning bids makes it difficult to assess the level of foreign participation in EU procurement. According to a 2011 EU-commissioned report, 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.

The EU Utilities Directive discriminates against bids with less than 50% EU content in procurement that is not covered by an international or reciprocal bilateral agreement. That domestic content requirement applies to foreign suppliers in a number of sectors: water; energy; urban transport; and postal services. Under the WTO Government Procurement Agreement (GPA), the EU denies the U.S. access to all of those sectors, except the electric sector, until it provides reciprocal access to EU firms.

The NTE also drew attention to a pending EU regulation that could affect U.S. access to the EU’s non-GPA covered procurement. That measure, which was addressed in a recent post, would penalize countries that apply restrictive procurement practices that discriminate against EU firms.

Brazil: Brazil has put in place a number of procurement preferences and restrictions. They include a preference for firms that produce domestically and meet economic stimulus requirements, even if the price of a domestic bid is more than 25% higher than a foreign bid. In addition, the procurement of “strategic” ICT goods and services may be limited to suppliers of technology developed in Brazil. The Ministry of Development, Industry and Commerce maintains an 8% preference margin for domestic producers of textile, clothing and footwear and 5% to 25% preference margins for certain Brazil-produced products, including pharmaceuticals. The National Petroleum Agency establishes local content requirements for Petrobras, which it must ensure that its entire supply chain meets. In the NTE, the U.S. urges Brazil to join the GPA.

Russia: When Russia became a WTO member, it committed to initiate negotiations to join the GPA in four years (2016). It has not yet begun those negotiations. As a consequence, when it made import substitution “a central tenet of its economic policy”, it initially implemented it through government procurement, but in 2015 extended it to state-owned enterprises (SOEs). Russia has argued that since its local content requirements, including preferences for domestic products and bans on foreign-made products in a variety of sectors, apply to federal or municipal procurement, they are not subject to the national treatment obligations of the General Agreement on Tariffs and Trade (GATT) or the General Agreement on Trade in Services (GATS). The NTE concludes that: “Given the breadth of the government’s role in the economy and the scope of the “Buy Russia” policies, such measures impede trade because U.S. exports are excluded from a broad section of the Russian economy.”

India: India’s lack of an overarching government procurement policy results in the application of a variety of procurement practices and procedures by the central government, even among ministries, and by the states. It also provides preferences to its micro, small and medium enterprises (SMEs) and SOEs. In addition, its National Manufacturing Policy requires increased use of local content in procurement in certain sectors.

China: The NTE focuses on the U.S. interest in China’s fulfilling its commitment to join the GPA, noting that its 5th revised offer (its latest) “showed progress” but still “fell short of U.S. expectations and remains far from acceptable”.

South Africa: A 2011 agreement with stakeholders commits South Africa’s government to expand significantly its procurement of goods and services from local suppliers and to aim to source 75% of its procurement locally. Also, government entities and parastatals must require suppliers in tenders in which the foreign content equals or is more than $10 million to undertake local commercial or industrial activity valued at 30% or more of the value of the foreign content.

Japan: The U.S. continues to monitor Japan’s implementation of the GPA and bilateral procurement agreements and pays “special attention” to procurement associated with construction projects for the Tokyo 2020 Olympics and a variety of major projects, including private finance initiative projects and projects covered under a 1991 bilateral agreement.

The NTE also pointed to other countries’ imposition of domestic preferences and other requirements, including:

  • Canada: the local content requirement in Hydro-Quebec’s wind-energy project.
  • Argentina: national preferences for domestic suppliers in most procurement, where the local tender is no more than 5% to 7% higher than a foreign tender.
  • Indonesia: requirements that entities  maximize domestic content, use foreign products only when necessary and designate foreign suppliers as subcontractors to local firms.
  • Egypt: preference for domestic bids within 15% of the price of foreign bids; and right of its SMEs to supply 10% of goods and services in every government contract.
  • Saudi Arabia: Saudi Arabia maintains protectionist policies that include; requirement that suppliers subcontract 30% of any government procurement to firms that are majority-owned by Saudi nationals; and a 10% price preference in favor of local products. It has not yet commenced negotiations to join the GPA despite its commitment to do so when it joined the WTO in 2005.
  • TurkeyTurkey has enacted a law that, when implemented, will allow civilian government ministries to impose offset requirements that foreign firms provide locally produced products.

The NTE is a companion to the President’s Trade Policy Agenda, which was published in March. The Trade Act of 1974 and other subsequent laws require the NTE to be submitted annually to the President, the Senate Finance Committee and appropriate committees of the House of Representatives.

Jean Heilman Grier

April 19, 2016

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