China has proposed standards for determining whether a product is considered a “domestic product” for purposes of government procurement, and thus eligible for a 20% price preference. If finalized, this measure will fill a gap in implementation of China’s 2003 Government Procurement Law, which requires government entities to purchase domestic goods, construction, and services. Such a definition has long been sought by foreign firms. As the US Trade Representative has pointed out: “Without clear rules on what constitutes a ‘domestic product,’ procurement officials often prefer to err on the side of caution and purchase products from domestic Chinese companies.” This post examines the conditions a product must meet to qualify as domestic, and how China would reconcile such requirements with national treatment obligations in any international agreements that it enters.
In December 2024, China’s Ministry of Finance (MoF) issued for public comment a Notice on Matters Related to Domestic Product Standards and Implementation Policies in the Field of Government Procurement (Draft for Comments). (An informal translation may be found here.) The public comment period closed in early January 2025.
Under MoF’s proposed domestic product standards, a product must meet the following three conditions to be considered a domestic product.
(1) The product must be produced within China, that is, the transformation of properties from raw materials and components to products must be achieved within the customs territory of China. The required transformation into a new product with a new name and characteristics completely different from the raw materials and components does not include minor operations such as labeling and packaging.
(2) The cost of domestic components must account for a specified proportion of the product, and the cost of components produced in China must meet specified ratio requirements. The specific ratio requirements for domestic component costs will be determined, by product, by MoF and relevant departments, based on the development of the industry. Until these requirements are determined—which could take several years, a product produced in China will be deemed a domestic product.
(3) The product must comply with requirements for designated products, such as for critical components and critical processes. For designated products, MoF and relevant departments will determine their domestic component cost ratio requirements and other requirements, such as production of critical components or completion of critical processes in China.
The goods subject to the domestic product standards refer to products classified as “goods” in the “Classification Catalogue for Government Procurement Items.”
To support government procurement of domestic goods, MoF proposes a 20% price deduction (price evaluation preference) for domestic products in the evaluation of tenders in procurement where both domestic and non-domestic products are competing.
Under the Finance Ministry’s proposal, procuring entities must explicitly require suppliers to provide a “Declaration Letter on Conformity with Domestic Product Standards.” They must also publicly disclose the “Declaration Letter” of the successful bidder along with the bid or transaction results.
The MoF notice includes cost accounting rules for components produced in China. It also requires all types of business entities to be treated equally, and specifies that suppliers must not be treated differently or discriminated against based on the ownership form, organizational form, equity structure, investor’s country, product brand, or other unreasonable conditions. China’s 2020 Foreign Investment Law included similar requirements.
In its proposal, MoF also addresses compliance with international agreements. If China is a party to an international treaty or agreement, its provisions would take precedence over China's domestic product policies. That would mean that if China joins an international agreement such as the WTO Government Procurement Agreement or the Comprehensive and Progressive Trans-Pacific Partnership, it would have to grant exemptions or waivers of its domestic product requirements for the products of the other parties to the agreement. (This is the approach the United States uses in its implementation of the Buy America Act of 1933.)
The US-China Business Council notes tha while MoF’s proposed definition of domestic products “makes some progress in addressing long-standing concerns, its phased timeline and lack of specifics leave room for gaps in implementation.” It also pointed out the 20% price evaluation preference for domestic products “risks disadvantaging imported products that are often more advanced.”
China’s Finance Ministry has not indicated when it might finalize the proposed domestic product standards. (A 2010 proposal to define domestic products was never finalized.)
Jean Heilman Grier
January 22, 2025
Related Posts
China’s New Investment Guidelines: Procurement