Survey of Transitional Measures in US FTAs

The recently concluded Trans-Pacific Partnership (TPP) permits several parties to apply a wide array of transitional and other special measures to facilitate the opening of their government procurement markets. Such measures have been incorporated into other free trade agreements (FTAs) negotiated by the United States. These measures form the background for examining the special provisions in the TPP. This post provides a survey of temporary and permanent measures in earlier FTAs. 

Higher Transitional Thresholds: Under several FTAs, slightly higher transitional thresholds have been permitted for short periods: two years in FTAs with Bahrain and Oman and three years in the U.S.-Colombia FTA and the Dominican Republic-Central American-U.S. FTA (DR-CAFTA). The temporary thresholds were, at most, twice the permanent thresholds, but generally less. After the transition period, all the parties applied the same thresholds.

Offsets: FTA partners have been allowed to impose offsets in several agreements.

  • North American Free Trade Agreement (NAFTA): A Mexican procuring entity may impose local content requirements of no more than 40% in labor-intensive turnkey or major integrated projects or 25% in capital-intensive turnkey or major integrated projects.
  • DR-CAFTA: The Dominican Republic (DR) may maintain offsets in procurement of construction services for 15 years, by requiring: (i) a foreign supplier seeking to participate in a procurement to be associated with an enterprise established under DR laws and which is capitalized with Dominican or mixed Dominican and foreign capital, and the foreign supplier’s share in the association generally does not exceed 50%; and (ii) Dominican nationals to comprise 50% of the management of a procurement. These percentages are to be reduced over a 15-year period.
  • U.S.-Israel FTA and WTO Government Procurement Agreement (GPA): Israel has been permitted to impose offsets, which began at 35% of the value of a contract and were reduced to 20%. In the revision of GPA, Israel agreed to phase-out its offsets over a 15-year period.

Set-asides: FTAs have allowed certain procurement to be set aside from their obligations.

  • NAFTA: Mexico was permitted to set aside procurement from NAFTA obligations under both transitional and permanent measures:
    • Transitional set-asides in each of the first nine years of NAFTA of: (i) a percentage (beginning at 50%) of the total value of procurement contracts of Petróleos Mexicanos (Pemex) and Comisión Federal de Electricidad (CFE) and non-energy construction contracts; and (ii) US$1.0 billion of other procurement.
    • Permanent set-asides, applied annually, beginning in the 10th year of NAFTA of: (i) US$1.2 billion of total procurement (excluding PEMEX and CFE); and (ii) US$300 million of PEMEX and CFE contracts.
  • U.S.-Panama FTA: The Panama Canal Authority (PCA) may set aside 10% of the goods, services and construction services that it purchases for expansion of the Panama Canal for Panamanian nationals or suppliers owned and controlled by Panamanian nationals, subject to certain conditions, including that it could set aside procurement only if the total value of its procurement for a fiscal year exceeds US$200 million.

Exclusions of Small Business Preferences: In all FTAs and the GPA, the U.S. sets aside procurement for its small and minority businesses. The U.S. exclusion is reflected in similar preferences of its FTA partners.

  • U.S.-Australia FTA: Australia excludes any form of preference to benefit its small and medium enterprises (SMEs).
  • U.S.-Colombia FTA: Colombia excludes set-asides of procurement below $125,000 on behalf of its micro, small and medium-sized companies (MSMEs).
  • DR-CAFTA: Costa Rica and the DR exclude procurement programs on behalf of their MSMEs, and Nicaragua was able to maintain a price preference for its MSMEs for five years after it implemented the Agreement.
  • U.S.-Korea FTA: Korea excludes set-asides for its SMEs.
  • NAFTA: Canada excludes set-asides for its small businesses.
  • U.S.-Oman FTA: Oman reserves the right to maintain a preference program to promote the development of its SMEs.
  • U.S.-Panama FTA: Panama excludes any procurement measure designed to promote its MSMEs, including awarding such enterprises a 10% price preference for five years after implementing the FTA.
  • U.S.-Peru FTA: Peru excludes procurement programs on behalf of its small and micro-sized companies.

Transitional Services Coverage: Under NAFTA, Mexico was permitted to base its initial coverage of services on a positive list (listing only its covered services). In 2005, it converted its services coverage to a negative list to correspond to the approach used by Canada and the U.S. from NAFTA’s entry into force.

Special Measures for Government Enterprises: FTAs have included special measures for government enterprises.

  • U.S.-Colombia FTA:
    • ECOPETROL may: (i) apply procedures equivalent to those in the FTA in conducting its procurement; (ii) reduce the 40-day time period for tendering to 10 business days; and (iii) apply more broadly the limited tendering circumstance involving additional deliveries of a good or service.
    • Special Covered Entities (Interconexion Electrica S.A., ISAGEN and Colombia Telecomunicaciones) are only required to apply the national treatment obligations, not the other procurement obligations.
  • U.S.-Panama FTA: The PCA may reduce the 40-day time period for tendering to as little as five business days, allow a supplier to submit a challenge to a procurement within five business days after publication of the announcement of a contract award on the Internet (rather than the standard 10-day minimum period) and does not need to suspend the award or performance of a contract when a supplier submits a bid protest.

Delayed Implementation of FTA Obligations: FTAs have permitted parties additional time to implement certain provisions.

  • DR-CAFTA: Costa Rica, DR, Guatemala, Honduras and Nicaragua were given two years after each implemented the FTA to comply with certain obligations, including the 40-day time limit for tendering, providing written communication of modifications to tender documentation, publishing a notice of contract award, allowing suppliers at least 10 days to submit a bid protest, making judicial decisions and administrative rulings of general application governing procurement publicly available and preparing written reports for awarding contracts using limited tendering.
  • U.S.-Panama FTA: For the first two years of the FTA, Panama was allowed to require suppliers to submit tenders within 30 days, rather 40 days.

The TPP’s treatment of transitional and other special measures will be examined in subsequent posts.

Jean Heilman Grier

November 30, 2015

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