Senior U.S. officials revealed privately in the days prior to the first Strategic and Economic Dialogue (“S&ED”) of the Obama Administration, convening in Washington, D.C. on July 27, 2009, that they planned to ask China to subscribe to the Government Procurement Agreement (“GPA”) of the World Trade Organization (“WTO”). They assigned this quest, they said, a high priority, even as the subject seemed to escape public notice.
China did not begin discussing the GPA at the WTO until December 2007, even though upon its WTO accession in 2001 it was expected to negotiate GPA accession “as soon as possible.” China has sent out officials to study the terms under which other countries have signed the Agreement, and is working on a written proposal that would open its government procurement to foreign enterprises while protecting certain areas of economic activity.
China’s trade partners had attached no particular urgency to China’s GPA accession until the autumn of 2008, when China as well as more developed countries, led by the United States, began committing hundreds of billions of dollars to government expenditure for recovery from a global economic recession. It then became important for manufacturers to gain access to the planned expenditures of foreign governments, and the GPA appeared to be the key to access.
The United States would like its manufacturers to be able to participate in the Chinese Government’s expenditures for recovery and so wants China to sign the GPA. China, of course, would like the same for its manufacturers -- to have governments in the United States, Europe, and Japan buy Chinese goods with the funds the governments are spending for recovery. But signing the GPA is not so easy. The signatories have carved out many restrictive exceptions. China does not want to give away more than it gets. In every country, nationalist sentiment clamors for job creation at home, not for government expenditures to buy foreign goods and, hence, to create jobs abroad.
At the very moment, in February 2009, when the United States was asking the world to shun protectionism and recognize that free trade is a necessary element of global recovery, the United States Congress was inscribing in the American Recovery and Reinvestment Act of 2009 (“ARRA”) a requirement for governments of all levels to “Buy American” when spending $787 billion. The provisions were summarized upon notification to the WTO:
- Section 604 of the ARRA requires the Department of Homeland Security (DHS) to procure US-manufactured textile and apparel goods, subject to certain exceptions (including non availability, de minimis, purchases outside the United States, and small purchases). This provision becomes effective 180 days after the date of enactment of the ARRA, which was 17 February 2009. Section 604(k) requires DHS to apply the "buy American" provision in a manner consistent with US obligations under international agreements.
- Section 1605 requires that only US-produced iron, steel and manufactured goods be used in public buildings and public works funded by the ARRA, subject to certain exceptions (public interest, non-availability, or unreasonable cost). Section 1605(d) requires the "buy American" provision be applied in a manner consistent with US obligations under international agreements.
The commitment to apply these restrictions “in a manner consistent with US obligations under international agreements” followed public pledges by the newly inaugurated lawyer-President “that we are going to abide by our World Trade Organization and NAFTA obligations just as we always have.” The President had come under fire from the Government of Canada, in particular, because of the ARRA provisions.
President Obama struggled to minimize the significance of the “Buy American” provisions by emphasizing that they would not alter the American commitment to respect all international obligations. He recognized the importance of not sending a signal of protectionism. He told a Canadian Broadcasting Corporation interviewer, “I think that if you look at history one of the most important things during a worldwide recession of the sort that we’re seeing now is that each country does not resort to ‘beggar they neighbor’ policies, protectionist policies, they can end up further contracting world trade.” Yet, he acknowledged, “a lot of governors and mayors are going to want to try to find U.S. equipment or services.”
Provincial premiers and mayors in Canada decided to copy the Buy American provisions, and the protectionist fever that began with the United States, at least symbolically, inevitably spread. The National Development and Reform Commission (“NDRC”) issued on May 27 in China Circular 1361, Opinions on the Implementation of Decisions on Expanding Domestic Demand and Promoting Economic Growth and Further Strengthening Supervision of Tendering and Bidding for Construction Projects. Were the title not to have said it all, a summary might read, “Buy China.” According to the Circular, “Government investment projects that are under government procurement should purchase domestic products, unless these domestic goods, construction engineering or services are not available in China or cannot be acquired on reasonable commercial terms. Projects requiring imported products will need prior approval from relevant government authorities.”
The United States is a signatory to the GPA. China is not. Consequently, Chinese enterprises have no rights of access to government procurement in the United States, nor have U.S companies rights to participate in government procurement in China. Were the congressional objective in the ARRA to keep out China, there was no legislative need for the provision. State and local governments, by international agreement, were free without the legislation to discriminate against Chinese goods. Both countries have included escape clauses -- the U.S. in its legislation and China in the non-binding NDRC Circular -- requiring goods to be available on “commercial terms” at home before prohibiting imports, but both are structured to spend their stimulus packages to create domestic, not foreign jobs.
The concept of free trade, which President Obama recognized, requires mutual access to government procurement. However, the United States, when it subscribed to the GPA in 1998, attached hundreds of exceptions, including especially total exceptions for thirteen state and local governments and qualified exceptions for most of the other thirty-seven. Exceptions for highway and mass transit funding apply to all fifty states and exceptions for procurement of construction grade steel cover most states. Most of the ARRA expenditures are slated for state and local governments, with an emphasis on infrastructure, so the commitment to abide by international obligations offsets almost not at all the Buy American provisions that are consistent with the restrictive U.S. implementation of the GPA.
Much of China’s recovery expenditures are anticipated to be provincial and local, the likely “relevant government authorities” in Circular 1361. China’s absence from the GPA means foreign enterprises have no rights to government procurement in China, but provincial and local governments could buy from them. Circular 1361 converts the absence of a right into an effective prohibition. China and the United States are closed to each other’s government procurement, with governments retaining considerable discretion to open up as needed.
The ARRA, and Circular 1361, are signals. The U.S. interest in pressing China to sign the GPA will not produce quick or meaningful results as long as the United States sends protectionist signals, and China likely will reveal a competing protectionism unless it believes there will be a reciprocal opening. Despite the U.S. pressure, the two countries only agreed, as to the GPA, to treat all goods manufactured domestically as domestic products, regardless whether there might be foreign ownership -- a reaffirmation of current law. The United States must step beyond assurances about compliance with international obligations and provide examples of a free procurement market; China must make purchases from abroad to enhance domestic stimulus projects. Without such concrete steps, both countries will be sending protectionist signals, and the more they press each other in settings like the S&ED, the more they may harm the cause of free trade.
Dr. Feldman was quoted recently in a Business Week report on the S&ED. He also discussed the June 2008 Strategic Economic Dialogue meetings in an interview with CNBC.
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