Evaluating effects of world trade agreements on government procurement

Context

Initially the General Agreement on Tariffs and Trade (GATT) refrained almost completely from implementing rules on government procurement. The first set of GATT Codes on Government Procurement came following the Tokyo Round (1981), when it was agreed that it would be desirable to eliminate discriminatory procurement practices eventually. However, the scope and coverage of this code was quite limited. As a result the Uruguay Round sought to reinforce and extend the rules (including extension to services), and a new Government Procurement Agreement (GPA) came into force in 1996.

The General Agreement on Trade in Services (GATS) during the Uruguay Round explicitly excluded government procurement issues, though it did oblige a commitment to future negotiations on services procurement. Thus at present GPA is the only discipline in this area, but any obligations only arise to the extent that government listed the public entities in the national schedules of the GPA signatories. Any future GATS-based GPA would by necessity expand the coverage of rules on services procurement to all WTO members.

As a signatory to the existing GPA the EU has a negotiating interest in seeking to improve access for EU suppliers to government contracts in both other and 'new' signatories markets. In the former case it may wish to press other countries with no or larger threshold limits to reduce them to the EU level, or to increase the coverage of sub central government agencies or public utilities or to increase the sector coverage, or to reduce specific country exemptions to MFN or reciprocity. Some state governments were not included, for instance, in the US offer of MFN treatment in the Uruguay Round, and some sectors (e.g. telecommunications, electricity and transportation safety projects) were exempted from the GPA by countries such as Japan. This type of negotiated increase in market access or in coverage of national treatment would require reciprocal commitment on the part of the EU, which would increase potential foreign competition in EU goods and services markets.

Implementation

Extending the coverage of contracts, sectors and countries where there is in principle open and non-discriminatory access to tendering for public procurement of goods and services does not however necessarily imply substantial changes in international trade, production and employment patterns, if informal and hidden measures continue to be used to actually allocate tenders. Substantial and comprehensive liberalization in this area requires not only the type of extension of coverage via GPA and GATS, but it requires the introduction also substantially greater transparency into the process than presently exists. This is likely to come about through a systematic change of philosophy on the part of governments, to one that views international competition as ultimately more likely to promote employment than short term protection measures. It may be that greater transparency can be reinforced by improved policing and monitoring activity by the WTO itself, through national Trade Policy Reviews and other mechanisms.

Any further opening of European Union (EU) procurement markets could result in reductions in EU and imported prices of goods and services which would benefit consumers in general, and help to reduce poverty in particular. Although there is some redistribution of income away from EU producers to EU consumers, there is likely to be a net benefit to EU economic welfare overall. In addition to these static net benefits there may be further dynamic benefits from increased competition (e.g. productivity and growth improvements).

If the other industrial countries (in particular US and Japan) similarly liberalize government procurement, reverse effects as far as production producer income and the trade effects are concerned can be anticipated. If the consumption effects are significant (as they would be given the size of the government procurement markets in the industrial countries) one may expect growth effects that increase overall production in the EU (and other industrial markets).

The impact on the EU of liberalization of government procurement across a wider range of countries (including the developing countries) can be expected to have a qualitatively similar pattern of effects on EU producers as US/industrial country liberalization. The indications are at present that the effect of this on the EU would not be large, given the reduced likelihood that the individual procurement thresholds will be passed in many developing countries and that income and technological similarity will make EU producers suitable suppliers in these markets. This may change in the longer term. Liberalization of government procurement could have a social impact, particularly in the short to medium term, as employment restructuring takes place in response to increased competition, and shifts occur between public and private spheres of economic activity.

In the short-term there is a reduced likelihood of individual thresholds and international competition becoming effective in government procurement markets in least developed and developing countries. There are unlikely to be significant general consumer welfare and poverty benefits accruing in developing countries in the short to medium term from liberalization of their own procurement policies. Similarly, significant production benefits for developing countries can not be anticipated, in other than the longer term impact of improved market access to the industrial countries induced by procurement liberalization. Given that it is often defence and high tech sectors in the industrial countries that are currently protected by government procurement policies, it is unlikely that developing countries will achieve a satisfactory penetration of these markets.

Claim

Reducing the price of goods and services by reducing 'non tariff' barriers induced by discretionary government procurement policies, and thereby fostering the globally efficient allocation of services (for goods and services production) will tend to bring benefits to consumers (including the poor) across all types of production.

The general lowering of government procurement barriers would tend to benefit consumers, particularly the poor, who rely heavily on publicly provided goods and services. These gains would accrue in the form of lower prices and improved quality of goods and services and also from the increased supply of publicly provided goods and services which would be made possible by the cost-savings in government expenditure programmes. These savings may be significant in developing countries, where public expenditure management systems are weaker.

Multilateral liberalization in the area of government procurement is likely to produce longer term production benefits, but these may be associated with social and economic adjustment costs.

World trade agreements on government procurement are likely to effect only the major developed countries, and only to a limited extent. Further negotiation liberalization would extend the positive effects to developing countries, particularly the higher-income ones, but this may be associated with increased social and economic adjustment costs in the short and medium term.

Government procurement rules – as reflected in the current WTO plurilateral agreement – must be revised so that governments retain the right to bolster markets for environmentally friendly products through green procurement.