Cato Online Forum

What Can TTIP Accomplish to Liberalize Government Procurement?

By Gary Hufbauer and Tyler Moran
September 2015

Introduction
Government procurement represents a major portion of economic activity on both sides of the Atlantic. In 2013, according to the latest OECD data, federal, state and local government procurement claimed 10 percent of US GDP.1 Some EU countries had similar levels of central and sub-central procurement spending (such as Spain, Ireland, and Greece), but most came closer to 15 percent of GDP. Given a range of 10 to 15 percent of GDP, the potential gains from liberalizing government procurement are substantial. Boosting competition for procurement markets will not only stimulate trade, but also enable governments to stretch their dollars and euros further.

GPA and FTA Provisions
The WTO Government Procurement Agreement (GPA) already imposes some discipline on U.S. and EU procurement contracts. The GPA requires that covered contracts above certain value thresholds be open to bids from other GPA members. Under the most recent iteration of the GPA, which entered into force in April 2014, both the United States and European Union apply a 130,000 SDR (Special Drawing Rights) threshold for covered central government goods and services contracts. The threshold for construction contracts is much higher — 5,000,000 SDR. These thresholds only apply to the entities scheduled in the signatory’s annex to the GPA, and the schedules are subject to various exceptions.

U.S. free trade agreements (FTAs) generally open more goods and services contracts to foreign bidding by reducing the value threshold for qualifying contracts, and TTIP should be no exception. For example, in the Korea-U.S. Free Trade Agreement (KORUS), the United States set a threshold of $100,000 for goods and services procured by U.S. federal entities, while Korea set a similar threshold. Construction contracts, however, typically maintain the much higher GPA threshold. While negotiators are sure to vigorously debate which federal agencies should be covered and at what threshold, the biggest challenge for TTIP will be to cover much more procurement by sub-federal government bodies, as well as certain “sacred cows” in federal procurement, such as airport expansion and renovation contracted by the Federal Aviation Administration.

Sub-Federal Procurement
The GPA covers some sub-federal procurement, but U.S. commitments are not extensive. Thresholds are generally high (355,000 SDR for covered U.S. sub-federal entities), and several states made very few or no commitments. Varying commitments were scheduled by 37 states in the GPA. By comparison, the EU offers much broader access to foreign producers, covering more agencies and setting a lower threshold for goods and services (200,000 SDR).2

While there’s little doubt that the U.S. federal government has the constitutional authority (per Article I Section 8) to make commitments on behalf of the states, the political landscape makes exercise of that power a risky endeavor. Responding to concerns from a broad coalition in Congress, the U.S. Trade Representative (USTR) declared that the Trans-Pacific Partnership (TPP) would not cover any state or local government procurement.3 In fact, as a rule, U.S. FTA commitments have not bound state governments. Instead, the USTR has solicited voluntary commitments from state governments. While this makes it easier to secure Congressional ratification, the voluntary approach undermines U.S. trade negotiations because, as a practical matter, no states have “volunteered” since the North American Free Trade Agreement (NAFTA) was implemented two decades ago. Hence, while the USTR declaration with respect to TPP was consistent with past U.S. practice, it gave no comfort to EU negotiators in the TTIP context.

The U.S. voluntary approach to sub-federal procurement has been widely criticized by negotiating partners, including the European Union. A 2015 European Commission report highlighted U.S. sub-federal procurement as one of just three major concerns, and with good reason.4 State governments account for nearly two thirds of total U.S. government procurement, making weak U.S. commitments all the more damaging.5

The federal government finances a good share of state procurement. The outstanding example was the American Recovery and Reinvestment Act of 2009 (ARRA, also known as the stimulus bill) which funded hundreds of billions of dollars of state projects. While the contracts were undertaken by the states as agents for the federal government, as a legal matter they failed to trigger federal procurement commitments. Not satisfied with simply skirting federal procurement commitments, the ARRA went a step further and imposed a “Buy America” requirement on all projects funded by the program.6 Thus, even state governments interested in making the most effective use of their procurement funds were unable to do so.

At the very least, TTIP’s procurement commitments should apply to all projects funded to a significant degree by federal programs, even when the funds are delegated to a sub-federal government. This should not run afoul of U.S. sensitivity towards state government autonomy, as the federal government’s power to impose conditions on the use of federal monies is well established in every sphere, from health care to highways. This approach to future federal spending programs would ensure national treatment for EU firms, even when the programs are implemented by the states.

Even so, this concession would fall short of what the European Union is seeking. Europe wants the states and large cities to allow European firms to bid on procurement contracts funded from local revenue sources. In the Comprehensive Economic and Trade Agreement (CETA), negotiated with Canada, the EU secured far reaching access to Canada’s sub-federal procurement markets, including sensitive energy, water and sewage contracts. Coverage extends to the municipal level and includes a wide collection of agencies. Since all Canadian provinces and territories made broad commitments, CETA’s procurement chapter is far stronger than parallel chapters in other Canadian FTAs. This outcome reflects the EU’s strong interest in robust procurement liberalization.

Unless USTR can address this EU priority, it will encounter roadblocks in securing EU liberalization in other areas. And if Congress warns USTR against making procurement commitments on behalf of the states, U.S. negotiators will need to find creative ways of convincing states to make voluntary commitments.

One approach would be for the EU to tie certain concessions to procurement commitments from specific states. More generally, legislators looking to assure that USTR remains firm on issues important to their constituents could add weight to their requests if their state government tied procurement commitments to certain EU concessions. States with similar interests might extract sizable EU commitments by using the combined weight of their procurement markets. States like Florida and Texas, for example, might entice EU negotiators to make stronger commitments on regulatory barriers for chemical and IT products. States with concerns over agricultural issues could also give the USTR additional leverage to pursue their interests.7

As another approach, the EU could limit its own sub-federal procurement commitments to US suppliers with a majority of employment in states that make satisfactory procurement offers. This was attempted in past U.S. FTAs with Latin American countries, but with little success. Only eight states signed on to the FTAs with Panama and Colombia, while ten made commitments in the U.S.-Peru FTA. However, states will probably show a greater interest in gaining access to the vast EU procurement markets, so it might be worth trying this approach in the TTIP context.

TTIP could also limit the distortionary effect of procurement preferences for domestic firms by requiring that state and local governments use price preferences rather than minimum content requirements. In other words, procurement tenders could not shut out bids based on the extent of foreign content. Instead, offers that contain a threshold level of foreign value would be awarded the contract only if the bid was a certain percent lower (say 10% or 25%) than the lowest offer from a domestic producer. This approach would limit the harm to government budgets when domestic firms are completely uncompetitive, while allowing the public to see just how much “buy national” preferences cost their local, state, and national budgets.

Conclusion: Dispute Resolution
The ARRA experience revealed that standard dispute resolution is not adequate for enforcing government procurement commitments. Canada, concerned over the ARRA’s discriminatory Buy America provisions, began consultations as soon as the ARRA was enacted in 2009. The consultations eventually resulted in an agreement between Washington and Ottawa, but the stimulus money was largely spent before that agreement took effect. As a result, Canadian firms were foreclosed from bidding on nearly all ARRA projects.

The TTIP should ensure that aggrieved firms can resolve legitimate disputes much more quickly. Procurement commitments are not worth much if offending governments can dodge their obligations by stalling the dispute resolution process. If the dispute resolution process does not work fast enough to award the contract in question to an aggrieved foreign firm, then appropriate money damages should be awarded as compensation.

If the TTIP can reform trans-Atlantic government procurement along the lines suggested, the chapter will serve as a template from much broader reforms on a global basis. This would be a true ray of sunshine in a murky area of world commerce. On the other hand, if TTIP falls flat on its reform efforts, it’s very hard to envisage meaningful progress in the WTO or most bilateral and regional FTAs.

Notes:
1 OECD Public Procurement data
2 See “Coverage schedules under the revised GPA,” World Trade Organization, www.wto.org/english/tratop_e/gproc_e/gp_app_agree_e.htm#revisedGPA.
3 https://ustr.gov/about-us/policy-offices/press-office/blog/2014/july/facts-about-government-procurement-and-tpp-tpp-promotes-buying
4 http://trade.ec.europa.eu/doclib/docs/2015/march/tradoc_153259.pdf
5 OECD data
6 The Buy America commitment was tempered by language requiring consistency with US international agreements, but the USTR then read provisions of international agreements as narrowly as possible.
7 For an example of such concerns, see the following letter from several senators to the USTR: http://www.casey.senate.gov/newsroom/releases/casey-toomey-call-on-ustr-to-protect-agricultural-exports-in-new-international-trade-agreement

The opinions expressed here are solely those of the author and do not necessarily reflect the views of the Cato Institute. This essay was prepared as part of a special Cato online forum on The Economics, Geopolitics, and Architecture of the Transatlantic Trade and Investment Partnership.

Gary Hufbauer is a Reginald Jones Senior Fellow at Peterson Institute for International Economics and Tyler Moran is a research analyst at Peterson Institute for International Economics.