China pressing home field procurement advantage

There are many ways to play favorites with purchasing decisions, and procurement schemes designed to rigorously produce competition use many devices to try to mitigate such favoritism. But government contracting is, like all government programs, a socio-political institution also, and not a narrow-minded penny-pinching regime of economic rationalists. So it is often a case of balance between the competing demands of socio-political interests and "pure" economical interests.

Social preference provisions have been the topic of many posts already. Today I give the nod to one of the bigger social preference controversies in world trade in the last year or so: China's moves to reduce or restrict foreign competition for its so-called home grown businesses -- so-called because often they are simply copy-cat knock-offs of foreign business ideas. It is rare anywhere in the world for truly home-grown business ideas to emerge.

A flavor of the controversy is suggested in the following articles:

U.S. steel industry calls for China trade restrictions September 19, 2007

China's government has subsidized the creation of a large steel industry that is now exporting big amounts of cut-price steel to the United States, said Andrew Sharkey, president of the American Iron & Steel Institute. Those subsidies, including discounted prices for land and energy, low-cost loans and debt forgiveness, represent unfair trading practices that threaten the U.S. industry, he said. The U.S. steel industry can compete against other companies, he said, but "we can't compete against other governments."

China Accused of Trade Restrictions June 23, 2009

The United States trade representative, Ron Kirk, said China had imposed quotas, export duties and other costs on raw materials used in the production of steel, chemicals and aluminum. In effect, he said, China was putting its thumb on the scale and giving Chinese manufacturers an unfair edge.

German Business Chiefs Criticize China July 19, 2010

Jürgen Hambrecht, chairman of giant chemical company BASF (BASFY), and Peter Löscher, chief executive of industrial conglomerate Siemens (SI), added their voices to a growing clamour of criticism against Chinese rules that are seen as disadvantaging foreign firms. Mr Hambrecht said foreign companies are frequently forced to transfer business and technological "know-how" to Chinese companies in exchange for market access.

There is currently a round of negotiation going on at the World Trade Organization level regarding China trade with the rest of the world involving government procurement matters. The Wall Street Journal has reported the events in this story:

China Reapplies to WTO Procurement Group

China offered to increase foreign companies' access to its government purchases as it seeks to overcome international complaints that it discriminates against foreign vendors, but analysts said the move still may not go far enough toward easing their concerns.

The offer was presented in the form of a new proposal for membership in the World Trade Organization's Agreement on Government Procurement, which requires nondiscriminatory access to government purchases.

The GPA is an agreement among more than a dozen parties, including the U.S. and the European Union, and has more than 20 observers, several of which, like China, are in the midst of negotiations to join the agreement.

State-owned enterprises—which include many of China's biggest companies—and agencies under provincial or local governments aren't covered by the new proposal, even though they make up a significant portion of government spending in China.

And China's proposed value thresholds for contracts that would fall under the GPA are still higher than the thresholds of other members, they say.

The proposal, which makes revisions to China's first proposal in 2007, comes amid intense criticism of China's government by foreign companies and governments for new rules governing access to its massive government-procurement market. Chinese officials estimate that such procurement contracts exceeded $100 billion in 2009.

Mr. Yao said China hopes other members will take into account that China is still a developing economy.

A blog post today in Foreignpolicy.com, The death of the China lobby? by Daniel W. Drezner, gives an expansive array of recent claims made by US and European parties about China's trade stance, in which procurement rules appear prominently. It is worth a review but would be a digression to this post. For me, the key point in his whole report is this:

At best, current policies are moving very slowly towards liberalization. The good news is that China is seeking to join the WTO's Government Procurement Agreement, which liberalizes trade among participating countries for government-commissioned projects. The bad news is that China's latest offer is half-assed tokenism underwhelming in terms of what's on offer, and likely to be rejected by the US and EU.

So, why is China suddenly so hostile towards western multinationals?

The simple realpolitik answer is that China is simply more powerful than it used to be, and its flexing its muscles now because it has them.

A Chinese perspective on this matter is appropriate. This particular one begins to sound a bit like the "governmental function" debate within US government procurement:

US welcomes China's GPA offer July 20, 2010 by Hao Zhou and Wei Lai

The US welcomes the improvement that China has made in its first revised offer to the WTO Government Procurement Committee, a senior trade official at the US embassy in Beijing said Monday.

However, a Chinese expert warned that China should pay attention to protect its vulnerable but promising companies while they are exposed to a larger and more competitive market.

"The revised offer submitted by China this time is focused on the definition of government procurement entities," Christopher Adams, minister counselor for trade affairs at the US embassy in China, told a seminar in Beijing Monday.

Washington is not asking China to cover all of its State-owned enterprises (SOEs) but does expect the coverage of SOEs that carry out government activities and provide public services, such as electric power companies, Adams said, urging China to include more sub-central government entities and SOEs in accession to the GPA.

"We don't expect companies that engage in purely commercial businesses like automakers, because other WTO rules apply to SOEs commercial activity," Adams said.

The GPA is one of the four plurilateral agreements under the WTO framework, and it doesn't require all the WTO members but only GPA parties to abide by the treaty, which aims to improve efficiency and transparency in government procurements.

"Chinese firms will gain access to a much larger government procurement market after China accedes to the GPA and remain highly competitive in China's domestic government procurement market," Adams claimed.

Jiang Yong, director of the Economic Security Studies Center at the China Institutes of Contemporary International Relations, said that China should be prudent in the GPA accession negotiations.

"The actual government procurement scale in China is much bigger than the announced figure, and, by the Chinese gauge, the government purchases scale in Western countries is not as huge as they boast," Jiang told the Global Times Monday.

The global government procurement market was estimated at $1.6 trillion in 2008. The Chinese government procurement market stands at around $100 billion, only 2 percent of its GDP. However, it doesn't cover most government-funded infrastructure projects.

"Given the strict limits imposed by Western countries on technology exports to China, it seems unworthy using the appreciating yuan currency to buy depreciating US commodities," Jiang said, noting that most Chinese government procurement entities do not have access to the huge Chinese forex reserve.

The US will not discuss the relaxing of technology export limits to China on the same table of China's GAP accession negotiation. "It's two totally different things," Adams said.