The Government Procurement Agreement (GPA) of the World Trade Organization (WTO) establishes “a framework of rights and obligations with respect to laws, regulations, procedures, and practices regarding government procurement with a view to achieving greater liberalisation and expansion of world trade…” The signatories have agreed that suppliers of goods and services in other signatory countries will be treated no less favourably than domestic suppliers in procurement covered by GPA, and that their laws relating to government procurement will be transparent and fair.
As a quid pro quo in the negotiations leading up to China’s accession to the WTO, China, committed itself to initiating negotiations for GPA membership by tabling an “Appendix 1 offer” “as soon as possible”. It took China six years following WTO accession to implement this GPA commitment. China delivered its initial offer along with its application in the end of 2007, which was met with criticism from negotiating parties of the GPA.
It is widely suspected, that China deliberately delivered an “unsatisfactory” proposal to simply fulfill its WTO commitment and simultaneously to signal its unwillingness to negotiate.
Under continuous pressure from the United States and EU, China came up with a revised offer on 9 July 2010. That offer contained modest progress in terms of covered central entities, making the first offer cover service procurement. In December 2011, China made a fresh bid to join the GPA but again was rejected by the US, which said it did not cover enough of China’s huge and complex array of state agencies and regional and local governments. This marks another failure in the negotiation of its bid for GPA membership. The result is largely not unexpected. China has been dragging its feet on GPA accession for good reason.
Main Issues of China’s GPA Negotiation
What is government procurement? Neither the GATT 1994 nor the GPA has a clear-cut definition of government procurement. The GATT defines it as procurement for government purposes, but leaving what governmental purposes are unanswered.
GPA 2007 develops a more comprehensive definition that refers to any kinds of procurement by covered entities not for commercial purposes. So the scope of government procurement of an individual party largely depends on its own legislative definition. While China’s current government procurement regime does not clearly specify what is regulated under it, it is very difficult for both Chinese and foreign negotiators to ascertain what they are going to negotiate about. The question is particularly difficult to answer in the case of China, since it is impossible to separate the role of government from the market. In fact, the central and local government is a major investment and market entity in China. As a result, the active role as an investor, of the Chinese government poses a serious challenge to the current GPA system.
To make the negotiation process even more complex is China has no major interest in joining the GPA. It is believed by many that there has been a lack of political momentum by China for GPA membership, despite potential benefits associated with it, such as access to government procurement from other countries. Beijing is yet to be fully convinced that such benefits will outweigh immediate costs such as loss of a powerful policy tool to pursue industrial, economic, social, and political objectives.
When a country joins the GPA, the government’s power in its consumption and investment will be greatly reduced. In the case of China, government-financed investment has been long considered a useful tool to induce and stimulate social investment and accomplish various policy objectives.
One of the major contentious issues in the negotiation of GPA accession is whether and to what extent the State-owned enterprises (SOEs) should be covered by the GPA. China contends that “all laws, regulations and measures relating to the procurement by state-owned and state-invested enterprises of goods and services for commercial sale, production of goods or supply of services for commercial sale, or for non-governmental purposes would not be considered to be laws, regulations and measures relating to government procurement. Thus, such purchases or sales would be subject to the provisions of Articles II, XVI and XVII of the GATS and Article III of the GATT 1994.” By such an argument, China suggests that it is not necessary to include SOEs in GPA coverage, since they have already undertaken the obligation of national treatment. However, the GPA parties are not convinced by this commitment. They are concerned that SOEs will favour domestic products in many cases.
Including SOEs in GPA coverage will cause serious challenges to the negotiation. First, Chinese SOEs are highly diversified with different degrees of market-orientation. Even if they are covered under the GPA, it is very difficult to distinguish between governmental and commercial procurement by an SOE. Secondly, the size of Chinese SOEs’ investment and consumption is too large for other existing members to offer similar benefits in return. Since GPA negotiation is based on strict reciprocity, it is almost impossible to find comparable sectors within incumbent parties that match Chinese SOEs.
Conclusion
While we are aware of all those difficulties and challenges in the negotiations of GPA accession for China, a country which is experiencing major economic change and development, I personally take the view that China should take a more positive and progressive position on GPA membership. Before joining the WTO in the 1990s, there was widespread concern and even fear that WTO accession would bring havoc to the country, wiping out Chinese national industries and domestic market players in many businesses. Now 10 years on, things are far more satisfactory than many people have feared. Instead, China finds WTO membership extremely beneficial, and China is now better integrated into the world economy than it was. GPA accession will for sure have a far-reaching impact on China as a whole and in particular on State-owned businesses, but in a positive way, if viewed from a long-term perspective.
China has been used to using government procurement to pursue other policy objectives, even to the extent of systemic misuse. We should always remember the fundamental objective of government procurement regimes is and must remain to get the “best value for money” which requires an open and transparent system.
According to a study conducted by the European Chamber of Commerce in China in April 2011, “The regulatory framework for government procurement in China is a drag on efficiency and innovation for the Chinese economy as a whole.”
The Chinese government may take the opportunity of the GPA accession negotiations to streamline its government procurement regime. Government procurement in China should be put under a strict and transparent regulatory system to ensure value for the money and freedom from corruption. Although the direct benefits of GPA accession might not be so visible, the negotiating process could be at least an opportunity for the government to use foreign pressure to reform and improve the current Chinese government procurement system which has been a major hotbed for corruption.
By Simon Bai, Winners Law Firm
WINNERS has been recognised consecutively as "Tianjin Firm of the Year" by two international legal journals: Asia Legal Business from 2008-2011, and by China Law & Practice from 2009-2011.
