[Federal Register Volume 64, Number 91 (Wednesday, May 12, 1999)]
[Notices]
[Pages 25525-25529]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-11930]
-----------------------------------------------------------------------
OFFICE OF THE UNITED STATES TRADE REPRESENTATIVE
Annual Report on Discrimination in Foreign Government Procurement
Pursuant to Executive Order 13116 (``Title VII'')
AGENCY: Office of the United States Trade Representative.
ACTION: Notice.
-----------------------------------------------------------------------
SUMMARY: Notice is hereby given that the United States Trade
Representative (``USTR'') has submitted the annual report on
discrimination in foreign government procurement, published herein, to
the Committees on Finance and on Governmental Affairs of the United
States Senate and the Committees on Ways and Means and on Government
Reform and Oversight of the United States House of Representatives,
pursuant to the reinstituted procedures of Title VII of the Omnibus
Trade and Competitiveness Act of 1988 (``Title VII''), as amended, as
set forth in Executive Order No. 13116 of March 31, 1999.
DATES: The report was submitted on April 30, 1999.
FOR FURTHER INFORMATION CONTACT: Stephen Kho, Assistant General
Counsel, Office of the US Trade Representative, 600 17th Street, NW,
Washington, DC 20508, 202-395-3581.
SUPPLEMENTARY INFORMATION: The text of the USTR report is as follows:
Office of the United States Trade Representative, Washington, DC
April 30, 1999
Annual Report on Discrimination in Foreign Government Procurement
I. Legal Authority
On March 31, 1999, the President signed Executive Order 13116,
which largely reinstitutes the provisions of Title VII of the Omnibus
Trade and Competitiveness Act of 1988 (``Title VII''), as amended.
Under the Executive Order, the United States Trade Representative
(``USTR'') is required to submit to the Congress by April 30 of each
year a report identifying foreign countries:
(1) That have failed to comply with their obligations under the WTO
Agreement on Government Procurement (``GPA''), Chapter 10 of the North
American Free Trade Agreement, or other agreements relating to
government procurement to which that country and the United States are
parties; or
(2) That maintain, in government procurement, a significant pattern
or practice of discrimination against U.S. products or services which
results in identifiable harm to U.S. businesses, when those countries'
products or services are acquired in significant amounts by the U.S.
Government.
Within 90 days of the submission of the report, USTR must initiate
under section 301 of the Trade Act of 1974, as amended, an
investigation with respect to any country identified in the report,
unless USTR determines that a satisfactory resolution of the matter has
been achieved. If the matter is not resolved during that period and
USTR determines that the rights of the United States under an
international procurement agreement are being violated, or that any
discriminatory procurement practices exist, the Executive Order
requires USTR, inter alia, to initiate formal dispute settlement
proceedings under the international agreement in question or revoke any
waivers for purchasing requirements granted to the discriminating
foreign country.
Title VII has been a useful and effective tool in challenging
foreign governments' procurement barriers. The reinstitution of Title
VII procedures through Executive Order 13116 sends a strong signal that
the President is committed to protecting U.S. interests in
international procurement markets.
II. Identification of Foreign Countries and their Discriminatory
Procurement Practices
From 1991 to 1996, USTR conducted six annual reviews under Title
VII. During that time, six identifications were formally made, while
numerous potentially discriminatory government procurement practices
were noted. USTR achieved satisfactory resolution with respect to eight
discriminatory or potentially discriminatory practices, including a
GATT dispute settlement proceeding, with regard to the procurement of
an electronic toll booth collection system in Norway, in which the
panel found in favor of the United States.
[[Page 25526]]
Two other Title VII determinations remain outstanding: In 1992,
USTR identified the European Union (``EU'') as engaging in
discriminatory procurement practices of government-owned
telecommunications in certain member states; the United States imposed
sanctions in 1993, which are still in place today. Also, in 1996, USTR
identified Germany for discriminating in the heavy electrical equipment
sector and for its failure to adequately implement its obligations
under the 1993 U.S.-EU Memorandum of Understanding on Government
Procurement. As a result, Germany agreed to seek legislative changes to
end its discriminatory practices and the United States agreed to
temporarily suspend sanctions (see below for an update).
After consulting with other executive agencies and U.S. businesses,
USTR has determined not to identify any countries under Title VII,
because the practices of concern are either being addressed under
another trade dispute mechanism, do not meet the criteria for
identification, or are currently under scrutiny as a result of previous
identifications. The Administration will continue to carefully monitor
these practices in making its determinations next year, and the United
States will move forward with WTO dispute settlement proceedings to
challenge Korea's government procurement practices in the construction
of the Inchon International Airport.
A. Korea
As a party to the GPA, the procurement market for the Republic of
Korea (ROK) was estimated at approximately $3.8 billion in 1998. Of
this, about $1.3 billion was subject to international tendering
procedures in accordance with GPA rules. In addition to purchases of
goods and services, it is estimated that Korea awarded construction
contracts valued at $6.1 billion in 1998.
Presently, Korea is constructing the Inchon International Airport
(``IIA''). Valued at $6 billion, IIA is one of the largest public works
projects in Asia, and the largest underway in Korea. Although the
airport is about half completed, procurements over the next several
years will be worth billions of dollars, including those for (1)
meteorological radar, (2) Satellite Navigation System (CNS/ATM), (3)
control facilities for parking, (4) a cargo x-ray system, and (5) a
passenger x-ray system. It is important that U.S. firms have fair
access to these contracts.
During negotiations for Korea's accession to the GPA in 1991-92,
the United States obtained Korea's commitment that the entities
responsible for airport construction would be subject to GPA
disciplines. However, soon after negotiations were concluded, Korea
created another entity--the Korea Airport Construction Authority
(``KOACA'')--to manage procurement for IIA construction. In February of
1999, the Korean Government made another change to its airport
procuring authority by changing KOACA into the Inchon International
Airport Corporation (IIAC). Korea now asserts that, because KOACA and/
or IIAC are not expressly listed as a covered entity in its GPA
schedule of concessions, procurement for the IIA is not covered by the
GPA.
In seeking to participate in the IIA project, U.S. suppliers have
repeatedly faced discriminatory tendering practices that hamper their
ability to compete effectively for related procurement contracts. These
Korean Government practices include the following:
Requiring that a firm hold four Korean licenses, including
a manufacturing license, in order to be eligible to bid as a prime
contractor, thereby precluding foreign firms that do not have a license
to manufacture in Korea from bidding as a prime contractor;
Requiring that foreign firms participate in a bid only as
consortium members or subcontractors to local firms acting as the prime
contractors; and
Failing to provide effective procedures to enable
suppliers to challenge alleged breaches of the GPA arising in the
context of individual procurements.
U.S. Government officials sought to resolve these matters through
representations to the Korean Government in bilateral and multilateral
fora. Because Korea did not confirm that procurement for airport
construction is subject to the GPA, on February 16, 1999, the United
States requested consultations with Korea under WTO dispute settlement
procedures. Consultations were held on March 17, 1999. The U.S.
Government will take further steps necessary to resolve this matter.
B. Japan
The United States and Japan have concluded bilateral Government
Procurement Agreements covering six key sectors: telecommunications,
computers, construction, supercomputers, medical technology, and
satellites. While Japan's implementation of some of these agreements,
such as the Medical Technology Agreement, has led to significant
improvement in market access for U.S. firms, results to date under
other agreements, such as the Computer, Construction,
Telecommunications, and Supercomputer Agreements, have been highly
disappointing. The Administration remains seriously concerned that the
objectives of these agreements, which focus on the improvement of
foreign firms' access to and expansion of sales in the Japanese public
procurement market, are not being met. Further, in light of the
Japanese Government's increased fiscal spending in public works and
``21st century technologies,'' we believe that U.S. firms should have a
fair opportunity to compete for these procurements in line with the
obligations contained in our bilateral agreements. The United States
has made clear our concerns to the Japanese Government with respect to
those areas where we believe Japanese implementation could be improved.
In addition, the U.S. Government has offered new proposals for
generating progress in several areas, while proposing various ways in
which the agreements can be made more effective. Our success to date in
pursuing this agenda, however, has been limited, and further action is
necessary in order to ensure that foreign firms have fair, open, and
transparent access to Japanese markets. Particularly problematic are
Japanese Government procurement practices related to computer goods and
services and public works projects.
Japan--Market Access for Computer Products and Services: U.S.
computer makers, global leaders in technology and performance, have
long had a disproportionately low share of the Japanese public sector
market as compared with their strong showing in the Japanese private
sector. To address this fact, the United States and Japan concluded a
bilateral agreement on government procurement of computers (covering
computer hardware, software, and services) in 1992. Under this
agreement, the Japanese Government agreed to institute changes to its
procurement system based on the principles of non-discrimination,
transparency, and fair and open competition, with the aim of expanding
government purchases of foreign computer products and services.
However, there is still much to be done in this sector to increase
transparency, openness, and fairness. In addition, while there has been
some sporadic increases in Japanese public procurement of foreign
computer
[[Page 25527]]
products and services, the overall aim of the agreement has not been
met on a sustained basis.
The U.S. Government continues to receive reports from U.S. industry
of problems in Japanese Government procurement of computers, including
unequal access to information, persistence of unreasonably low bids,
and a lack of strong efforts by the Japanese Government to ensure that
sole-sourcing procurements by government entities decrease
significantly, as called for in our bilateral agreement. U.S. industry
has also noted that even where bidding is open, Japanese purchasing
agencies often evaluate bids in a way that encourages excessively low-
priced bids. These factors have created an environment whereby U.S.
computer companies enjoy only limited access to the Japanese Government
procurement markets. An important result of these problems has been a
steady, long-term decrease in the foreign share of the Japanese public
sector Personal Computer (``PC'') market since 1992 and a significant
decline in the foreign share of the Japanese public sector mainframe
and mid-range computer market in the last two years for which there is
data. The next annual review of this agreement, covering 1997 data, is
scheduled for May in Tokyo. Despite signs that there may have been an
increase in Japanese Government purchases of foreign mainframe and mid-
range computers in 1997, continuing poor performance of state-of-the-
art foreign-made PCs, and the fact that foreign firms have continued to
hold approximately 35 percent of Japan's overall private sector
computer market over the last several years, are evidence that
significant non-competitive forces are still at work in the Japanese
public sector computer market. As a result, the U.S. Government remains
committed to fully address discriminatory and non-transparent practices
in this sector.
In light of the poor results under the agreement to date, lingering
concerns over fairness and transparency, and rapid changes in
technology in this sector, last August the U.S. Government presented
the Japanese Government with a set of proposals devised to improve
implementation of the agreement and bring its provisions into line with
advances in technology. These include taking specific steps to further
improve the bid evaluation process to give greater weight to
technological innovation and other key non-price factors. retch
To date, the U.S. Government has been extremely disappointed with
the Japanese Government's reluctance to seriously consider these
proposals, particularly since the result would be a more competitive
procurement system and better value for Japanese Government entities.
The U.S. Government continues to urge Japan to undertake further steps
to ensure that the provisions of this agreement are fully implemented
and that its objectives are met.
Japan--Market Access for Construction: American firms are well-
known for their top-notch expertise in design/consulting and
construction projects. Despite two bilateral agreements intended to
enhance access to Japan's public works market, American companies
continue to fare poorly and the objectives of the agreements are not
being achieved. The 1991 Major Projects Arrangement is intended to
familiarize foreign firms with Japan's public works market while the
main purpose of the 1994 Public Works Agreement is to make bidding and
contracting procedures more transparent and objective. The U.S.
Government is seriously concerned by the fact that, at the June 1998
annual review, it was recognized that U.S. firms had won only $50
million in contracts over the preceding year--less than one percent of
Japan's $250 billion public works market and only half of the $100
million in contracts won the year before.
The United States has focused on two key areas that require serious
attention in this sector--Japanese restrictions on the formation of
joint ventures for construction projects and the very low number of
design/consulting procurements open to foreign firms. Regarding joint
venture formation for construction projects, the United States has
pressed Japan to eliminate the ``three-company rule,'' under which the
Japanese Government limits to three the number of firms that can
participate in a joint venture. In addition, the United States has
asked Japan to allow companies, rather than procuring entities, to
determine whether or not a supplier can bid as a solo bidder or as a
member of a joint venture. To date, Japan has rejected these requests.
The United States will continue to urge Japan to eliminate these
restrictions, thereby promoting greater competition in this sector.
With regard to the low number of design/consulting procurements
open to foreign firms, Japan's Construction Ministry recently has
undertaken initiatives in response to U.S. concerns. These initiatives
include allowing design/consulting firms greater freedom to partner on
projects; combining design contracts in a way that would lead to
greater coverage of procurements by the agreements, thereby increasing
opportunities for foreign firms; and contracting out all future design
work (instead of conducting design ``in-house''). The United States is
encouraging other ministries to follow the Construction Ministry's lead
and is monitoring closely these initiatives to see if they result in
progress under the agreements.
The U.S. Government continues to urge Japan to take immediate,
concrete steps in both the design/consulting and construction areas
that will lead to increased business opportunities for American
companies. The United States has made clear our expectation that
progress be made before the next annual review of the public works
agreements, which is tentatively scheduled for July 1999.
C. Germany
In April 1996, USTR identified Germany in the Title VII report for
its failure to comply with market access procurement requirements in
the heavy electrical equipment sector. The identification was based on
irregularities in the procurement process for two separate steam
turbine generator projects. In particular, the Title VII Report noted a
``pervasive institutional problem'' with respect to Germany's
implementation of a remedies system for challenging procurement
decisions. The imposition of trade sanctions, however, was delayed
until September 30, 1996, because consultations with Germany suggested
a resolution might be possible given additional time. On October 1,
1996, then-Acting USTR Barshefsky announced that the German Government
had agreed to take steps to ensure open competition in the German heavy
electrical equipment market, including reform of the government
procurement remedies system as well as outreach, monitoring, and
consultation measures. The United States did not, however, terminate
the Title VII action at that time because legislation implementing
reform of the procurement remedies system needed to be enacted.
In May 1998, the German parliament passed legislation requiring
significant reforms in the German procurement system, including reforms
with respect to bid challenge procedures. This legislation was signed
and entered into effect on January 1, 1999. The Administration has
advised the German Government that it will review the status of this
Title VII identification on the basis of practical experience
[[Page 25528]]
demonstrating the effective implementation of this legislation.
III. Transparency in Government Procurement
Active support for early conclusion of a WTO Agreement on
Transparency in Government Procurement is a key element of the
Administration's ongoing efforts to promote the development of
transparent procurement environments throughout the world. Drawing
largely on proposals made by the United States, WTO Ministers agreed at
the 1996 Singapore Ministerial Conference to establish the WTO Working
Group on Transparency in Government Procurement. The Working Group's
mandate is to: (1) conduct a study on transparency in government
procurement practices; and (2) based on this study, develop elements
for a multilateral agreement on transparency in government procurement.
Conclusion of a WTO agreement on transparency in government
procurement will serve a wide range of important U.S. interests. It
will help to establish a more stable and predictable business
environment for U.S. exporters, even in markets where governments
maintain ``buy national'' or other purchasing restrictions. It will
also build on the ``good governance'' reforms that a growing number of
countries have adopted in response to the international financial
crisis, and the deeper structural impediments to efficient long-term
growth and development.
In 1997 and 1998, the Working Group's initial study of WTO Members'
general procurement policies and objectives revealed broad
international agreement on many key principles. Based on this work and
subsequent consultations, the Working Group is poised to move forward
with negotiations on the elements of a transparency agreement. Those
elements will likely include:
Information on National Legislation and Procedures;
Information on Procurement Opportunities;
Information on Tendering and Qualification Procedures;
Transparency of Decisions on Qualification;
Transparency of Decisions on Contract Awards; and
Domestic Review Procedures.
The United States and its Quad partners have urged that the Working
Group seek to conclude these negotiations by the Third WTO Ministerial
Conference, in late 1999.
IV. International Government Procurement Agreements
A. The WTO Agreement on Government Procurement (``GPA'')
The GPA, which entered into force on January 1, 1996, is a
``plurilateral'' agreement included in Annex 4 to the WTO Agreement. As
such, it is not part of the WTO's single undertaking, and its
membership is limited to the 26 WTO members that signed the Agreement
in Marrakesh or that subsequently acceded to it. The current Members
are the United States, the member states of the European Union
(Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland,
Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, United
Kingdom), Aruba, Canada, Hong Kong, Israel, Japan, Liechtenstein,
Norway, the Republic of Korea, Singapore, and Switzerland. Chinese
Taipei, Iceland, and Panama are in the process of negotiating accession
to the GPA, although by the terms of the GPA, Chinese Taipei must
become a WTO member prior to GPA accession. In their protocols of
accession to the WTO, Bulgaria, the Kyrgyz Republic, Latvia, Mongolia,
and Slovenia have committed to pursue GPA accession.
In its report to the 1996 Singapore Ministerial Conference, the
Committee on Government Procurement, which monitors the GPA, stated its
intention to undertake an ``early review'' of the GPA starting in 1997.
The review would be aimed at the implementation of Article XXIV:7(b)
and (c) of the GPA, which call for further negotiations to achieve the
following objectives:
Simplification and improvement of the GPA, including,
where appropriate, adaptation to advances in the area of information
technology and streamlined procurement methods;
Expansion of coverage of the GPA; and
Elimination of discriminatory measures and practices which
distort open procurement practices.
GPA Members have agreed that one of their principal objectives for
the review of the Agreement is to promote expanded membership of the
GPA by making the Agreement more accessible to non-members.
In the course of the review, many Members have also noted the
importance of ensuring that the GPA's rules accommodate the use by
governments of new information technologies and other innovations in
government procurement procedures. Many governments now use electronic
forms of publication for procurement notices and other documents to
improve dissemination capabilities and lower costs for both suppliers
and governments. The United States believes that the GPA must
accommodate such improvements in the operation of procurement systems.
The United States and other Members have also recognized the potential
for simplifying the Agreement's statistical reporting requirements, an
issue that is of particular interest to members' sub-central
procurement authorities and to other countries that may potentially be
interested in acceding to the GPA.
The GPA establishes a procedure for monitoring members'
implementing legislation. The United States has used this procedure to
better understand and comment on procurement practices of concern to
U.S. suppliers, such as the practices of Korea's airport construction
authorities and the application of the EU ``Utilities Directive.''
B. Chapter 10 of the North American Free Trade Agreement (``NAFTA'')
In Chapter 10 of the NAFTA, signatories agreed to open the majority
of non-defense related federal procurement opportunities to competition
from all North American suppliers. Because Mexico is not a member of
the GPA, its participation in the NAFTA marked the first time that
Mexico had committed to eliminate discriminatory government procurement
practices. While differences exist between NAFTA Chapter 10 and the GPA
(e.g., with respect to thresholds and sub-federal coverage), the
principles of non-discrimination, fair and open competition, and
transparency are established with equal force in both agreements.
In October 1998, agreement was reached by the delegations of
Canada, Mexico, and the United States to the NAFTA Working Group on
Government Procurement with respect to the subject of electronic
transmission, pursuant to Article 1024(5) of the NAFTA. Particularly,
the delegations agreed that the NAFTA Parties may publish invitations
to participate for all procurements in either paper or electronic
format, or both.
Recently, the Administration has received complaints from U.S.
exporters that Mexico is not adhering to the NAFTA requirement that the
time limit for the receipt of tenders must be open for a minimum time
period that is consistent with Article 1012, which allows suppliers to
prepare and submit meaningful tenders. Generally, the period for the
receipt of tenders is to be no less than 40 days from the date of
publication of a Request for Proposal. A 1997 study commissioned by
Canada indicated that this problem is pervasive
[[Page 25529]]
in Mexican procurement procedures subject to the NAFTA. In the NAFTA
Negotiating Group on Government Procurement, the United States has
joined Canada in seeking clarification on this issue and in urging
Mexico to ensure that its procurement authorities comply with the
relevant NAFTA commitments.
C. Free Trade Area of the Americas (``FTAA'')
The United States is presently involved in discussions for creating
a new free trade area, the FTAA. As an active participant in the
Negotiating Group on Government Procurement, and as the discussions
involving government procurement is in the very early stages, the
United States is generally interested in (1) concluding a text
embodying the principles of transparency and due process in government
procurement, leading to a recommendation for agreement at the October
1999 FTAA Ministerial meeting to implement the results of this work by
December 1999; (2) achieving agreement on a set of commitments which
will ensure non-discrimination in government procurement within a scope
to be negotiated, to be implemented as part of the conclusion of the
FTAA; and (3) achieving agreement on the basic elements of a common
procurement reporting system.
V. Other Trade-Distorting Practices
A. Bribery and Corruption
Among the most consistent complaints the Administration receives
from U.S. industry and labor representatives is that bribery and
corruption compromise U.S. market access in many foreign markets. This
is particularly true for big ticket infrastructure projects for which
preparation of a bid package alone can cost millions of dollars. U.S.
firms often find that they are bidding on projects with little or no
certainty as to whether the offered technology and price are going to
be the primary considerations in the award of contracts. Despite their
concerns, however, many U.S. firms have in the past been hesitant about
coming forward publicly with cases in which they have seen bribery and
corruption influence contract awards, because of fears that they may
experience a commercial backlash with respect to future contracts.
These circumstances call for government-to-government initiatives
to root out bribery and corruption in international procurement
markets. The Administration is aggressively pursuing this objective in
a wide range of international fora. The recent entry into force of the
OECD Convention on Combating Bribery of Foreign Public Officials in
International Business Transactions, which obligates its 34 parties to
impose criminal sanctions on the offering and payment of bribes in
procurement markets and other international commercial transactions,
represents a major step forward. The United States and 33 other
countries have signed the OECD Convention.
Furthermore, twenty-five members of the Organization of American
States (``OAS''), including the United States, have signed the OAS
Inter-American Convention Against Corruption, which obligates its
parties to impose criminal sanctions, and provides for international
legal cooperation in combating corrupt practices in international
business transactions. The Administration looks forward to early
ratification of the OAS Convention.
B. Offsets in Defense Trade
When purchasing defense systems from U.S. defense prime
contractors, many U.S. trading partners require compensation in the
form of offsets as a condition of purchase in either government-to-
government or commercial sales of defense articles and/or defense
services. Offsets include mandatory co-production, licensed production,
subcontractor production, technology transfer, countertrade, and
foreign investment. Offsets may be directly related to the weapon
system being exported, or they may take the form of compensation
unrelated to the exported item, such as foreign investment or
countertrade.
Prime contractors view offset arrangements as a necessity for
success in the international marketplace. However, offset requirements
cause prime contractors to select subcontractors based on their being
located in the country requiring the offset versus best value, thereby
adversely affecting potential U.S. subcontractors. Originally designed
to enhance allied national security, offsets increasingly have become
economic development tools for the countries that demand them.
Furthermore, there has been a recent trend to fulfill offset
requirements with non-defense products versus defense products.
Charlene Barshefsky,
United States Trade Representative.
[FR Doc. 99-11930 Filed 5-11-99; 8:45 am]
BILLING CODE 3190-01-P
