Annual Report on Discrimination in Foreign Government Procurement Pursuant to Executive Order 13116 (``Title VII'')

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