The European Union could block non-EU companies from bidding for government contracts if European firms continue to struggle to win public tenders abroad, the European Commission said, in a move that could sharply escalate trade tensions.
European software companies in particular have complained that they are sidelined in bids for government contracts in China, while the European Commission also has concerns about U.S. legislation that favours homegrown firms.
To fight back at what it regards as unfair competition from its major economic rivals, EU commissioners for the internal market and trade have put forward proposals that could see a dramatic shift in the public procurement landscape.
“Our instrument will create leverage to open third-country public procurement markets, thereby helping EU companies get a fair crack of the whip at business opportunities in the overseas government procurement market,” the European Commission, the EU’s executive, said in a document explaining the proposal.
“Only €10 billion of EU exports – 0.08% of EU GDP – currently find their way in global procurement markets.”
Under the proposal, European public authorities could exclude foreign firms from competing for EU contracts over the value of €5 million if there is evidence that European companies are routinely overlooked by public bodies abroad.
The proposals need to be approved by the EU’s 27 member states and the European Parliament before becoming law, a process that can take up to a year.
The Commission has been reluctant in the past to tackle suspected protectionism in other markets and has relied on public procurement agreements at the World Trade Organization to create a level playing field.
In January, the EU urged China to join the WTO’s agreement on government procurement, but the Asian giant refused, saying developed nations kept raising the bar on what they expected from Chinese companies.
Commission figures show that the EU makes €352 billion worth of public procurement contracts open to foreign bidders. By comparison, the U.S. market offers only €178 billion to outside bidders and Japan €27 billion.
Figures on contracts awarded by China from its €83 billion public procurement market are more difficult to come by, a Commission official said.
“A lot of problems need to be resolved before China can join the (WTO) pact,” said Suo Bicheng, director of the Department of World Trade Organization Affairs at China’s Ministry of Commerce.
The Chinese official said the Commission’s plan to exclude Chinese firms from public tenders was unlikely to drive the country into accepting bids from more European manufacturers.
“The EU’s new pact, when adopted, won’t have an immediate effect on Chinese companies bidding for EU contracts and won’t scare China into making concessions over the government procurement agreement proposal, as they expect,” he told the China Daily newspaper.
The EU says it is also irked by “Buy American” measures creeping into U.S. policy, in particular the 2011 Jobs Bill and the 2009 American Recovery and Reinvestment Act.
The Chinese ambassador in Brussels, Wu Hailong, rejected accusations that European companies get a bad deal in China.
“Provided that they receive equal access to our market and receive market exposure on an equal footing there is still the possibility that Chinese consumers choose domestically produced products,” he said.
“And it is reasonable that they may go for low prices.”
The Business Software Alliance (BSA), an industry lobby, said that in spite of efforts by China to tone down requirements for government contracts, in practice the group’s members, including Microsoft, were still overlooked.
“One of our biggest challenges is that the fastest growing market for technological products is being walled off to foreign companies,” said David Ohrenstein, from the BSA in Washington.
Ohrenstein is watching Chinese and Indian procurement restrictions in particular because both have legislation in place restricting foreign firms from public bids.
Metin Kazak, Bulgarian MEP (ALDE), welcomed the public procurement initiative and underlined the significance of this move especially when related to emerging economies such as China.
“The importance of procurement markets is underlined by the estimate from the EU Chamber of Commerce in China that public procurement accounts for roughly 20% of Chinese GDP. It is therefore vital that this proposal succeeds in opening such markets in emerging economies thus creating jobs and growth in the EU”.
Morten Løkkegaard, Danish MEP (ALDE) and spokesman for procurement within the Internal Market committee also underlined the importance of such initiatives especially during times of economic crisis:
“The most important issue is to create a level playing field. In my view it is not in the interest of the EU, nor of the Member States to close off the markets from third countries, and thereby pay more than necessary for goods or services in the public sector. We need to fight the economic crisis by staying competitive, not by closing our markets to keep out the most competitive foreign bidders”.
“We are the most open market in the world and we see no reason why others should not open their markets more”, argued Karel De Gucht, European commissioner for trade. “We need this pressure to open up markets for our companies and our products.
Michel Barnier, European commissioner responsible for the Internal market and services said that Europe is “open for business” as it is a firm belief that the “opening up of public procurement generates benefits at global and European level”
“By presenting this instrument to open markets, we [also] respond to the unanimous request of the European Council, which specifically ordered the Commission for such an instrument for a reciprocal opening of the markets that could generate mutual benefits.”
The American Chamber of Commerce to the European Union (Amcham EU), welcomed the legislative initiative as another step to the liberalisation of procurement markets internationally and underlined its potential significance.
“If properly drafted and implemented, a new instrument could deepen competitiveness and enhance procurement markets globally. Conversely, any legislative initiative should not be a tool for economic protectionism, nor for side-stepping the WTO dispute settlement process.”