Controversies in state coverage
How states and cities spend tax dollars--and who is authorized to make spending choices--is a critical, ongoing debate in our democratic system. So it's no surprise that trade rules covering government procurement are controversial:
- Should states bind their purchasing procedures to the rules of trade agreements?
- Given that it is legislatures who authorize most spending, shouldn't they have a say in whether the state is bound or not?
Also controversial have been recent decisions by USTR:
- adopting a policy on 'reciprocity'--an attempt to deny procurement opportunities abroad to businesses from any state that has not bound its purchasing under the rules of a particular trade agreement.
- not acknowledging state withdrawal from a procurement commitment, as requested by a Governor or a state legislature.
Should states bind their purchasing?
Given the volume of government procurement that takes place at the state and city level in the United States, the inclusion of sub-national procurement as part of a trade package clearly strengthens US offers at the negotiating stage. It is equally true that states and cities lose some flexibility to set their own purchasing rules when they agree to be bound by the terms of such an agreement.
Most states strongly assert that they already pursue non-discriminatory purchasing programs and are open to bids from foreign suppliers. Many feel that citizens are best served when public procurement processes are transparent, simple, and open to all comers--resulting in better use of taxpayer dollars. Others argue that directing government spending to local businesses helps support economic development and the retention of tax dollars within a state or city.
Well over half of all states have legislation giving in-state firms the edge in the case where identical or equivalent bids are submitted. Local preferences are a different matter. Limitations on the use of 'buy local' or 'Buy American' mandates have been part of the global trading system since the Tokyo Round of negotiations in the 1970s; and local purchasing preferences continue to be challenged by US trading partners.
Who should make the decision?
The scope of government procurement was expanded in the Uruguay Round of negotiations to include sub-federal procurement. USTR asked Governors to make commitments to the WTO General Procurement Agreement then being negotiated. For the most part, state legislatures were not informed of the request--despite the fact that legislatures have the power to approve and modify state budgets.
Only one Governor--Mark Racicot on Montana--responded to USTR by noting that the decision was not his to make: "Montana has statutory
procurement preferences designed to benefit in-state vendors....As a result, I am unable to make
any commitment which could be interpreted as contrary to these statutes," he wrote in a November 1993 letter to USTR. Later, however, Montana was included on
the list of bound states.
The issue of decision-making authority appeared again ten years later when USTR sent letters to Governors asking for their agreement to bind state purchasing under the Central American Free Trade Agreement and other subsequent FTAs.
In Maryland, Governor Ehrlich agreed to bind Maryland under CAFTA. Arguing that the power to make this decision rested with the legislature, the Maryland General Assembly enacted legislation that rescinded the commitment, overriding a veto from the Governor in the process. Two other state legislatures--in Hawaii and Rhode Island--also pressed for recognition of their role in this decision.
In an attempt to lesson the occasional tensions between branches of state governments that requests for participation in the procurement chapters of FTAs can create, the National Conference of State Legislatures suggested that USTR simply copy legislative leaders on letters to Governors regarding the request.
The suggestion was rebuffed.
USTR's new 'reciprocity' policy
Instead, USTR introduced a new policy, designed to incentivize states to sign on. Noting the dwindling number of states that agreed to bind their purchasing practices to new trade agreements, USTR announced a policy found in the most recently-negotiated free trade agreements with Latin American nations. This 'reciprocity' policy would deny subnational procurement opportunities in FTA partner countries to businesses from those states that refused to bind their purchasing policies under the agreement--and conversely, provide such opportunities only to businesses from sign-on states.
In a letter to Washington Governor Christine Gregoire, USTR Robert Zoellick summarized the policy accordingly:
If your state choose to participate in the new FTAs, our foreign trading partners' sub-federal entities will open their procurement to any supplier that: 1) offers goods substantially produced or services substantially performed in your state; or 2) has its principal place of business in your state.
Reaction to this new policy was negative. The National Association of State Procurement Officials wrote to US Trade Representative Robert Zoellick in February 2005:
According to your letter, a state will not be required to "change its current government procurement practices." However, your letter further states, "Specifically, U.S. negotiators will be asking Panama and the Andean countries to open their sub-federal government procurement markets to suppliers from U.S. states that agree to participate in the FTAs." These are contradictory statements, in practical terms.
IGPAC requested USTR to "improv[e] its overall federal-state trade and investment policy approach...prior to instituting revisions to procurement-specific coverage policies," and then raised a number of concerns about the policy:
- what criteria would be used to determine business location?
- who would be empowered to create such lists of states or companies?
- how would challenges be addressed?
- how would regulatory enforcement occur, in light of the possibility that companies could devise ways to 'game' the proposed system?
Others noted that the practical impact of the policy was to discriminate against small businesses, since these are far less likely to have multiple 'business presences,' including one in a 'participating' state.
As of this writing, it is not clear that IGPAC's concerns have been addressed. The 'reciprocity policy' remains in effect.
State seeks a 'delisting' of its procurement commitment, but is ignored
As noted above, the Maryland General Assembly passed bills governing the state's participation in international trade agreements, and sought a withdrawal from its procurement commitments. But Maryland remains listed under various FTAs and as a participating state in the WTO General Procurement Agreement.
International controversies on procurement
Government procurement was also a factor in the failure to complete negotiations with Malaysia and the nations of southern Africa (SACU). Purchasing programs intended to empower the bumiputra (Malay) and black majorities in Malaysia and South Africa, respectively, were fiercely defended.