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Richmans' Trade and Taxes Blog
Government procurement is a one-way street between U.S. & China
Howard Richman, 7/1/2011
On June 25, the New York Times revealed that the California government is purchasing a bridge that was made in China. Here's a selection from the story:
The new Bay Bridge, expected to open to traffic in 2013, will replace a structure that has never been quite the same since the 1989 Bay Area earthquake. At $7.2 billion, it will be one of the most expensive structures ever built. But California officials estimate that they will save at least $400 million by having so much of the work done in China. (California issued bonds to finance the project, and will look to recoup the cost through tolls.)
And California is not alone, the New York government is also contracting with China for its infrastructure projects:
In New York City alone, Chinese companies have won contracts to help renovate the subway system, refurbish the Alexander Hamilton Bridge over the Harlem River and build a new Metro-North train platform near Yankee Stadium. As with the Bay Bridge, American union labor would carry out most of the work done on United States soil.
Meanwhile, the Chinese government publishes government procurement catalogs detailing which products may be purchased by its huge public sector. Imported products are routinely excluded from these catalogs, forcing American corporations to build their factories in China and share their proprietary technology with Chinese competitors if they wish to sell to China's growing markets. A publication of CBI, the British equivalent of our Chamber of Commerce, summarizes China's Government Procurement Law:
1) Catalogue: If a company operates in a sector regulated by the GPL [Government Procurement Law], then the (sub) central government can only procure goods and services from a catalogue of products, works and services maintained and update by the MOF [Ministry of Finance]. The listed products, services and works must be bought through a centralized agency (usually the Central Purchasing Agency or a department central purchasing agency). Companies may have to acquire a series of certifications from Chinese authorities and comply with domestic content requirements in order to comply with the catalogue requirements. According to the draft 12th Five Year plan for the MOF, the ministry plans to amend and correct the catalogue system.
2) ‘Domestic Product’: The GPL gives preferential market access to ‘domestic products’. Domestic products are defined as those with over 50% of value added in China. Under the GPL, the Chinese government is obliged to prefer domestic goods, projects, and services.
Foreign ‘imported goods’ may still be purchased under the GPL in exceptional circumstances. Authorities can purchase foreign goods if the domestic equivalent is over 20% more expensive. Most countries give domestic preferential treatment but a margin of 20% is very large and could distort the market and hinder the normal price competition and R&D investment. In practice, this has led to a three tier system of market access (in decreasing order of ease):
- Domestic products made in China by Chinese-controlled firms;
- Domestic products made by FIEs [Foreign Invested Enterprises];
- Imported products.
Congress should make a reciprocal law applying to government procurement of Chinese products when any federal funds, whatsover, are involved. In general, the U.S. government should insist upon (in the words of Lou Dobbs) "mutual, reciprocal balanced trade."