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

[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]


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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.

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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]
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