Academic journal article Law and Policy in International Business

Offsets in Chinese Government Procurement: The Partially Open Door

Academic journal article Law and Policy in International Business

Offsets in Chinese Government Procurement: The Partially Open Door

Article excerpt

Introduction

The Chinese economy grew over thirteen percent per year in 1992 and 1993, making it the fastest growing major economy in the world.(1) However, shortages of power and deficiencies in infrastructure threaten to slow China's growth.(2) To address these problems, the Chinese government has promised to spend huge amounts of capital on infrastructure development. It plans to build eighty dams,(3) numerous power plants,(4) several major highways(5) and railways,(6) and subway systems in eighteen cities.(7) It has purchased large numbers of aircraft and is continuing to expand its civilian fleet.(8) It intends to increase the number of telephone lines five-fold by the year 2000 and has already doubled the number of lines in the past year.(9) In addition to its investment in infrastructure, the government also plans to invest in technology, equipment, and services for the modernization of key industries and state enterprises.(10) For imported telecommunications equipment alone, China is expected to spend about US$90 billion.(11) Estimates suggest that by the year 2000, China will spend over a trillion dollars on these projects.(12)

This incredible surge in Chinese government spending comes at a time when international organizations are paying more attention to government procurement. The World Bank has been one of the leaders in this trend, becoming increasingly concerned with the implementation of the projects it funds.(13) In order to promote efficient and cost-effective implementation, the World Bank generally requires international competitive bidding for Bank-financed procurement. Other international development banks, such as the Asian Development Bank and Japan's Overseas Economic Cooperation Fund (OECF), have similar requirements.(15)

The GATT has also begun to address government procurement. After the Tokyo Round in 1979, the first Agreement on Government Procurement (the Agreement) committed signatory governments to begin opening their procurement to foreign bidders.(16) The Agreement was recently expanded during the Uruguay Round.(17) When the new 1994 Agreement goes into effect in early 1996, it will open an estimated US$350 billion per year of government contracts to international bidding.(18)

Another major recent development in the field of public procurement was the drafting of the Model Law on Procurement, adopted by the United Nations Commission on International Trade Law (UNCITRAL) in 1993.(19) Under the Model Law, international competitive bidding is the norm, and governments must justify the use of other procurement systems.(20)

All of these initiatives represent a growing consensus that government procurement generally should be open to foreign bidders. Allowing foreign companies to supply goods and services to governments opens an estimated twenty-five percent of the global economy to international trade.(21) This opening brings with it all of the benefits of free trade: countries can specialize in industries where they hold a comparative advantage, achieve economies of scale, and maximize economic gain; and governments can obtain high quality goods and services at the lowest possible cost. Allowing foreign competition also improves procurement systems. Open procurement requires transparency and account-ability, reducing government corruption and waste.

Despite these advantages, governments are usually reluctant to open their procurement to foreign competition.(22) Even the United States, a promoter of more open government procurement, has a system of domestic preferences codified in Buy American statutes.(23) China has also favored local industry in its government procurement. Although China has purchased a large quantity of foreign equipment and services,(24) a significant portion of Chinese government Procurement is still closed to foreign companies.(25) Moreover, when foreign companies do bid on procurement contracts, they are often required to commit to "offset" the value of the contract through the purchase of Chinese goods, the use of local content, or other means. …

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