Wall Street Journal (10.26.10)

EU Pushes China to Open Bidding

Seeking Access to Public Contracts, Bloc Urges Beijing to Sign 1996 Treaty

BRUSSELS—Amid the global brawl over Beijing's exchange-rate policy, the European Union is leading a push against China on another front: public contracts.

John W. Miller discusses Europe's tougher line on trade with China, as the EU focuses on China's process for bidding on contracts.

China restricts bidders on most public contracts to companies whose trademark and technology are registered in China, a category that includes many foreign companies, but one that can also be used as a tool to keep them out.

That is why a key pillar of the EU's new 2020 trade strategy, to be presented to key EU officials Wednesday, is a demand for a fair deal for EU firms on so-called public procurement.

China's public-procurement rules are part of a broad effort by the government to promote "indigenous innovation" and help the country become less reliant on cheap manufacturing.

But they have provoked an outcry among foreign technology companies, many of which complain that the playing field in China is tipping against them and in favor of Chinese companies, particularly in the state sector. Foreign companies say they face mounting obstacles trying to sell in China, including tough regulations on standards, testing and local certification.

Although China's central government maintains that China doesn't discriminate against foreign companies on procurement, the rules have emboldened local governments to shut foreign companies out of bidding for contracts worth billions of dollars.

European countries have traditionally been more conciliatory toward China on trade issues than the U.S., but this is changing amid surging Chinese exports to a region that is grappling with high unemployment. EU officials, as well as corporate leaders, are increasingly ready to openly criticize China, setting aside concerns that open attacks may invite reprisals.

Last year, an elaboration of government procurement rules was released, indicating that purchases of high-tech equipment would be limited to locally developed technology. That prompted foreign companies in the U.S., Europe and Asia to make an unprecedented joint complaint.

The government later revised the rules, removing some of the restrictive language, but companies and foreign business associations continue to protest.

EU officials say they hope to pressure China into conceding more openness by urging it to sign up to the Government Procurement Agreement, a little-known 1996 treaty among 41 members of the World Trade Organization. China is among a number of important emerging economies negotiating to join the pact at a time when stimulus spending has made the economic role of governments more important.

With the nine-year-old Doha round of trade talks on the back burner, "the only [global] trade negotiation with a heartbeat is the GPA," says Simon Evenett, a trade economist at the University of Saint Gallen in Switzerland. "It's a deal with clear corporate winners, and it's not amorphous." The Doha round, which focused on agriculture and opening markets for developing countries, never gained support from the world's biggest companies, he said.

The U.S. has also called for China to join the GPA, but the EU can afford to be more aggressive because the Buy American provision in recent stimulus spending hurts the U.S. position, say WTO officials. With the exception of defense spending, EU rules stop its 27 members from protecting markets from each other and, by extension, non-EU countries like the U.S. and China.

China restricts bidders on most public contracts to companies whose trademark and technology are registered in China, a category that includes many foreign companies, but one that can also be used as a tool to keep them out. Above, a residential construction project in Xiangfan, Hubei province.

The EU's trade strategy will be the guiding policy statement for Karel De Gucht, the Belgian who took over as trade commissioner this year. It contains the usual language calling for completing the Doha round by the end of 2011, more trade in green technology, bilateral deals and opening up trade in services.

What is new, however, regards China. The strategy calls for more "symmetry in access to public procurement markets in developed countries and large emerging market economies." The latter refers to China.

The recession has increased pressure on the EU to crack open big developing markets for its own companies. China's infrastructure projects — the size of its recent stimulus package was $586 billion — make it the No. 1 target for companies like Germany's Siemens AG, France's Alstom SA and European Aeronautic Defence & Space Co, the parent company of airplane maker Airbus.

An official at the Chinese ministry to the EU in Brussels said Beijing's aim in requiring bidders for public contracts to be registered domestically is to spur technology advances the same way the U.S and the EU did by subsidizing airplane makers like Boeing Corp. and Airbus.

In a recent speech, Chinese Premier Wen Jiabao said, "In government procurement, China gives equal treatment to all products produced in China by foreign-invested enterprises and Chinese-invested enterprises alike."

At Issue

The EU is pushing China to join the Government Procurement Agreement,

a treaty among 41 members of the WTO.

· Under the rules of the pact, governments can't discriminate against foreign firms on construction contracts worth more than $7.6 million, or on public-service contracts worth more than $500,000.

· Countries can exempt regional governments. Thirteen U.S. states, for example, don't belong.

· China wants to join but with exemptions for regional governments and state-owned firms—a position the EU and U.S. oppose.

EU officials and business leaders say the situation is tolerable for big, established firms. "We have a good relationship with the Chinese government," says Marc Langendorf, a spokesman for Siemens, which has 61 offices in China. "As we are present in China for more than 130 years and actually employing more than 43.000 local people, wWe are treated the same way as a Chinese company."

However, for most firms, Chinese public contract policy "is not good news in general," says Alain Berger, a former president of Alstom in China and now head of the company's EU relations in Brussels. "It's a constraint we have to learn how to play with." Alstom has 8,000 employees and revenue of around $1.5 billion a year in China.

The GPA guarantees nondiscrimination for contracts above a threshold — $7.6 million for construction projects, and $500,000 for service agreements. Some $2 trillion in public contracts are tendered every year, according to research published this year by Business Europe, a Brussels-based lobby group.

That treaty, however, is full of holes, say legal experts.

But the annexes to the GPA contain hundreds of exceptions. For example, European countries don't have to consider U.S.-based bids to supply air-traffic-control equipment. The EU and Canada close their markets for computers and office supplies to each other. Military spending is almost always exempted.

The GPA offers its members a legal recourse at the WTO if one of its companies unfairly loses a bid for a public contract. If discrimination is shown, countries have the right to impose retaliatory sanctions. However, it has only been used three times, and not since 2001 when the U.S. lost a case against South Korea over the building of an airport. Improving enforcement is a key goal of the current round of redrafting the GPA.

The rise of stimulus money spurred the current willingness to revamp the GPA, say WTO officials. Trade negotiators met in Geneva two weeks ago, hoping to accomplish two things: expand the range of coverage and get China to join, as it promised when it signed up to the WTO in 2001. In July, China submitted an offer deemed insufficient because it included only the central government and exempted wealthy provincial states and state-owned major companies, say WTO officials. Chinese officials say they will revise the offer by a June 2011 deadline, but that their new proposal must correspond realistically to their country's economic situation.