The collapse of global trade, murky protectionism, and the crisis:

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VOX Research-based policy analysis and commentary from leading economists crimination in public procurement. Among these are the WTO's Government Procurement Agreement (GPA), and bilateral trade agreements with Australia, Jordan, and Chile as well as plurilateal trade agreements such as the North American Free Trade Agreement (NAFTA). These agreements reflect decades of US diplomacy that has sought to open procurement markets around the world. The Obama administration, alarmed by the prospect of a public procurement trade war, interceded and helped broker a less harmful compromise. While Section 1605 of the US stimulus legislation retained certain "Buy American" requirements, the legislation ultimately requires implementation in accordance with existing commitments under international agreements. While that compromise resolved many of the legal issues posed by the legislation's "Buy American" provisions, the broader political problem remained. Faced with a crisis, the US seemed poised to quickly jettison its decades-old leadership role in, and commitment to, open procurement markets and the pursuit of value for money. This sentiment emboldened free-trade sceptics and empowered states inclined to favour domestic firms and industries in their own procurement systems. To repair the damage left by this imbroglio, leaders must clarify that, as a matter of law and principle, the world's largest economies remain committed to open markets, in procurement and otherwise. Protectionism is bad for procurement Putting aside trade considerations, protectionism undermines the fundamental business-based and value-oriented underpinnings of successful procurement regimes. While protectionism no doubt serves a political purpose, from a public procurement policy perspective, research and experience demonstrate that it is bad policy. Protectionism restricts markets and limits competition Yet competition is one of the foundations upon which effective public procurement regimes depend. Faced with limited access to the world's best (and best-priced) firms, facilities, materials, and talent, governments inevitably pay premiums for what they buy. Past studies routinely identify welfare losses in those countries with high barriers to procurement trade. For example, as with many stimulus packages around the world, one of the stated aims of the pending US stimulus package is to rebuild crumbling infrastructure. If, however, protectionist impulses prevail, favouring domestic steel in US infrastructure spending could result in the government paying above-market prices for raw materials; as a result, the infrastructure stimulus will result in fewer workers employed on fewer public works projects, and the public ultimately will enjoy fewer miles of improved roadways, bridges, and renovated classrooms. Protectionism increases transaction costs Artificial constructs that favour domestic over foreign end products based upon percentages of materials or labour or nuances of the manufacturing or "transformation" process are difficult and time consuming to administer. These devices sap human resources that could be better employed seeking optimal value-based purchasing outcomes. Moreover, many of these rules ignore the realities, and reduce the efficiency, of the global supply chain. Experience shows that customer agencies or bureaus – tasked with actually provid- 88
The collapse of global trade, murky protectionism, and the crisis ing public services (rather than rhetoric) – more aggressively resist domestic preferences than elected leadership. This makes sense, in that the government agencies more acutely feel the pinch of politically-imposed, inefficient, and potentially crippling welfare losses. Complex preferences also inject unnecessary inefficiency into the procurement process through the time and effort that private-sector firms must devote to learning the nuances of unduly complex government rules and monitoring their manufacturing/ importing/development efforts to remain in compliance. Protection invites retaliation By their nature, market-opening procurement agreements are reciprocal. One nation opens its domestic market in return for better access to foreign procurement markets. Protectionism can undo this bargain and this, ultimately, limits domestic firms' access to foreign markets. Short-term, episodic protectionism has the potential to violate pre-existing international agreements and obligations. These actions, particularly when adopted by major industrialised nations, also diminish those States' standing as leaders and proponents of free trade. The US, for example, severely undermined its leadership position in free trade when it attempted to restrict other nations' access to Iraqi reconstruction work. The costs of such political theatre clearly outweigh any long-term benefits. Moreover, to the extent that certain protectionist acts, such as invoking emergency exceptions, may be permissible within the letter of the law, they clearly violate the spirit of the free-trade agreements, and even-the most finely crafted technical defences prove unpersuasive in the court of public opinion. Procurement preferences routinely fail to achieve intended outcomes Procurement preferences consistently prove themselves blunt, rather than surgical, instruments. They are remarkably imprecise, favouring a small number of sophisticated participants within targeted groups. Procurement preferences are bad governance As wealth distribution tools, procurement preferences (as opposed to direct investment, support, or subsidies) impede transparency by masking the true cost of the subsidy or support programs. Should governments intend to assist, support, or subsidise individuals, institutions, or industries (such as a domestic steel industry), they should do so directly and transparently, publicly quantifying and disclosing the level of support, subsidy, or relief. If the costs of, or externalities associated with, that subsidy or support are unpalatable, disguising them in the procurement process is not only inefficient and ineffective, but also disingenuous. Governments should not fall into the trap of deploying protectionist procurement practices in times of economic crisis. Rather, governments should focus on optimizing the performance of their procurement systems. Economic crisis and stimulus as a good governance opportunity We believe that crises often present a unique opportunity to address long-term, systemic problems. Today, governments should leverage the momentum from their responses to the financial crisis to make long overdue improvements to their public procurement regimes. As, for the foreseeable future, governments spend an increas- 89
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