Procurement might sound boring but it's a highly controversial transatlantic topic

Public procurement – basically, how governments buy goods and services – is a pretty technical topic, to put it mildly. Yet, what sounds rather dull and bureaucratic is one of the most highly contested issues in the TTIP negotiations. Part of the reason for that are states’ interests in this area.

The NAFTA (find background information on the trade deal in this post) marked the beginning of an era of multilateral trade deals, which were negotiated outside of the GATT and later the WTO. These deals shifted the focus away from tariffs and duties. Going beyond eliminating tariffs, the NAFTA emphasized diminishing nontariff barriers to trade. Ever since then, regulatory topics touching upon state authority have been a key issue for U.S. states in international trade policy.

About this blog This blog offers sections from my study to highlight some of the questions, topics and findings. I've edited the posts for the web, especially some of the references and footnotes, but all sources can be accessed in the full study.

The focus on NTBs is especially pronounced in the TTIP because transatlantic tariffs are already low for most industries. So, limiting nontariff barriers has been a key focus of the negotiations from the very beginning. Generally, such NTBs to trade are:¹

Industrial policy-related NTBs such as subsidies that governments use to promote a home-based industry or protect it from global competition
Regulatory policy-related NTBs by which governments, again, want to promote their own companies
Structural impediments, which result from a lack of competition or transparency in a market

Subsidies are rare in the transatlantic context, but regulatory policy-related NTBs and structural impediments are prevalent in this study despite the generally open transatlantic market because these are the issues that states are affected by and thus want to make their voices heard on. One of them is public procurement.

The EU wants all U.S. states to open their procurement markets

For the states, public procurement is one of the most controversial and important nontariff barriers in the TTIP. Over 40 percent of the people I talked to named procurement as one of the key topics for states in the transatlantic trade deal. The TTIP aims at easing market access on both sides of the Atlantic and this includes an opening of procurement markets at all governmental levels. Public procurement is of great significance for the states because they have considerable power over their own procurement markets and many states want to preserve their laws granting preferential treatment to in-state producers and service providers. Examples are rules that favor local agricultural producers or local solar panel makers.

About the pictures on this site Through a one-year scholarship, I was fortunate enough to be a visiting researcher at Columbia University in the City of New York. While on campus, I took lots of pictures of the surroundings, some of which I decided to display on this site.

These preferential treatment laws, some of which are called “Buy American” laws), are meant to boost state economic and job growth and have been a controversial item of international discussion before: The World Trade Organizations’s (WTO) Government Procurement Agreement (GPA), for instance, specifically does not apply to the state and local level in the U.S. Even under the latest revisions to the GPA, the U.S. maintains exclusions for the states (see map).

Respondents both from the state and the federal level detailed how the U.S. federal government cannot force states to adhere to international procurement rules, thus obliging them to open their procurement markets. Rather, the administration must ask states to voluntarily sign on to the procurement provisions. In the GPA, not all states signed on (see map) and for subsequent free trade agreements with procurement rules, the number of states covered gradually declined.²

The EU’s stated goal for the TTIP is to remove any barriers to state- and local-level procurement for European companies. This has been an early and adamantly stated European objective, put forward repeatedly by the then-Commissioner for Trade Karel de Gucht.³ With this, the EU addresses federal-level statutes such as the Jones Act, which requires all maritime transport between U.S. ports to be carried on ships built in the U.S., but it also focuses strongly on state-level “Buy American” or “buy state/local” legislation.

Procurement as a proxy debate for questions on state sovereignty

Some interviewees were worried that the TTIP, if completed, might directly impinge on state sovereignty in the field of public procurement. This would mean that the EU mounts enough pressure to force changes to U.S. legislation, so as to require states to open their markets. The issue is acerbated by the fact that the U.S. federal government wants to open up the European procurement markets as well and therefore needs to consider the state-level rules as a bargaining chip in the negotiations.

Yet, some of respondents did not view the procurement issue as a major challenge for states precisely because there is no legal way for the federal government to force any trade provisions on the states. It is questionable whether the EU has enough negotiation power to provoke legislative changes in the U.S. because the federal government would put up strong resistance out of political calculations: The administration will likely not risk a political battle with state governments over the popular “buy local” measures, even though some business organizations are against them. The only leeway the federal administration has is in the field of “flow down funds”, which is federal money provided to the states for state-level procurement. The federal government could theoretically subject these funds to procurement rules under the TTIP but not those funds the states raise themselves.

Number of U.S. states covered under the WTO GPA (originally signed in 1981)

Number of U.S. states covered under the procurement rules with Panama (signed in 2006)

The debate surrounding public procurement shows that the primary concern for state legislators engaged in transatlantic trade policy is that state regulatory authority could be overridden by TTIP provisions. They are not primarily concerned with economic development topics. Overall, roughly 37 percent of respondents stated that the issue of state sovereignty is part of the international trade policy debate, which relates to questions on trade policy-making within the U.S. federal system and not to questions on exports and FDI, which receive most media and scholarly attention. States aim to safeguard their right to legislate and regulate according to local circumstances against perceived threats from international trade negotiations. To that end, they aspire to amend the TTIP provisions in their favor and, more broadly, to create openings at the federal level for states to provide input.

Conflicts over public procurement: U.S. states vs. the federal government vs. the EU

To understand these viewpoints on the procurement negotiations in the TTIP, they have to be put into the context of U.S. federalism. The U.S. states, generally, would like to maintain discretion over their own procurement decisions. This is their legally guaranteed right: The U.S. federal government cannot force the states to change the way they use their own revenues in the area of procurement. State governments can voluntarily open their procurement markets under international free trade agreements such as the WTO’s General Procurement Agreement (see map) or bilateral free trade agreements. In practice, this means that the USTR approaches each state individually and asks whether it wants to be included in the procurement agreement or not. The USTR typically addresses the governor as the person to sign a state on to international procurement rules, as letters from the administration to the states reveal.⁴

Despite the USTR’s focus on governors, though, the debate on who within the state government gets to decide on the sign-up for procurement rules garnered some attention among the states in the early 2000s.⁵ In some states, the governor has the sole responsibility to sign a state up for international procurement rules. In other states, the legislatures have claimed a say in making these decisions by setting up trade policy commissions.

Even how to count procurement is contested

The controversy surrounding public procurement partly stems from different judgements on behalf of the EU and the U.S. on each other’s procurement market. In their respective reports on trade barriers, each side argues that the other’s public procurement market is closed and discriminatory.⁶ Each side accuses the other of miscalculations and methodological flaws in their studies, which heightens the tensions in the procurement negotiations.

In Maine, the trade policy commission has to review a trade agreement and the legislature has to authorize the governor to bind the state to international rules of free trade agreements. Otherwise “an official of the State, including the Governor, is prohibited from binding the State, or giving consent to the Federal Government to bind the State, to a trade agreement.”⁷ Similar language exists in laws in Hawaii, Maryland, New Jersey, Rhode Island and Utah. In effect, these statutes apply mainly to procurement rules: This is the one area of the TTIP in which state officials have full discretion.

Thus, again, the administration will push for states to be covered under international procurement rules, but it has to rely on convincing and persuading them, it cannot force them. Only if the U.S. Congress passed a law requiring all states to adhere to international procurement rules could the administration oblige states. While this is legally and theoretically possible, this option was rejected as politically unlikely by most respondents due to the expected enormous political pushback from state officials and members of Congress themselves. Even the faint possibility of preemption is nevertheless a concern for the states, as over 40 percent of respondents named procurement an important topic for states. Therefore, the administration, according to their own officials, is very cautious about how to approach the states, careful to take into account state interests in free trade agreements. The federal government will stick to pointing out the benefits of opening procurement markets, arguing that this would bring economic gains.

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In earlier negotiations, critics of the administration’s approach have called into question whether the federal government really does stick to only pointing out the benefits of opening procurement markets: For example, a report by civil society group Public Citizen alleged that the USTR was pressuring governors into procurement agreements by saying that other countries’ noncentral procurement markets could be closed off for states that do not adhere to international rules.⁸ For the TTIP, such issues have not been raised during the negotiations.

Overall, state-federal tensions on procurement in the TTIP are muted because both the states and the administration know that for political reasons, no agreement on procurement can be made without the states. While the federal government would certainly favor overseeing procurement rules throughout the U.S. and while business associations would favor a complete opening of noncentral procurement in the U.S., they acknowledge that this is an area in which states have full discretion. Still, there is anxiety that the USTR might switch to a more forceful approach with the states or that the EU might succeed in putting pressure on the USTR to change U.S. legislation. These concerns are exacerbated by the lack of transparency of the negotiations.

The federal government’s acknowledgement of state interests in the negotiations is an instance of Putnam’s two-level game at play. In short, political scientist Robert Putnam postulates that in international negotiations, the domestic politics are an important to account for.⁹ Contrary to most discussions of the two-level game, however, the domestic constraint on the federal government does not emanate from national-level veto players, such as Congress or corporations, but from state-level actors. While legislative changes to require open state procurement markets are an unlikely scenario, individual states or groups of states nevertheless speak out on procurement. This interest representation acts as a limit on what U.S. negotiators can offer the EU because states have legislative authority over their public procurement.

One of the most formal ways to make state opinions on procurement known are the IGPAC reports (read about this advisory body in this post), which have for years stressed the importance of procurement to states. In its most recent report on the Transpacific Partnership (TPP), IGPAC members are split on whether opening their procurement markets is economically beneficial or not, but they do agree that this decision should be left to the states: “IGPAC would object to any expansion of state-level coverage whether in the form of removing any exceptions, lowering procurement thresholds or coverage of state procurement entities without explicit state consent.”¹⁰

Examples of such state-level procurement rules were explained in a letter by the Maine Citizen Trade Policy Commission to the USTR. The commission members described that “Maine has specific procurement administrative rules (…) for textiles and footwear prohibiting purchasing of goods that do not comply with certain fair labor, equal rights, and health and safety standards.”¹¹ The commission further states:

[T]he State of Maine and many local governments have proactively promoted Buy local and Maine Made programs including Farm to School, Farm to Hospital and other initiatives aimed at sourcing healthy, local and regional foods into institutions as a way of enhancing nutritional and other health outcomes for consumers, supporting local economies, and improving farm profitability. We oppose any provisions in the TTIP that would limit preferences in public procurement programs for healthy, locally grown foods.¹²

Any direct contact or pressure by the EU towards state governments on procurement issues is deemed unacceptable by the commission.

Procurement was also featured prominently in a meeting between state officials with Members of the European Parliament in Vermont. At the November 2015 gathering facilitated by the Vermont Commission on Trade and State Sovereignty and the National Caucus of Environmental Legislators (NCEL), there was a morning panel on procurement as well as a later breakout session on the topic.¹³, which allowed for an exchange of views and mutual learning. Experts with knowledge of the meeting highlighted the importance of procurement for the states, especially for maintaining farm to school programs, which favor local agricultural producers. After talking to EU officials as well as U.S. administration officials, the experts realized, though, that the EU was likely more focused on bigger procurement items, such as transportation equipment or dredging.

Even if states’ decisions on how to use their own revenues for procurement is not touched by the TTIP, several respondents pointed out that some federal-level rules might still apply to them. This is related to the issue of flow-down funds, meaning funds the federal government gives to the states for public procurement purposes. In essence, states use federal money for part of their state-level procurement projects. If these flow-down funds were covered under the TTIP, states’ choices in how to procure could be constrained when using such funds. Flow-down funds have been a specific target of the EU, yet the first 15 negotiation rounds did not yield an agreement on the issue.

So far, no open conflict but concerns over curtailing state authority

To sum up, public procurement remains a controversial topic that is being fought over in the negotiations, but it is more of a theoretical than a practical concern for the states. There is a discrepancy, partly fueled by the lack of access to negotiation texts, between what some state officials see as potential negative effects from the TTIP and what is politically feasible in the negotiations. For states, the attention paid to procurement derives largely from the fact that it is one of the few issues they care about and have jurisdiction over.

Based on the current legal and political situation in the U.S., it is still unlikely that state-level procurement rules face serious changes due to the TTIP. The USTR seems conscious of the high salience states attach to the issue and, in turn, also seems to use this as a bargaining chip to justify their hardline position towards the EU: The U.S. has repeatedly shunned the EU’s requests to open state-level procurement markets in the TTIP negotiations. In a leaked document describing the state of play of the TTIP negotiations in March 2016, the paragraphs on procurement mention that the EU sought and received answers on a variety of federal-level procurement issues. Yet, “the US was not able to provide any further answers or comments with regard to sub-Federal procurement and again underlined its difficulties and sensitivities in this area.”¹⁴

The USTR’s rejection of EU procurement demands with reference to states’ concerns could merely be a negotiating ploy and not be done out of genuine care for states’ interests. Either way, it clearly speaks to the administration’s awareness of states’ interest in transatlantic trade policy and once again highlights the two-level game nature of public procurement negotiations. Evidently, “domestic politicking is central to international negotiation”:¹⁵ Not only did states represent their interests by maintaining the status quo of noncentral public procurement despite outside pressure, they also advocated in favor of this status quo at the federal level and educated EU legislators about it in dedicated meetings.