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A joint statement was issued on 26 May (but not posted until 4 June) by nine ministries and government agencies: the National Development and Reform Commission (NDRC), the legislative office of the State Council, the ministries of industry and information, housing, railways, water resources, supervision, transport, and commerce ministries. This notice states:

“Government investment projects should purchase domestic products, unless these domestic goods, construction engineering or services are not available in China or cannot be acquired on reasonable commercial terms. Projects requiring imported products will need prior approval from relevant government authorities.”

Domestically made goods includes products of China-based operations of foreign companies.

The Law and the recent measure only apply to procurement directly from the government: State-owned enterprises (SOEs) are not bound.

The circular has aroused considerable concern that it could agitate foreign trade relations and encourage protectionism. Only a few weeks ago, Bejing criticized Washington’s “Buy American” provision, favouring US suppliers of steel, iron and manufactured goods in projects financed by its stimulus. Xinhua news agency called such conditions “poison” to efforts to solve the global economic crisis. The government apparently promised in February to treat foreign and domestic goods equally in stimulus spending and has appealed to other governments to support free trade and avoid protectionism.

In fact, The Government Procurement Law of the People’s Republic of China has been in place since 2002. Article 10 states:

“The government shall procure domestic goods, construction and services, except in one of the following situations:

(1) where the goods, construction or services needed are not available within the territory of the People’s Republic of China or, though available, cannot be acquired on reasonable commercial terms;

(2) where the items to be procured are for use abroad; and

(3) where otherwise provided for by other laws and administrative regulations.

The definitions for the domestic goods, construction or services mentioned in the preceding paragraph shall be applied in accordance with the relevant regulations of the State Council.”

Why then was any new measure necessary? The official explanation is that there has been discrimination against Chinese goods and the relevant ministries wanted to revise this trend and emphasize the provisions of the 2002 Law, presumably particularly in the light of the huge two-year stimulus package of 4 trillion yuan (€ 420 billion).

Finally, it should be noted that China has not signed the WTO’s Government Procurement Agreement that extends the principle of a level playing field to government procurement.

Foreign makers of wind turbines have already complained that they have been shut out of bidding on a $5 billion stimulus-financed power project, a worrying development. Chinese companies have benefited from technology and expertise gained from foreign companies established in China. This policy makes foreign companies more reluctant to transfer the technology needed to tackle climate change.

On the face of it, it is unclear how much effect the new order/directive will have in practice. The criticism of the measures by foreign companies has been muted. The European Union Chamber of Commerce in China wisely stated on 17 June that it:

“is concerned that, given the current economic climate, overreliance on a policy advocating preferential treatment for domestic companies sends the wrong signal to the domestic and international business community at a time when international cooperation is key to sustaining economic recovery.”

What is clear is that, once again, lack of transparency and early explanation fuel foreign suspicion that the measures are protectionist. When the document was noticed by the media, nearly two weeks after its posting), there were alarming reports that China was rolling out a new policy designed to exclude foreign investors from stimulus projects. Chinese officials then argued that the circular was the subject of serious misinterpretation. But the die was already cast in terms of perception, particularly as Premier Wen Jiabao and Vice Premier Wang Qishan had earlier this year stated that the stimulus packages should be open to all economic operators.

The extent to which foreign companies lose out in government procurement contracts will, as always, depend upon what happens in practice


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