Anne-Célia Disdier*, Lionel Fontagné*, Enxhi Tresa
This article was originally published in the October 2021 edition of the 5 papers…in 5 minutes.
Public procurement, which represents 14% of gross domestic product (GDP) in the European Union (EU) and 10% in the United States (US) (1), is notoriously home-biased, possibly even twice as home-biased as private purchases. There are good reasons for such bias. One is the complexity of procedures and decision levels: public procurement takes place at different levels, national, sub-national or even local, and foreign competitors are not well aware of actual practices. Furthermore, even when information is available, openness to competition is subject to multiple thresholds depending on the nature of the good or service and on the authority purchasing it. The second reason for the observed home bias is the lack of discipline in these markets: public procurement does not fall under multilateral disciplines at the World Trade Organization (WTO). The Government Procurement Agreement (GPA) is a plurilateral agreement. Importantly, the reciprocity of market access is granted only to signatories of the plurilateral, which is a powerful incentive to join. Similarly, only a party of the plurilateral can complain against any discriminatory measure and rely on the dispute settlement mechanism. The absence of multilateral commitment leaves considerable latitude for regulatory restrictions on public procurement.
While the trade deflecting impact of public procurement measures has been documented, we know little about the determinants of the measures actually in force. In this paper, Anne-Célia Disdier, Lionel Fontagné and Enxhi Tresa investigate the determinants of the prevalence of regulatory obstacles to international public procurement. Why and how are obstacles raised to foreign producers? Ultimately, do governments rely on stringent public procurement practices to shield domestic producers from the toughness of foreign competition? Does the risk of retaliation against domestic firms already present in international markets restrain governments from implementing restrictive measures? To address these issues, the authors combine detailed data on bilateral trade flows for 175 countries over the period 2009-2016, at the detailed product level, with exhaustive information on measures affecting public procurement markets included in the Global Trade Alert database (2). They observe which importing country is imposing a public procurement restriction on which product exported by which trade partner. The last piece of information needed concerns formal protection, namely, tariffs imposed on the targeted products by the implementing jurisdictions. These tariffs have bilateral and time-varying dimensions, as do the two other variables of the final database. Their conclusions are clear-cut. As hypothesized, importing countries enforce on average less measures on products originating from trading partners with which important commerce takes place. At the extensive margin, i.e. whether at least a measure is enforced or not, this suggests the presence of long-term relationships between buyers and sellers. At the intensive margin, the mechanism at play is slightly different. Countries that start imposing measures on certain exporter-product pairs during the period (i.e. “Switchers”), use a higher frequency of restrictions towards important exporters. However, the number of measures enforced remains lower than that observed for “Non-switchers”. Second, the potential for foreign retaliation cushions the protectionist attempts in a domain hardly regulated by multilateral rules. Lastly, Disdier, Fontagné and Tresa highlight substitutability between tariffs and public procurement restrictions.
(1) These figures exclude utilities, e.g., services playing a vital role in economic and social development (water, energy, transport and postal services).
Original title of the article: Economic drivers of public procurement-related protection
Published in: The World Economy, 2021
Credits (picture): samjapan – Shutterstock
* PSE Professors