[Federal Register Volume 65, Number 89 (Monday, May 8, 2000)]
[Notices]
[Pages 26652-26656]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-11415]


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OFFICE OF THE UNITED STATES TRADE REPRESENTATIVE


Annual Report on Discrimination in Foreign Government Procurement 
Pursuant to Executive Order 13116 (``Title VII'')

AGENCY: Office of the United States Trade Representative.

ACTION: Notice.

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SUMMARY: Notice if hereby given that the United States Trade 
Representative (``USTR'') has submitted the annual report on 
discrimination in foreign government procurement, published herein, to 
the Committees on Finance and on Governmental Affairs of the United 
States Senate and the Committees on Ways and Means and on Government 
Reform and Oversight of the United States House of Representatives, 
pursuant to the reinstituted procedures of Title VII of the Omnibus 
Trade and Competitiveness Act of 1988 (``Title

[[Page 26653]]

VII''), as amended, as set forth in Executive Order No. 13116 of March 
31, 1999.

DATES: The report was submitted on May 1, 2000.

FOR FURTHER INFORMATION CONTACT: John Ellis, Office of the US Trade 
Representative, 600 17th Street, NW, Washington, DC 20508, 202-395-
3063.

SUPPLEMENTARY INFORMATION: The text of the USTR report is as follows:

Office of the United States Trade Representative, Washington, DC, April 
28, 2000

Annual Report on Discrimination in Foreign Government Procurement

I. Executive Summary

    Executive Order 13116, which the President signed on March 31, 
1999, re-institutes the provisions of Title VII of the Omnibus Trade 
and Competitiveness Act of 1988 (``Title VII''), as amended. Title 
VII establishes procedures for identifying foreign countries 
engaging in discriminatory government procurement practices. The 
Executive Order mandates that the United States Trade Representative 
(``USTR'') submit a report on the identified countries and practices 
to the Congressional committees of jurisdiction within 30 days of 
the submission of the National Trade Estimate Report (for the years 
1999, 2000, and 2001), and publish these reports in the Federal 
Register. This is the second annual report required by the Executive 
Order.
    In accordance with the provisions of the Executive Order and on 
the recommendation of the Trade Policy Staff Committee, USTR has 
decided to terminate the 1996 Title VII identification of Germany 
for discrimination in the heavy electrical sector. This decision is 
based on Germany's implementation of new legislation that appears to 
effectively address the concerns raised by the United States through 
the original Title VII identification.
    USTR's 1992 identification of the European Union (``EU'') for 
discriminatory procurement practices of government-owned 
telecommunications entities in certain member states, as well as the 
resulting U.S. sanctions, remains outstanding. There are no other 
outstanding Title VII identifications. However, the Administration 
continues to work in a range of bilateral and multilateral fora to 
resolve U.S. concerns with procurement practices described in this 
and previous Title VII reports. Those concerns, discussed in detail 
below, relate to foreign procurement practices in the following 
areas:
    <bullet> Japan: Public works
    <bullet> Taiwan: Various aspects of the procurement regime
    <bullet> Canada: Provincial price preferences
    <bullet> Mexico: Implementation of new procurement laws and 
NAFTA tendering periods
    <bullet> Korea: Airport construction
    <bullet> Germany: Sect filters
    In addition, this report describes the Administration's efforts 
to eliminate discriminatory foreign procurement practices by 
building and strengthening the international rule of law in a wide 
range of multilateral, regional and bilateral fora:
    <bullet> The FTAA Business Facilitation initiative and 
Negotiating Group on Government Procurement
    <bullet> The WTO Working Group on Transparency in Government 
Procurement
    <bullet> The WTO Committee on Government Procurement
    <bullet> The NAFTA Working Group on Government Procurement
    <bullet> The OECD and OAS Conventions on Combating Bribery and 
Corruption
    <bullet> Consultations on the Use of Offsets in Defense Trade

II. Provisions of the Executive Order

    Pursuant to Executive Order 13116, USTR is required to submit to 
the Congress each year a report identifying foreign countries:
    (1) That have failed to comply with their obligations under the 
WTO Agreement on Government Procurement (``GPA''), Chapter 10 of the 
North American Free Trade Agreement, or other agreements relating to 
government procurement to which that country and the United States 
are parties; or
    (2) That maintain, in government procurement, a significant 
pattern or practice of discrimination against U.S. products or 
services which results in identifiable harm to U.S. businesses, when 
those countries' products or services are acquired in significant 
amounts by the U.S. Government.
    Within 90 days of the submission of the report, USTR must 
initiate under section 301 of the Trade Act of 1974, as amended, an 
investigation with respect to any country identified in the report, 
unless USTR determines that a satisfactory resolution of the matter 
has been achieved. If the matter is not resolved during that period 
and USTR determines that the rights of the United States under an 
international procurement agreement are being violated, or that any 
discriminatory procurement practices exist, the Executive Order 
permits USTR, inter alia, to initiate formal dispute settlement 
proceedings under the international agreement in question or revoke 
any waivers for purchasing requirements granted to the 
discriminating foreign country.
    Title VII has been a useful and effective tool in challenging 
foreign governments' procurement barriers. From 1991 to 1996, USTR 
conducted six annual reviews under Title VII. During that time, six 
identifications were formally made, while numerous potentially 
discriminatory government procurement practices were noted. USTR 
achieved satisfactory resolution with respect to eight 
discriminatory or potentially discriminatory practices. The re-
institution of Title VII procedures through Executive Order 13116 
sends a strong signal that the President is committed to protecting 
U.S. interests in international procurement markets.

III. Identification of Specific Discriminatory Foreign Procurement 
Practices

A. Practices Identified in Previous Reports

    Germany--Power Generation: In 1996, USTR identified Germany for 
its failure to comply with market access procurement requirements in 
the heavy electrical equipment sector. The identification was based 
on irregularities in the procurement process for two separate steam 
turbine generator projects in Germany. In particular, the 1996 Title 
VII Report noted a ``pervasive institutional problem'' with respect 
to Germany's implementation of a remedies system for challenging 
procurement decisions. The imposition of trade sanctions, however, 
was delayed until September 30, 1996, because consultations with 
Germany suggested a resolution might be possible given additional 
time.
    On October 1, 1996, USTR announced that the German Government 
had agreed to take steps to ensure open competition in the German 
heavy electrical equipment market, including reform of the 
government procurement remedies system as well as outreach, 
monitoring, and consultation measures. The United States did not, 
however, terminate the Title VII action at that time because 
legislation implementing reform of the procurement remedies system 
needed to be enacted.
    In May 1998, the German parliament passed legislation requiring 
significant reforms in the German procurement system, including with 
respect to bid challenge procedures. This legislation entered into 
effect on January 1, 1999. Although the law is still relatively new 
and not fully tested, a precedent-setting decision in an August 1999 
case demonstrated that losing bidders can now challenge procurement 
decisions in a court of law and anticipate a fair ruling. The United 
States has not received further complaints from U.S. suppliers.
    Accordingly, USTR has decided, on the recommendation of the 
TPSC, to terminate the outstanding Title VII determination against 
Germany for discrimination in the heavy electrical sector. The 
Administration will continue to monitor the implementation of 
Germany's procurement reform legislation.
    EU--Telecommunications: In 1992, USTR identified the European 
Union (EU) as engaging in discriminatory procurement via the 
practices of telecommunications entities with ``special and 
exclusive rights'' in certain member states. As a result of this 
identification, the United States imposed sanctions in 1993, which 
remain in place today. In 1999, the European Commission (EC) 
informed the Administration that telecommunications operators in 
most EU member states were exempted from the procurement 
requirements in the Utilities Directive. Consequently, the EC 
requested that the United States remove the sanctions imposed in 
1993. The Administration has asked the EC for clarification of the 
amendments to its regulations and how those amendments apply to 
individual EU Member States. When that information is received, the 
Administration will review the issue, including the overall market 
access conditions in the EU telecommunications market.

B. Practices Identified in This Report

    In developing this report, USTR has given careful consideration 
to a wide range of views and information, including the 
recommendations of other executive agencies and U.S. embassies and 
consulates overseas, private sector responses to USTR's request

[[Page 26654]]

for comments on this year's Title VII report (published in the 
Federal Register on February 1, 2000), and information on foreign 
government procurement practices reported in the 2000 National Trade 
Estimates Report.
    On the basis of this information, and after consultation with 
the TPSC, USTR has determined that no practices meet the criteria 
for Title VII identification this year. As in previous years, 
however, there remain a number of foreign government procurement 
practices of concern which the Administration is pursuing in 
bilateral and multilateral fora, including WTO dispute settlement 
when appropriate, or that require continued monitoring and study.

Japan--Public Works

    American companies are world-renowned for their expertise and 
competitiveness in design/consulting and construction projects. 
However, in 1999, American design and construction firms won only 
$50 million (.02 percent) in contracts in Japan's $250 billion 
public works market. This is the same level of participation as 
1998, only half of the $100 million in Japanese public works 
contracts awarded to U.S. firms in 1997, and well below U.S. 
participation in this market in the late 1980's. Proportionally, 
Japanese firms do 12 times as much public construction business in 
the United States as American firms do in Japan.
    These disappointing results have occurred despite commitments 
made by Japan in our two U.S.-Japan public works agreements. In 
particular, the 1994 U.S.-Japan Public Works Agreement aims at 
``reforming bidding and contracting procedures for public works in 
Japan, to enhance transparency, objectivity and competition, as well 
as to strengthen the application of the principle of non-
discrimination.'' In spite of this, Japan has engaged in a 
significant and persistent pattern of practices of discrimination 
that impedes American companies from participating in Japan's public 
works sector. These practices include rampant bid-rigging; 
unreasonable restrictions on the formation of joint ventures, 
including the three-company joint venture rule which limits to three 
the number of members in joint ventures for construction projects; 
the use of unreasonably vague and discriminatory qualification and 
evaluation criteria; and the structuring of procurements and 
calculation of procurement values so they fall below the agreements' 
thresholds.
    The U.S. and Japanese Governments have met at least annually to 
discuss the U.S. Government's substantive concerns with these and 
other practices in this sector. These discussions have been helpful 
in making progress on some issues, but major impediments continue to 
deprive American firms from opportunities within Japan's vast public 
works sector. Although the 1994 Agreement has no expiration date, 
the consultation provision requiring annual meetings between the 
United States and Japan expired on March 31, 2000, and Japan 
rejected the U.S. Government's formal request to extend the 
consultation provision. The United States believes a continuation of 
the government-to-government discussions on the implementation of 
the 1994 Agreement is needed given the continuing problems in this 
sector.
    The United States expects that Japan will take steps to resolve 
concerns regarding this persistent pattern of practices. If these 
concerns are not resolved in a timely manner, the U.S. Government 
will initiate the steps necessary to identify Japan under Title VII.
    Taiwan--General Procurement Procedures: Taiwan, which is in the 
process of acceding to both the WTO and the GPA, recently enacted a 
law and promulgated regulations intended to bring its procurement 
practices into conformity with the requirements of the GPA. Although 
the new procurement law is an improvement over the former 
procurement regime, particularly in the area of transparency, it 
will not be fully applicable to foreign bidders until Taiwan's 
accession and does not cover the full range of procurement 
activities of interest to U.S. suppliers. Moreover, the new 
regulations do not appear to have effectively addressed problems 
that U.S. suppliers continue to experience in the Taiwan procurement 
market, particularly in the following areas:
    <bullet> The lack of timely and effective arbitration 
procedures, which prevent satisfactory resolution of contract 
disputes;
    <bullet> High bid bond requirements and unacceptably high 
potential contract liabilities;
    <bullet> Frequent costly and unreasonable contract change 
orders;
    <bullet> The use of tender specifications to exclude foreign 
bidders;
    <bullet> Qualification requirements that require experience in 
similar projects in Taiwan, which do not take into account relevant 
experience in other markets;
    <bullet> Qualification requirements that require foreign 
suppliers to establish local subsidiaries; and
    <bullet> The use of offsets in certain key sectors.
    The Administration continues to urge the Taiwan authorities to 
take concrete steps, in preparation for its WTO and GPA accession, 
to eliminate these and other procurement practices that appear 
inconsistent with WTO requirements or that constitute an unfair or 
unnecessary restriction on competition in Taiwan's government 
procurement market.
    Canada--Provincial Price Preferences: Canada is the only Party 
to the GPA that has not assumed obligations to cover procurement by 
sub-central government entities. Some Canadian provinces maintain 
``Buy Canada'' price preferences that favor Canadian suppliers over 
U.S. and other foreign competitors. The Administration is concerned 
that the application of those preferences may result in an imbalance 
of bilateral market access opportunities in government procurement, 
will continue to raise these concerns in bilateral discussions, with 
a view to bringing Canadian provincial governments and other 
government and government-owned entities within the scope of the GPA 
and NAFTA procurement rules.
    Mexico--Implementation of New Procurement Laws and NAFTA 
Tendering Periods: On January 4, 2000, Mexico published new laws 
relating to the procurement of Public Works and Related Services. 
These laws require Mexican procurement agencies to implement a new 
system of ``Buy Mexico'' purchasing preferences. While the laws 
appear to include a general exception for treaty obligations, there 
remains a potential risk that Mexico could implement the laws in a 
way that would be inconsistent with Mexico's NAFTA commitments. The 
Administration is following the situation closely to ensure Mexico's 
conformity with its obligations under the NAFTA.
    The United States also remains concerned about complaints that 
some Mexican agencies are not adhering to NAFTA requirements 
relating to the time periods to be provided for tendering. The 
United States has joined Canada is seeking clarification of this 
issue in the NAFTA Negotiating Group on Government Procurement 
(NGGP), and continues to urge Mexico to ensure that its procurement 
authorities comply with the relevant NAFTA commitments.
    Korea--Airport Construction: Practices applied by Korea in 
procurements for construction of the new Inchon International 
Airport project favor Korean firms over foreign firms. These 
practices, such as the use of domestic partnering, short deadlines 
and certain licensing requirements, appear inconsistent with the 
GPA, and restrict the ability of U.S. and other foreign firms to 
participate meaningfully in bidding opportunities and to win 
contracts. U.S. officials raised these concerns with Korea 
repeatedly in the WTO Government Procurement Committee and in 
informal bilateral consultations.
    Because Korea's GPA schedule does not explicitly list the names 
of the entities procuring for the Inchon International Airport 
project, the United States and Korea disagreed about whether such 
procurements were even covered by the Agreement. The United States 
maintained that these entities, which were specifically created for 
the purpose of procuring for this particular project, are covered 
because they are in fact subordinate to Korea's Ministry of 
Construction and Transportation, a ``central government'' entity 
explicitly listed in Korea's GPA schedule. Korea, on the other hand, 
denied coverage of these entities under its GPA obligations.
    The two governments could not come to an agreement after two 
years of discussions. Therefore, the United States asked a WTO panel 
to examine this issue. Formal consultations between the governments 
were held on March 17, 1999, and meetings of the panel were held in 
October and November of last year. On April 7, 2000, the panel 
issued its final report to the two governments. In its report, the 
panel concluded that this particular airport construction project is 
not covered by the GPA. The panel made this determination based on 
its findings, inter alia, that the project is not explicitly written 
into Korea's GPA schedule and that the entities procuring for the 
project are not ``legally unified'' with Korea's listed entities.
    Germany--``Sect Filters'': Policy guidance issued by the German 
Federal Government has raised concerns about a potential for 
discrimination against U.S. firms in procurement decisions by German 
entities. In September 1998, the Federal Economics Ministry issued 
procurement guidelines to be

[[Page 26655]]

put into effect by all Federal Government Ministries. These 
procurement guidelines warn that a firm should be deemed 
``unreliable'' if it refuses to sign a so-called sect filter. The 
filter requires a firm's leadership to attest that Scientology 
principles will not be used or spread in fulfillment of any 
contract; that the leadership of a firm will not recommend or 
approve participation in courses or seminars relating to Scientology 
principles during the course of business; and that firms reject 
Scientology principles in conjunction with any subsidiary. 
Procurement entities are permitted to reject bids and immediately 
terminate contracts if a firm does not sign the sect filter.
    Although issued at the Federal level and only for use on 
procurements related to consulting or training services, state-level 
entities and even private firms currently appear to be using sect 
filters beyond that narrow scope. While it still remains unclear how 
these measures will be implemented, at least one major U.S. supplier 
has had to undergo a qualification process that was significantly 
more extensive than that required by its competitors. Upon learning 
of the sect filter requirements, the Administration raised its 
concerns with the German Government and continues press the Germans 
to repeal this discriminatory policy.

IV. Expanding and Strengthening the International Rule of Law With 
Respect to Government Procurement

A. Free Trade Area of the Americas (``FTAA'')

    In the March 1998 San Josa Declaration, the Trade Ministers of 
the 34 countries of the Western Hemisphere agreed that the specific 
objectives of the FTAA negotiations in the area of government 
procurement were to ensure: ``openness and transparency of 
government procurement processes''; ``non-discrimination * * * 
within a scope to be negotiated''; and ``impartial and fair review 
for the resolution of complaints and appeals by suppliers and the 
effective implementation of such resolutions.'' In the November 1999 
Toronto Declaration, FTAA Ministers instructed their negotiators to 
submit draft negotiating texts for ministerial review by the end of 
2000. The FTAA governments are committed to concluding the FTAA 
negotiations by 2005.
    Currently, only 27 countries and territories are Parties to the 
WTO Government Procurement Agreement. The entry into force of the 
FTAA procurement chapter, therefore, is likely to more than double 
the number of countries that have agreed to open their government 
procurement markets and subject them to strong, binding, non-
discriminatory international procurement rules. In order to achieve 
the Toronto mandate, the Administration has pressed for a focused 
and forward leaning work program in the Negotiating Group on 
Government Procurement (``NGGP''). During the first part of the 
year, the NGGP has agreed that delegations will submit drafting 
proposals on all the elements that have been identified for 
inclusion in the FTAA procurement chapter. The NGGP will consolidate 
those proposals and seek to narrow differences and, where possible, 
achieve consensus on specific provisions by the end of the year. The 
resulting negotiating text will provide the framework for subsequent 
negotiations on the coverage (i.e., specific market access 
commitments) of the eventual procurement chapter.

B. WTO Working Group on Transparency in Government Procurement

    Continued, active support for early conclusion of a WTO 
Agreement on Transparency in Government Procurement is a key element 
of the Administration's ongoing efforts to promote the rule of law 
in public sector economic management throughout the world. 
Conclusion of this Agreement will serve a wide range of important 
U.S. interests. It will help to establish a more stable and 
predictable business environment for U.S. exporters, even in markets 
where governments maintain ``buy national'' or other purchasing 
restrictions. It will also build on the ``good governance'' reforms 
that a growing number of countries have adopted in response to the 
international financial crisis and the deeper structural impediments 
to efficient long-term growth and development.
    In 1999, the WTO Working Group on Transparency in Government 
Procurement moved forward rapidly with the development of concrete 
provisions for potential international commitments in this area. On 
this basis, WTO Members are in a good position to conclude a 
multilateral agreement on transparency in government procurement. 
This work provides a strong foundation for continuing to pursue U.S. 
procurement objectives in bilateral and regional negotiations, as 
well as in the WTO. The Administration will, in the context of WTO 
Members' decisions on the overall WTO agenda, continue to actively 
support the efforts to conclude a strong multilateral Agreement on 
Transparency in Government Procurement at the earliest date 
possible.

C. The WTO Agreement on Government Procurement (``GPA'')

    The GPA, which entered into force on January 1, 1996, is a 
``plurilateral'' agreement included in Annex 4 to the WTO Agreement. 
As such, it is not part of the WTO's single undertaking, and its 
membership is limited to the 27 WTO members that signed the 
Agreement in Marrakesh or that subsequently acceded to it. In its 
report to the 1996 Singapore Ministerial Conference, the Committee 
on Government Procurement, which monitors the GPA, stated its 
intention to undertake an ``early review'' of the GPA starting in 
1997. The Administration considers the review of the Agreement to be 
an important opportunity to streamline the GPA and make it more 
understandable to current and potential new GPA Parties, their 
suppliers, and their procuring entities.
    The United States and the other GPA Parties believe that the 
completion of this process will make the Agreement more accessible 
to a much broader range of WTO Members. Currently, five WTO Members 
are in the process of negotiating accession to the GPA, or preparing 
for those negotiations. A number of other countries, particularly 
eastern European countries seeking to accede to the European Union, 
have committed to pursue GPA accession in the future. In order to 
facilitate and expedite this process, the WTO Government Procurement 
Committee is developing standard accession procedures and time-
tables. The Administration believes that the development of 
systematic accession procedures will complement the review process 
in making the GPA more accessible to a broad range of WTO Members 
and significantly expanding international participation in the open, 
rules-based international trading system for government procurement.
    The GPA provides a consultative procedure to assist the Parties 
in monitoring and enforcing their procurement commitments under the 
Agreement. The United States has used this procedure to comment on 
questionable procurement practices, such as the application of the 
EU ``Utilities Directive,'' and to obtain detailed information 
relevant to potential dispute settlement cases.

D. Chapter 10 of the North American Free Trade Agreement (``NAFTA'')

    In NAFTA Chapter 10, the NAFTA signatories agreed to open the 
majority of non-defense related federal procurement opportunities to 
competition from all North American suppliers. Because Mexico is not 
a member of the GPA, its participation in the NAFTA marked the first 
time that Mexico had committed to eliminate discriminatory 
government procurement practices. While differences exist between 
NAFTA Chapter 10 and the GPA (e.g., with respect to thresholds and 
sub-federal coverage), the principles of non-discrimination, fair 
and open competition, and transparency are established with equal 
force in both agreements.
    As with the WTO Government Procurement Committee, the NAFTA 
Working Group on Government Procurement provides a useful forum for 
the Administration in monitoring and enforcing the NAFTA Parties' 
procurement commitments.

E. Combating International Bribery and Corruption

    Among the most consistent complaints the Administration receives 
from U.S. industry and labor representatives is that bribery and 
corruption can seriously compromise commercial opportunities in many 
overseas government procurement markets. This is particularly true 
for big ticket infrastructure projects for which preparation of a 
bid package alone can cost millions of dollars. U.S. exporters often 
report that they bid on projects with little or no certainty as to 
whether the offered technology and price are going to be the primary 
criteria in the award of contracts. In many cases, they may be 
doubly disadvantaged if their international competitors are not 
subject to legal disciplines similar to the U.S. Foreign Corrupt 
Practices Act. Despite these concerns, U.S. firms are frequently 
hesitant about coming forward publicly with cases in which they have 
seen bribery and corruption influence contract awards, because of 
fears that they may experience a commercial backlash with respect to 
future contracts.

[[Page 26656]]

    These circumstances call for government-to-government 
initiatives to root out bribery and corruption in international 
procurement markets. The Administration is aggressively pursuing 
this objective in a wide range of international fora. The OECD 
Convention on Combating Bribery of Foreign Public Officials in 
International Business Transactions, for example, represents a major 
breakthrough in this area. The Convention obligates the parties to 
criminalize bribery of foreign public officials in the conduct of 
international business, which can include government procurement. It 
is aimed at proscribing the activities of those who offer, promise, 
or pay a bribe. For this reason the Convention is often 
characterized as a ``supply side'' agreement, as it seeks to effect 
changes in the conduct of companies in exporting nations. The 
Convention entered into force in February 1999 for 12 of the 34 
signatories. As of April 2000, 20 signatories, including the United 
States, had ratified it.
    In March 1996, countries in the Western Hemisphere concluded 
negotiations on the Inter-American Convention Against Corruption. To 
date, 26 countries have signed it and 18 have ratified. This 
Convention, a direct result of the Summit of the Americas Plan of 
Action, requires that the signatories criminalize bribery, using 
language modeled in part on the U.S. Foreign Corrupt Practices Act, 
and adopt other various measures aimed at both national and 
international corruption. The Convention entered into force in March 
1997 for those countries which have ratified it.
    The Administration is pursuing a broad range of complementary 
initiatives in the WTO and other international and regional trade 
fora. For example, we continue to press WTO Members for early 
conclusion of a multilateral Agreement on Transparency in Government 
Procurement. We have also led initiatives to ensure full and timely 
implementation of the WTO Agreement on Customs Valuation and to 
strengthen the operation of the WTO Agreement on Pre-Shipment 
Inspection. As part of the Business Facilitation initiative for the 
Free Trade Agreement of the Americas, the Administration has already 
secured important commitments to ensure transparency and due 
process, particularly in relation to customs procedures, that will 
apply to all 34 countries of the Western Hemisphere. These 
initiatives strengthen the international rule of law and help to 
create a transparent, stable and predictable business environment 
that suppresses corrupt practices and allows U.S. firms and their 
workers to compete on a level playing field in overseas markets.

F. Offsets in Defense Trade

    When purchasing defense systems from U.S. contractors, many 
foreign governments require compensation, in the form of offsets, as 
a condition of purchase in either government-to-government or 
commercial sales of defense articles and/or defense services. 
Offsets include mandatory co-production, licensed production, 
subcontractor production, technology transfer, countertrade, and 
foreign investment. Offsets may be directly related to the weapon 
system being exported, or they may take the form of compensation 
unrelated to the exported item, such as foreign investment or 
countertrade.
    Originally designed to enhance allied national security, some 
key U.S. trading partners now use offsets to pursue economic and 
commercial objectives. Department of Commerce data indicates that, 
while over 90 percent of recent offset agreements were associated 
with exports of U.S. aerospace weapons systems, almost half the 
resulting offset transactions were fulfilled with non-aerospace 
products. Such mandatory offset requirements may negatively affect 
U.S. firms and their workers by enhancing foreign suppliers' 
competitive capabilities or opportunities, reducing U.S. exports, 
and potentially limiting domestic job opportunities in these 
industries. They may also have a negative impact on the foreign 
buyer, since contract award decisions that are determined by the 
willingness or ability of a supplier to provide offsets may result 
in procurement that does not achieve the best possible value in 
terms of the price and quality of the equipment, installation, 
materials or services supplied.
    An Interagency Offset Steering Committee, chaired by the 
Department of Defense and including representatives of the 
Departments of Commerce, State and Labor and the Office of the 
United States Trade Representative, was established in 1999. The 
Committee has been working to develop strategies that would reduce 
the adverse effects that defense related offsets may have on the 
industrial base and on U.S. trade interests. On this basis, the 
Committee has initiated bilateral discussions with U.S. allies in an 
effort to focus allied governments' attention on the adverse effects 
of offsets in defense trade and to explore ways for reducing or 
eliminating them.

Carmen Suro-Bredie,
Chairman, Trade Policy Staff Committee.
[FR Doc. 00-11415 Filed 5-5-00; 8:45 am]
BILLING CODE 3190-01-P