International Government-Procurement Obligations of the United States: An Overview
Released: 2006-01-09T00:00:00

Summary:
This report contains an overview of the major procurement agreements to which the UnitedStates is a party, including the World Trade Organization (WTO) Agreement on GovernmentProcurement, the procurement chapter of the North American Free Trade Agreement (NAFTA) andprovisions from other free trade agreements. In addition, this report highlights major federal lawsthat relate to the government-procurement obligations of the United States.

subsections: section_title: The WTO Agreement on Government Procurement
subsections: section_title: Overview
paragraphs: The United States' WTO obligations with respect to government procurement are containedin the WTO Agreement on Government Procurement (AGP). (1) Generally, the AGP appliesthe basic WTO national treatment and most-favored-nation obligations to the area of governmentprocurement. The AGP was negotiated during the Uruguay Round of the General Agreement onTariffs and Trade (GATT), and took effect in the United States on January 1, 1996. (2) Unlike other provisions of theWTO, which countries must accept as a condition of membership, the AGP is a plurilateralagreement. Therefore, AGP parties are only committed to apply the agreement to other AGP parties. Presently, in addition to the United States, the AGP has been accepted by the European Communities(EC), each of the 25 EC Member countries, (3) Canada, Hong Kong, Iceland, Israel, Japan, Korea, Liechtenstein,Netherlands with respect to Aruba, Norway, Singapore, and Switzerland. (4) 
section_title: General Obligations
paragraphs: The AGP applies to "any law, regulation, procedure or practice regarding any procurementby entities covered by the Agreement." (5) This includes central and sub-central governmental entities, as wellas other government-related entities that a member Party designates. (6) In addition, the AGP governs"procurement by any contractual means, including through such methods as purchase or as lease,rental or hire purchase, with or without an option to buy, including any combination of products andservices." (7) 
Pursuant to Article I, each Party to the AGP must submit an Appendix with Annexes that listthe Party's covered entities, as well as the products and services that it may or may not procure forAGP purposes. The Appendix is divided into five Annexes: Annex I covers central governmententities; Annex II, sub-central government entities; Annex III, all other entities which procure inaccordance with the AGP; Annex IV, services and; Annex V, construction services. (8) 
It is important to note that the AGP does not apply to all procurement contracts, but only tothose contracts that are covered by a Party's specific commitments. Further, of the covered contracts,the AGP only applies to those that are valued at or exceed designated monetary thresholds set forthin each Party's Annexes in terms of Special Drawing Rights (SDRs). (9) In the United States thethresholds are given official dollar amounts in biennial notices issued by the Office of the UnitedStates Trade Representative (USTR). (10) The U.S. Annexes, which set out the scope of U.S.commitments, will be discussed in detail later in this report. (11) 
The AGP further provides that where governmental entities, "in the context of" AGP-coveredprocurement, require non-listed enterprises to award contracts in accordance with particularrequirements, Article III obligations regarding national treatment and non-discrimination "apply mutatis mutandis to such requirements." (12) One commentator explains this requirement by stating that "alisted entity could not oblige an independent enterprise to favour national suppliers when purchasinggoods on its behalf," and further notes that "[t]he increasing privatization of public services givesadded importance to this rule." (13) 
Consistent with the overall framework of the WTO, the AGP requires national treatment andnondiscrimination in contracting. In addition, the AGP contains obligations regarding tenderingprocedures, qualification of suppliers, offsets, invitations to participate in procurements, tender andselection procedures, awarding of contracts, transparency, and challenge procedures. Disputes underthe Agreement are generally subject to WTO consultation and dispute settlement procedures,although the AGP does establish some special rules. The AGP also contains general exceptions fromAgreement obligations, as well as a specific national security exception. A party to the AGP mayalso make changes to its Schedule, however, the changes are subject to consultations with the WTOand, in the case of significant changes, negotiations with member states on possible compensation.
section_title: National Treatment and Non-discrimination (Article III)
paragraphs: AGP national treatment and most-favored nation (MFN) obligations apply with respect togoods, services, and suppliers of goods and services and involve issues related to the country oforigin of goods and the degree of foreign affiliation or ownership of locally established servicesuppliers.
Both the national treatment and MFN obligations are contained in Article III paragraph 1,which provides that
Article III, paragraph 2 of the AGP prohibits discrimination against locally-establishedsuppliers based on foreign ownership links or foreign supply. The provision states that 
Article III also provides that the obligations stated above do not apply to "customs duties andcharges of any kind imposed on or in connection with importation, the method of levying such dutiesand charges, other import regulations and formalities, and measures affecting trade in services otherthan laws, regulations, procedures and practices regarding government procurement covered by thisAgreement." (15) 
section_title: Rules of Origin (Article IV)
paragraphs: Rules of Origin are defined in Annex 1A of the WTO as 
laws, regulations and administrative determinations ofgeneral application applied by any Member to determine the country of origin of goods providedsuch rules of origin are not related to contractual or autonomous trade regimes leading to the grantingof tariff preferences going beyond the application of paragraph 1 of Article I of GATT 1994. (16)
While the AGP itself does not contain separate rules of origin, it does provide that a Party may notimplement rules of origin regarding the importation or supply of government procured products orservices "which are different from the rules of origin applied in the normal course of trade and at thetime of the transactions in question to imports of supplies of the same products or services from theParties." (17) Article IV,paragraph 2, however, allows this requirement to be amended in light of the results of WTOnegotiations on rules of origin for products and services. (18) 
section_title: Tendering Procedures (Article VII)
paragraphs: Article VII of the AGP establishes the general rules regarding tendering procedures. Atendering procedure is the system through which companies engage in competitive bidding forgovernment and other contracts. Specifically, Parties to the AGP are to ensure that their proceduresare "applied in a non-discriminatory manner" (19) and "shall not provide to any supplier information with regardto a specific procurement in a manner which would have the effect of precluding competition." (20) Article VII, paragraph 3defines the three types of tendering procedures governed by the AGP as: (1) open tenderingprocedures -- in which all interested supplies may bid; (2) selective tendering procedures -- underwhich only those suppliers invited to bid may do so and; (3) limited tendering procedures -- wherethe entity contacts the suppliers individually and requests bids. (21) 
section_title: Qualification of Suppliers (Article VIII)
paragraphs: Article VIII requires that AGP Parties not discriminate among suppliers of other Parties, orbetween domestic suppliers and suppliers of other Parties in the process of drawing up lists ofqualifying suppliers. (22) Article VIII also requires qualification procedures to be consistent with eight categories ofrequirements including that "[a]ny conditions for participation in tendering procedures . . . be limitedto those which are essential to ensure the firms' capability to fulfill the contract in question." (23) 
Article VIII(b) further mandates that participation requirements "be no less favourable tosuppliers of other parties than to domestic suppliers and shall not discriminate among suppliers ofother parties." In addition, when evaluating the financial or technical capacity of a potential supplierunder Article VIII, both "the supplier's global business activity as well as . . . its activity in theterritory of the procuring entity" shall be taken into account. (24) Moreover, Article VIII provides that nothing in the listed requirements "shall preclude the exclusion of any supplier ongrounds such as bankruptcy or false declarations, provided that such an action is consistent with thenational treatment and non-discrimination provisions of this Agreement." (25) 
section_title: Selective Tendering Procedures (Article X)
paragraphs: Article X requires that for every covered procurement, the selection of suppliers be fair,non-discriminatory and that international competition be ensured by "inviting tenders from themaximum number of domestic suppliers and supplier of other parties, consistent with the efficientoperation of the procurement system." (26) As provided in Article VIII, Parties may establish qualificationprocedures and keep lists of qualified suppliers. However, in cases where there is sufficient time tocomplete the qualification procedures, suppliers requesting participation "shall be permitted tosubmit a tender and be considered." (27) The only exclusionary principle is the efficient operation of theprocurement system. In other words, additional suppliers who meet the qualification proceduresmust be permitted until the admission of additional suppliers would make the operation of theprocurement system inefficient. 
section_title: Limited Tendering Procedures (Article XV)
paragraphs: Parties may utilize limited tendering procedures as provided for in Article VII if they are "notused with a view to avoiding maximum possible competition or in a manner which would constitutea means of discrimination among suppliers of other Parties or protection to domestic producers orsuppliers." (28) ArticleXV provides numerous situations where limited tender provisions are appropriate. (29) The situations include:
The absence of tenders under open or selectiveprocedures.
When the tenders received are collusive.
When the tenders received are not in conformity with the essentialrequirements of the tender.
When the tenders received are from suppliers who do not comply with theconditions for participation established in accordance with the AGP.
When the products or services can only be supplied by a particular supplier andno reasonable alternative or substitute exists, such as in the case of art work or other exclusive rightsarraignments (i.e., patents or copyrights).
When the products or services can not be obtained in time by means of an openor selective tendering procedure. (30)
In the case of additional deliveries, (i.e., replacement parts for existing suppliesor installations) by the original supplier, or in situations where a change in supplier would requirethe purchase of equipment or services that are not interchangeable with existingsupply.
In the case of prototypes, first products or services that are developed in thecourse of contracts for research, experiment, study or original development. 
Where additional construction, within the objectives of the original tender, arenecessary to complete the terms of the original tender. (31)
New construction services that are the repetition of similar constructionservices for which an initial contract was awarded under open or selective tenderprocedures.
Products purchased on the commodities market.
Purchases made under exceptionally advantageous conditions arising in thevery short term. (32)
Contracts awarded to the winners of design contests, provided the contest isconsistent with the principles of the AGP.
section_title: Offsets (Article XVI)
paragraphs: Pursuant to the AGP, governmental entities may not impose, seek, or consider offsets eitherin qualifying and selecting suppliers, products, or services, or in evaluating tenders and awardingcontracts. (33) Offsetsare defined in the AGP as "measures used to encourage local development or improve thebalance-of-payments accounts by means of domestic content, licensing of technology, investmentrequirements, counter-trade or similar requirements." (34) At the same time a developing country, may, subject to certainlimitations, negotiate conditions for the implementation of offsets. For example, at the time ofaccession to the AGP, a developing country may bargain to obtain "requirements for incorporatingdomestic content." (35) 
section_title: Challenge Procedures (Article XX)
paragraphs: In addition to the possibility of party-to-party dispute settlement under the general WTOdispute resolution procedures, the AGP requires that suppliers have access to separate challengeprocedures for alleged breaches in the context of government procurement. In the event that asupplier complains of a breach, each Party must initially encourage the supplier to seek resolutionof its complaint in consultations with the procuring entity. (36) The procuring entity isthen committed to "accord[ing] impartial and timely consideration to any such complaint, in amanner that is not prejudicial to obtaining corrective measures under the challenge system." (37) The AGP then sets forthrequirements for the challenge procedures themselves, generally requiring that they be"non-discriminatory, timely, transparent and effective." (38) 
section_title: Dispute Settlement (Article XXII)
paragraphs: The WTO Dispute Settlement Understanding (DSU) applies to consultations and disputesettlement involving the AGP with certain exceptions. (39) For example, only AGP Parties may participate in decisions oractions by the DSU in AGP disputes. (40) Also, cross-retaliation is not available with respect to theAGP. (41) As such, WTOMembers may not suspend AGP benefits as a countermeasure in a dispute arising under a separateWTO agreement. (42) 
section_title: Exceptions (Article XXIII)
paragraphs: The AGP contains a national security exception, which is generally patterned after ArticleXXI of the 1994 GATT. (43) The exception states that:
Nothing in this Agreement shall be construed to preventany Party from taking any action or not disclosing any information which it considers necessary forthe protection of its essential security interest relating to the procurement of arms, ammunition orwar materials, or to procurement indispensable for national security or for national defensepurposes. (44)
In addition to the national security exemption, the AGP also contains a number of generalexceptions, which are to some extent modeled on the general exceptions contained in Article XX theGATT 1994. (45) Examples of exemptions include, but are not limited to, public morals, order or safety, intellectualproperty and philanthropic institutions.
section_title: Rectifications and Possible Compensation (Article. XXIV)
paragraphs: A Party to the AGP has an opportunity to make rectifications to its Appendix, to transfer anentity from one Annex to another, and "in exceptional cases" to make "other modifications" bynotifying the WTO Committee on Government Procurement. (46) A WTO Member seekingsuch action must also provide information as to the likely consequences of the change for the"mutually agreed coverage of the Agreement." (47) If these changes are of a "purely formal or minor nature," theywill become effective if there is no objection within 30 days of notification. (48) In other cases, theChairman of the Committee is required to promptly convene a Committee meeting, where proposalsand claims for "compensatory adjustments" will be considered. Consideration of proposals andclaims is to be done "with a view to maintaining a balance of rights and obligations and acomparable level of mutually agreed coverage provided in this Agreement prior to suchnotification." (49) If anagreement is not reached, Parties are then free to pursue the matter under WTO consultation anddispute settlement procedures.
section_title: The United States Appendix to the AGP
paragraphs: To fully understand the scope of U.S. obligations, it is essential to examine the U.S.Appendix to the Agreement, which includes the U.S. government and quasi-government agenciescovered by the AGP, the U.S. threshold for procurement contracts, and various exceptions that theU.S. has taken to AGP obligations. (50) 
Federal Agencies (Annex I). Subject to monetarythreshold requirements, (51) the AGP applies to all federal (including legislative and judicialbranch) agencies, except the Federal Aviation Administration. (52) While the Department ofDefense (DOD) is a listed entity, the Agreement does not apply to specified DOD purchases, suchas textiles and specialty metals. (53) Furthermore, DOD purchases in 14 Federal SupplyClassification (FSC) categories are generally not covered by the AGP for national securityreasons. (54) Moreover,the United States Department of Agriculture listing does not include procurement of agriculturalproducts made in furtherance of agricultural support or human feeding programs. (55) Finally, the U.S. Agencyfor International Development is not covered with respect to procurement for the direct purpose ofproviding foreign assistance. (56) 
The United States has invoked the Article XXIII national security exception for variousfederal procurements. Specifically, regarding the Department of Transportation, the Annex states that"pursuant to Article XXIII, the national security considerations applicable to the Department ofDefense are equally applicable to the Coast Guard, a military unit of the United States." (57) With respect to theDepartment of Energy, the Annex states that "pursuant to Article XXIII, national security exceptionsinclude procurements made in support of safeguarding nuclear materials or technology and enteredinto under the authority of the Atomic Energy Act, and oil purchases related to the StrategicPetroleum Reserve." (58) The United States has also provided that 14 FSC categories "are not generally covered" with respectto DOD procurements "due to the application of Article XXIII, paragraph 1." (59) Finally, the United Stateshas reserved the right to invoke Article XXIII, paragraph 1 with respect to purchases by all coveredfederal entities in 56 FSC categories. 
State Agencies (Annex II). Thirty-seven statesand their covered agencies are currently listed in the U.S. Annex II. (60) Commitments regardingstate procurement are subject to the U.S. General Notes, any exceptions listed for a particular state,and the following Annex II general exceptions:
for specified states the AGP does not apply to the procurement ofconstruction-grade steel (including requirements on subcontracts), motor vehicles andcoal;
the AGP does not apply to preferences or restrictions associated with programspromoting the development of distressed areas and businesses owned by minorities, disabledveterans and women;
Annex II may not be construed to prevent any state entity from applyingrestrictions that promote the general environmental quality in the state, as long as the restrictions arenot disguised barriers to trade;
the AGP does not apply to any procurement made by a covered entity on behalfof non-covered entities at a different level of government (e.g., a county or city);and
the AGP does not apply to restrictions attached to Federal funds for masstransit and highway projects. (61)
"All Other Entities" (Annex III). This Annexcovers procurement by the following entities: Tennessee Valley Authority (TVA); the PowerMarketing Administrations (PMAs) of the Department of Energy; the Port Authority of New Yorkand New Jersey; the Port of Baltimore; the New York Power Authority; and, Rural ElectrificationAdministration Financing. (62) Procurements by some of these entities are subject to specificexceptions stated in the Annex as well as the General Notes. In addition, the AGP does not applyto restrictions attached to federal funds for airport projects with respect to all of the listed entities.
Services (Annex IV). Annex IV includes onlythose services that are not covered by AGP obligations. The U.S. Annex states that the followingservices from the Universal List of Services, (63) are excluded:
all transportation services, including launching services, and transportationservices where incidental to a contract for the procurement of supplies;
dredging;
all services purchased in support of military forces locatedoverseas;
management and operation contracts of certain government or privately-ownedfacilities utilizedd for government purposes, including federally-funded research and developmentcenters;
public utilities services, including telecommunication and ADP-relatedtelecommunication services except enhanced (i.e. value-added) telecommunicationsservices;
research and development and;
printing services (for Annex II entities only). (64)
Also applicable to the Annex are the U.S. General Notes. For example, General Note 8contains the U.S. reciprocity requirement for services that is explained in the Statement ofAdministrative Action submitted to Congress along with the Uruguay Round agreements. TheAdministration described this requirement as follows:
Most countries limited their coverage of services tothose sectors in which they were willing to make market access commitments under the GeneralAgreement on Trade in Services. The United States offered coverage of services procurement in allbut seven services sectors, but only on the basis of reciprocal access from other signatories. MostCode members were willing to apply the 1996 Code to procurement of key services, such ascomputer, environmental, and value-added telecommunications services. (65)
Construction Services (Annex V). Annex Vdefines a construction services contract as "a contract which has as its objective the realization bywhatever means of civil or building works, in the sense of Division 51 of the Central ProductClassification [CPC]," (66) and includes within its AGP commitment all services listed inDivision 51 of the CPC. The threshold levels for the procurement of construction services are listedin Annexes I-III. (67) Ahigher threshold for certain construction services of the Republic of Korea, however, is provided forin the U.S. General Notes.
General Notes. The United States has claimedexceptions in its General Notes for set-asides on behalf of small and minority businesses. (68) 
The General Notes also state that except as otherwise specified in its Appendix, procurementin terms of U.S. coverage does not include
non-contractual agreements or any form of governmentassistance, including cooperative agreements, grants, loans, equity infusions, guarantees, fiscalincentives, and government provision of goods and services to persons or government authoritiesnot specifically covered under U.S. annexes to this agreement. (69)
In addition, procurement does not include the acquisition of fiscal agency or depositoryservices, liquidation and management services for regulated financial institutions and sale anddistribution services for government debt. (70) Further, for contracts to be awarded by non-covered entities, theAGP may not be construed to cover any goods or service component of that contract. (71) 
As noted earlier, the United States has established a reciprocity requirement for services,stating that "[a] service listed in Annex 4 is covered with respect to a particular Party only to theextent that such Party has included that service in its Annex 4." (72) 
The U.S. General Notes also contain several country-specific exclusions:
Canada: AGP does not apply to procurement of goods and services, includingconstruction, by Annex II and III entities. (73)
Korea: for construction services, AGP applies only to procurement by AnnexII and III entities above a 15 million SDR threshold. (74)
Japan: AGP does not apply to procurement of goods and services, includingconstruction, by NASA (75)
Japan: U.S. will not extend AGP benefits regarding the award of contracts byAnnex III entities that are responsible for the generation or distribution of electricity. (76)
section_title: The North American Free Trade Agreement (NAFTA)
paragraphs: The North American Free Trade Agreement (NAFTA), as approved and implemented byCongress, entered into force on January 1, 1994. (77) Chapter 10 of NAFTA contains extensive procurementobligations, which generally follow and build upon provisions contained in the 1979 GATTProcurement Code. (78) Since Mexico is not currently a party to the WTO AGP, its procurement obligations with the UnitedStates are governed solely by NAFTA. Procurement obligations between the United States andCanada had been, prior to NAFTA, contained in the U.S.-Canada Free Trade Agreement, whose$25,000 threshold for federal goods contracts has been carried forward into the NAFTAagreement. (79) 
In addition to exceptions in individual schedules, NAFTA procurement obligations, likethose of the AGP, are subject to national security and general exceptions. (80) Article 1018, paragraph1 contains the Agreement's national security exemption, stating that:
The NAFTA general exception, set forth in Article 1018 paragraph 2, states:
section_title: Procurement Obligations Under Other Free Trade Agreements
paragraphs: In addition to the WTO and NAFTA, many of the other Free Trade Agreements (FTAs) thatthe United States has in effect contain provisions with respect to government procurement. Theagreements vary in their respective details, but all share provisions in common, including, but notlimited to, exemptions for certain Department of Defense procurements and threshold requirements. For example, the U.S.-- Israel FTA contains provisions for the waiver of any buy national provisionsfor contracts with a value greater than $50,000. (83) Moreover, our most recent FTAs such as the U.S.-- Chile FTA,U.S.-- Singapore FTA, U.S.-- Morocco FTA and the U.S.-- Australia FTA (84) each contain procurementprovisions that closely track those provided for by the AGP. (85) With respect to thresholdrequirements, however, some of the newer FTAs contain thresholds that are much lower comparedto the AGP. (86) It is alsoimportant to note that while there are "essential security" provisions in the agreements with bothChile and Singapore, (87) currently, neither the Morocco or Australia agreements contain a national security exceptionspecifically applicable to government procurement obligations. Furthermore, the DominicanRepublic-Central American Free Trade Agreement (DR-CAFTA) also contains provisions relatingto government procurement that are similar to those contained in the U.S.- Morocco andU.S.-Australia FTAs ( i.e., without a national security exception), however, while implementinglegislation has been enacted for DR-CAFTA, the agreement has not yet taken effect. (88) 
section_title: United States Statutes that Effect International Government-Procurement Obligations
subsections: section_title: Buy American Act(89)
paragraphs: Initially adopted in 1933, the Buy American Act is the major domestic preference statute thatgoverns procurement by the federal government. (90) The Buy American Act requires that the government buydomestic "articles, materials, and supplies" when they are acquired for public use unless a specificexception applies. (91) 
Goods qualify as domestic under the statute if they are "such unmanufactured articles,materials, and supplies as have been mined or produced in the United States," or "such manufacturedarticles, materials, and supplies as have been manufactured in the United States substantially all from articles, materials, or supplies mined, produced, or manufactured, as the case may be, in theUnited States." (92) Federal regulations define the term "substantially all" as meaning that the "cost of domesticcomponents must exceed 50 percent of the cost of all the components." (93) 
There are five primary exceptions to the Buy American Act. The Act does not apply toprocurements where its application would be inconsistent with the public interest or unreasonablein cost. (94) In addition,the Act does not apply to procurements of products for utilization outside the United States, or ofproducts not produced or manufactured in the United States in sufficient and reasonably availablecommercial quantities and of satisfactory quality. (95) Lastly, the Act does not apply to procurements under$2,500. (96) 
section_title: Trade Agreements Act of 1979 (TAA)
paragraphs: When Congress approved the GATT Procurement Code in the Trade Agreements Act of1979, it also authorized the President to waive procurement restrictions such as the Buy AmericanAct in implementation of international obligations. (97) Specifically, the statute permits the President to:
The President may designate a foreign country for purposes of the TAA only if he determinesthat the country or instrumentality:
is a party to one of the WTO Agreement on Government Procurement or theNAFTA and will provide appropriate reciprocal competitive government procurement opportunitiesto U.S. products and suppliers of such products;
is a country or instrumentality, other than a major industrial country, which willotherwise assume WTO procurement obligations and will provide such opportunities to suchproducts and suppliers;
is a country or instrumentality, other than a major industrial country, which willprovide such opportunities to such products and suppliers; or
is a least developed country. (98)
A provision added in the NAFTA Implementation Act of 1993 makes the waiver authorityinapplicable to any small business or minority preference. (99) 
To encourage additional countries to join the WTO AGP, and to provide reciprocalcompetitive government procurement opportunities to U.S. goods and suppliers, the TAA requiresthe President, with regard to procurement covered by the Agreement, to prohibit procurement ofproducts of a foreign country or instrumentality that has not been designated by the President. (100) 
The prohibition does not apply, however, in the case of procurement for which there are nooffers of U.S. products or services or of eligible products, or such offers are insufficient to fulfillU.S. Government requirements. (101) As amended by the Uruguay Round Agreements Act, the TAAalso authorizes the President to waive the prohibition on procurement of products from a non-Partycountry or instrumentality where the country has: (1) agreed to apply transparent and competitiveprocedures to its government procurement equivalent to those in the Agreement and (2) maintainsand enforces effective prohibitions on bribery and other corrupt practices in connection with itsgovernment procurement. The TAA also permits the President to authorize agency heads to waivethe prohibition on a case-by-case basis when in the national interest, and to authorize the Secretaryof Defense to waive the prohibition for products of countries or entities that enter into a reciprocalprocurement agreement with the Department of Defense. (102) 
Specific amendments to the TAA have been made through the years to implementprocurement obligations contained in U.S. FTAs. (103) At this time, however, no statutory changes have been madeto implement the procurement chapters of the U.S. FTAs with Jordan, Chile or Singapore.