International Trade: Foreign Sourcing in Government Procurement
Released: 2019-06-24T00:00:00

Letter

Background

U.S. international trade agreements that cover USG procurement include the GPA and bilateral and regional FTAs. The revised GPA has 20 parties (including the EU) covering 48 WTO member countries (including the 28 EU member countries). Another 33 WTO members are observers; of these, 10 are in the process of acceding to the agreement. In addition to the GPA, the United States has 14 FTAs with 20 countries, four of which (Canada, Israel, Singapore, and South Korea) are also parties to the GPA. Almost all of the FTAs to which the United States is a party include provisions covering government procurement.

The GPA aims to mutually open government procurement markets for goods, services, and construction services among its parties, according to the WTO. Under the GPA, foreign suppliers are able to compete alongside with U.S. suppliers for USG contracts covered by the agreement, and U.S. suppliers are able to compete for covered foreign government contracts in accordance with the framework established by the GPA. According to the office of the United States Trade Representative (USTR), to implement U.S. obligations under the international agreements that cover government procurement, the United States—generally (and not always) — waives preferential purchasing requirements for goods and suppliers from other countries that are parties to the agreements in covered procurements over a certain threshold. For example, USTR has waived the Buy American Act and other preferential provisions for eligible products in acquisitions covered by various trade agreements. However, Commerce officials noted that small business set-aside requirements are not waived nor are the provisions of the Berry Amendment.

Government Procurement Markets and the Procurement Opportunities That Parties to the GPA and FTAs Have Reported Opening to Foreign Firms

As part of our body of work on international government procurement, we have previously reported the following:

The U.S. and EU government procurement markets are comparable in size, and each is larger than those of all other GPA and U.S. FTA partner countries combined. Some other parties to the agreements also have large government procurement markets, including Japan, South Korea, Canada, Mexico, and Norway.

The government procurement chapters of the GPA and selected U.S.

FTAs that we reviewed generally have similarities in text and commitments, possibly because key parties negotiated multiple agreements concurrently. However, the revised GPA generally provides more comprehensive market access than the selected FTAs we reviewed.

The United States reported opening more procurement opportunities covered by the GPA to foreign firms than had other parties to the agreement. Data for 2010 showed that the United States reported $837 billion in GPA covered procurement. This amount is about twice as large as the approximately $381 billion reported by the next five largest GPA parties combined—the EU, Japan, South Korea, Norway, and Canada—even though total U.S. procurement is less than that of the other five parties combined.

Previously, we reported on the opportunities available to U.S. and foreign firms seeking to compete for covered government procurement contracts in the countries that are parties to the agreements. In the current report, we analyze the value and number of actual contract awards, reported in procurement databases, including contracts covered under the GPA and NAFTA and those not covered. Covered contracts can be awarded to domestic firms, to firms from countries that are parties to the GPA and U.S. FTAs, or to other non-U.S. firms. Additionally, the Buy American Act does not apply to products that are purchased for use outside the United States, nor to the acquisition of services. Therefore, such contracts can be awarded without the application of Buy American Act domestic preference conditions to bids from any firm, including firms from non-GPA and non-FTA countries.

Two Types of Data Sources Used to Estimate Foreign Sourcing in Government Procurement

To estimate foreign source procurement, we looked for information about where the goods and services that governments purchase are produced and the characteristics of the firms supplying those goods and services. We identified two types of primary data sources that could be analyzed to estimate foreign sourcing in government procurement: (1) government procurement databases to estimate direct cross-border central government procurement and (2) input-output tables merged with international trade data to estimate total procurement by all levels of government and the portion comprising imported goods and services.

Data from Government Procurement Databases on Contracts Awarded by Central Governments

Government procurement databases collect information on contracts awarded by government entities to firms supplying goods and services. Except for Japan, all the countries in our analysis maintain online government procurement databases that can serve as a primary data source to generate statistics on their foreign source central government procurement. The USG and the other six main parties to the GPA and NAFTA use these databases to report to the WTO their required procurement statistics under the GPA. While Japan does not have a government procurement database, Japan’s central government collects procurement data from various ministry sources and reports the aggregated data to the WTO. As table 1 shows, the U.S. Federal Procurement Data System-Next Generation (FPDS-NG) provides more data fields that can be used as proxies for measuring foreign source procurement than the non-U.S. databases provide. FPDS-NG contains data on four potential proxy measures of foreign sourcing—firm location, firm ownership, product and service origin, and place of performance. The database for the EU and Norway and the databases for Canada and Mexico all contain contract award data related to firm location. South Korea’s database and Japan’s WTO submission on its 2013 procurement contain data on source country of goods and services. Therefore, two data fields, one reflecting firm location and the other reflecting country of product and service origin, appear to provide reasonable proxy measures of foreign source procurement, although neither is available across all data sources. (For more information on the characteristics of each government procurement database, see app. II.)

Information about how much goods and services a country imports provides the basis for another approach to estimating what portion of all government procurement in that country is imported. The WIOD provides such information, giving us a second type of data and an alternative analytical approach for estimating foreign source government procurement. The WIOD links data on an economy’s supply chain interdependencies to data on its import and export flows, thus providing a proxy estimate of the share of imports in procurement by all levels of government. We based our method for analyzing linked input-output tables on an approach used by the European Commission which examines import penetration of government procurement within Europe.

Unlike the contract data we analyzed from government procurement databases, the WIOD data capture procurement by all levels of government. However, the input-output tables are organized by industry, which requires a decision as to which industries make up the government sector in any given country’s economy. Some industries, like “public administration”, can safely be assumed to be part of the governmental sector in every country. Other industries, like education or health care, vary across countries in the degree to which they are part of the government sector, if at all.

While this analytical method based on input-output tables can provide broad estimates of how much governments are purchasing imported goods and services, it relies on some important assumptions that may affect the reliability of the results. For example, it assumes that the goods and services purchased by all levels of government are imported to the same extent as they are when purchased by other industries in the same country. This assumption, known as the “proportionality assumption”, recognizes that results from this method may overestimate the share of imports in government procurement to the extent that the analysis does not capture attempts by the government sector to limit foreign sourcing in its procurement. On the other hand, other aspects of this method may underestimate the share of imports in government procurement. For example, the input-output data include intermediate inputs but do not include purchases for investment, such as some government assets because, according to the authors of the European Commission study, input-output tables do not have the data to distinguish between investments by the private and public sectors. Thus, the input-output data could exclude investment made through construction services like those purchased to build highways, schools, or other assets that have long-term use, services that are included in covered procurement under both the GPA and NAFTA.

The USG Likely Procured More Than Twice as Much from the Other Six Main Parties to the GPA and NAFTA as Vice Versa, but Exact Comparisons Are Not Possible

The value of U.S. government (USG) contracts awarded to firms located in the other six main parties to the GPA and NAFTA likely exceeds twice the estimated value of contracts from those parties to U.S. firms, but exact comparisons are not possible. The USG awarded contracts valued at about $12 billion to foreign-located firms in fiscal year 2015, of which less than half went to firms located in the other six main parties. Conversely, the government procurement data we analyzed indicated the central governments of these parties awarded almost $7 billion to foreign sources, of which less than a third were awarded to firms located in the United States or for goods or services from the United States. Over three- quarters of these U.S.-sourced contracts were awarded by Canada and Mexico. Only the USG’s procurement database contains data on firm ownership. Analyzing these data, we found that the USG awarded more, by reported contract value, to foreign-owned firms located abroad, than it awarded to U.S.-based subsidiaries of foreign-owned firms. This was mostly U.S. Department of Defense (DOD) contracts in support of the U.S. military presence in those countries. Overall, while available contract data enable broad cross-country comparisons, these data allow only limited insight into the effects on the U.S. economy of foreign sourcing of USG procurement. This is principally because the contract data do not capture the economic roles of firms awarded contracts and thus do not allow for a definitive assessment of the economic implications of foreign sourcing, as we discuss later in this report.

USG Contracts Valued at About $5 Billion Went to Firms Located in the Six Main Parties, out of About $12 Billion Awarded to All Foreign-Located Firms

In 2015 the USG awarded about 511,000 contracts valued at about $290.9 billion. Out of this total, about 47,000 contracts valued at about $12.1 billion were awarded to firms located outside the United States (as shown in the data by firm location). Similarly, the USG awarded about 50,000 contracts valued at about $16.5 billion for foreign goods and services (as shown by country of product and service origin). See table 2.

Of the USG foreign source procurement awarded to firms in the other six main parties to the GPA and NAFTA, firms located in the EU received more than half in terms of contract value and slightly less than half by number. In 2015 the USG awarded about 10,000 contracts valued at about $5.3 billion to firms located in the other six main parties to the GPA and NAFTA (see table 2 above). This $5.3 billion is about 40 percent of the total value of USG contracts awarded to foreign-located firms. Firms located in the EU received almost 5,000 USG contracts valued at $2.8 billion. Firms located in Japan, South Korea, and Canada were awarded most of the remaining aggregate USG contract value ($1.1, $0.8, and $0.6 billion, respectively) and number of contracts (about 1,500, 600, and 2,900, respectively) awarded to firms in the other six main parties to the GPA and NAFTA. Firms located in Mexico and Norway received less than 1 percent of the aggregate USG contract value and number of contracts awarded to firms in the other six main parties.

However, as table 2 also shows, the majority of foreign-sourced USG procurement, in terms of both value and number of contracts, went to firms located in countries that are not among the other six main parties to the GPA and NAFTA. Germany, Japan, and South Korea are among the top five countries whose firms received the most USG contract value in fiscal year 2015. However, countries in the Middle East, including Afghanistan, United Arab Emirates, and Saudi Arabia, were also among the countries whose firms were main recipients of USG procurement in terms of aggregate contract value (see app. III for additional information on USG foreign source procurement by country).

Finally, table 2 shows that FPDS-NG data are similar when we use, instead of firm location, the alternative measure of foreign sourcing based on country of product and service origin. For example, the aggregate value of contracts awarded by the USG for goods and services originating in countries of the other six main parties was about 43 percent of the overall value of USG foreign source procurement—the same proportion we found when using firm location as proxy measure of foreign sourcing. In addition, as with the results based on firm location, most of the USG’s foreign source procurement as measured by country of product and service origin went to countries outside the other six main parties to international procurement agreements.

USG Awarded Less by Contract Value to U.S.- based Subsidiaries of Foreign-Owned Firms Than to Foreign-Owned, Foreign-Located Firms, Which Mainly Support DOD Operations Abroad

Foreign-located firms can be either foreign-owned or U.S.-owned, just as U.S.-located firms can be either foreign-owned or U.S.-owned. Among the government procurement databases we used, only the FPDS-NG includes data on firm ownership. Some research on foreign sourcing in government procurement differentiates between direct and indirect cross- border procurement based on knowledge about both the location and ownership of the successful bidder: In direct cross-border procurement, the successful bidder is both foreign-owned and foreign-located.

In indirect cross-border procurement, the successful bidder is a U.S.- based domestic subsidiary of a foreign-owned firm.

According to a recent EU Commission study, between 2009 and 2015, the EU’s indirect cross-border government procurement was more than 5 times greater in terms of both value and number of contract awards than its direct cross-border government procurement. The study notes that indirect cross-border procurement is often high when direct cross-border procurement is low and suggests that may reflect actual or perceived barriers to cross-border bidding, which lead firms to rely on their locally based subsidiaries for cross-border sales. The study reported that indirect cross-border government procurement (foreign-owned, domestically located vendor) accounted for 21.9 percent of the number and 20.4 percent of the value of certain contract awards in the EU’s 28 countries, while direct cross-border government procurement (foreign-owned, foreign-located vendor) accounted for 1.7 percent of the number of contracts and 3 percent of contract value.

In contrast to the findings of that EU Commission study, our analysis of FPDS-NG data shows that indirect cross-border procurement by the USG was smaller in terms of total award value and number of contracts than direct cross-border procurement. This indicates that foreign firms selling to the USG generally do not establish a local presence in the United States. Specifically, foreign-owned firms located in the United States (indirect cross-border procurement) received contracts valued at about $3.6 billion, or less than 1 percent of the value of all USG contracts. By contrast, firms that were both foreign-owned and foreign-located (direct cross-border procurement) received contracts valued at about $11.8 billion, or about 4 percent of the value of all USG contracts ($290.9 billion). Therefore, USG direct cross-border procurement was about three times greater than indirect cross border procurement for contracts awarded in fiscal year 2015.

A possible explanation for this finding could be that foreign-owned and foreign-located firms are awarded more USG contracts in terms of value and number than U.S. subsidiaries of foreign-owned firms because those contracts are covered by international procurement agreements. Foreign- owned and foreign-located firms are awarded more USG contracts because they may bid for large-value GPA covered USG contracts at a higher rate than their U.S.-located counterparts, or they may generally be more competitive for such contracts. However, for contracts not covered under the GPA and NAFTA, the relative difference between the two groups of foreign-owned firms becomes smaller in terms of aggregate contract value. Therefore, the difference between direct and indirect cross-border procurement is likely not due to agreement coverage as one might expect. To better understand why the USG’s direct cross-border procurement was larger than its indirect cross-border procurement, we further analyzed the FPDS-NG data on firm location, firm ownership, and place of performance—where the services were performed or where the goods were produced.

Based on firm location, as stated earlier, foreign-located firms were awarded about $12.1 billion in USG contracts. Measured by aggregate contract value, almost all of the USG contracts awarded to those firms were performed abroad (i.e., outside the United States)—$11.9 out of $12.1 billion or 98 percent. USG contracts performed abroad are commonly awarded to U.S.-located as well as to foreign-located firms. In 2015, the USG awarded contracts performed abroad valued at about $23.3 billion, of which about half was awarded to U.S.-located firms.

In particular, as figure 1 suggests, while U.S.-located firms received contracts performed abroad valued at $11.4 billion, foreign-located firms were awarded USG contracts valued at $11.9 billion. Almost all of those USG contracts—$11.7 out of $11.9 billion or 98 percent—were awarded to firms that were foreign-owned as well as foreign-located (i.e., direct cross-border government procurement). The vast majority of the value of these USG contracts to foreign-owned, foreign-located firms was for DOD contracts performed abroad. In particular, DOD awarded about 84 percent of the value of USG contracts—$9.8 billion out of $11.7 billion— that were performed abroad and awarded to foreign-owned, foreign-located firms. The vast majority of those contracts ($7.5 billion or 77 percent) were covered under the GPA and NAFTA. (See app. III for a breakdown by agency of all USG contracts performed abroad and awarded in fiscal year 2015 to foreign-owned, foreign-located firms.)

Foreign-owned firms located in six countries received the majority (57 percent) of DOD’s $9.8 billion in aggregate award value of contracts performed abroad. Specifically, firms located in three countries in the Middle East—Afghanistan, Saudi Arabia, and United Arab Emirates— together received 28 percent of that award value; firms in Japan and South Korea together received 18 percent; and firms in Germany received 11 percent. About a quarter of DOD’s $9.8 billion in aggregate award value were for purchases of fuel, oil, lubricant, and wax. About 9 percent were for education and training services, and about 7 to 8 percent each were for construction of buildings and housekeeping services. For example, fuel was the main product procured by DOD in United Arab Emirates, while in Saudi Arabia most DOD procurement was for education and training services. (See app. III for a breakdown of DOD contracts performed abroad and awarded to foreign-owned and foreign- located firms, by country.)

Central Governments of the Other Six Main Parties Awarded Almost $2 Billion to U.S.-Located Firms or for U.S.-Made Products out of About $6.5 Billion in Foreign-Awarded Contracts

Our analysis of available procurement contract data from 2015 shows that the central governments of the other six main parties to the GPA and NAFTA, apart from the USG, awarded contracts valued at about $170.5 billion. About 4,000 out of a total of 245,000 of these contracts with an estimated total value of about $6.5 billion were awarded to foreign sources, that is, to foreign-located firms or for imported products and services. Some of these contracts awarded by the other six main parties were covered by the GPA and NAFTA, while others were not.

Furthermore, the central governments of the other six main parties awarded about 2,000 U.S.-sourced contracts worth about $1.8 billion (see fig. 2). U.S.-sourced contracts are contracts awarded to U.S.-located firms or for products made in the United States. Canada and Mexico awarded most of the U.S.-sourced contracts. Specifically, central government contracts awarded to U.S.-located firms by Canada and Mexico accounted for almost 80 percent of the value and number of all U.S.-sourced contracts.

Over 60 percent of the value and number of U.S.-sourced contracts awarded by the central governments of the other six main parties were for the procurement of goods. In particular, Canada awarded more than 20 times more in contract value to purchase goods than it did to purchase services from U.S.-located firms. However, for contracts covered under trade agreements, the other six main parties collectively awarded more U.S.-sourced contracts for services than for goods; these contracts were awarded primarily by the EU and Mexico. U.S.-located firms were awarded virtually no construction services contracts. This result is consistent with our findings for procurement flows among all countries among the other six main parties to GPA and NAFTA and may be explained by the proxy measure used—firm location, which accounts only for direct cross-border procurement. For example, the EU commission paper cited previously finds that for construction works the share of direct cross-border procurement in the total value of awards was 1.7 percent compared with 12.3 percent for indirect cross-border procurement.

While Available Contract Data Enable Broad Cross- Country Comparisons of Foreign Sourcing by Central Governments, They Allow Limited Assessment of Economic Implications

Select Data Elements Available in Government Procurement Databases Allow for Broad Cross-Country Comparisons, but Not Precise Estimates

The data available from the government procurement databases we analyzed provide relevant and useful information for assessing foreign sourcing in government procurement, but these data do not allow for precise cross-country comparisons based on the GPA provisions on rules of origin. Data and reporting on country of origin for goods and services is limited for a number of reasons. Most of the databases we analyzed contain fields on contract award value and type of contract, as well as fields on firm location or country of product or service origin—proxy measures of foreign sourcing that, as we have found, allow for broad cross-country comparisons. However, precise estimates from the available data are not possible because no single internationally accepted definition exists to distinguish procured goods and services that are “foreign” from those that are “domestic” and the information in government procurement databases is not uniform. There is no agreed- upon definition of the country of origin for goods and services for statistical reporting purposes in the GPA even though a similar term— country of production—is used in the 1994 GPA’s general principles on nondiscrimination. Instead, the GPA generally expresses that a party shall apply the rules of origin that it applies in the normal course of trade when determining the country of origin for goods and services in covered procurement.

Another factor that limits cross-country comparisons of country of origin data by parties to the GPA is the recent revision to the GPA itself, which no longer requires the parties to provide country of origin statistics, as we previously reported. According to the 1994 GPA, parties were to provide statistics on the country of origin for products and services purchased by its entities, to the extent that such information is available. However, the revised GPA, which went into effect in 2014, does not require parties to report available information on the country of origin of purchased products or services. While all the GPA members included in our scope reported the amount of covered procurement to the WTO, only Japan (until 2013) reported statistics on the “nationality of the winning tenderer”. The WTO Committee on Government Procurement’s Work Programme on the Collection and Reporting of Statistical Data is currently examining the issues surrounding how countries define country of origin for the procurement of goods and services.

Finally, while the United States collects a variety of relevant data on foreign sourcing, those data have certain limitations for cross-country comparisons since the data are collected for different purposes. While U.S. agencies collect country data on successful bidders and the country of origin of goods and services in response to the Buy American Act and report these in FPDS-NG, the agencies do not collect data on country of origin determinations in response to relevant provisions of the GPA or NAFTA. For example, the U.S. Federal Acquisitions Regulation (FAR), in implementing statutes including the Buy American Act, applies different tests to determine the country of origin of an end product and defines end products to include “domestic”, “foreign”, or “U.S.-made”. The test to determine country of origin for an end product under the Buy American Act is different from the test to determine country of origin in the procurement of an end product under trade agreements.

According to the FAR, for manufactured products, the Buy American Act uses a two-part test to define a domestic end product: (1) the article must be manufactured in the United States, and (2) the cost of domestic components must exceed 50 percent of the cost of all the components. According to the FAR, for procurement under trade agreements, the test to determine “country of origin” is “substantial transformation”, (i.e., transforming an article into a new and different article of commerce, with a name, character, or use distinct from the original article). The substantial transformation test can also be used to determine whether a product is a U.S.-made end product. The FAR also defines a foreign end product as an end product other than a domestic end product. Therefore, under the FAR, contracting officers use different tests and different descriptors to designate country of origin. Since corresponding data fields for these descriptors are not available in FPDS-NG, the data do not allow for exact cross-country comparisons of foreign sourcing under the GPA and NAFTA.

Available Procurement Contract Data Allow Limited Assessment of the Economic Implications of Foreign Sourcing

In all countries included in this report, available contract data do not allow for a definitive assessment of the economic implications of foreign sourcing in government procurement, such as impacts on wages and profits. As figure 3 shows, using the United States for illustrative purposes, foreign versus domestic sourcing in government procurement could be viewed in four different ways —firm location, firm ownership, product and service origin, and place of contract performance. For example, FPDS-NG data shows that a task order under a DOD contract for facilities support performed in Iraq reports the United Arab Emirates as the country of product and service origin for safety and rescue equipment, while also reporting the firm location and ownership as the United States. FPDS-NG data showed that another task order under the same contract, for housekeeping services, reports the place of performance as Kuwait but reports the United States as the country of product and service origin, the firm location, and the country of firm ownership. As another example from FPDS-NG data, a contract awarded by the U.S. Agency for International Development for internet services performed in Malawi and awarded to a foreign-owned business reports the United States as the country of service origin but the United Kingdom as the firm location. Each of the various different ways relevant to the sourcing of USG contracts can be viewed on a continuum based on the extent of foreign involvement associated with the production and service delivery processes.

Country of firm location. As found in the procurement databases, suppliers can be located, for example, domestically in the United States or abroad. However, the economic effects related to the country of firm location depend on what is produced in the country relative to what is produced elsewhere. For example, the supplier may be an end product manufacturer doing less skill-intensive assembly and packaging, a high technology and skill-intensive manufacturing firm that substantially transforms a product that is subsequently used as an input in the production process, or a broker providing unskilled labor for product distribution. In each of these examples, the country of firm location could experience different economic effects from the awarded contract.

Country of firm ownership. Suppliers could be domestically or foreign owned, and who owns the firm determines who accrues the firm’s profits. However, determining ownership is challenging because a supplier awarded a contract may have various ownership structures. For example, the supplier may be a sole proprietor or a corporation with shareholdings, subsidiaries, ultimate owners, or may be a participant in a corporate group. The supplier may have established a presence in the United States through a foreign-owned subsidiary or may participate in a partnership such as a joint venture with a U.S. firm.

Country of product or service origin. Goods and services purchased under government procurement contracts may be domestically produced or imported. In this case, the effects can be analyzed in the same way as trade flows in general. However, the country of product or service origin is more challenging to determine for government procurement contracts compared with general trade in goods and services, since government contracts typically cover more than one good or service. Therefore, the country of origin for certain goods included in a contract may be different from the country of origin for other goods under the same contract.

Country of contract performance. USG contracts can be executed within the United States or outside the United States. For example, the country of contract performance may determine where the service is delivered as opposed to the location or ownership of the firm that delivers the service. The place of performance may lead to benefits and costs accruing to the location where the contract is performed. For example, if a service is delivered or the products are produced outside the United States, the contract likely employs local labor and therefore benefits the local labor market.

Because available data in government procurement databases do not specify the supplier firm’s economic role, the economic effects of the awarded contract remain uncertain. The potential effects of the awarded contract on other firms, workers, the government, or consumers in the domestic and foreign economies may vary depending on the supplier firm’s economic role.

Foreign Sourcing Is a Minor Share of Government Procurement, and Our Analysis Did Not Find a Consistent Relationship with Coverage under the GPA and NAFTA

We estimate that foreign sourcing is generally a small share of government procurement for the United States and the other six parties to the GPA and NAFTA. Foreign sourcing by the USG and the other parties’ central governments, estimated by government procurement databases, varied in value from about 2 to 19 percent of overall central government procurement. Foreign sourcing by all levels of government, estimated by data on trade and public sector purchases by the United States and the other six main parties, shows that government imports ranged from about 7 to 18 percent of the goods and services purchased by these countries’ governments. In addition, our analysis of central government contract data found that foreign sourcing is sometimes but not always greater, in terms of value and number of contracts, for contracts covered by procurement agreements than for contracts not covered by those agreements.

Foreign Source Procurement by Central Governments Estimated from Country Databases Varied in Value from 2 to 19 Percent of Overall Central Government Procurement

Our analysis of available data on firm location from government procurement databases shows that foreign sourcing in 2015 ranged in value from 2 to 19 percent of overall central government procurement (see fig. 4). The central governments of the EU, Mexico, and the United States awarded less than 5 percent of the aggregate value of their procurement contracts to foreign-located firms. The proportions for Canada and Norway were about 11 and 19 percent, respectively. Both Canada and Norway can be characterized as small, open economies bordering much larger, open trading partners, which may contribute to their relatively larger shares of foreign sourcing in central government procurement. Canada’s central government awarded about 10 percent of the value of all its contracts to firms located in the United States. Similarly, Norway’s central government awarded about 19 percent of the value of all its contracts to firms located in the EU.

Our analysis of available data on country of product and service origin shows that Japan procured less from foreign sources (2 percent) than both the United States (6 percent) and South Korea (3 percent). See figure 5.

We obtained similar results in terms of number of foreign-sourced contracts. Less than 5 percent of the number of central government contracts was sourced from abroad in the EU, Japan, South Korea, and Mexico. For the United States, Norway, and Canada, the numbers of foreign-sourced contracts based on firm location comprise higher percentages (9, 8, and 13 percent, respectively). Canada’s central government awarded about 9 percent of the total number of contracts it awarded to firms located in the United States. Similarly, Norway’s central government awarded about 7 percent of the total number of contracts it awarded to firms located in the EU.

Except for the United States, most of the central governments of the other six main parties to the GPA and NAFTA awarded few construction services contracts to foreign-located firms. One possible explanation is that, given the higher dollar value threshold of contracts in this sector, foreign-owned firms may have a greater incentive to establish a local presence through subsidiaries in the host countries. The data in the non- U.S. databases do not provide enough information to explore that hypothesis. However, FPDS-NG data show that construction services contracts are the main contract type awarded to foreign-located firms by the USG, which awarded about 3,090 construction services contracts worth $1.8 billion (or about 20 percent and 8 percent of all construction services contracts, respectively) to foreign-located firms. Less than 1 percent of these contracts’ award value was for contracts performed in the United States and over 70 percent of these contracts’ award value was for contracts covered by the GPA and NAFTA.

In addition, the USG awarded a roughly equal share (about 4 percent of all contracts in terms of value) of goods and services contracts to the other six parties to the GPA and NAFTA. Canada, on the other hand, awarded a relatively large percentage of the value of all goods contracts (30 percent) to firms located abroad.

Foreign Source Procurement Estimated by an Alternative Method Shows Import Percentages by All Levels of Government Range from 7 to 18 Percent of All Government Purchases

We also assessed the degree of foreign sourcing in terms of government import percentages to identify patterns in government procurement that may differ from those based on the location of the supplier and origin of goods and services. Using linked input-output tables and an alternative analytical approach, we were able to broadly estimate the domestic and foreign sources of inputs to the government sector for the United States and the six main parties to the GPA and NAFTA. This alternative approach to estimating foreign source government procurement is based on macroeconomic data on trade flows of goods and services between countries and the types of goods and services purchased by the public sector. Unlike the approach above based on government procurement contract data, this approach allows us to calculate broad estimates of domestic and foreign sourcing in procurement by all levels of government—central, state, and local.

Table 3 shows our broad estimates based on a narrow definition of the government sector, which includes only “public administration”. In the table, the columns are the purchasing countries or the EU. The rows indicate where the goods or services are being purchased from. As the table shows, for all the countries and the EU, foreign sourcing generally accounts for a small portion of all governmental purchases. For example:

Out of the estimated $1.2 trillion that the central, state, and local governments in the United States purchased, $100 billion was imported from outside the United States—a total foreign source percentage of about 9 percent, including $26 billion (2 percent) from the EU.

Out of the $460 billion that the EU governments at every level purchased, $36 billion was imported from outside the EU—a total foreign source percentage of about 8 percent, including $10 billion (2 percent) from the United States.

Out of the $178 billion that governments in Japan purchased, $12 billion was imported from outside Japan—a total foreign source percentage of about 7 percent.

In general, the smaller economies in terms of government purchases— Canada, South Korea, Mexico, and Norway—imported a relatively larger percentage of such purchases than the United States, EU, and Japan. Specifically, Canada, South Korea, and Norway imported about 9 to 13 percent of their governments’ purchases. Mexico imported a notably large share of about 18 percent. Of the estimated $24 billion in purchases by Mexico’s government sector, about 6 percent was from the United States and about 3 percent from the EU. This inverse relationship between the size of an economy and the relative percentage import share of government purchases has been noted by others that have used the input-output methodology.

Basing estimates of foreign source government procurement on the narrow definition of the government sector may not be as appropriate in countries where the government plays a large role in various additional sectors. Figure 6 shows the size of the government sector under the narrow definition as well as two broader definitions which add additional industries. The “typical definition” as defined in the EU study also includes the education and health care sectors. The “broad definition” also includes a portion of the energy and the telecommunications sectors. The relative sizes of the parties change under the different definitions, as shown in the figure. For example, while the EU government sector is less than half the size of the U.S. government sector under the narrow definition ($460 billion for the EU compared with $1,159 billion for the United States), under the broad definition they are comparable in size ($2.4 trillion for the EU and $2.6 trillion for the United States).

Figure 7 shows the estimated percentages of each country’s and the EU’s government sector purchases that are imported under the narrow, typical, and broad definitions as described above. Under all three definitions, the United States and EU have some of the smallest percentages of imported government purchases, between 8 and 10 percent. Mexico has one of the largest percentages, between 17 and 22 percent. Canada and Norway are in the middle, from about 12 to 16 percent. For South Korea and Japan, the estimated percentages of government sector purchases that are imported increased under the broad definition—from 7 percent to 17 percent for Japan, and from 9 percent to 22 percent for South Korea.

Available Contract Data Indicate Foreign Sourcing Is Not Always Greater for Contracts Covered by the GPA and NAFTA Than for Other Contracts

Our analysis of 2015 data from central government procurement databases finds evidence that foreign sourcing was sometimes, but not always, greater for contracts covered by the GPA and NAFTA than for contracts not covered by those agreements. Given the goals promoted by the GPA and NAFTA, one might expect that procurement covered by such agreements would likely result in a higher number or larger aggregate value of contracts awarded to foreign-located firms or for the purchase of foreign goods and services. For the United States and two of the other six main parties to the GPA and NAFTA—Mexico and South Korea—the results bore out that expectation: for all three, more central government foreign sourcing in terms of contract value occurred when procurement was covered by the agreements. However, our analysis also shows that for two other parties, Canada and Norway, the opposite was true; for the remaining two parties, the EU and Japan, we found little difference or could not calculate an estimate. Our previous work showed that only about a third of the estimated average annual government procurement at all levels of government from 2008 through 2012 was covered by the GPA and NAFTA ($1.5 out of $4.4 trillion).

The available data from the government procurement databases that we analyzed show that the USG and the central governments of Mexico and South Korea awarded at least twice as much to foreign sources for contracts covered by international agreements—ranging from 2 to 6 percent of the value of covered contracts compared with less than 1 to 2 percent for non-covered contracts (see table 4). In particular, for contracts awarded by the USG, foreign-located firms received more than twice the value of covered compared with non-covered contracts—about $8.8 billion compared to $3.4 billion, respectively. Results for the USG are similar when looking at the amount of foreign source procurement based on product and service origin. Conversely, U.S.-located firms were awarded a higher aggregate value of non-covered contracts from the USG, compared with covered contracts. (See table 4.)

For Canada and Norway, more central government foreign sourcing in terms of contract value occurred when procurement was not covered by trade agreements than when it was. For covered contracts, Canada’s central government awarded 1 percent of the value of all contracts to foreign-located firms compared with 10 percent of the value for non- covered contracts. Similarly, Norway awarded foreign-located firms more than 5 times more in non-covered than covered contracts as measured by aggregate contract value.

For the EU and Japan, data on the value of foreign sourced contracts and their agreement coverage are either not available or incomplete. The available EU data have a significant number of foreign unclassified contracts and do not include contracts below the GPA threshold values, which limits the reliability of any comparison for covered versus non- covered contracts. In addition, Japan’s 2015 GPA submission of 2013 procurement data did not report on the amount of foreign source procurement broken out by covered and non-covered contracts, because, according to Japanese officials, this is not a GPA statistical reporting requirement. Therefore, we could not calculate a similar comparison of the value of covered versus non-covered procurement for Japan.

Finally, with regard to the number of contracts awarded, our analysis of available data from country databases does not show a consistent relationship with international procurement agreement covered awards to foreign-located firms or for foreign-sourced goods or services. In South Korea and the United States, the number of contracts not covered by trade agreements and awarded for foreign sourced products was greater compared with covered contracts. Conversely, in Canada, EU, Mexico, and Norway, the number and share of contracts covered by trade agreements and awarded to foreign-located firms was greater compared with non-covered contracts. In percentage terms, foreign-located firms received the same share (9 percent) of covered and non-covered contracts awarded by the USG.

Agency Comments

We provided a draft of this product to USTR, Commerce, OMB, and GSA for comment. Commerce provided technical comments on this report, which we incorporated, as appropriate. USTR, OMB, and GSA did not comment on our draft report.

As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the U.S. Trade Representative, the Secretary of Commerce, the Director of the Office of Management and Budget, the Administrator of the General Services Administration, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-8612 or gianopoulosk@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V.

Appendix I: Objectives, Scope and Methodology

This report examines the extent of foreign sourcing in government procurement by the United States and the other six main parties to selected international procurement agreements. Under the World Trade Organization (WTO) Agreement on Government Procurement (GPA), the other main parties, besides the United States, are the European Union (EU), Japan, Canada, South Korea, and Norway. Under the North American Free Trade Agreement (NAFTA), the other main parties are Mexico and Canada. The report (1) provides alternative broad estimates of foreign sourcing by the U.S. government (USG) and the central governments of the other six main parties to the GPA and NAFTA, and (2) assesses foreign sourcing as a share of estimated central government procurement and of estimated procurement by all levels of government, and the extent to which central government contracts that are covered under the GPA and NAFTA are foreign-sourced.

We analyzed data from two types of sources: (1) government procurement databases in Canada, the EU, South Korea, Mexico, Norway, and the United States, for 2015, and (2) 2014 trade data merged with data on the types of goods and services purchased by the public sector. Since Japan does not have a national procurement database, data for Japan were based on its WTO GPA submission for 2013, which is the last submission that contains information on its foreign sourcing in government procurement. We also interviewed cognizant government officials in Washington, D.C.; Ottawa, Canada; Mexico City, Mexico; Seoul, South Korea; and Tokyo, Japan, and reviewed available research literature to identify potential methods, sources, and data limitations. We also interviewed government officials at the EU mission in Washington, D.C. and exchanged information with officials knowledgeable of the EU government procurement database.

Analysis of Data on Contracts Awarded from Government Procurement Databases

We collected and analyzed data from the following five databases: for the United States, the Federal Procurement Data System-Next Generation (FPDS-NG); for the EU and Norway, Tenders Electronic Daily (TED); for Canada, Contract History; for Mexico, the Government of Mexico e-Procurement System CompraNet; and for South Korea, the South Korea ON-line E-Procurement System (KONEPS).

Several of these government procurement databases included data on procurement at all levels of government—national, state, and local— while others did not. Therefore, we limited our analysis to data on central government procurement. For a detailed discussion of the characteristics of each database, see appendix II.

To identify data fields that could be reasonably compared across databases, we followed a number of methodological steps: First, we looked for fields that capture the total award value of the contract at the time of award (2015); the type of contract in terms of goods, services, and construction services; the contract award date; the contract duration; and the type of tendering procedure. We took into account the following considerations:

Units of analysis. We established appropriate units of analysis across databases. Several databases contained a number of fields that were potentially relevant to our work. Specifically, in FPDS-NG the unit of analysis is the contract award. The database contains data at the contract action level (contracts, task orders, and their modifications). We used contract awards for the number of reported contracts, but for certain data on indefinite delivery vehicles (IDVs) such as government-wide acquisition contracts, indefinite delivery contracts, and blanket purchase agreements, we relied on data for task orders awarded in fiscal years 2015 through July 2018 (see discussion of contract valuation and multiple-year, multiple-award contracts below) because they contained information on place of performance, country of product and service origin, and place of manufacture, which were the relevant fields for foreign sourcing. The TED database contains information on contract notices, contract award notices, and contract awards above certain thresholds set by relevant EU legislation. While the EU and Norway use contract award notices to estimate the value of covered procurement in their GPA statistical notifications, we used contract awards because they allowed us to estimate actual foreign sourcing. The databases for Canada, Mexico, and South Korea contain a contract identifier, which is the sole and unique unit of analysis that is available.

Contract valuation. We established comparable fields across databases that represented the estimated maximum total value of a procurement awarded in 2015 over its entire duration. For FPDS-NG, we developed a methodology that is consistent with the methodology laid out in the revised GPA and avoids the inconsistencies of the revised U.S. methodology, which we previously reported. In particular, in October 2015, the Office of the U.S. Trade Representative (USTR) notified the WTO that the United States had revised its methodology for preparing GPA statistical reports on U.S. federal procurement. To more precisely reflect the value of the federal procurement market at the time of each report, the revised methodology presented the total amounts obligated under GPA covered contracts over a 6-year period—that is, the year the contract was awarded plus 5 years after the award. As we previously reported, the revised methodology has both advantages and disadvantages. It improves the accuracy of reporting but introduces a 6-year delay, whereas the revised GPA requires reporting within 2 years of the end of the reporting period. In addition, the revised valuation methodology is not consistent with the one used by other countries and creates an internal inconsistency: In measuring actual obligations for procurement contracts rather than the value at the time of award, the revised U.S. methodology is inconsistent with the methodology used by other large GPA members, such as the EU, Norway, Canada, and Mexico, which report contract values at the time of award rather than actual obligations or expenditures.

The United States continues to report the number of covered contracts to the WTO based on their award value, which leads to an inconsistency between the reported numbers and values of reported U.S. government procurement contracts. The contracts comprising the reported value of covered procurement are determined at a later time under the revised methodology and can result in a different set of contracts being used to determine the reported value.

Our current methodology uses base and all options value for all contracts awarded in fiscal year 2015 unless the contract was an IDV. For IDVs we used the base and all options value of task orders awarded in fiscal years 2015 through July 2018 under those IDVs to avoid overestimating the total value. We used the aggregate base and all options value for task orders under those contracts because the alternative—using the base and all options value on the base IDVs—is inflated due to problematic data entries for multiple awards. As a result, our methodology produces an estimate that is consistent with methods used by other parties, internally consistent, and in accordance with the methodology for valuation in the revised GPA. As we noted earlier, the result is close to the obligations value currently reported in the Trade Agreements Report used by USTR to report to the WTO.

In TED, we used the contact award value field, because it captures the appropriate measure and according to EU documentation was corrected for errors in the data. For the EU and Norway, we found that for above-threshold procurement approximately 15 percent and 12 percent of the contract award values were missing, respectively. We took additional steps to address these missing values to generate estimates of the total contract award values. Specifically, we implemented a Predictive Mean Matching (PMM) multiple imputation methodology for the EU and used post-stratification estimation techniques for Norway. (See app. IV for more details on both methods.) However, we excluded the value of below-threshold procurement for the EU and Norway because it is reported on voluntary basis and suffers from missing and implausible values. In particular, for the EU, about 42 percent of the contract award values below threshold are missing and another 10 percent are below €1,000. For Norway, 80 percent of the contract award values below threshold are missing. Nevertheless, as a robustness check of the results from our analysis, we applied our imputation methodology discussed in appendix IV to the entire TED dataset and found that once those values are estimated, the amount of procurement awarded by the EU to U.S.- located firms increases by less than 10 percent. However, we do not consider the estimate sufficiently reliable to be included in our aggregate analysis.

In Contract History, we used the contract value field because, according to Canadian officials, it includes the original total value of the contract at the time of the award. In addition, those officials noted that this field was used by Canada in its reporting of covered procurement for its WTO statistical notifications. In CompraNet, we used the contract amount field since, according to Mexican officials, this field reflects the total value of the contract award. In KONEPS, we used the total awarded value field, since it was the only field available for our analysis and contained the value awarded for a given year (see adjustments we made for multiple-year contracts below).

Currency denomination. We converted contract values reported in different currencies in the databases into dollars using the period average exchange rate for 2015 as provided by the International Monetary Fund’s International Financial Statistics.

Contract modifications or amendments. Since we defined the value of the award at the time of award, we selected contracts awarded in 2015 and excluded any subsequent modifications or amendments in all the databases.

Contract types. We used the product and service classifications that each database used to group contracts by type. Different databases used different classification schemes, and we did not independently reclassify any contracts to a uniform classification system, since such a system does not exist and a concordance among all schemes is not possible. In FPDS-NG, we used the U.S. product and service codes to classify federal government contracts in product groups and categorized reported procurement as either goods, services, or construction services. In TED, we used the type of contract field, which categorized reported procurement as supplies, services, and works based on the EU common procurement vocabulary in TED. In Contract History, we used the grouping of goods, services, and construction, which Canadian officials provided to us based on the global shipment identification number codes and description in the database. In CompraNet, we used the type of contract field, which indicates if the contract is for goods, services, or public works. In KONEPS, the data on foreign procurement included goods only, and no classification scheme was available for foreign procurement contracts.

Multiple-year, multiple-award contracts. Some countries’ procurement practices include contracts awarded for multiple years, and we accounted for the valuation of those contracts by estimating their total cumulative value over multiple years at the time of award in 2015. In FPDS-NG, we accounted for the value of multiple-award contracts by using the base and all options value of task orders awarded in fiscal years 2015 through 2018 for IDVs initially awarded in fiscal year 2015. In TED, available documents noted that member states can use alternative multiple-year tools such as framework agreements and dynamic purchasing systems for a certain time period or for repeat purchases, respectively. While the indicator field for these data in TED was not sufficiently populated for further analysis of those types of contracts, the contract valuation field we used had already accounted for the total value of the contract, and thus no further adjustment was warranted. Officials in Canada provided data on multiple-year contracts, including call-ups and standing offers. However, since the contract value field we used accounted for the total value of the contract, no further adjustment was needed. For Mexico, CompraNet contains information on framework agreements and multiple-year contracts, but since the contract value field indicated the total value of the contract award, no adjustment was needed. South Korea also uses multiple-year contracts, and we made several adjustments to estimate South Korea’s total value of 2015 awards. We identified multiple-year contracts in KONEPS in 2015; based on solicitation numbers, we then removed the value of contracts originally awarded in prior years, while adding the value of multiple year contracts with solicitations in 2015 and awards in 2016 and 2017.

Type of tendering procedure. In all databases we included in our analysis contracts under open and limited tendering procedures.

Second, we identified data fields among the five databases that could potentially be used as proxy measures of foreign sourcing in government procurement: contractor data related to firm location contractor data related to firm ownership data on country of product and service origin However, we did not identify a data field common to all five databases that could be used as a proxy measure of foreign sourcing. FPDS-NG contained data on all four measures listed above. TED, CompraNet, and Contract History contained contractor data related to firm location. KONEPS and Japan’s WTO submission on its 2013 procurement contained data on country of product and service origin. Therefore, two data fields—firm location and country of product and service origin—were available in two groups of countries as reasonable proxy measures of foreign source procurement.

Finally, we analyzed the contract data from the government procurement databases by GPA coverage. Some databases contain a field for GPA coverage, the data for which we deemed to be reliable for our purposes; for the databases that did not, we developed a proxy measure for GPA coverage. FPDS-NG contains a field on trade agreement coverage, but we found it to be unreliable as reported in previous work; therefore, we constructed a method to identify GPA covered procurement using an approach that USTR confirmed is consistent with the steps applied by the USG in developing its GPA statistical notifications. TED contains an identifier for GPA covered procurement, and we used this field to estimate GPA covered procurement for Norway and the EU after taking steps to address missing values for this identifier using other information in the dataset. Contract History contains a field that lists all internal and international agreements applicable to a contract in Canada. Therefore, covered procurement includes all contracts covered under the GPA, NAFTA, and other Canadian international procurement agreements. For Mexico, CompraNet contains a data field on type of procedure, which indicates the eligible firms that can bid on a contract. The data in this field indicate that the contract is (1) open to national firms only; or (2) international procurement under trade agreements, that is, open to both national (Mexican) firms and foreign firms from FTA partner countries; or (3) international procurement open to national firms, foreign firms from FTA partners, and all other foreign bidders. We treated international procurement in CompraNet as a proxy for GPA covered procurement. We grouped all contracts awarded in 2015 into two categories: non-covered procurement, which includes contracts open to national firms only, and covered procurement, which includes contracts open to foreign bidders (i.e. all contracts in categories 2 and 3 described above). KONEPS does not have a data field that specifically identifies covered procurement. Therefore, we defined a proxy for covered procurement as procurement above the revised GPA thresholds by covered entities. However, we were unable to make an adjustment for goods and services excluded from the agreement, since KONEPS does not classify foreign procurement by product service codes.

To analyze the extent to which central government contracts that are covered under the GPA and NAFTA are foreign-sourced, we compared the proportion of foreign-sourced award values for contracts covered under the GPA and NAFTA to the same proportion of foreign-sourced contracts, which are not covered by those agreements. Our analysis describing the relationships between trade agreement coverage and procurement award values did not account for additional factors and was limited due to the data available. As we previously reported, the countries within our scope represent over 90 percent of the GPA countries’ total government procurement. Moreover, we previously performed consistency checks across time periods for these countries and determined that covered procurement out of total central government procurement appeared relatively stable over time. However, a more robust test of the relationship between foreign sourcing and selected international agreement coverage would use a larger cross-section of data over time and control for factors such as types of goods and services procured, size of the economy, type of tendering procedure, and other specific details of each agreement, among others.

To determine whether the procurement contract data from the five databases were reliable for our purposes, we identified in relevant countries the appropriate data sources used to prepare the countries’ and the EU’s submissions of statistical notifications to WTO and other government procurement reports. To ensure consistency between our methods for estimating foreign sourcing with the methods used by the countries and the EU in their estimates of covered procurement for their GPA statistical notifications, we discussed with government officials in Canada, Japan, Mexico, and South Korea their process and data used to create their statistical notifications and other WTO reports, and we took steps to replicate existing report totals of EU covered procurement. We performed a sensitivity check for the U.S. data in FPDS-NG, where more than one relevant data field was available, to determine whether the definitional differences in the data fields were likely to materially affect our results about foreign sourcing. The results were similar across all six fields that could be used as alternative proxy measures of foreign source procurement in FPDS-NG data (see app. III, tables 11 and 12).

In addition, we conducted electronic tests of all five procurement databases to identify whether the data were complete and internally consistent. We determined that the country procurement databases were sufficiently complete and internally consistent after taking the additional steps for the EU and Norway as described earlier, related to missing contract award values (see app. IV). We also shared our analyses of the data with cognizant officials from the corresponding countries who were willing to verify our methodology and replicate our analysis. Procurement and trade officials and researchers in Canada, Mexico, South Korea and Japan answered our questions relevant to data quality including data collection, cross checks of data entries, access controls, internal reviews, primary users, completeness and updates to the data, missing values, reporting mistakes, electronic safeguards and procedures for follow-up if errors are found. In Canada and Mexico officials replicated and confirmed our methodology and results. Results for South Korea and Japan were consistent with alternative available official publications.

The various limitations in the procurement contract data that we identified and addressed, to the extent possible, affected our ability to obtain precise estimates of foreign sourcing in government procurement, but they were not an impediment to using the data for broad comparisons of orders of magnitude. Such comparisons include the amount of foreign sourcing, measured using firm location and country of product and service origin, by the USG and central governments of the other six main parties to the GPA and NAFTA. The data also allowed broad comparisons of bilateral procurement flows among the parties, as well as comparisons by type of contract and agreement coverage, as available, for the seven parties to the GPA and NAFTA within our scope.

Analysis of Trade Data Linked to Data on the Goods and Services Purchased by the Public Sector

To obtain information on the aggregate levels and percentages of procurement by all levels of government that are imported, we relied on input-output tables from the World Input Output Database (WIOD) for 2014. The input-output tables have an industry by industry format, with each country’s industries listed separately. The data in each table are derived from publically available data from both national statistics agencies and international organizations such as the United Nations and the Organisation for Economic Co-operation and Development. We relied on the WIOD to ensure that the combined data from different countries was collected to be consistent. These data do not allow for distinctions between different levels of government.

To assess the reliability of estimates based on the WIOD data, we first reviewed available documentation for the database. In cases where we had questions, we received written responses from WIOD officials. In addition, we compared estimates based on the WIOD to estimates based on other databases and found similar results. In general, we found that the data were sufficiently reliable for our purposes.

To estimate the level and percent of procurement from the database, we took the following steps. First, we identified the industries associated with the governmental sector. Then, for that industry (or combination of industries), we obtained both the total level of purchases (or inputs), and the inputs that came from within that country, or other countries of interest. To obtain an estimate for the EU, we combined the purchases over the 28 member countries then in the EU. In general, we followed a procedure outlined in a 2017 paper produced by the European Commission. In this paper, the authors describe how input-output tables can be used to measure cross-border penetration in public sector procurement.

An essential step in our method is defining which industries make up the government sector. Moreover, because the composition of the government sector and the patterns of government purchases vary by country, different measures of the government sector are more appropriate for different countries—since what goods and services the government provides or performs affects what it procures from the private sector. For example, for the EU, the government funds the majority of services in the area of public administration, defense, social security, education, and health care. In contrast, the USG funds a smaller share of health care services.

We followed the model laid out in the European Commission paper and defined the government sector in three ways: 1. Narrowly Defined – (O84) Public administration and defense; compulsory social security 2. Typically Defined – (O84) Public administration and defense; compulsory social security (Q) Human health and social work activities 3. Broadly Defined – (O84) Public administration and defense; compulsory social security (Q) Human health and social work activities (D35) Electricity, gas, steam and air conditioning supply (E36) Water collection, treatment and supply (E37-E39) Sewerage; waste collection, treatment and disposal activities; materials recovery; remediation activities and other waste management services (1/3) * (H49) Land transport and transport via pipelines (1/2) * (H53) Postal and courier activities (1/2) * (J61) Telecommunications However, our procedure deviated from the European Commission report with regard to an additional category of expenditure in the report, final consumption by government. As in our prior reports, we did not include this category. This category includes both spending on social benefits, health care, and education as well as spending on collective items such as defense. We did not include this category in prior reports partly due to data reliability concerns about consistency in measurement of spending on social benefits across countries. However, if we had included it, that would have caused our estimates of import penetration to be smaller, because the WIOD tables do not include any cross-border expenditures for this category. For example, the percentage for the United States would have changed from about 8 percent to about 4 percent.

To construct consistent data from different countries over time, certain assumptions were made by the WIOD. An assumption that has important implications for our analysis is known as a “proportionality assumption,” which is typical in the construction of input-output tables. This assumption requires that the percentage of a product that is imported is constant across all industries. In the example provided by the WIOD: “If 20 percent of Czech absorption of electronics is sourced from Germany, then 20 percent of any Czech final or intermediate use of electronics is assumed to originate from Germany.” The WIOD has attempted to improve on the proportionality assumption by making it at a more disaggregated level, but according to the WIOD, the proportionality assumption remains a limitation of the data set and consequently of our analysis. Importantly for our analysis, the proportionality assumption implies that the results we obtained from this method may not capture attempts by the government sector to award a larger share of its procurement to domestic firms relative to other industries.

Another important limitation for our analysis is the scope of the industry data reported by the WIOD. Specifically, the input-output data include intermediate inputs but exclude purchases by government for investment. Such purchases could include some government assets that would be considered procurement covered by the GPA and NAFTA. For example, the input-output data could exclude construction services like those government purchases to build highways or schools that have long-term use, which are procurements potentially covered by the GPA and NAFTA.

Finally, while we followed a method described above that has been used to study procurement, there are alternative methods that could have also been used based on input-output data. For example, according to industry officials at the U.S. Bureau of Economic Analysis, the “Trade in Value Added” methodology is such a method, and such data are maintained by the Organisation for Economic Co-operation and Development.

We conducted this performance audit from March 2017 to May 2019 in accordance with generally accepted government auditing standards.

Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Characteristics of Central Government Procurement Databases

The following appendix contains descriptive comparative information about the five databases included in our review: for the United States, the Federal Procurement Data System-Next Generation (FPDS-NG); for the EU and Norway, Tenders Electronic Daily (TED); for South Korea, the South Korea ON-line E-Procurement System (KONEPS); for Mexico, the Government of Mexico e-Procurement System CompraNet; and for Canada, Contract History.

For each database, we provide its formal name and function, contract and/or agency coverage, and data field(s) related to firm location, firm ownership, source country of goods or services, location of contract execution, contract valuation, trade agreement coverage, and type of contract in terms of goods, services or construction services.

Appendix III: Additional Results Related to Foreign Sourcing by the U.S. Federal Government

The following appendix provides supplemental information from our analysis of foreign sourcing by the United States in fiscal year 2015 based on data from the Federal Procurement Data System-Next Generation (FPDS-NG). FPDS-NG contains data on four potential proxy measures of foreign sourcing—firm location, firm ownership, product and service origin, and place of performance. The database contains six fields that correspond to these four proxy measures. See tables 11 and 12. For cross-country comparisons, we use two of the six measures—vendor country code (13QQ) and country of product and service origin (9E). We disaggregate the data by country and list the top 20 countries, which are recipients of USG contracts based on firm location. See tables 13 and 14. Since about 10 percent of USG contracts are performed outside the United States, we also provide a breakdown of those contracts that are awarded to foreign-owned and –located firms by agency. See table 15. Finally, since most of these contracts by contract value are awarded by the Department of Defense (DOD), we also provide a country breakdown of DOD contracts performed outside the United States and awarded to foreign-owned and –located firms. See table 16.

Appendix IV: Methodology for Addressing Missing Contract Award Values in the Tenders Electronic Daily Database

European Union

To report on European Union (EU) procurement data in the Tenders Electronic Daily (TED) database for 2015, we took steps to address missing contract award values, which amounted to approximately 15.2 percent of the 38,233 in-scope contract award values. To address these missing contract award values, we implemented a multiple imputation methodology that imputes a range of values for each missing contract award value and allows for estimation of additional uncertainty induced by the imputation methodology. After determining that the data were likely to be conditionally missing at random, we used predictive mean matching (PMM) to address missing values as described below. We determined that using PMM was appropriate because it can provide more robust results when the relevant variable is not normally distributed; PMM, as a form of multiple imputation, allows us to assess the variability introduced through the process of addressing missing data; and PMM, when properly specified, does not distort averages or variance in the underlying data.

As we discuss below, the method for addressing missing values used by the EU has none of these features.

In PMM, a regression model is first fit to complete cases in the dataset to predict values for the variable of interest for the entire dataset (i.e., including complete and incomplete cases). These predicted values are used to identify complete observations (“donors”) that are close (a “match”) to a given observation that is missing a value for the variable of interest. The PMM model draws matches using the posterior predicted distribution of the regression model. When PMM is used in conjunction with multiple imputations, this process is repeated multiple (m) times for each missing value. As a result, each of m imputations may match to a different donor. The donor’s observed value for this variable is donated to fill the blank data cell—not the predicted value used to match to this donor. The strength of the predictive model used to identify these matches will affect variation in the set of m imputed values because a better predictive model will identify donors that have observed values more consistently close to their predicted values.

In order to specify our PMM model, we first explicitly tested the Ordinary Least Squares regression model used to match donors as part of the process discussed above. We performed standard regression diagnostics, including an examination of the included variables and residuals to avoid overfitting. We found that our model was able to explain 86 percent of variation in contract award values and appeared to have well-behaved (homoscedastic) residuals.

We drew m=30 imputed values for each missing observation using the PMM process described above, which allowed us to generate estimates of the total contract value amounts and measure the uncertainty induced in those estimates by the imputation methodology. We used these measures of uncertainty to construct 95 percent confidence intervals and express these values as a percentage relative to the estimate itself. To assess the quality and reliability of the multiple imputations that followed from this predictive model, we performed four main sensitivity checks, which are included in tables 17 and 18. 1. We examined the proportion imputed for each subset of the data that we planned to report. The column headed “Percent imputed contract awards” shows the proportion of the count of contracts in a given data subset that were imputed using the methodology described above. We looked to avoid any individual subset being substantially greater than the overall average of 15 percent imputed. In practice, we individually checked any subset exceeding 30 percent imputed. 2. We evaluated the level of uncertainty induced by the imputation methodology across important subgroups of the data. The column headed “95 percent confidence interval +/-” indicates the percent of the “Contract award value estimate” that, when added and subtracted to this estimate, forms the 95 percent confidence interval. The level of uncertainty expressed in the relative confidence interval results from between-imputation variance, which could indicate extreme or inconsistent matches. We looked for confidence intervals that were, in our judgment, narrow as a proportion of point estimates. In practice, nearly all of the subgroups we are choosing to report have confidence intervals smaller than plus or minus 3.5 percent of point estimates. 3. We evaluated the percent of imputed values across important subgroups of the data. “Percent of imputed value duplicates” is a diagnostic column to test for sparseness of imputation matches among the 30 imputed values for each imputed contract award. We determined the number of duplicate imputation draws among the 30 imputed values for each observation, which could indicate sparseness in the number of suitable matches or overfitting of the model. We intended to inspect any finding with more than about 5 out of 30 (17 percent) duplicated imputation draws; in practice, however, this threshold was not reached for any subsets of the data that we have chosen to report. 4. We compared estimates resulting from our imputation methodology to published EU reports across important subgroups of the data. “Alternative estimate (EU’s missing value methodology)” shows the results of replicating a methodology for correcting missing data described in EU documents and used for some EU reports. The EU methodology is based primarily on the average value of contracts that are present in the dataset. This provides a general point of comparison, allowing us to determine which subsets of the data are likely to be responsible for estimation differences with prior EU publications. This comparison methodology therefore provides a benchmark but not a diagnostic for the imputation models. There are several important differences between our imputation methodology and the EU’s methodology. a. Calculation of confidence intervals: The EU’s methodology results in the same value substituted for every contract award of a given type (construction goods, and services). As such, it is not possible to estimate confidence intervals for a given observation or group of observations using this methodology. In contrast, the multiple imputation models include estimates of uncertainty. b. Distortion of subgroup averages: The EU’s methodology is not sensitive to differences in group averages apart from contract type. As a result, it may distort subgroup averages. For example, if hypothetical Country A has services contracts that average $100 but the overall average for services contracts is $1,000, substituting the overall average into missing values for Country A as the EU methodology would have the effect of significantly distorting Country A’s characteristics. In contrast, the imputation models we used are designed to be sensitive to all significant reported differences in contract awards because we included all reported variables in our imputation models.

Norway

To report on Norway procurement data in the TED database for 2015, we needed to take steps to address missing contract award values (153 of 1,319 missing, or about 11.5 percent). The scale of the missing values is thus smaller than for the EU data, while the dataset as a whole is too small, in our judgment, to support correction through an imputation model. Our statistical tests found no evidence that contract award values were conditionally missing at random. Thus, we assume that the data are missing completely at random and corrected the missing data using post- stratification estimation techniques. To do so, we treated the database of contract awards as the full population of such contract awards, which provides the full joint distribution of contract attributes. We treated the complete observations (88.5 percent of the total) as our sample of this population. Post-stratification adjusts the sampling weights for this sample so that the joint distribution of post-stratifying variables, which we selected based on our reporting needs, matches the known population joint distribution.

Based on the resulting confidence intervals, we determined that the post- stratification sampling results in data are sufficiently reliable for subsets defined by foreign status and contract type (see table 20) or by foreign status and GPA coverage (see table 21).

Appendix V: GAO Contact and Staff Acknowledgments

GAO Contact

Kimberly Gianopoulos, (202) 512-8612 or gianopoulosk@gao.gov.

Staff Acknowledgments

In addition to the contact named above, Adam R. Cowles (Assistant Director), Marisela Perez (Analyst-in-Charge), Gergana T. Danailova- Trainor, Ben Bolitzer, Andrew Kurtzman, and Julia Kennon made major contributions to this report. James Ashley, Peter Choi, David Dayton, Christopher Keblitis, Grace P. Lui, John Yee, and Timothy Young provided technical assistance.