International Procurement: Problems in Identifying Foreign Discrimination Against U.S. Companies

Published by the Government Accountability Office on 1990-04-05.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

Problems in
Identifying Foreign
Discrimination Against
U.S. Companies
             United States
GAO          General Accounting Office
             Washington, D.C. 20548

             National Security and
             International Affairs Division


             April 5,199O

             The Honorable John Conyers, Jr.
             Chairman, Committee on Government Operations
             House of Representatives

             Dear Mr. Chairman:

             Your letter of May 1, 1989, expressed concern about implementation of
             Title VII of the Omnibus Trade and Competitiveness Act of 1988. Title
             VII requires the President to identify, in an annual report, countries that
             discriminate against ITS. companies in their government procurement
             practices. Countries identified in the report are subject to sanctions that
             would limit their access to 17,s. procurement, if negotiations to correct
             these inequitable practices are unsuccessful.

             You requested that we ( 1) assess the availability and adequacy of infor-
             mation about foreign discriminatory procurement, and (2) review execu-
             tive branch efforts to gather this information. The first Title VII report
             is due April 30, 1990, so we reviewed the executive branch’s plan to
             gather the information based on similar past efforts and an assessment
             of existing knowledge.

             Most government procurement markets are closed to foreign suppliers.
Background   However, 20 countries wanting to eliminate discriminatory practices
             have worked together toward this goal by agreeing to the Code on Gov-
             ernment Procurement, under the auspices of the General Agreement on
             Tariffs and Trade (GATT). The code requires signatories to adopt trans-
             parent (open and predictable) procedures to guarantee

              Congressional frustration with the limited coverage of the code and its
              failure to create more foreign sales for U.S. suppliers led to the passage
              of Title VII. In identifying countries, Title VII includes not only procure-
              ment covered by the code, but also discrimination that occurs outside
              the code; however, the criteria for identifying discrimination and the
              associated information gathering processes differ between the two.

              The United States Trade Representative (IJSTR) has responsibility for
              implementing Title VII. The work program has been led by the Trade
              Policy Staff Committee’s Subcommittee on Government Procurement;

              Page1                                  GAO/NSIAD.90-127   International   Procurement

                        this interagency group is also responsible for working on code negotia-
                        tions. As with other trade investigations, much of the information gath-
                        ering to identify foreign discrimination is the responsibility of USTR
                        country desk officials with the support of the Department of Commerce
                        and the overseas posts.

                        Implementation of Title VII was slow getting started, and the first report
Results in Brief        is due April 30, 1990. IJSTR has decided to take a broad look at virtually
                        every country around the world to identify potential discrimination.
                        USTR has not concentrated on the most significant countries; for exam-
                        ple, countries where the IJnited States has the most leverage to effect

                        The availability of information on foreign procurement practices varies
                        in quality and quantity, affecting determinations. The private sector has
                        not come forward with many complaints. It is generally acknowledged
                        that the government’s ability to obtain information about foreign gov-
                        ernment procurement has been limited in the past by a lack of expertise
                        and by resource constraints. Nevertheless, USTR is still relying on these
                        same methods and sources for the Title VII investigation.

                        The April 30,1990, deadline in the act gave the executive branch 20
Information Gathering   months to prepare the President’s first report. Following interagency
Started Late            study and discussion, the work program was adopted 1 year after the
                        act’s passage, in August 1989. The first steps in the g-month work pro-
                        gram were taken December 1, 1989,4 months later than planned. As a
                        result, three-quarters of the time allotted will not be used to conduct the
                        investigation. Lawmakers in conference extended the deadline in the
                        original House bill from December 31, 1988, “to ensure...evidence of suf-
                        ficient quantity and quality. ...”

                        USTR'S information gathering is broad in scope. The act has several crite-
Investigation Not       ria that countries must meet to be identified as discriminatory in
Focused                 noncode procurement One criterion was intended to focus USTR'S efforts
                        on those countries over which the United States has leverage through
                        sanctions. Nevertheless, ITS. officials decided to gather information on
                        virtually all countries and later make country-by-country determina-
                        tions of where there is leverage. Thus, the current investigation seeks
                        detailed information on the procurement procedures and practices of

                        Page 2                                GAO/NSL4D-90.12’7   International   Procurement

                      many countries which sell little to the U.S. govermnent, in some cases
                      less than $100,000.

                      Little new information gathering has been undertaken in the investiga-
Code Monitoring       tion of code-covered procurement. Officials believe their existing moni-
Unchanged             toring of signatories’ compliance through the GATT Committee on
                      Government Procurement works well. The IJnited States is currently
                      pursuing a formal complaint against another code signatory. Officials
                      said that if this case is not resolved in time, Title VII requires the coun-
                      try to be identified in the April report.

                      While fairly comprehensive information is made available by the code’s
                      transparency requirements, it takes a long time to gather and analyze in
                      order to reach any conclusions. Thus, this year’s annual Title VII inves-
                      tigation will be based on some information that is over 2 years old.

                      There is much less information on non-code-covered procurement. There
Noncode Information   are indications of discrimination, but knowledge varies considerably
Difficult to Gather   from country to country and sector to sector. Officials are generally
                      relying on the private sector to identify problems because there is little
                      transparency outside the code. Also, the private sector must provide
                      evidence of harm before a country will be identified as conducting dis-
                      criminatory practices.

                      The overseas business communities are to be surveyed by the U.S. posts.
                      The posts have discretion in conducting their surveys and they have
                      limited resources. The principal means of soliciting help from the domes-
                      tic business community is a Federal Register notice. However, private
                      sector response has been limzd. Retaliation by foreign governments
                      remains a prevalent concern for U.S. businesses; also, some firms ques-
                      tion the benefit of IJ.S. government involvement, Aside from a few,
                      aggressive companies, many firms appear reluctant to come forward. In
                      addition, U.S. industry representatives in some sectors have given up
                      trying to sell to certain “closed” markets and have found other means to
                      enter these markets. Some U.S. industry and government representa-
                      tives suggested that if the U.S. government made more direct contact,
                      private sector response may improve.

                       Page 3

                    Country and industry desk officers and overseas post officials are the
Procurement         principal government sources for information, but they have limited
Expertise Limited   experience in working on noncode procurement issues. Some overlap-
                    ping investigations have occurred, and this information can be used for
                    Title VII, but only for narrow sectors of specific countries. The general
                    lack of expertise has produced information that is often not of sufficient
                    quality for Title VII. For example, USTR'S National Trade Estimate
                    Report on Foreign Trade Barriers (NTE report), due out only 1 month
                    before the April report, describes discriminatory procurement practices.
                    Although the NTE report depends on the same methods to gather infor-
                    mation as Title VII, responsible officials do not consider it a reliable
                    source for identifying countries under Title VII.

                    Although the initial MTR investigation under Title VII has been very
Recommendation      broad, covering virtually all countries worldwide, we believe future
                    efforts should be better focused to make better use of available
                    resources and expertise. Therefore, we recommend that the United
                    States Trade Representative narrow the scope of future Title VII investi-
                    gations to only those countries over which the United States has lever-
                    age, as defined in the act, before information gathering begins.

                    In accordance with your wishes, we did not obtain written comments on
Views of Agency     a draft of this report. However, we discussed our findings with officials
Officials and Our   at USTR, the Department of Commerce, and the Department of Defense
Evaluation          and have included their views where appropriate. In response to our
                    concerns about slow implementation, LJSTR officials told us that they
                    have created a task force to intensify their efforts to complete the
                    report. Also, officials acknowledged that the scope of the initial investi-
                    gation could have been narrowed earlier, but they thought it was impor-
                    tant to develop information on many countries about which they know

                    We believe that a more effective investigation would result if USTR
                    focused on fewer countries in future Title VII information gathering. As
                    a result, more in-depth analyses and more active contact with the pri-
                    vate sector could occur. Furthermore, the U.S. government purchases lit-
                    tle from many of t,he countries under investigation for the first Title VII
                    report, and they rc’present smaller potential markets for U.S. suppliers.

                    page4                                 GAO/NSIAD+O-127   International   Procurement

     Appendix I provides general background information on the code, Title
     VII, and how we conducted our work. The availability of evidence about
     foreign discrimination in procurement is assessed in appendix II, and the
     government’s information gathering methods are reviewed further in
     appendix III.

     Unless you publicly announce its contents earlier, no further distribu-
     tion of this report will be made until 30 days from its issue date. At that
     time we will send copies of this report to the United States Trade Repre-
     sentative, the Secretaries of Commerce, Defense, and State, and to other
     interested parties.

     This review was performed under the direction of Allan I. Mendelowitz,
     Director, International Trade and Finance Issues, who may be reached
     on (‘202) 275-4812 if you or your staff have any questions. Other con-
     tributors are listed in appendix IV.

     Sincerely yours,

     Frank C. Conahan
     Assistant Comptroller General

     Page 5                                GAO,‘NSIAD9O-127   International   Procurement

Letter                                                                                                         1

Appendix I                                                                                                     8
Background               What Is the GATT Government Procurement Code?                                         8
                         What Is Title VII‘?                                                               10
                         Objectives, Scope, and Methodology                                                12

Appendix II                                                                                                15
What Types and           What Does the Code Provide?                                                       15
                         Why Is Less Known About Procurement Outside of the                                18
Sources of Information      Code?
Are Available?           Why Does Military Procurement Pose Special Problems?                              22

Appendix III                                                                                              26
How Is the               Has Code Compliance 13eenReviewed Further?                                       27
                         How Is Information Being Obtained Outside of the Code?                           28
Investigation Being      How Will Countries HP Identified?                                                30
Appendix IV                                                                                               32
Major Contributors to    National Security and International Affairs Division,                            32
                              Washington, D.C.
This Report


                         EC         European Community
                         mc         Department of Commerce
                         DOD        Department of Defense
                         ITS        Foreign Commercial Service
                         GATT       General Agreement on Tariffs and Trade
                         MO: I      Memoranda of Understanding
                         NTE        National Trade Estimate
                         1w         Trade Opportunities Program
                         TPSC       Trade Policy Staff Committee
                         I’STR      United States Trade Representative

                         Page 6                               GAO/NSIABW-127     International   Procurement
Page 7   GAO/NSlAD%M27   Intematio~I   Pmcurement
Appendix I                                                                                                     --

                    Governments are the largest single purchasers of goods and services in
                    every major country, csreating an annual world market potentially worth
                    hundreds of billions of dollars. However, most of this vast market has
                    been closed to foreign suppliers because of formal and informal mecha-
                    nisms that favor domestic. firms. In the IInited States, the Buy American
                    Act of 1933 requires that, where applicable, only ITS-origin articles,
                    materials, or supplies be acquired for public use. Regulations implement-
                    ing this law apply a prlc’e differential in favor of domestic sources.

                    Countries wanting to r+minat,e discriminat,ory practices in government
What Is the GATT    procurement, howravt,r have worked together t,oward this goal by devel-
Government          oping the Agreement,. or Code, on Government Procurement.l The code
Procurement Code?   was negotiated during the 1973-79 Tokyo Round of Multilateral Trade
                    Negotiations under thta auspices of the General Agreement on Tariffs
                    and Trade (GATT). a.n.‘r itself does not provide for “national treatment”
                    in government procurement. Also, the code guarantees procurement
                    opportunities rathey than actual sales

The Code Creates    Code signatories are ~~~rnrnittedto nondiscrimination against other sig-
Obligations         natories’ products in sljecified procurement, areas. Signatories must
                    maintain transparent (open and predictable) procedures and provide
                    full information to ot h(br signatories on every stage of their procurement
                    process. The commitmt~nl to nondiscrimination obligates the United
                    States to lift its Buy :imerican price preferences in purchasing deci-
                    sions? The code calls t’l)r 1he signatories to provide contract information
                    on request and to p111~11sh  an annual statistical report on their
                    purchases. The statistiG>sdisclose purchasing entities, product catego-
                    ries, and suppliers’ n:rt ionalitjies. The reports also indicate the estimated
                    value of contracts abcl\Veand below the threshold for code coverage and
                    of contracts awarded ~lsing “single-tendering” procedures, identifying

                    ‘The 12 signatories to the (.od~~znclllde 21) countries: the Lnned States, Austria, Canada, Finland,
                    Hong Kong, Israel, Japan \ww.ry. Smgaporv. Sweden, Switzerland. and, under the European Com-
                    munity (EC), Belgium, Denmark Frwct~. Ir&md. Italy, Luxembowg, the Netherlands, fhe 1Jnited
                    Kingdom. and West Gcrman~

                    “The United States also WBIVI+ I<II? .imcrwan preferences for some nonsignatory countriq including
                    “least-developed” and Canbbwn Rwm countrirs. Also. the pnce differentials do not apply to defense
                    pmcuremmt from allies un vw~ hg wuproal       Memoranda of 1Tndrrstandmg on procurement

                    Page 8                                              GAO/NSIADBO-127       International   Procurement
                             Appendix I

                             the legal basis on which they were awarded.4 U.S. government officials
                             use these statistics to monitor code compliance. They review the statis-
                             tics and raise questions about them at formal, semiannual meetings of
                             the GATT Committee on Government Procurement.

                             The code establishes formal procedures to enforce signatories’ obliga-
                             tions. However, these procedures are not often used. The first step to
                             resolve an allegation of noncompliance is bilateral consultations. Then,
                             if the parties cannot resolve their differences, a dispute resolution pro-
                             cess begins that includes investigation and arbitration by a panel of
                             other signatories.

                             The code does not cover certain significant government agencies, or
                             “entities,” including those that purchase large amounts of telecommuni-
                             cations equipment, heavy electrical machinery, and transportation
                             equipment.’ Services are covered only when they are incidental to the
                             procurement of supplies and equipment. Also, the code does not cover
                             purchases costing less than a minimum “threshold” value, military
                             weapons, or purchases made by state and local governments.

                             Exclusion of certain countries, entities, product sectors, and small
                             procurements limited the scope of the code’s coverage and, conse-
                             quently, of government procurement opportunities for U.S. suppliers.
                             We reported in 1984’)that the value of code coverage had not met expec-
                             tations of generating over $20 billion in anticipated foreign sales oppor-
                             tunities. Instead, foreign opportunities in 1981 totaled just $4 billion,
                             compared to $18 billion in US. opportunities for foreign suppliers.

Limited Coverage Led to       Bilateral agreements with a few signatory countries extend code-like
Other Negotiations            coverage to certain areas not specified in the code and thereby increase
                              sales opportunities for I!.S. suppliers. For example, the 1980 U.S.-Japan
                              Agreement on Procurement by Nippon Telegraph and Telephone Public

                              “The Intematmnal Agreement on tiovenunent Procurement: An Assessment of Ih Commercial Value
                              ;utd Ie.S. Government Implementatmn (GAO/NSIALM6I    17, July 16, 1984).

                              Page 9                                        GAO/NSlAlHO-127     International   Procurement
                     Appendix I

                     Corporation grew out of the original negotiations on the code. It pro-
                     vides code-like transparency in Japanese procurement of telecommuni-
                     cations products not covered by the code. It also establishes a set of
                     procedures and requires that solicitations be published and that ade-
                     quate time to respond to such solicitations be fixed. In addition, a 1987
                     agreement with Japan sets up more transparent procurement proce-
                     dures for super-computers and requires a periodic review of these proce-
                     dures’ implementation. Free Trade Agreements with Israel and Canada
                     lower the threshold for coverage and thereby extend code-like trans-
                     parency to smaller contracts. In addition, the U.S.-Canada Free Trade
                     Agreement includes a bid protest system, which provides local resolu-
                     tion of contract disputes and helps to ensure nondiscriminatory treat-
                     ment of suppliers.

                     The United States was disappointed with the code’s original coverage
                     but hoped that renegotiations provided for in the agreement would rem-
                     edy the imbalance in opportunities between U.S. and foreign govern-
                     ment procurement. Indeed, the first phase of renegotiations concluded in
                     1986 and resulted in amendments that improved code procedures. The
                     second phase, begun in 1987, has focused on expanding coverage to ser-
                     vices and to procurement by entities in major excluded sectors. These
                     negotiations, expected to conclude in 1990, are being conducted at the
                     same time as the first Title VII investigation. Procurement opportunities
                     will also expand if more countries join the code. However, many coun-
                     tries are not able to meet the code’s obligations, and attracting new
                     members has been a concern.

                     In 1987, Members of Congress, frustrated by continued foreign govern-
What Is Title VII?   ment discrimination against U.S. suppliers, drafted legislation designed
                     to offer a more forceful measure to get 1J.S.suppliers fairer treatment
                     from other countries. This legislation led to the inclusion of the Buy
                     American Act of 1988 as Title VII of the Omnibus Trade and Competi-
                     tiveness Act of 1988. Title VII amended both the Buy American Act of
                     1933 and the Trade Agreements Act of 1979. The U.S. government is
                     also able to use more general “section 301”; authority to deal with dis-
                     crimination in government procurement overseas.

                     7Chapter 1 of Title III of the Trade Art of 1974, commonly referred to as section 301, provides the
                     President with the authority and procedures to enforce U.S. rights under international trade agree
                     mats and to respond to certain unfair foreign practices.

                     Page 10                                             GAO/NSIAW90-127      International   Procurement
Appendix I

Title VII requires an annual report from the President identifying coun-
tries, other than least-developed countries, that discriminate against the
United States in their government procurement. The President has dele-
gated the responsibility for preparing the report (sec. 7003 of Title VII)
to the United States Trade Representative (,IJSTR). The first annual
report is due April 30, 1990. The date for this report was changed from
December 31, 1988, in the House version of the bill, “to ensure that the
executive branch has adequate time to obtain evidence of sufficient
quantity and quality to identify...countries...and to coordinate with
reporting requirements associated with the annual National Trade Esti-
mate Report on Foreign Trade Barriers...due on March 31st of each
year.“8 Countries identified as not complying with the code or as acting
in a discriminatory manner are subject to sanctions that would limit
their access to U.S. procurements, if negotiations to correct these inequi-
table practices are unsuccessful.

Sanctions may be modified or restricted to further the public interest, to
avoid the creation of a monopoly, or to ensure acceptable quality at
competitive prices. Further, for national security reasons, ln the case of
procurements awarded under authority of Department of Defense Mem-
oranda of Understanding (MOUS) with foreign governments, Title VII
allows the President to delegate to the Secretaries of Defense, Army,
Navy, or Air Force the authority to waive sanctions. The President has
chosen to delegate this authority to the Secretary of Defense. However,
the conferees believed it possible to take actions for national security
reasons consistent with U.S. trade policy goals. They therefore intended
that “the Secretary of Defense and the United States Trade Representa-
tive consult with one another to determine methods for achieving
greater cooperation bcatweenthem for the purpose of promoting
increased reciprocity for U.S. suppliers seeking access to the govern-
ment procurement markets of foreign countries participating in Depart-
ment of Defense Memorandum of tinderstanding programs.“”

 Title VII requires the annual report to identify the following types of
 countries: (1) signatories who are not in compliance with the code; (2)
 signatories whose governments discriminate against U.S. firms in their
 procurement of products or services not covered by the code; and (3)
 nonsignatories whose governments discriminate against U.S. products or

 *Conference Report accomplu~ymg ILK. 3, Ommbus Trade and Competitiveness Act of 1988 (H. Rept.
 100-576, Apr. 20, 19SS).

 ‘1~. Conf. Rept. 100-576, p liK>O

 Page 11                                         GAO/NSIALMW12’7     International   Procurement
                         services. For a country to be identified as being in the latter two catego-
                         ries, the discrimination must represent a “significant and persistent pat-
                         tern or practice” and result in “identifiable harm” to U.S. businesses,
                         and its products or services must be acquired in “significant” amounts
                         by the U.S. government. The test for “significant” amounts of 1J.S.pro-
                         curement was intended “to permit the executive branch to focus its
                         efforts on those countries over which the United States can exercise
                         some leverage.“1c’

                         To identify discrimination, the law specifies a number of factors for con-
                         sideration: the code’s requirements and the offending country’s specific
                         practices, such as its use of sole-sourcing, whether it splits contracts,
                         whether it provides adequate bidding times, whether it uses specifica-
                         tions that limit U.S. participation, and whether it violates any other
                         additional criteria deemed appropriate.

                         In developing the annual report, Title VII requires the President to take
                         into account information and advice from government agencies, through
                         the “interagency trade organization,” the Trade Policy Committee,” and
                         from U.S. businesses in the United States, from countries that have
                         signed the code, and from other countries whose products or services
                         are acquired in significant amounts. To obtain information from busi-
                         nesses, the conferees suggested that executive branch officials (1) seek
                         information from committees in the private sector such as the Industry
                         Sector Advisory Committees and the Labor Advisory Committee; (2)
                         place a notice in the Federal Register requesting information from IJS.
                         businesses; and (3) instruct the commercial staffs at U.S. embassies to
                         seek information from American businesses in their particular country.

                         The Chairman of the House Committee on Government Operations
Objectives, Scope, and   requested that we determine whether the executive branch is assem-
Methodology              bling data that will allow it to arrive at informed conclusions about for-
                         eign government procurement. practices in the Title VII report.

                         “The Trade Policy Comrmttw II& a working-level interagency group called the Trade Policy Staff
                         Committee (TPSC). The TPSC has various “bilateral” country subcommittees as well as a subcommit-
                         tee on government procurement. which IISTR chairs; Commerce, State, Labor, Justux, Treaauy, and
                         the Office of Managemrnt and Budget have representatives on this subcommittee.

                         Page 12                                          GAO/NSIAD-90127      International   Procurement
Appendix I

Our review focused on two objectives:

1. To assess the availability and adequacy of information needed to
identify noncompliance with the GATT Government Procurement Code
and other discriminatory practices by foreign countries;

2. To evaluate the methods for gathering and compiling information,
including the coordination of efforts within the U.S. government.

To document the legal requirements of Title VII, we reviewed the law,
the conference report. and the hearings on the original legislation in
 1987. To determine alternative means for identifying discriminatory
practices, we assessed other provisions of the Omnibus Trade and Com-
petitiveness Act of 1988 with similar reporting requirements, and we
spoke with those responsible for their implementation.

We interviewed trade officials at USTR and the Department of Commerce
(ooc) with expertise in international government procurement issues.
They are responsible both for implementing Title VII and for represent-
ing the United States in the code. We reviewed their work plan for
implementing Title VII and monitored their progress in meeting goals
that the plan established. To document the officials’ ongoing efforts to
monitor signatories’ compliance with the code, we reviewed cables, cor-
respondence, and annual statistics provided by signatories under the
code’s requirements as well as other GATT material provided by DOC.We
also spoke with foreign members of the GATT Government Procurement

 We met with officials at I JSTR responsible for preparing drafts of the
 Title VII report and with LYX industry specialists familiar with sector
 issues to establish the breadth of materials on government procurement
 issues in the U.S. government. We reviewed cables, reports, and other
 documents dealing with foreign government procurement and other
 overlapping trade issues. We also met with DOD officials who are famil-
 iar with military procurement issues. We did not meet with DOCForeign
 Commercial Service ( KS) officers in U.S. embassies overseas, but
 reviewed their reporting on code compliance and other related trade
 issues and broadly discussed FCS officers’ knowledge of procurement
 issues with USTR and (ommerce officials.

 To assess the information available from the private sector and to
 obtain industry views on the adequacy of consultations with the private
 sector, we spoke wit b a range of industry representatives, including

 Page 13                                GAO/NSIAD90127   International   Procurement
Appendix I

Industry Sector Advisory Committee chairpersons and members, trade
and industry associations, and Washington, DC., representatives of indi-
vidual firms. We did not speak to industry representatives overseas. Our
private sector interviews focused on areas where government procure-
ment historically has been a problem and where or when it constitutes a
large share of foreign purchases.

Our work was performed from July 1989 through December 1989 in
accordance with generally accepted government auditing standards. We
did not obtain written agency comments on a draft of this report, but
have discussed the draft with officials at USTR, Commerce, and Defense
and have incorporated their comments where appropriate.

Page 14                             GAO/NSIAMO-127   International   Procurement
Appendix II

‘what Types and Sourcesof Information
Are Available?

                     Title VII requires action based on adequate evidence of discrimination in
                     foreign procurement practices. The quality and quantity of information
                     about each foreign government’s procurement practices vary widely.
                     Information falls into two broad groups: procurement covered by the
                     GATT Government Procurement Code, and procurement not covered by
                     the code.

                     Information on code-covered procurement is fairly comprehensive but it
                     takes time and expertise to analyze. It consists of (1) data on procure-
                     ment systems and practices, and statistics on bidding opportunities pro-
                     vided by governments that have signed the code; (2) input from
                     overseas posts and the private sector; and (3) extensive U.S. govern-
                     ment analysis of these data.

                     Information on non-code-covered procurement is incomplete and uneven
                     in quality. Much of the information available is anecdotal or general,
                     based on industry complaints or information-gathering activities for
                     cases on specific trade sectors.

                     LKK analysis of compliance with the code provides a major source of
What Does the Code   information on code-covered procurement practices for the Title VII
Provide?             investigation. The US. government already monitors signatories’ com-
                     pliance with the provisions of the code by studying code-reported infor-
                     mation, asking overseas posts for information on compliance, and
                     receiving private sector input on problems with code-covered procure-
                     ment US. officials consider issues of noncompliance raised through the
                     code’s dispute settlement procedures to be equivalent to discrimination
                     under Title VII.

                     The obligations of the code generate a large amount of information
                     reported by signatory governments; this information can be reviewed to
                     establish compliance. For example, code signatories publish their pro-
                     curement laws and regulations and provide full information about and
                     explanation of every stage of the procurement process to ensure nondis-
                     criminatory treatment. Also, entities covered by the code publish tender
                     notices for covered procurement. The publication of these notices and
                     the provision of adequate bid response times and reasonable delivery
                     deadlines in the notices are important measures of signatories’

                     Statistics reported by signatories on code-covered opportunities provide
                     some information on potential compliance problems. To identify possible

                     Page 16                              GAO/NSlAD9@127   htemationd   Pmcumnent
                             Appendix II
                             What Apes and Sources of Information
                             Am Available?

                             discrimination, ooc analyzes patterns of the use of single-tendering and
                             the value of tenders that fall below the code’s threshold. These are
                             reported in the statistics on a country- and entity-specific basis. Procur-
                             ing entities may attempt to circumvent code requirements by using
                             single-tendering when it is not justifiable or by dividing contracts to
                             keep them below the threshold for coverage. Based on its analysis, DW
                             develops questions to ask other signatories during semiannual reviews
                             by the GATT Committee on Government Procurement.

Are the Statistics Useful?   The statistics have shortcomings that raise some doubts about their use-
                             fulness in identifying potential noncompliance with the code for the
                             Title VII investigation. First, the statistics reported have had significant
                             time lags. In recent years, the United States took about 11 months to
                             report its statistics to the GATT Committee; more than half of the remain-
                             ing signatories took longer (as much as 14 months) to report their

                             Some foreign representatives believe that the data review is not very
                             useful because the statistics are outdated. Others, including the United
                             States, still consider the review of procurement statistics to be impor-
                             tant. U.S. officials note that statistics can be used as an indicator of non-
                             compliance with the code. However, they stress that statistics alone do
                             not establish noncompliance with the code or discrimination. Evidence
                             from specific contracts is also necessary. Thus, U.S. officials must
                             review the data thoroughly for signs of possible noncompliance and then
                             follow up with officers at overseas posts and with U.S. industry

                             The process for reviewing data in the Committee is lengthy, taking
                             12-18 months to complete. Therefore, compliance determinations may
                             not be finished until over 2 years after procurements have been made.
                             Because it takes so many months for the statistics to be reported and
                             reviewed, there is also considerable delay before the statistics are made
                             public. As of late 1989, the latest statistics that GATT labeled
                             “unrestricted” were from 1985. However, U.S. government sources con-
                             tinued to give these and later statistics a national security classification.

                             Further, U.S. officials have stated that signatories’ data reporting sys-
                             tems, though improved from the past, still have problems. In addition,
                             the varied means of determining the nationality, or “country of origin,”
                             of a product have posed a problem. Inconsistencies in defining country
                             of origin have rendered some of the statistics on actual purchases

                             Page 16                                GAO/NSIAD9@127   International   Pmcwement
                         Appendix II
                         What Types and Sources of Information
                         Are Available?

                         unusable for judging results. Changes making country of origin report-
                         ing consistent for code signatories as of February 1988, together with
                         efforts to unify the EC market by 1992, are expected to improve statis-
                         tics based on country of origin. These statistics will be available for
                         future Title VII investigations.

What Do Overseas Posts   c&s Trade Opportunities Program (TOP) provides information on code-
                         covered procurement that can be used to indicate compliance with the
and Industry Provide?    code. TOP disseminates trade leads, including all code-covered tenders,
                         provided by the posts overseas. DOCreviews mp-reported information,
                         including bid response times and delivery deadlines, to determine possi-
                         ble noncompliance. However, there have been some problems with selec-
                         tive reporting of TOP notices. Code tender reporting was limited,
                         sometimes due to resource constraints, by overseas officers’ judging
                         what they considered to be 1J.S.commercial interests. Officials told us
                         that they have taken steps to resolve these selective reporting problems.

                         In addition to reporting tender notices, officers at overseas posts pro-
                         vide other information on signatories’ compliance. LXX conducts code
                         compliance reviews on each country every 2 years and asks the posts to
                         review both contract-specific and general procurement issues in their
                         host country. Responses that we examined were brief and generally
                         indicated that there were no compliance problems. Overseas posts also
                         have continuing responsibility to report compliance problems.

                         Even with this experience, FCS officers may not be able to provide
                         detailed information on foreign procurement practices. Some officials
                         believe that FCS officers need more education on procurement, because
                         the officers’ knowledge of government procurement is limited, and their
                         reporting on procurement practices is often deficient. Moreover, one
                         Washington-based official who had been responsible for monitoring
                         compliance during an overseas posting told us that he did not have a
                         detailed knowledge of the code’s procedures; most of his procurement-
                         related discussions with foreign representatives dealt with broad policy

                          The transparency in code-covered procurement should allow private
                          industry to identify and complain about problems more easily. However,
                          officials at LMX and l’STK do not receive many specific complaints from
                          U.S. businesses on code-covered procurements. They believe that this is
                          because companies fear retaliation from foreign governments if they
                          complain. Also, many companies may still not be knowledgeable about

                          Page 17                                GAO/NSIAD-90-127   International   Procurement
                                    Appendix II
                                    What Types and Sources of lnfbrmation
                                    Are Available?

                                    the obligations or rights that the code established or may prefer to han-
                                    dle problems without involving the U.S. government.

                                    Information on government procurement practices not covered by the
Why Is Less Known                   code is limited, because these practices do not benefit from the code’s
About Procurement                   procedures and statistical reporting requirements. For some countries,
Outside of the Code?                no information exists, because these countries lack formal procurement
                                    systems. Extensive information is available in a few narrow areas
                                    where US. bilateral procurement agreements, such as Free Trade Agree-
                                    ments, provide code-like requirements and transparency. However, the
                                    lack of transparency in almost all non-code-covered procurement makes
                                    it difficult to identify discrimination. Further, prior to the passage of
                                    Title VII, the US. government     did not conduct systematic reviews of all
                                    noncovered procurement.

                                    The availability of information on discrimination varies according to
                                    sector and country, because the U.S. government collects information
                                    about non-code-covered procurement only when specific problems arise.
                                    Moreover, there is greater reliance on input from the private sector for
                                    non-code-covered procurement issues, although firms’ willingness to
                                    come forward varies. Some government officials told us that because
                                    their time is limited, they take a reactive approach to trade issues. They
                                    rely on the private sector to bring discrimination to their attention and
                                    to identify priorities.

Why Are Some in the                 The major private sector sources are individual firms, industry and
Private   sector   Reluctant   to   trade associations, and advisory groups, mainly Industry Sector Advi-
                                    sory Committees. According to government sources, individual firms
Complain?                           provide the best specific, detailed descriptions of foreign government
                                    practices that are discriminatory. Both firms and trade associations sup-
                                    ply good information on broader procurement questions. The advisory
                                    committees are not a good source of factual information, but instead are
                                    more policy oriented and have a broader, industrywide focus. The gov-
                                    ernment often uses the Industry Sector Advisory Committees to alert
                                    the private sector about important trade issues.

                                    U.S. industry provides information that is mixed and incomplete,
                                    depending on which industry is under review. Firms in some sectors
                                    have not had many difficulties with foreign government procurement.
                                    One reason for this is that most of these firms’ overseas business is in
                                    the private sector. Others have not raised procurement difficulties with

                                    Page 18                                 GAO/NSIALMO-127   International   Procurement
Appendix II
What ms       and !huces   of Information
Are Available?

the U.S. government because they are not a high priority; for example,
some consider the problem of foreign industrial policies and other trade
barriers to be more important to their sector. Further, industry repre-
sentatives told us that some firms might be unable to identify discrimi-
nation in procurement because they are unaware of government
procurement issues or lack extensive overseas experience.

Several other factors explain why industry representatives do not raise
procurement problems with the U.S. government. In the transportation
sector, and railways in particular, industry representatives told us that
they have stopped pushing for the removal of discrimination in the mar-
kets of industrialized countries because practices are too ingrained, and
the railway systems arc fully developed already. Instead, firms have
entered foreign mark&s by establishing joint ventures and manufactur-
ing arrangements. Sirnilarly, a representative in the construction ser-
vices industry reported that when firms encounter procurement
problems in a foreign market they tend to work around them, often
using joint ventures and consortium arrangements.

In other sectors, U.S. industry has been more willing to seek government
assistance and provide information about unfair foreign practices. For
example, in the area of heavy electrical equipment, U.S. industry pro-
vided government officials with data showing that a number of foreign
governments purchased equipment exclusively from favored domestic
firms, despite competitive 17,s.products. Responses to questionnaires
sent to posts, and recent overseas fact-finding missions, have also gener-
ated information on foreign discrimination. As a result, industry special-
ists in the U.S. government have an updated, detailed market history,
but only for this sector. Because the U.S. government so far has not initi-
ated any trade cases about this issue, firms may be very willing to pro-
vide information for the Title VII investigation,

 In addition, representatives in the telecommunications sector told us
 that they have regularly cooperated with the LJS. government, provid-
 ing material on discriminatory foreign procurement practices, and they
 remain willing to do so. However, the quality of information provided by
 individual companies may vary-although        one major firm has detailed
 data on transactions and practices, another has been unable to identify
 specific problems and their causes. Still, several firms noted that aside
 from a few, aggressive companies, most would be reluctant to discuss
 problems publicly

 Page 19                                    GAO/NSIAMO-127   International   Procurement
                         Appendix U
                         what Types and Sources of lnfonnation
                         Are Availablr?

Is Retaliation Still a   Retaliation by foreign governments is a prevalent concern for the pri-
                         vate sector; this fact may limit input for the Title VII investigation. For
Problem?                 example, large, diversified firms fear the loss of existing business with
                         foreign governments if they complain about specific cases. However,
                         although private sector sources frequently mentioned this concern, few
                         of those we talked to cited any actual case of retaliation. Many think
                         that provisions for confidentiality are necessary to encourage firms to
                         come forward, but some noted that even these might not be sufficient. In
                         addition, industry may not come forward with a case of discrimination
                         because it does not believe that doing so will be worthwhile. The cost, in
                         terms of potential foreign retaliation as well as in time, effort, and
                         expense, is perceived to outweigh the benefits of changes to foreign
                         practices resulting from the U.S. government’s efforts.

                         Some government and privat,e sector representatives thought that the
                         most effective way to solicit industry input for the Title VII investiga-
                         tion was to contact individual companies directly, because firms are less
                         likely to respond to indirect requests for information. Certain firms told
                         us that they sometimes go directly to U.S. government representatives
                         when they have trade problems. Also, for proprietary reasons, some
                         firms do not want, to provide information to an advisory committee or
                         industry association

What Do Other            Overlapping government activities also generate information on discrim-
Government Activities    ination in non-code-covered procurement. For example, a U.S. govern-
                         ment database of nontariff measures that affect specific products and
Provide?                 sectors has been compiled for use by U.S. negotiators in the GATT Uru-
                         guay Round of multilateral trade negotiations. The database summarizes
                         the current knowledge of country and industry desk officers, foreign
                         posts, and the private sector. It includes entries describing government
                         procurement barriers m over 30 countries. The descriptions vary in
                         detail and age. Further? more than one-third of these entries indicate
                         additional information nerds to be gathered.

                         Some information on non-code-covered foreign government tender
                         notices is available through the ?UPsystem. However, information from
                         IW notices is not comprehensive because foreign governments as well as
                         overseas posts have no obligation to report tenders outside of the code.
                         Also, the announcements are summaries of the actual bidding

                         Page 20                                 GAO/NSIALXW127   International   Procurement
     Appendix II
     What Types and Sources of Information
     Am Available?

     As a result of the renegotiations to expand the code’s coverage, informa-
     tion has been developed on noncovered sectors and on countries consid-
     ered to be the most probable candidates for signing the code. In code
     renegotiations, information on excluded sectors, such as telecommunica-
     tions and heavy electrical equipment, as well as services, is exchanged
     by signatory governments. Directives prepared for European Commu-
     nity (EC) 1992 market unification efforts provide further information on
     excluded sectors. EC 1992 efforts have also generated other directives’
     dealing with government procurement, including some that apply to
     public supply contracts and public works contracts.

     In addition, investigations of discrimination required by overlapping
     trade legislation produce information on non-code-covered procurement.
     The level of detail of this information depends on the requirements of
     the law.

     The NTE report, a key source of input determining “super 301”1z cases
     under the Omnibus Trade and Competitiveness Act of 1988, broadly
     identifies a wide range of trade barriers in specific countries. Each
     year’s report reflects changes from the previous year and adds informa-
     tion on newly identified discrimination. Of the 36 entries in the 1989
     report, 15 mentioned government procurement barriers.l” Country and
     industry specialists named this report as one good source of information
     on foreign government procurement practices, although several noted
     that the information in t,he report was very general. A U.S. government
     official has cautioned that the NTE report is not a reliable source of
     information on government procurement issues, because (1) those who
     prepare the report (country specialists, with the assistance of economic
     officers overseas) lack expert,ise on government procurement issues; (2)
     the report misidentifies certain practices, such as predatory pricing, as
     government procurement barriers; and, (3) the report uses different
     selection criteria.

      Other overlapping investigations focus on industry sectors as well as on
      countries. The Telecommunications Trade Act of 1988 called for an
      investigation of countries that discriminate in the telecommunications
      sector. Because governments in many countries continue to own or to
      run telecommunicat.ions companies, government procurement issues are

      ‘““Super 301” provbiom requm identification and investigation of “priority” foreign countries and
      trade practices that pose sigmfmmt barriers to and restrictions on U.S. exports or investment abroad.

      “‘Entries indentifird   not onI:. ~~~div~dualcountries but also ihe Europtxm Community and Gulf Coop
      rration Council

      Page 21                                              GAO/NSIAD-90.127     International   Procurement
                    Appendix II
                    What Types and Sources of Information
                    Are Available?

                    very important in this sector. The information generated by the investi-
                    gation focused only on certain countries and was rather general; specific
                    examples of discrimination were not gathered. In addition, the Brooks-
                    Murkowski Amendment to the Continuing Resolution for the 1988 fiscal
                    year budget (P.L. 100-202) required information gathering on access to
                    public works projects overseas. The overseas posts, which did not have
                    a great deal of background in the area, provided substantive input on
                    the procurement of construction goods and services in a very short
                    period (about 1 week). Also, industry representatives provided input
                    that, according to one source, lacked detailed information.

                    As a result of these I’S government trade activities and the information
                    they generate about foreign government procurement practices, country
                    and industry specialists in Washington, and economic and commercial
                    officers overseas, are aware of certain procurement issues. However,
                    their knowledge varies greatly, according to both country and sector.
                    For example, FCS officers most often deal with procurement issues in
                    specific sectors, according to requests from Washington agencies,
                    although a few seem to become more involved in non-code-covered pro-
                    curement matters on their own initiative.

                    In some sectors, obtaining information about discrimination will be very
                    difficult. Little information exists on the procurement of services
                    beyond what is available as a result of efforts to broaden the code. The
                    lack of international definitions, rules, procedures, and statistics for the
                    service sector makes it difficult to determine what problems exist. Fur-
                    ther, one service industry representative believes that discrimination in
                    government procurement tends to be more indirect for services than for

                    Gathering information about discrimination in the defense sector will
Why Does Military   face additional problems because of the focus on national security con-
Procurement Pose    terns. Where there are indications of discrimination in foreign military
Special Problems?   procurement, there is little available evidence for the Title VII investiga-
                    tion because (1) the 17.8 government generally does not monitor foreign
                    procurement practices nor promote trade in defense products, and (2)
                    the private sector rarely complains to the government.

                     National security concerns are often a reason to exclude foreign compe-
                     tition in making decisions about procurement. For this reason, defense
                     products have generally been excluded from trade agreements and are
                     usually excluded from code coverage. A report from the private sector

                     Page 22                                GAO/NSIAIHO-127   lntematicmd   Procurement
                        Appendix II
                        What Types and Sources of Information
                        Am Available?

                        Defense Policy Advisory Committee on Trade stated that the United
                        States still has to address how fair rules of trade in defense goods are

                        Much international defense purchasing is subject to bilateral MOUS that
                        include provisions for reciprocal accessto defense procurement.14 MOUS
                        vary in scope and in the degree of reciprocity required, but all have a
                        general provision waiving policies that give preference to national prod-
                        ucts. However, the MOUS do not require procedures like those used in the
                        code to add transparency and to ensure equal treatment for all potential

                        Although MOUS have commercial consequences, they are not treated as
                        trade agreements. Instead, MOUs are considered national security agree-
                        ments and are almost solely the responsibility of DOD. The principal
                        objective of the MO~JS is to enhance military readiness and armaments
                        cooperation. DOD officials believe that the MOUs have been successful in
                        maintaining U.S. access to foreign defense markets by increasing foreign
                        access to the U.S. market. Because defense objectives could be jeopard-
                        ized, DODopposes linking these agreements to nondefense goals in
                        achieving market access.

Little Is Known About   As a result of the focus on national security in defense procurement,
                        there is no monitoring of foreign practices similar to that under trade
Foreign Military        agreements. For example, there are no procurement data exchanged
Procurement Practices   under the MOUS, unless the purchases also happen to be covered by the
                        code. DOD does not generally review the military procurement laws and
                        procedures of the countries that have signed agreements. Although DOD
                        has constructed data to assessthe balance of foreign military sales and
                        purchases covered, t,hese have serious deficiencies.

                        There is little existing information available for the first Title VII inves-
                        tigation. Until recently. the US. government did not support the com-
                        mercial export of defense products, therefore there was little need to
                        gather knowledge about foreign defense procurement practices. How-
                        ever, DOD, together with the KS, has just assembled some information on
                        the practices of foreign military agencies. This material will form part of
                        a planned guide for [T.S. firms on how to sell to foreign defense minis-
                        tries. The information collected is very general in nature, but it includes
                        a basis for identifying discrimination.

                         “The IJnited States has rccwnwl       MOUs with 19 countries.

                         Page 23                                              GAO/NSL4@SO-127   International   I’mcurement
Appendix II
what Types and Sources of Informatinn
Are Available?

In the future, more information on Mo!J-covered procurement and dis-
criminatory practices may be available. In September 1987, the Deputy
Secretary of Defense initiated a comprehensive evaluation of the MOUS.
Although a final report was never issued, some of the task force’s rec-
ommendations were announced on September 27, 1989, in testimony
before the House Committee on Government Operations, Subcommittee
on Legislation and National Security. They included adding code-like
procedures to the MOUSthat would create more transparency in foreign
military procurement practices.

Such improvements would allow monitoring of Marl-covered trade and
create sources of information on foreign practices for future Title VII
investigations. Other new joint efforts of DODand the FCSto publish for-
eign opportunities and to educate both defense and commercial officials
overseas about promoting defense sales could also create greater gov-
ernment awareness about discrimination in the purchase of defense

Additional developments are increasing concern about the commercial
aspects of international trade in defense items. Some believe the pro-
posed creation of a united European armaments market and reactions to
anticipated reductions in international defense spending may add to for-
eign discrimination. European unification efforts have produced some
information on barriers in these countries’ defense procurement.

With no active mouit oring, DODrelies on private sector complaints to
learn about problems with MOUS.When a 1J.S.company complains, DOD
officials provide assistance. However, officials do not generally reccivc
complaints about foreign military procurement. Before annual bilateral
MOUmeetings, DODasks selected defense indust,ry associations to submit
suggested agenda items; these could include problems with discrimina
tory practices. However. industry representatives have felt. they had lit-
tle opportunity to contribute to MO11meetings, and they have given little

Thus, with little industry input, DODis in a difficult position to question
discriminatory practices in foreign defense procurement. Furthermore,
U.S. restrictions and a favorable trade balance in defense goods discour-
age any DODefforts to raise such issues. In contrast, foreign countries
frequently raise questions in Mo11meetings about 1J.S.practices such as
small business set-;rsides.

Page 24                                 GAO ‘NSIAD-90.127   htcmational   Procurement
Appendix U
what Types and Sources of Information
Are Available?

U.S. defense industry representatives confirmed that they do not for-
mally pursue resolutions to their problems. When they face discrimina-
tion, they are not likely to go to the U.S. government for help. Although
they consider foreign defense procurement practices nontransparent,
and defense trade generally to be restricted, especially concerning
requirements to offset defense sales with purchases of foreign goods
and services, they accept these problems as part of the normal business
environment. Some representatives noted that large companies can work
around discrimination by creating joint ventures with their foreign com-
petition. Furthermore, they consider IJ.S. restrictions, such as export
controls, a more important issue.

1J.S.defense companies fear foreign retaliation and question the ability
of the 17,s. government, to remedy their problems. Various factors inhibit
industry from looking to DOD to solve problems. The MOUS are principally
the responsibility of DOD acquisition officials; because the objective of
the MOUS is to foster defense cooperation, some industry representatives
doubt that adversarial issues would be pursued. The defense industry
has frequent interaction with DOD, but the relationship centers around
regulatory functions that industry considers adversarial, such as export
controls. Government officials believe it is their responsibility to keep
the industry “at arm’s length” in most of their contact.

Industry generally does not bring complaints to other agencies such as
CJSTK or not. They believe these agencies do not understand defense
trade issues. Although TISTR is advised by the Defense Policy Advisory
Committee on Trade, there is no one at USTR whose principal responsibil-
ity is defense trade issues, and none of the country desk officials we
talked to had regular contact with DOD officials. DOCand State do have
some contact with defense issues. At DCC,most defense matters are han-
dled by the Bureau of Export Administration, which deals with export
control and defense industrial base issues, rather than by the Interna-
tional Trade Administration, which monitors trade legislation. Similarly,
State regulates the commercial export of defense products. While State
also reviews defense reproduction and technical assistance agreements,
it does not promote commercial sales.

 Page 25                                GAO/NSIAlMO-127   International   Procurement
Appendix III                                                                                -
How Is the Investigation Being Conducted?

               Compiling the President’s Title VII report will take place in two phases.
               The first is information gathering, during which overseas posts, various
               government agencies, and the private sector will be called upon to detect
               the use of foreign discriminatory practices. In the second, the decision-
               making phase, the information will be analyzed by officials who will
               apply the act’s criteria to identify those countries that are not in compli-
               ance with the code or that otherwise discriminate in their procurement
               of goods and services. The resulting list of discriminatory countries will
               then be sent through the interagency clearance process before going to
               the President for final approval.

               USTR  is responsible for the Title VII report, working through the existing
               interagency trade policy-making apparatus. Specifically, the TPSCSub-
               committee on Government Procurement has adopted a work program
               that outlines particular tasks to collect the needed information and indi-
               cates who will perform these tasks. A subsequent Tm paper has further
               detailed the responsibilities and the decision-making process.

               Most of the time that the act allots to compile the President’s report was
               not used by the administration in developing the first report. The
               requirement for a thorough investigation of unfair foreign procurement
               practices became law August 23,1988. The reporting deadline of April
               30,1990, gave the executive branch 20 months to conduct its work. Fol-
               lowing interagency study and discussion, the work program was
               adopted 1 year after the act’s passage, in August 1989. The first steps in
               the g-month work program were taken December 1, 1989,4 months later
               than planned. As a result, the many tasks in the work program will have
               to be carried out in the remaining 5 months.

               The law creates significant new government responsibilities. The work
               program gives USTR and MX: primary responsibility for gathering and
               reviewing the needed information. However, no new resources have
               been added by either agency to implement Title VII; instead, these duties
               have been added to those that the responsible offices already have,

               The scope of the investigation is broad until the decision-making process
               begins. Therefore, IWH will collect information on the procurement sys-
               tems and practices of all but the least-developed countries, over 100 in
               total. Based on the act’s requirements, there are differences in the plan
               to gather information on code and non-code-covered procurement.

               Page 26                                GAO/NSIAIHO-127   htematiod   Procurement
                        Appendix III
                        How Is the Investi@ion   Being Conducted?

                        Officials interpret Title VII as reinforcing their present commitment to
Has Code Compliance     monitor code compliance. USTR and the E&S Office of Multilateral
Been Reviewed           Affairs monitor other signatories’ compliance, with assistance from the
Further?                overseas posts. For the Title VII report, little new information gathering
                        has been undertaken to identify signatories not in compliance with the
                        code. Nor does the work program change the timing or methods of the
                        review process, because officials believe they work well.

                        IJSTR has relied upon the existing methods of gathering information
                        about signatories’ code-covered procurement. Thus, annual determina-
                        tions will be based on such things as the biannual compliance reviews
                        conducted by the overseas posts (the last was conducted in January
                         19891, the ad hoc investigation of private sector complaints, and the
                        information gathered through the semiannual GATT Government Pro-
                        curement Committee meetings.

                        Much valuable information is available for conducting the Title VII
                        investigation because of the transparency in code-covered procurement.
                        But, because it takes a long time to gather and review the information,
                        this year’s annual Title VII determinations will be based on some meas-
                        ures of compliance that are over 2 years old. For example, the GAIT Gov-
                        ernment Procurement Committee will be ending its 1987 statistical
                        review as the President’s 1990 report is being prepared.

Will Actual Sa.les Be   Citing disappointing results of the code in increasing U.S. sales to for-
Considered?             eign governments, some private sector officials thought that, for Title
                        VII, finding the presence of discrimination should be based on actual
                        sales to each signatory. They suggested an approach similar to that used
                        in U.S. civil rights cases: If, based on other experience, U.S. suppliers
                        should be selling certain goods or services to a foreign government but
                        are always unsuccessful, then there must be discrimination.

                         Government officials told us that a review based on such findings would
                         not be conclusive because the code does not guarantee sales for signato-
                         ries’ suppliers. Instead, the code’s procedural rights and obligations cre-
                         ate only opportunities. Sales are determined by each company’s
                         competitiveness. Furthermore, such an analysis would only be possible
                         in t,he future, after planned improvements in signatories’ statistical
                         reporting are made, but there are no plans to use results to determine
                         signatories’ compliance under Title VII. Other legislation calls for
                         results-based reviews of foreign compliance with different trade

                         Page 27                                    GAO/NSL4DpO-127   Lntemtioml   Procurement
                       Based on their past review of signatories’ practices, U.S. officials believe
                       that compliance with the code has generally been good. Foreign govern-
                       ment representatives to the GATT Committee on Government Procure-
                       ment, however, have mixed views of code compliance. While some have
                       few or no complaints, others believe that noncompliance (and, therefore,
                       discrimination) continues to be a problem.

                       The United States is currently pursuing a formal complaint against
                       another code signatory. Officials said that if this case is not resolved in
                       time, Title VII requires that the country be identified in the April report.

                       The work program calls for information gathering by three methods: (1)
How Is Information     cables to overseas posts, (2) contributions by the interagency bilateral
Being Obtained         TPSC subcommittees, and (3) requests for comments from the private sec-

Outside of the Code?   tor in the United States and abroad. Title VII information gathering
                       focuses on non-code-covered procurement by signatory countries and
                       procurement by nonsignatory countries. Although there are many more
                       nonsignatory countries than signatory countries, they represent much
                       smaller procurement markets.

                       The overseas posts were given a month to provide much of the informa-
                       tion being used to identify discriminatory foreign procurement prac-
                       tices, to notify foreign governments, and to survey the local business
                       community. The cables to posts include a detailed questionnaire about
                       the foreign procurement environment, procurement procedures, and
                       procurement practicc5.

                       Officials generally consider the overseas posts’ knowledge of procure-
                       ment issues limited, and their reporting widely varied from country to
                       country. To help educate posts on the issues and requirements, the
                       cables give some general background information; other briefing materi-
                       als are to be sent latrtr. Because of the posts’ limited resources, a fill-in-
                       the-blank reporting format was adopted.

                       Although the cables ask the posts to provide factual information on
                       unfair practices, they also ask the posts to assess the openness of the
                       foreign countries’ procurement methods. To do this, the posts must
                       apply the act’s code-like criteria and review all the countries’ procure-
                       ment laws and practices. To assist in this assessment, the cables ask a
                       series of very specific- and technical procurement questions.

                       Page28                                  GAO/NSIADSO-127   International   Procurement
                             Appendix III
                             How Is the Investigation   Being ( kmducted?

                             The interagency TPSC bilateral subcommittees, chaired by USTR, will
                             review and augment the posts’ responses, using information they
                             already have on hand. The IJSTR country desk officials play a central
                             role in gathering this information from their counterparts in m. They
                             have been given a briefing and provided background materials to
                             improve their knowledge of procurement issues.

                             The availability of information on the different countries’ procurement
                             practices varies considerably in quality and quantity. According to offi-
                             cials, much of the existing information is incomplete and does not meet
                             the detailed requirements in Title VII for identifying discrimination. For
                             example, the annual IiTlc report represents a summary of known pro-
                             curement problems and will be issued again 1 month before the Title VII
                             report. Although it depends on the same sources as will be used for Title
                             VII, officials told us these sources do not have expertise in procurement
                             issues. Because previously gathered information is not detailed enough
                             to make any determinations, additional requests will be made to update
                             and expand upon known problem areas.

    Private Sector Contact   Although the first t,wo methods for obtaining information rely on gov-
    Differs                  ernment channels, the third method focuses on the private sector. How-
                             ever, there are differcances in how information will be gathered from the
                             domestic and from the overseas business communities.

                             The principal method for gathering information from the domestic busi-
                             ness community is a request for public comment published in the Fed-
                             eral Register. The private sector advisory committees are encouraged to
                             respond to this request. The notice asks for specific information requir-
                             ing a knowledge of procurement issues that may take time to develop.
                             Specifically, respondeMs are asked to identify “requirements of the
                             Agreement which ant not being complied with...or describe how the
                             country has maintained a significant and persistent pattern or practice
                             of discrimination.” The notice asks for a separate submission on each
                             country and for each submission to include both an estimate of the cost
                             of the discriminatory practices and information about similar U.S. gov-
                             ernment procurement Respondents may file confidential business infor-
                             mation (with a publit’ summary) under established procedures.

                              Individual domestic firms and industry associations have not been con-
                              tacted directly. However, direct contact was used to gather information
                              for the Telecommunications Trade Act of 1988, where affected compa-
                              nies were more easily idcbntifiable. Officials said limited resources and

                              Page 29                                       GAO/NSIAIMO-127   International   Procurement
                         Appendix III
                         How Is the Investigation   Being Ckmducted?

                         the need for equal treatment prevent the use of more vigorous
                         approaches, such as B survey, to gather information.

                         Contacting the overseas business community is another responsibility of
                         the posts. Although resources are also scarce in the posts, the overseas
                         business communities are to have been contacted directly. In addition to
                         requesting comments on the procurement environment, procedures and
                         practices, the posts were told to ask the business community to quantify
                         both U.S. sales to the foreign government and the potential business that
                         was lost because of dwcrimination. The posts have discretion in con-
                         ducting their surveys because no guidance is given on the number, type,
                         or size of companies that should be contacted.

                         After the necessary information has been collected, the decision-making
How W ill Countries Be   process then begins The various criteria in the act to assess non-code-
Identified?              covered procurement will be used to identify countries. There are no
                         standard legal definil ions for the criteria to be used, according to a WTR
                         lawyer. The TPS~Subcommittee on Government Procurement will then
                         review the initial draft reports from the bilateral subcommittees and the
                         responses to the Federal Register notice. Follow-up investigations to
                         complete the necessary information will take place ;ts needed.

                         First, discrimination against the lJnited States must be determined. Offi-
                         cials have offered t.h<’following guidance to the posts and to the country
                         desks responsible for finding discrimination.

                         Discrimination may be thought of as:

                         a) treatment differenr from and less favorable than that accorded to
                         national suppliers of the country in question, and/or

                         b) failure by the g~n~nment to use competitive procedures in procure-
                         ment, and/or

                         c) failure by the go\,tsrnment to provide predictable (i.e., guaranteed)

                         Second, the discrmunation must be significant and persistent. In this
                         way systematic discrimination can be distinguished from isolated
                         enforcement problemj. This determination will be based on information
                         the posts supply

                         Page 30                                       GAO/NSIADM-127   International   Procurement
Appendix JIl
How Is the Investl@lon   Being Conducted?

Third, this discrimination must result in identifiable harm to U.S. busi-
nesses. Lost sales opportunities could be construed as the complete
inability to bid or the failure to win a bid. The private sector was asked
to provide this information to the TPSC Subcommittee on Government
Procurement, but firms must show that opportunities actually have
been lost. If U.S. industry has stopped trying to sell in markets long
since closed, it may be difficult for the industry to document the harm.

The next criterion that will be applied requires the U.S. government to
have procured goods or services from the foreign country in significant
amounts. The purpose of this significance test is to focus the investiga-
tion where the United States can use the potential sanctions to end the
discrimination. This test could eliminate many of the countries still
under investigation, as many countries’ suppliers sell very little to the
U.S. government; a $10 million limit would eliminate all but about 30
countries. However, many of these countries are included in the first
Title VII investigation, even some that have sold less than $100,000 to
the U.S. government in fiscal year 1988.

Officials have decided to gather information on all countries in order to
(1) ensure equal treatment, of all countries; (2) develop an information
base on countries where little is known; and (3) educate government
officials about procurement. Officials’ interpretation of “significant
amounts” necessary for leverage will vary according to an individual
country’s productive capacity in a given industry or because of other
factors. These more detailed, country-by-country determinations using
various classifications may be difficult because the U.S. government
data have limitations and inaccuracies that could affect any such

 A final review will take into account the effects of the identified dis-
 crimination on U.S. commerce and the comparability of opportunities
 available to foreign suppliers in the United States. Also, determinations
 would consider any requests for consultations by countries wishing to
 avoid identification. Guidance on how these requests will be handled
 was being developed at the time of our review. Final country reports
 will be written recommending a list of discriminatory countries to the
 United States Trade Representative. After the various TPSC agencies
 have approved the choices and the President has made a final decision,
 the report is to be sent to Congress by April 30, 1990.

 Page 31                                    GAO/NSIAD9O-127   lntemtional   Procurement
Appendix IV

Major Contributors to This Report

                        John Watson, Assistant Director
National Security and   Adam R. Cowles, Evaluator-in-charge
International Affairs   Jill Derderian, Evaluator
Division, Washington,

(483631)                Page 32                               GAO/NSIAD90.127   International   Fluauement
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