United States General Accounting Office . GAO Report to the Chairman, Subcommittee on International Trade, Committee on - Finance, U.S. Senate February 1990 EUROPEAN SINGLE MARKET Issues of Concern to U.S. Exporters GAO/NSIAD-90-60 National Security and International Affairs Division B-237894 February 13, 1990 The Honorable Max Baucus Chairman, Subcommittee on International Trade Committee on Finance United States Senate Dear Mr. Chairman: This report responds to your August 9, 1989, request that we identify and evaluate issues related to the European Community’s Single Internal Market Program, known as EC1992, of concern to U.S. exporters. We focused on the issuesof product standards, testing, and certification; rules of origin; and public procurement requirements. Copies of this report are being sent to the Secretariesof Commerceand State, the United States Trade Representative, and to other interested parties. This report was prepared under the direction of Allan I. Mendelowitz, Director, International Trade and Finance Issues.He can be reached on (202) 2764812, if you or your staff have any questions. Other major contributors are listed in Appendix I. Sincerely yours, Frank C. Conahan Assistant Comptroller General Executive Summ~ In 1989, many congressionalcommittees held hearings on issues related Purpose to the European Community (EC)Single Market program, commonly known as EC 1992. Of particular concern is the impact of EC1992 on small and medium-sized U.S. exporters that do not have European subsidiaries. At the request of the Chairman of the Subcommittee on International Trade, SenateCommittee on Finance, GAO identified issuesrelated to the EC1992 program that will affect market accessfor U.S. exporters and evaluated those issuesGAO believed to be of the most concern. In 1986, the ECapproved the Single Internal Market program, compris- Background ing almost 300 measures,with the goal of removing barriers to the free movement of goods,services, capital, and people among its 12 member states by the end of 1992. In June 1989, the ECreported that the processof completing the internal market was irreversible. At the end of 1989, about 93 percent of the legislation needed for the program had been proposed, and 51 percent had been adopted. The EC comprises a market of over 320 million people and is the largest US. trading partner. The Departments of Commerceand State, and the Office of the United States Trade Representative (USTR)all play roles in monitoring and providing information to interested parties on EC 1992 and in trying to influence the EC1992 process. The EC1992 program could provide substantial benefits to U.S. export- Results in Brief ers; however, some unresolved market accessquestions are causefor U.S. concern and are being watched by the federal government. Some proposed restrictive practices could limit increased U.S. accessin the areas of (1) product standards, testing, and certification, (2) rules of ori- gin, and (3) public procurement. l US. exporters generally must meet national standards and have their products tested and certified in each ECcountry where sold. Under EC 1992, a US. exporter legally will have to meet only one standard and have its product tested in one ECcountry to sell throughout the EC.How- ever, U.S. exporters were concernedwhether ECcountries will be able to use the European standards-setting, testing, and certification processes to keep products out. Page2 GAO/NSIAIMO4OEuropean Market Executive Summary l The way the ECrecently has applied its rules of origin to various elec- tronic and high technology products and componentshas raised U.S. industry’s concern that the ECwill use these requirements to promote or to protect certain industrial sectors. U.S. businessand government offi- cials fear this action could force U.S. companiesto build plants and other facilities in Europe to avoid such barriers. l The EC is seeking to open its public procurement market in sectors previ- ously closed to non-ECsuppliers, ostensibly giving U.S. exporters more salesopportunities. However, becauseproposed bid requirements appli- cable to these sectors may be applied in a discriminatory manner, US. exporters face a great deal of uncertainty. ECstandards, testing, certification, and public procurement require- ments will probably not be any more restrictive than they are today and may provide greater opportunities for U.S. exporters. However, the EC seemsto be increasing the number of products to which rules of origin, particularly value-added origin rules, are to be applied. GAO's Analysis Standards, Testing, and A key issue is whether it will be easier for U.S. exporters to meet Euro- Certification pean standards and to get their products tested and certified for sale in Europe under EC1992. Currently, U.S. exporters sometimesmust make costly modifications to their products to meet different specifications in various ECmember states. Frequently, a product certified for sale in one ECcountry doesnot meet the certification requirements for sale in another. U.S. industry has expressedconcern about accessto the EC’Sstandards- setting process and whether the processwill enable individual ECmem- ber states to keep products out. On the whole, GAO believes that U.S. exporters will not be any worse off, and could be better off, under the new system. A major concern of U.S. exporters is the need for more accurate and timely information about EC 1992. GAO learned that there are some ways to alleviate U.S. exporters’ concerns.For example, . the American National Standards Institute receives the work plans and draft standards of the European standards-setting organizations and Page 3 GAO/NSlAINO4O European Market Executive SummarY can, in turn, submit comments and concernsto those organizations on behalf of U.S. business. . ECDirective 831189 established an information procedure that permits examination of drafts of member state national standards to determine their compatibility with the principle of free circulation of goods.The US. government could seek accessto this data for the benefit of U.S. exporters. Rules of Origin Recent EC initiatives involving rules of origin, particularly value-added origin rules, have sparked U.S. industry fears that the ECwill use these requirements to promote or to protect certain industrial sectors.US. exporters in the electronics industry and in the auto parts industry are concernedthat manufacturers will replace U.S.-origin componentswith E-origin components to avoid ECpenalties. According to U.S. govem- ment officials, such concernscould lead U.S. companiesto make costly capital investments in the ECwhen they are not necessarily ready to do so from a businessor marketing perspective. To counteract these concerns,U.S. officials are negotiating an agreement on an internationally accepteddefinition of rules of origin during the current round of multilateral trade negotiations. Public Procurement The $630-billion ECpublic procurement market has been largely untap ped by U.S. exporters. Certain sectors, such as public construction and public utility projects, have not been covered by multilateral agreements and may still not be completely open to non-ECfirms under EC1992. Under the EC’Sproposed plan, bid requirements for newly opened sec- tors will be different from those for sectors covered by multilateral agreements.Entities procuring in the former category would be permit- ted to exclude from consideration offers with less than 50-percent EC content. If they do consider such bids, they must grant a 3-percent price preference to equivalent offers having at least 50-percent ECcontent. This type of discrimination is not permitted for sectors covered by mul- tilateral agreements. U.S. officials are engagedin negotiations to extend a multilateral trade agreement to cover all public procurement sectors. Successfulnegotia- tions could increase U.S. export opportunities in ECpublic procurement. Page 4 GAO/NSLUHO8O European Market Executive Sumnuuy This report contains no recommendations. Recommendations As requested, we did not obtain written agency comments on this report; Agency Comments however, we did discuss its contents with officials from Commerce, State, USTR,and some private sector representatives and incorporated their comments where appropriate. Page 5 GAO/NSIAWW30 European Market Contents Executive Summary 2 Chapter 1 8 Introduction The European Community and EC 1992 EC 1992 and the General Agreement on Tariffs and Trade 8 10 Role of Various U.S. Government Agencies 11 Objectives, Scope,and Methodology 12 Chapter 2 14 Standards, Testing, Background on Standards, Testing, and Certification 14 Current Situation in the EC for U.S. Exporters 16 and Certification Situation for U.S. Exporters in the EC 1992 Environment 18 Issues Implications for US. Exporters of the New Standards, 22 Testing, and Certification Requirements On-Goingand Possible U.S. Actions to Allay U.S. 26 Exporters’ Concerns Conclusions 27 Chapter 3 28 Rules of Origin Issues Background 29 Existing Agreements and Regulations on Rules of Origin 30 Recent EC Legislation May ChangePolicy on Rules of 31 origin Implications of Recent EC Decisionson Rules of Origin for 35 U.S. Trade Interests On-Goingand Possible U.S. Actions to Allay U.S. 37 Exporters’ Concerns Conclusions 38 Chapter 4 39 Public Procurement Current EC Public Procurement Situation 39 EC 1992 Proposed Changesin Public Procurement 41 Issues Multilateral Public Procurement Negotiations 43 Implications for U.S. Exporters 44 Conclusions 45 Appendix Appendix I: Major Contributors to This Report 46 Page 6 GAO/NSuD9680 European Market Contents Abbreviations ANSI American National Standards Institute CEN European Committee for Standardization CENELECEuropean Committee for Electrotechnical Standardization EC European Community FISI European Telecommunications Standards Institute GAO General Accounting Office GATT General Agreement on Tariffs and Trade IEC International Electrotechnical Commission Is0 International Standards Organization ITC International Trade Commission NIST National Institute of Standards and Technology UL Underwriters Laboratories, Inc. USTR Office of the United States Trade Representative Page 7 GAO/NSIAD-go60 European Market Chapter 1 Introduction The European Community (EC) is the largest U.S. trading partner, and trade-related events there have a major impact on US. business.In 1985, the EC approved a program to remove all physical, technical, and fiscal barriers to internal trade by 1992. This program, known as EC 1992, will affect all goodstraded in or with the EC. As a member of the international trading community, the ECmust continue to meet its multi- lateral trade obligations as it moves toward EC1992. The EC is a market of over 320 million people, with a combined gross The European domestic product nearly comparable to that of the United States. When Community and EC it was created by the Treaty of Romein 1957, the ECconsisted of Bel- 1992 gium, France, Italy, Luxembourg, the Netherlands, and West Germany. Today it has 12 member states- the United Kingdom, Ireland, and Den- mark joined the original signatories in 1973, Greecejoined in 1981, and Spain and Portugal joined in 1986. The EC accounted for over $155 billion in two-way merchandise trade with the United States in 1988. The United States sent some 23 percent of its exports to the ECin 1988, with the leading U.S. exports (29 per- cent) consisting of office machine parts, computers, aircraft and aircraft parts, engine parts, soybeans,and coal. The Treaty of Romeenvisaged a single, integrated European market. The first major focus of the Treaty was to remove all tariffs and quotas among the ECmember states and to introduce a common customs tariff. The common customs tariff was completed in 1968, but integration lan- guished for a number of years. In the early 198Os,interest in ECintegration revived becauseECbusiness perceived that the ECwas less competitive with the United States, Japan, and the newly industrialized countries due to the fragmentation of the ECmarket. In 1985, the ECapproved the 1992 program with the goal of removing all barriers to the free movement of goods,services, capital, and people among the 12 ECmember states by the end of 1992. A White Paper, entitled “Completing the Internal Market,” prepared by the ECCommission, the executive arm of the EC,listed almost 300 meas- ures neededto achieve the single internal market. These measuresare divided into the three following parts: 1. Elimination of physical barriers to reduce transport costs and result in significant time savings. Eliminating or reducing customs procedures Page g chapter 1 Introduction between EC member states should enable products to move as freely within the EC as they do in the United States. 2. Elimination of technical barriers to open previously closed national markets in areas such as insurance and public procurement. The single industrial standards for products with health, safety, or environmental implications should make it easier to market products throughout the EC. 3. Elimination of fiscal barriers to facilitate intra-Ec trade. Different indirect tax rates among member states, such as differing value-added and excise taxes, necessitateborder controls to avoid tax evasion. Har- monization of these indirect tax rates is one aspect of eliminating fiscal barriers. EC officials have said that fiscal barriers will be the most diffi- cult barriers to eliminate. Other anticipated benefits for Europe from this program include econo- mies of scale in production for a larger market, increased competition in somesectors, greater research and development expenditures, lower prices, a greater variety of products to stimulate consumer demand, and lower budgetary expenditures on government regulations. The EC’Suse of unanimous voting was a major impediment to earlier progress in integration becauseany single ECmember state could veto proposed actions. To solve this problem, the ECpassedthe Single Euro- pean Act, which allowed for qualified majority voting on almost all aspectsof the single market. The act took effect on July 1, 1987, and represented a crucial step neededto move to the internal market. In its June 1989 progress report, the ECCommission reported that the EC 1992 processis now irreversible but expressedconcern that the prog- ress toward removing most technical barriers could not hide the fact that nothing had been done to abolish physical and tax barriers. By the end of 1989, about 93 percent of the neededlegislative measureshad been proposed, and 51 percent had been adopted. The EChad adopted 142 of the 261 measuresproposed; however, the percentageof adopted measuresin force varied among the 12 member states. Page 9 GAO/NSIAD~ European Market Chapter 1 Introduction Since its creation in 1948, the General Agreement on Tariffs and Trade EC 1992 and the (GAIT) has been the forum for discipline in international trade. The GATT General Agreement on is both a system of principles specifying the rights and obligations of its Tariffs and Trade contracting parties and an institution. The principles are basedon the proposition that trade should be determined by economic factors rather than government intervention. The basic principles that underlie GAIT are (1) the most-favored-nation concept, which states that the contracting parties will conduct their commercial relations with each other on the basis of nondiscrimination, (2) national treatment, which provides that imported products should receive the sametreatment as domestically produced products with respect to internal taxation and regulation, and (3) the concept that any protection of domestic industries should causethe least distortion to trade possible, and the belief that tariffs are the preferred form of protection, The impact of EC1992 on the GATT and the current round of negotiations scheduled to end in 1990 is not yet clear. According to the Office of the U.S. Trade Representative (USTR),EC1992 initiatives frequently influ- ence the position of ECnegotiators in GATT talks. For example, the EC is attempting to liberalize and open its public procurement market in sec- tors not previously covered by the GATT Agreement on Government Pro- curement. With EC1992, the EChas agreed to discuss extending coverage to include these sectors. Also, in negotiations on the effectiveness of the GATT Standards Code,a USTR official testified that the EC’Sinternal approach to standards, testing, and certification has enabled its GATT negotiators to be more forthcoming. Someof the EC1992 legislation in such areas as standards and public procurement are already addressedin GATT agreements.Roth the United States and the ECare signatories of the GAP Standards Code,entered into force on January 1,1980, which obliges signatories to ensure that standards and certification systems are not used as barriers to trade. Signatory countries must use open procedures when developing new standards or certification systems or revising old ones and must provide an opportunity for others to comment on proposed standards and certi- fication systems before they are finalized. The code includes enforce- ment or dispute settlement provisions to deal with code violations. It also promotes the adoption of relevant international standards as a basis for new national standards and encouragessignatories to partici- pate in international standards-setting organizations with a view toward harmonizing their technical regulations. Page 10 GAO/NSuDM European Market Chapter 1 lntnnluction The GAIT does not require that ECregulations be compatible with it but, if they are not, any GATT signatory that claims its GATT benefits have been adversely affected could ask the GATT to renegotiate concessionsor other compensation. GATT safeguard provisions include waiver procedures, which allow a GATT member to escapetemporarily from negotiated GATT commitments and to impose emergency, restrictive trade measureswhen it can demonstrate actual or threatened serious injury to a domestic industry. The member must then notify the GATT and negotiate with affected exporting countries to arrange compensation. If ECindustries encounter transitional difficulties with EC1992, it is possible that these safeguard provisions could be invoked. ECguidelines state that the ECwill meet its international obligations and will aim to strengthen the multilateral system but will do so in accord- ance with the concept of balance of mutual benefits and reciprocity. In sectors that have no multilateral rules, the ECsays it would be prema- ture to extend the benefits of EC1992 to non-m countries automatically and unilaterally. Consequently, it will seek new international agree- ments but will negotiate bilaterally with its trading partners to obtain satisfactory accessto their markets to compensatefor the benefits that trading partners may obtain from the European single market before international agreementsexist. The U.S. government has established a program to monitor develop- Role of Various U.S. men& work with industry, provide information, and establish federal Government Agencies policy on EC1992. In 1988, a usm-chaired interagency task force on EC 1992 was formed to identify and address EC1992 problem areas for U.S business.The Department of Commercehas established its Single Inter- nal Market Information Service to provide the U.S. businesscommunity with information and assistanceto prepare for EC1992. Commerce’s Trade Development Bureau and the U.S. and Foreign Commercial Ser- vice also have M: 1992 activities. The Small BusinessAdministration also has been alerting U.S. small businessto look toward Europe as an export market. The State Department’s embassies,consulates,and the U.S. mission to the EChave increased their reporting since the inception of the EC1992 program. They are also monitoring the implementation of the program in ECmember states and coordinating the many visits of Americans to Europe on EC1992-related business. Page 11 GAO/NS~90-50 European Market Chapter 1 Introduction Three U.S. government agenciesare responsible for GATT Standards Code implementation. USTRhas general responsibility for coordinating the international trade activities of federal agenciesthat engagein stan- dards-related activities. Both the Departments of Commerceand Agri- culture have technical offices to assist U.S. exporters in taking advantage of the Standards Code by disseminating notices of proposed foreign government standards and rules of certification systems. Inter- ested parties can then comment on these notices through these agencies. USTRheads the US. delegations to trade negotiations in the GATT. 1Objectives, Scope,and International Trade, SenateCommittee on Finance, we have assessed Methodology how EC1992 may affect U.S. small and medium-sized merchandise exporters. This report focuseson three key concernsof US. exporters: product standards, testing, and certification; rules of origin; and public procurement. In making our assessment,we reviewed documents and interviewed offi- cials of the Departments of Commerceand State, USTR,and the Small BusinessAdministration concerning their involvement in monitoring EC 1992 and the issuesof concern to exporters. Analysts from the Interna- tional Trade Commission (ITC)and the CongressionalResearchService provided us with an overview of their work in the area. We met with private sector associations and small businessowners to determine their views on EC1992 and its potential impact on U.S. exporters. We obtained information from US. embassy, Foreign Commercial Ser- vice, and American Chamber of Commerceofficials in Brussels, Frank- furt, London, Paris, and Madrid on how doing businessin Europe will change and affect U.S. exporters. We also obtained information on stan- dards, testing, and certification issuesfrom representatives of national standards-setting bodies in Brussels, London, Bonn, Paris, and Madrid, and one European standards-setting body. In Brussels, officials from the U.S. mission to the ECgave us information on what steps they were taking to monitor and influence the EC1992 processwith the ECCommission. We interviewed ECCommission officials to obtain information about specific EC1992 issuesof concern to export- ers. In addition, we obtained information from private sector consul- tants, trade association officials, and attorneys in Brussels and Frankfurt about what advice they are giving clients on how EC1992 will change businesspractices in Europe. Page 12 GA0/NSL4D9080 European Market Chapter 1 Introduction Officials from seven U.S. state economic and trade promotion offices told us how EC1992 was affecting their export promotion activities. We also obtained written responsesto questions from 12 additional state trade promotion offices. We obtained information from representatives of U.S. private sector associations,businesses,and think tanks, as well as a magazine pub- lisher in New York City. We discussedstandards and testing and certifi- cation with the American National Standards Institute (ANSI)and Underwriters Laboratories, Inc. (uL). We attended congressional,Commerce,and ITC EC1992 hearings. Finally, we obtained and analyzed numerous documents, studies, books, and reports on Ec 1992. As requested, we did not obtain written agency comments on this report, but we did discuss its contents with officials from the Departments of Commerceand State, USTR, and private sector representatives. Our work was performed in accordancewith generally acceptedgovernment auditing standards from March through December 1989. Page 13 GAO/NSLAD9080 European Market Chapter 2 Standards, Testing, and Certification Issues At present, U.S. exporters find it difficult to meet the various complex standards, testing, and certification requirements in different ECcoun- tries. It follows then that a key question for U.S. exporters is whether it will be easier for them to meet ECrequirements under EC 1992. The adoption of unified standards for products with health, safety, or environmental implications, known as regulated products, could be ben- eficial to U.S. exporters. US. government officials believe that econo- mies of scale will be gained becauseeach product will need to meet only one standard. On the other hand, if the new standards are biased against U.S. suppliers, then the U.S. competitive position could be eroded and its ECsales levels reduced while it is retooling production and seeking the necessaryapprovals. Currently, most regulated products have to be tested and certified in EC countries in order to be sold in those countries. The United States hopes to reach an agreement with the ECwhereby most products regulated by EClegislation that require testing and certification can be tested in the United States to fulfill Ec certification requirements. In general, standards are voluntary technical specifications that are Background on approved by a standards-setting body. Both the United States and the EC Standards, Testing, have promoted health, safety, and environmental standards. Certifica- and Certification tion attests that a product complies with technical specifications; for some products the manufacturer can declare conformity with the stand- ard, while others must be certified by a third party. The ECmember states have national standards-setting bodies that belong to both inter- national and Europe-wide standards-setting bodies. In the United States, standards are developed by many different organizations, one of which is also a member of international standards-setting bodies. Standards can be classified by the intended user group, such as l company: meant for use by a single industrial organization, . industry: developed and promulgated by an industry for materials and products related to that industry; or . government: such as those designed to be used by the Department of Defenseor other federal government agency. Standards can be classified by the manner in which they specify requirements such as Page 14 GAO/NSIAD90-60 European Market Chapter 2 strmdruds, Tdhg, and CertUlcatlon huea . performance: how a product is supposedto function, or l design: characteristics, or how the product is to be built. Standards are generally voluntary, however, they can becomemanda- tory when published as part of a codeor regulation. Voluntary stan- dards typically developed and promulgated by an industry through a consensusprocesscan becomemandatory when they are referenced in government regulations. Standards can take on a de facto mandatory status when their use is required by the market for commercial reasons. One of the prime objectives of standards is to promote economy in human effort, materials, and energy in the production and exchangeof goods.Standards are used to prevent deceptive practices and assure adequate and consistent quality of goods and services.They also promote the removal of barriers causedby different national practices. Commerce’sNational Institute of Standards and Technology (NET) believes that standards often provide the basis for buyer-seller transac- tions and thus have a great impact on companies and nations. The U.S. standards community and the ECboth subscribe to the intema- tional view of certification as a processby which the producer or certi- fier attests that a product, service, or person satisfies the requirements of the referenced standard. Two of the principal purposes of certifica- tion are to (1) identify the product, service, or person as meeting the specific standard, and (2) ensure that the product, service, or person does conform and will continue to conform to the requirements of the standard. The ECand the United States use two types of certification- self-certification, whereby the manufacturer useshis mark, symbol, or statement to tell the consumer that the product meets a specific stand- ard, and third-party certification, which is normally performed by an outside organization that owns and controls a certification mark. Standards-setting organizations include those that solely develop stan- dards; those that test and certify products; trade associations;and pro- fessional, technical, and building code organizations. In the United States alone, approximately 30,000 current voluntary standards have been developed by more than 400 organizations. These do not include procurement specifications used by government procurement authori- ties or mandatory codes,rules, and regulations containing standards used at various government levels in the United States. Page 15 GAO/NS~90.60 European Market Chapter 2 StandarN T-tin& and Certi!lcation IMU- According to the ITC,three different types of technical trade barriers Current Situation in currently exist in the EC. the EC for U.S. Exporters 1. Differences in voluntary standards or specifications regarding prod- uct form, function, and compatibility and/or interchangeability with other products. These differences are usually defined as voluntary, but they are often used by procurement authorities and can attain a de facto mandatory status. 2. Barriers created by incompatible technical regulations. These are usu- ally mandatory standards contained in health, safety or environmental protection regulations. Noncompliance with these standards makes import of a product illegal. 3. Differences in product-testing procedures. This often forces a manu- facturer to repeat tests in the importing country that had already been made in the producing country and can causeextra paperwork and costly delays. Most current standards being used in ECcountries were formulated or adopted by the national standards bodies in each member state. The EC has some standards of its own formulated under the “old approach,” whereby technical standards were written directly into EClegislation; however, most standards are national ones, and U.S. exporters, as a practical matter, currently must meet these national standards in each country to sell their products in that country. This sometimesnecessi- tates costly modifications to products. Even where standards are simi- lar, lengthy delays can be causedby the lack of mutual recognition of testing and certification between ECmember states. As one U.S. industry official told us, it is common for a product to be allowed into one EC country but not into another. U.S. testing and certification laboratories do have some agreementswith their ECcounterparts. For example, UL,a large US. standards, testing, and certification organization, has agreementswith someof its counter- parts in Europe to test to national requirements and mutually accept test data for a limited number of products. UL also has a Technical Assis- tance to Exporters program to help manufacturers understand and com- ply with foreign national and international certification requirements, standards, and practices before they begin to obtain overseasproduct certification. uL offers technical information for all ECcountries. Page 16 GAO/NSL4D90-60 European Market Chapter 2 standards, Testing, and Certification Issues EC Adoption of Existing The International Standards Organization (ISO), the world’s largest inter- International Standards national standards body, covers all fields except electrical and electronic standards, which are covered by the International Electrotechnical Com- mission (IEC). Both organizations carry out their work through many technical groups. As of early 1988, ISOand IEC had published over 6,000 and 1,800 standards, respectively. The majority of [so and IEC member bodies are governmental institutions. In Europe, each country has a national standards-setting body that pro- vides representation to European-wide standards-setting organizations. The European Committee for Standardization (CEN) and the European Committee for Electrotechnical Standardization (CENELEC) are made up of all ECand European Free Trade Association members.’ A CEN official told us that observer status for non-membercountries does not exist in either CENor CENELEC rules; therefore, the United States cannot be an observer. All CEN/CENELEC members are also members of LWand IEC. CE.N and CENELEC’S policy is to base their work as much as possible on international standardization organization results. The international standard may be adopted without any changesor modified to meet European market needs.OnceCENor CENELEC has begun work on a Euro- pean standard, all national committees are required to stop any national work on the same subject until these two standardization committees finish their work. The European Telecommunications Standards Institute (ETSI) is an autonomous body set up in 1988 to develop telecommunications stan- dards in Europe. ETSI requires that its members be based in one of 20 European Telecommunications Conferencecountries. Membership in ETSI is open to non-governmental bodies. Unlike CEN/CENELEC, ETSI allows non-member organizations to obtain observer status, conveying the right to speak but not to vote. According to an NIST official, the high percentageof international stan- dards that have been adopted as national standards by ECmember state standards-setting bodies is facilitating the consolidation or “harmoniza- tion” of European standards. rsoand IECstandards now comprise 43 per- cent of Danish standards, 37 percent of French standards, 22 percent of Dutch standards, 16 percent of British standards, and 5 percent of Ger- man standards. By contrast, less than half of 1 percent of ISOand IEC ‘The European Fme Trade Association consists of Austria, Finland, Iceland, Norway, Sweden, and Switzerland. Page 17 GA0/NSIAD90-50 European Market Chapter 2 Standards, Testing, and Cerdflcation Issues standards have been formally adopted as American National Standards, but this is not representative becausemany ISOand IEC standards are based on U.S. technology, especially in photographic materials, informa- tion technology, aerospace,petroleum, plastics, oil and gas, packaging, and banking. ANSIcoordinates and approves voluntary standards in the United States. ~SI is a private nonprofit federation of some 250 organizations that designatesstandards set by these organizations as American National Standards after determining that the standards were developed and approved in accordancewith its consensusprocedures.ANSIalso coordi- nates and provides the infrastructure for U.S. participation in ISO and IEC. In the past the ECmember state standards-setting bodies had been more involved than the United States in international standards setting. For example, ECcountries chair 70 to 75 percent of the ISOsecretariats, while the United States chairs 12 percent. However, ANSIofficials told us that the U.S. secretariats are in areas that are important to the United States such as fiber optics, information technology, aerospace,petro- leum, plastics, and banking. According to ANSI, which is the U.S. repre- sentative to the international standards organization, the ISOsecretariats the United States holds produce 27 percent of ISOstandards. In this way, according to another industry official, the United States holds more rso/ IEC secretariats than any other individual country. U.S. government offi- cials believe that the United States must becomemore aggressively involved in ISOand IEC if it is to maintain or to increase its penetration of foreign markets. Situation for U.S. uct standards setting proposed by the EC’SWhite Paper has two guiding Exporters in the EC principles: (1) harmonization, whereby all member states will use the 1992 Environment same standard for products regulated by the E-those with health, safety, or environmental implications, and (2) mutual recognition, whereby each ECcountry will recognizeother ECcountries’ standards for products not regulated by the EC-those not covered by harmonized standards. For products regulated by the EC, the ECwill adopt measureslaying out essential requirements that products must meet, and the European stan- dards-setting bodies will develop detailed standards sufficient to ensure that products meet the essential requirements. Compliance with these Page 18 GAO/NSIAD9W30 European Market Chapter 2 Standards, Testing, and Certification Imm standards will not be mandatory, but an ECstandards official told us their use will put a producer on the “fast track” to approval. The EC claims that products that show they meet the essential requirements via CEN/CENELEC or other standards will be able to be sold freely throughout the EC.Under the EC'S guidelines, U.S. exporters will be able to market their products freely throughout the EC if (1) they meet a harmonized European standard, or (2) they can prove conformity to the essential requirements. For products not regulated by the EC,U.S. exporters will still have to meet the national standards of the importing country where they exist. Under the mutual recognition principle, products legally meeting one member state’s standard, and/or acceptedfor sale in one member state, should then be free to move throughout the EC. Several decisions since 1979 by the European Court of Justice have helped to facilitate the removal of technical barriers to trade in the EC. In its landmark Cassisde Dijon decision, the Court ruled that Germany could not keep out a French beveragebecauseit did not satisfy German alcohol content standards, since the product was legally produced in France. In this case,and in subsequentinterpretations, the Court acceptedthe principle that a product legally sold in one member state must have the right to move freely throughout the ECunless an import- ing member country could demonstrate that its exclusion was based on genuine issuesof public health and safety. In one U.S. businessassociation’s view, the decision facilitated move- ment toward EC1992 becauseit meant that ECmember countries had to accept some expeditious means of developing m-wide minimum product standards. In subsequent decisions involving British and French stan- dards for milk, German standards for beer, and Italian standards for pasta, the Court has continued to uphold the principle it set forth in its Cassisde Dijon decision. US. Access to EC Public and private sector U.S. delegations are working with the ECCom- mission and CEN/CENELEC to make the European standards-setting pro- Standards-Setting Process cessmore transparent and more open to non-European participants. In early 1989, CEN/CENELEZ agreed to provide ANSI with monthly CEN/ CENELEC work plans. ANSI began a work plan subscriber service in April 1989 to inform interested U.S. firms about CEN/CENELEX standards-set- ting activities. Page 19 GAO/NSIAD-!lWW European Market Chapter 2 In May 1989, Commerceand the EC Commission issued a joint communi- que announcing the establishment of a dialogue on standards issuesof mutual concern. In June 1989, the two European standardization com- mittees issued a memo to their members discussing their commitment to using international standards. The organizations encouragedthe accep- tance of comments on their work from non-member countries under the auspicesof the relevant national member body that belongs to ISO/IEC. For the United States, the relevant body would be ANSI. In July 1989, ANSI agreed to share more information with CEN/CENELEC, so ASI now compiles, to the extent possible, a work plan similar to the one CEN has been providing to ANSI and provides it to the two European standardiza- tion committees. In early 1989, ANSI requested observer status in CEN/CENELEC, but it was denied. ANSI then proposed that international standardization organiza- tion technical committee secretariats participate in CEN/CENELEC Euro- pean standards development. In other words, I.W/IEC would be given observer status at CEN/CENELEC. The two European standardization com- mittees also denied this proposal; however, according to Commerce,CEN/ CENELEC said that ISO/IECmembers could work with CEN/CENELEC to develop a work plan for a standard, but these members could not partic- ipate in the standards-drafting process.In August, the two European standardization committees reached an agreement with I.SO/IEC to exchange work plans and technical documents. As a member of ISOand IEC,ANSI has accessto these documents. According to CENand CENELIX,they will adopt international standards where they exist and where they believe it is appropriate. It is only where international standards do not exist and are unlikely to emerge in the foreseeable future that CEN/CENELEC will use another basis for their standards harmonization. In June 1989, CEN/CENELEC proposed that, for all new European standards activities, if ISO/IEC will complete the neces- sary work within the required time frame, CEN/CENELEC will adopt the resulting international standard. ANSI believes much progress has been made in terms of improving the transparency of the CEN/CENELEC standards-setting process,and now the United States needsto use it to its best advantage. U.S. public and pri- vate sector officials believe that CEN/CENELEC'S willingness to adopt international standards is another step toward improving U.S. accessto the EC market, and now the United States must hold CEN/CEKELEC to that policy. Page 20 GAO/NSIAD9O4O European Market chapter 2 standada, Testing, and Certification Iaaues U.S. Access to EC Testing In July 1989, the EC Commission approved a draft testing and certifica- and Certification tion document, known as the EC’Sglobal approach, which lays out pro- posals for testing and certification in the ECin the EC 1992 environment, The proposal, which aims to set the ground rules for future procedures in the regulated sector, states that the ECwill require mutual recognition of test results by “notified bodies” -those meeting EC-specifiedcriteria based usually on ISO/IFXguides- for products covered by EC measures. The document proposes a modular approach to conformity assessment procedures. It is expected that the EClegislative measureswill delineate which module or modules can be used to prove conformity for products in that category. An EC Commission standards official told us that, through the EC'S new approach to standards, testing, and certification, the ECwants to increase the flexibility that manufacturers have in meeting require- ments. For many products, if a manufacturer produces its product in accordancewith the harmonized European standard, and the ECallows a manufacturer’s declaration of conformity for that product, the manufac- turer will be able to self-certify that it meets the essential requirements of the ECmeasures.Manufacturers that do not produce to the European standard must have their products tested and certified by a third party to ensure that they meet the essential requirements. Testing will be car- ried out by testing organizations “notified” by member states that they conform to the ECcriteria for accreditation as a certification body. Products that present a substantial risk to health and safety will be sub- ject to more stringent requirements. Manufacturers will have to register their quality assuranceprograms or obtain pre-marketing-type approval from a “notified body.” Under the GATT Standards Code,the ECis obligated to grant products produced in non-z countries accessto its certification processon the same basis as its own producers. In the July 1989 testing and certifica- tion proposal, the ECCommission states that products from non-= coun- tries will be given the same choicesof means to demonstrate conformity with ECdirectives as ECproducers. It is not clear at this time whether all U.S.-madeproducts that require certification will have to be tested by an m-accredited body. The EC Commission proposal provides for negotiations with non-% govem- ments to enable EC “notified bodies” to accept test data and certificates from non-= testing bodies. For products not regulated by the EC, existing bilateral agreementsbetween an ECmember state government Page 2 1 GAO/NSuDsQ60 European Market Chapter 2 Standards, Testing, and Certification Issues or private organizations and a third country entity may or may not be subject to ECreview and approval. For products regulated by the EC,it is possible that such bilateral agreementscould be nullified, but, in princi- ple, it is hoped they will also be transformed into EC-wideagreements. According to US. government officials, ECCommission officials have stated they do not want to disrupt existing trade covered by bilateral agreements. With regard to testing and certification of products not regulated by the EC,the EC’Sphilosophy is that mutual confidence is better developed through accreditation of organizations to do testing and certification and self-policing than through legislation. Therefore, for products to which no measuresapply, the ECCommission is encouraging testing and certifi- cation bodies to follow the samecriteria the EChad laid out to certify “notified bodies.” In May 1989, the United States and the ECCommission also agreedthat the principles of opennessand transparency should apply for testing and certification and reaffirmed that products imported into the ECwill have the same accessto testing and certification procedures as ECprod- ucts. In addition, the United States hopes to reach agreementswith the ECfor U.S. products destined for sale in the ECto be tested in the United States. According to one association, in principle the adoption of common stan- Implications for U.S. dards is widely seenby U.S. companies in Europe as a major benefit. Exporters of the New U.S. companies with production facilities in Europe believe they will be Standards, Testing, able to rationalize production acrossnational frontiers to a much greater degree than at present. U.S. exporters may achieve comparable benefits and Certification becausethey are now assured that complying with whatever standard is Requirements adopted for a product will provide accessto the entire ECmarket. On the other hand, according to the same association, concernshave been expressedthat only products meeting national standards criteria and receiving the mark of a national standards body can be sold in some markets. Although a product might meet all legal requirements for sale in an ECmember state, it might not meet commercial requirements. According to one businessassociation, insurability rules can be used to keep out products not meeting a specified national standard. For exam- ple, an electrical product meeting all EClegal requirements for sale in that country might not be able to get insurance. A product meeting all legal requirements for sale might be incompatible with other units in a Page 22 GAO/NSIAD9O-fW European Market Chapter 2 Stadards, Testing, and Certiffcation Issues system and therefore not be saleable commercially. Consumer resistance to products that do not have that country’s national mark is another way in which products meeting legal requirements might not find com- mercial acceptance. In Europe, for certain industries, such as physical plants and machinery, companies set their own standards that, in turn, becomethe national standards. According to this association, concernsexist in the United States that some European companies with rigid standards will seek to protect their ECmarket position by having their national standard adopted on an m-wide basis. On the other hand, the need to achieve consensuswithin the CEN/CENELEC processshould mitigate this. In this association’s view, the major concern of US. companiesis that CEN/ C~ELEC will adopt standards that are not used in the United States, thus in fact excluding or hindering the competitiveness of U.S. products, or necessitating costly modifications to sell in the ECmarket. The adoption of different standards from those used in the United States creates two problems: (1) the need for extensive proof that the U.S. product meets the EC’Sessential requirements; and (2) the fact that even if the product meets the essential requirements, consumersmight not accept it becauseit is nonstandard. One way partially to resolve this problem is for CEN/CENELEX voluntarily to adopt and for U.S. manufac- turers to use international standards. Another way is to make use of the accessthe United States has to the European standards-setting process to hold CEN/CENELEC accountable to their commitment to using intema- tional standards and their willingness to listen to presentations from nonmember experts. In addition, Commercehas received reports from various industries of a reduction of European work in certain ISO/IECcommittees presumably becausetheir time is being spent on CEN/CENELEC work instead. If CEN/ CENELEC plan to hold to their commitment to adopt those international standards that can be completed within the required time frame, then a reduction in European attention to its international standards-setting obligations could be an impediment to ECadoption of international standards. According to an ECCommission standards official, CEN/CENELEC are har- monizing only about 10 to 20 percent of the products covered by stan- dards in Europe-those affecting health, safety, and the environment. The mandate from the Cassisde Dijon decision should allow all other products’ meeting one member state’s national standards to be sold in all Page 23 GAO/NSIA.D9080 European Market Chapter 2 Stan-, T&&U& and Ckrdfkation Issues other member states. It remains to be seen how well this will work and how much the situation will really change for exporters to the EC. Through new standards, testing, and certification regulations, the EC is endeavoring to create a more open market in which goodscan flow more freely between member states. It is not yet clear, however, how the mar- ket will react to increased product availability made possible by harmo- nization and mutual recognition. Although a product might meet all of the EC’Srequirements to be sold in a particular member state, it will remain the consumer’s prerogative whether or not to purchase it. As one Foreign Commercial Service officer told us, although the EC will legally be one market, it will still be made up of different cultures and languages-what sells in one country or region will not necessarily sell in another. This idea was reinforced at Export ‘89, the U.S.-ECSmall BusinessTrade Congressin October in Frankfurt, West Germany. Sev- eral ECofficials reminded U.S. participants that a harmonized Europe did not mean a homogenizedEurope. Questions that remain to be answered are: How much will the new test- ing and certification procedures differ from the old, and will it cost U.S. exporters more to market their products in the ECin the future? U.S. exporters probably will not be any worse off under EC 1992, and they could be better off. Although U.S. manufacturers have expressedcon- cern over the possible requirement of quality assurancetesting, it is also not clear how this requirement for certain products will affect testing and certification of U.S.-madeproducts. An official from one European national standards-setting body told us that the quality assurancesys- tem is voluntary- it is market-driven, not legally required. Currently, bilateral agreementsexist for testing only a few of the U.S.- made products sold in Europe. Even if the ECcontinues to require most products to be tested in Europe, the fact that European certification enables a product to move freely throughout the ECshould save U.S. exporters the cost of getting products tested in each country. What is not yet clear is how the Europeans will assessthe conformity of U.S.- made products to the European standards or to ECessential require- ments. According to one industry official, this is where discrimination and delays could occur. Both U.S. government and private sector repre- sentatives have expressedconcern over whether the United States is ready to extend bilateral agreementscurrently in place with one mem- ber state to the other 11. The EC will need to prove to the United States Page 24 GAO/NSIAIMO8O European Market Chapter 2 Standards, Testing, and CertifScation Issues that the certification bodies in the other EC countries are competent before the agreementsare extended m-wide. The certification systems in the ECand the United States are very differ- ent. The EC'S global approach to testing and certification calls for recip- rocal accessto markets in any agreementsnegotiated with non-member countries. Becausethe ECis opening its market completely, this require- ment means the United States would have to do the same. Industry and businessassociation officials have expressedconcern over whether the United States can or would want to provide reciprocal access.The United States can provide national treatment, whereby the EC firms would receive accessto testing and certification in the United States on the same basis as U.S. firms do; however, there is somequestion as to whether the U.S. private sector wants mutual recognition of laborato- ries. In addition, becausemost testing and certification are done pri- vately in the United States, it is doubtful that the U.S. government could negotiate an agreement covering U.S. private sector testing and certification. Consumer acceptanceof the ECmark for products’ falling under harmo- nized standards will ultimately determine the successof mutual recogni- tion of testing and certification between ECmember states. Will this mark be acceptedby consumersin individual member states, or will con- sumers still want their country’s national mark affixed to the product? If the latter, mutual recognition of testing and certification will have a limited impact not only on U.S. exporters but also on anyone shipping products between ECmember states. Concernsalso exist over whether declarations of conformity by U.S. manufacturers will be accorded the same treatment as those by Euro- pean manufacturers and whether the use of the ECmark by U.S. manu- facturers will be restricted. In addition, the increasing emphasis on quality assurancein the proposed IX certification processcould be a problem for US. manufacturers. It is not clear whether certification bodies will insist that it is not possible for them to assessfactories outside their regions. One provision of UL'S agreementswith manufacturers requires that the manufacturer allow UL to inspect the factory, since UL believes it is not possible to determine whether products meet established requirements without evaluating the components and the finished product on the pro- duction line. This is similar to the quality assurancerequirements in the EC’Sglobal approach to testing and certification. A UL official indicated Page 26 GAO/NSIAD-9080 European Market chapter2 Standards, Te~thg, and Chtiffcation [esues that he believes U.S. manufacturers already exporting to Europe proba- bly will not have to modify their processtoo much to fulfill the EC'S quality assurancerequirements, but it might be more difficult for those who have not previously exported to Europe. A major EC1992-related concern of U.S. exporters is the need for more On-Going and Possible accurate and timely information. Small and medium-sized U.S. exporters U.S. Actions to Allay without offices in Europe tend to rely heavily on others for the informa- U.S. Exporters’ tion they need to make businessdecisions regarding the ECmarket. Concerns A CEN official explained to us that all CEN members are required to notify each other of their standards development work. ECDirective 83/ 189 established an information procedure that permits drafts of national standards to be examined to determine their compatibility with the principle of free circulation of goods within the EC.Member states submit draft standards to cm, which compiles the information and dis- tributes it to other cm members. The United States may be able to obtain more timely information about ECstandards-setting activities through this procedure. This CEN official suggestedthat the U.S. govem- ment could ask the ECCommission to allow CEN to distribute this infor- mation to others. The CEN official also suggestedthat, to get more information, US. exporters should ask ANSI for the information on standards-setting activ- ities that CENis already providing in monthly work plans. CEN itself, however, is not equipped to provide information to individual U.S. exporter requests. U.S. exporters can submit comments and concerns through ANSI. According to the National Association of Manufacturers, . U.S. companies in Europe should participate in national and EC-wide standards-setting bodies; . U.S. companies should be familiar with existing ISO/IECstandards and be prepared to implement them for products sold in Europe; l US. companies should contact ANSIfor information on proposed stan- dards relevant to them; l in developing US. national standards and in participating in intema- tional standards bodies, U.S. companiesshould seek to ensure a maxi- mum level of conformity between international standards and national standards in Europe, North America, and Asia; and Page 28 GAO/NSIAD9O4O European Market chapter2 Standards, Testing, and Certillcation Ieeuea l U.S. companies should identify obstaclesrelated to national application and use of standards that may inhibit distribution even of those prod- ucts conforming to new x-wide standards. Several standards officials indicated to us that increased US. emphasis on the use of international standards would make it easier to meet Euro- pean standards in the future. Increased participation in international standards-setting activity would indirectly enable the United States to have more influence on CEN/CENELEC standards. NIST officials believe the U.S. government should encourageU.S. manufacturers to use intema- tional standards and to produce to market requirements instead of try- ing to get the market to change to U.S. requirements. ANSIofficials believe that both the public and private sectors should be more involved in alerting manufacturers to the importance of intema- tional standards to remain competitive. BecauseCEN/CENELEC have agreed to use international standards where appropriate, they said it is in U.S. manufacturers’ best interests to use them also in order to sell in Europe. Under EC1992, a U.S. exporter will have to meet only one standard and Conclusions have its product tested in one ECmember state to sell throughout the EC. Therefore, U.S. exporters will probably not be any worse off than they are under the current system and could be much better off. It is still possible that different commercial means could be used in EC countries, such as insurance requirements, consumer resistance,or delays in certification, to try to keep non-national products out of EC national markets. Both the US. public and private sectors recognizethe need to continue to monitor and try to influence developments in the standards, testing, and certification areas; some ways to accomplish this better have been identified. Page 27 GA0/NSIAD9080 European Market Chapter 3 Rules of Origin Issues The ITC defines rules of origin as laws, regulations, and administrative practices that are applied to ascribe a country of origin to goods in inter- national trade. They are applied in the customs procedures of importing countries to assure that trade programs and regulations are properly implemented. Rules of origin are used for such purposes as granting most-favored-nation tariff status; implementing preferential trade pro- grams; applying antidumping duty policies; complying with marking statutes; and reporting statistical data on international trade. They can also be used to determine eligibility to sell to a government entity that has buy-national procurement restrictions. Local content requirements specify the level of investment necessaryto market a product in a par- ticular country. The importance of rules of origin has grown as finished products increasingly incorporate parts and processingfrom more than one coun- try and as preferential agreementshave becomemore common in inter- national trade. The internationalization of production has made it difficult to assign origin unambiguously and to restrict preferential trade programs to the intended beneficiaries. The determination of origin has been a source of contention in U.S.-EC trade relations since the early 1970s when the ECadopted special rules of origin to implement its free trade agreement with the European Free Trade Association. According to U.S. government officials, until recently the ECresisted U.S. efforts to reach an international agreement on a common definition of rules of origin in the GAIT. However, the EC1992 program has increased the visibility of origin-related issues.There is growing concern in the United States that the ECwill adopt rules of ori- gin that discriminate against non-m products. According to ECCommis- sion officials, the ECgenerally maintains no official local content policy, but it has recently stipulated value-added percentage origin rules in con- nection with antidumping regulations, The ECCommission origin determinations concerning semiconductors and photocopiers, made since the inception of the EC1992 program in 1985, are of particular concern to the United States. U.S. suppliers in the high technology and electronics industries have expressedconcern that U.S. components could be “sourced out” of certain products as third- country manufacturers basedin Europe attempt to comply with ECrules of origin. U.S. auto parts suppliers expressedsimilar fears when the EC recently considered a value-added origin rule in the application of quan- titative restrictions on Japaneseautomobiles. Page 28 GA0/NSIAD9080 European Market Chapter3 Rules of Origin Issues According to US. government officials, fears of being “sourced out” of final products manufactured by third-country firms could lead U.S. com- panies to make costly capital investments in Europe when they are not ready to do so from a marketing or salesperspective. In addition, the uncertainty surrounding the application of rules of origin in EC 1992 could lead to increased U.S. investment in the EC by companies’ fearing loss of accessto this market. Thus, U.S. policymakers expressedconcern that ECrules of origin, particularly value-added origin rules, may pres- sure U.S. companies to transfer jobs and technology to Europe. U.S. government and industry officials worry that the EC may manipu- late rules of origin in somesectors for trade and industrial policy pur- poses.Becauserules of origin are applied on a product-by-product basis, the EC could also yield to political pressures to protect certain industries during the transition to 1992. USTR and private sector officials claim that the lack of transparency, the unpredictability, and the arbitrary nature of EC rules of origin could discourage U.S. companies from exporting to Europe. According to the ITC, country of origin determinations basedon substan- Background tial transformation, changeof tariff heading, and value-added tests may be applied, independently or in combination, depending on the product and trade policy of the importing country. In the caseof the EC, the Commission sets the trade policy that is implemented by the member states. Typically, the substantial transformation rule confers origin on the last country of manufacture, which does not necessarily indicate the relative economic contributions of the producing countries. The change-of-tariff- heading principle confers origin on a product if it is sufficiently trans- formed in a given country to merit a change in its title under the tariff classification system. The value-added principle calls for a certain mini- mum percentage of the value of a final product to be added in the coun- try that is considered the country of origin. The calculation of value added may include both the value of the materials and componentsused to produce an article and the direct processingcosts. The ECapplies value-added origin rules for the administration of indus- trial policies, voluntary export restraints, statistical monitoring, and public procurement. For example, under the proposed ECcontent requirements for public procurement in the sectors of water, energy, Page 29 GAO/NSL4D-90-60 European Market Chapter3 Rulea of Chigin Issues transport, and telecommunications, suppliers should receive nondiscrim- inatory accessto ECpurchasers if their bids contain at least 50 percent Ec content. No internationally accepteddefinition of rules of origin exists among the Existing Agreements GATT signatories nor is there a uniform set of procedures for applying and Regulations on them. However, the application of many of GATT'S provisions recognizes Rules of Origin the need for a determination of origin, and a GATT article contains guide- lines on origin marking requirements. The basis for the application of recent ECrules of origin included several existing agreementsand regulations, such as the 1973 Kyoto Customs Convention, the 1968 ECCouncil Regulation 802/68, and the GATT Antidumping Code of 1979. A USTRofficial stated that, in practice, both the United States and the EChave complex and sometimesunpredictable processesfor determining the origin of different products. The Kyoto Customs Convention Annex D.l, entered into force in 1977, states that customs services shall employ two basic criteria in determin- ing rules of origin: (1) whether the goods have been wholly produced in one country, where only one country enters into consideration in attrib- uting origin and (2) whether substantial transformation has occurred involving two or more countries. The United States is a signatory to the Kyoto Convention but did not sign Annex D.1 becauseat the time U.S. officials believed that it more closely reflected the European system for determining origin than the U.S. system. Some22 others signed the Annex, including the EC. ECRegulation 802/68, entered into force in June 1968, further defines the concept of last substantial transformation and serves as the guide- line for subsequentEClegislation on the origin of goods.This regulation states that the origin of a product manufactured in two or more coun- tries shall be determined by the country in which the last substantial processor operation that is economically justified was performed. In addition, a processcarried out solely to circumvent ECantidumping reg- ulations will not confer origin. The GATT Antidumping Code of 1979, the basis for applying antidumping and countervailing duties, contains no definition or procedural guide- lines for rules of origin. Therefore, each GATT signatory may apply its own system to determine the origin of imported products for Code purposes. Page 30 GAO/NSIAD9O8OEuropeanMarket Chapter 3 Rules of Origin Isauea Within the last two years, the EC has adopted new criteria to determine Recent EC Legislation the origin of semiconductors, photocopiers, and computer printers. May Change Policy on Th esenew criteria are basedon manufacturing processesas well as on Rules of Origin value-added requirements. A 45percent value-added requirement is cur- rently applied to certain consumer electronic goods,such as tape record- ers, radios, and televisions. The EChas initiated antidumping investigations against Japanesetypewriters, electronic scales,and com- puter printers. In addition, some ECmember states have considered new value-added origin rules for automobiles, that are subject to quantitative restrictions and 50-percent content provisions for products to be treated as ECorigin in certain public procurement bids. A U.S. businessassociation official commented that while these meas- ures alone do not indicate a fundamental change in the EC’Sposition on origin, they could signal more changesto come. Among U.S. exporters, representatives of the electronics industry have been the most vocal in expressing their concernsabout ECpolicies on rules of origin. Semiconductors According to a USTRofficial, the February 1989 ECregulation on deter- mining the origin of integrated circuits and assembly provisions posesa potential threat to U.S. semiconductor manufacturers. The new rule of origin for integrated circuits states that the criterion for the origin of semiconductors is no longer the assembly processbut the diffusion or wafer fabrication process.To obtain m-origin, semiconductors will now have to contain silicon chips that are diffused in the EC;otherwise, they will be subject to a 14-percent tariff. According to semiconductor repre- sentatives, this change makes it more difficult for foreign-based compa- nies to obtain E-origin for their semiconductors. Another ECregulation, known as the “screwdriver assembly rule,” states that antidumping duties may be imposed on certain imported products assembledand sold in the ECthat have been consideredto have been dumped in the past, unless at least 40 percent of their parts and materials were obtained outside of the dumping country. No more than 60 percent of the value of a product’s parts and materials may originate in the dumping country. The provision also states that the ECwill take into account, on a case-by-casebasis, the variable costs incurred ln the operation and the research and development car-r-ledout and applied within the EC. According to US. government and industry representatives, ECrules of origin, coupled with screwdriver assembly measures,create a strong Page 31 GA0/NSIAD9080 European Market Chapter 3 Rules of Origin Issuea influence on foreign firms to use components from an ECmember state rather than from another country to avoid dumping duties and may con- stitute nontariff barriers to trade for semiconductors. For example, although the ECguidance calls for 45-percent non-Japanesevalue in printed circuit boards, semiconductor industry representatives claim that Japanesemanufacturers are apparently being told that the circuit board component of their computer printers must contain at least 45-percent ECvalue for the printer to obtain ECorigin. Only by obtaining ECorigin for the boards can Japanesemanufacturers assure at least 40-percent non-Japanesevalue in the fished printer and avoid dump- ing duties under the screwdriver assembly rule. The Japaneseare reportedly attempting to ensure the European origin of their circuit boards by replacing U.S. semiconductors with European semiconductors, thus avoiding dumping duties without reducing the level of Japanese content in their printers. At the sametime, the ECsucceedsin increasing the market for its own semiconductors.Commerceand industry officials believe this is one example of an ~c-origin decision with local content implications that, taken together with other rules of origin, compels local investment. Not only U.S. semiconductor suppliers but also U.S. manufacturers of final products that use semiconductors may feel the effects of EC antidumping measures.For example, U.S. high tech manufacturers that purchase many of their components from Japan and the newly industri- alized countries run the risk of being subject to antidumping duties aimed at these countries. Both the diffusion rule of origin and the value-added rule of origin in the screwdriver assembly provision put pressure on U.S. semiconductor pro- ducers to manufacture in the EC.U.S. companies can avoid the direct impact of the 14-percent tariff and the indirect impact of the screw- driver assembly rule by ensuring ECorigin of their own products. It remains to be seenwhether the ECorigin and value-added require- ments affecting U.S. semiconductor manufacturers will be followed by ECinitiatives with similar effects on other U.S. industries. Other Electronic Products A caseinvolving a Japanesemanufacturer of photocopiers assembledin the United States illustrates how the ECrules of origin, combined with EC antidumping policies, might affect U.S. economic interests. The Japanese firm was assembling photocopiers in its California plant, then shipping them to the ECas products of U.S. origin, thus avoiding 20-percent Page 32 GAO/NSIAD!Kl80 European Market Chapter 3 Rules of Ori@n Iesuen dumping duties on photocopiers exported directly from Japan. In early 1989, the ECquestioned the origin of these U.S.-assembledcopiers. When ECofficials visited the plant in California to determine whether it should be considered a substantial operation, they found that US. assembly and manufacturing fell below the 45-percent value-added requirement and therefore decided to apply 20-percent antidumping duties unless the firm increased the non-Japanesecontent of these copiers. The firm sub- sequently increased its U.S. operations to the point where dumping duties no longer apply. Meanwhile, in an effort to prevent future disputes of this nature, the EC adopted a definition outlining the operations that do not confer origin on foreign-made photocopiers. These operations include%&+emblyof photo- copying apparatus accompaniedby the manufacture of the harness, drum, rollers, side plates, roller bearing, screws, and nuts. The United States objected to the EC’Sadoption of a negative rule of origin, taking the position that rules of origin should be based on a positive standard to the maximum extent possible-defining what does confer origin as opposedto what does not. In addition, U.S. officials fear a possible loss of Japaneseinvestment in the United States due to stricter EC origin rules for photocopiers and other Japaneseproducts manufactured or assembledhere. Within the last two years, ECantidumping duties have been levied against Japanesetypewriters, electronic scales,and photocopiers assem- bled in the EC.Other ECantidumping investigations are currently in progress for certain Japanesecomputer printers. Since the imposition of these duties, most of the affected Japanesefiis have undertaken to raise the ECcontent of their products progressively. Quantitative Restrictions As borders open between ECmember states, enforcement of the approxi- mately 1,000 quotas and other import restrictions maintained by indi- vidual member states will becomeimpossible. Consequently, the ECfaces a choice between either phasing out these restrictions after 1992 or transforming them into E-wide restrictions. If the ECtries to protect industries, it is uncertain whether the ECwill institute specific quotas for different products, such as automobiles and electronics, or whether it will change origin rules to protect those industries now subject to quotas. Page 33 GAO/N3IAD90-60 European Market chapter 3 Rule8 of OrigIn Isane According to a U.S. international businessassociation, the EC will likely maintain sometransitional rules restricting imports in an effort to pro- tect some critical industries, such as automobiles and consumer electron- ics. Although these measureswill be directed at the Japanese,U.S. officials are not sure how the ECwill define “transitional” and how these measureswill affect U.S. trade. France, Italy, Britain, Spain, and Portugal import a limited number of Japaneseautos annually. Currently, Japanesevehicles account for about 11 percent of the total ECautomobile market. According to recent ECstatements, it appears likely that the ECwill pro- pose a voluntary export restraint agreement with Japan to replace cur- rent individual member state restrictions that would stay in effect for a limited period until European manufacturers have had time to adjust to an open market. It is possible that Japan will attempt to avoid the impact of these voluntary restrictions by exporting autos manufactured in its U.S. plants. For example, Honda plans to start exporting cars from its U.S. plant by 1991. A U.S. businessassociation official expressed concern that the origin of cars made in the Honda plant could be ques- tioned, as in the photocopier case.In this official’s view, if, in the EC’S estimation, the U.S.-madeHondas do not contain sufficient U.S. content, they may be considered Japaneseand thus subject to restrictions. At stake for the United States are the economic and employment benefits of Japaneseinvestment in U.S. manufacturing facilities. According to a State Department official, however, becauseit is up to the Japaneseto monitor and abide by a voluntary agreement, the ECcould not restrict imports of Japanesecars from the United States without adopting a dif- ferent piece of legislation. The U.S. auto parts supply industry, with a $1.4 billion market in Europe, has expressedconcern about how the ECwilI apply value-added origin rules to determine which Japanesevehicles will be subject to restrictions. ECmembers already have used local content rules to pres- sure Japaneseauto manufacturers to transfer investment and technol- ogy to Europe and to buy from local suppliers. For example, the United Kingdom has convinced three Japanesefirms to open plants there rather than to export from Japan. Such rules could force Japanesemanufactur- ers to increase their use of ECcomponents at the expenseof U.S. and other third-country suppliers. Page 34 GAO/NSIAMO8O European Market chapter3 RulesofOri&I.ssues For certain sectors in which the ECwould like to improve its competi- Implications of Recent tiveness, such as high technology, consumer electronics, telecommunica- EC Decisions on Rules tions, and automobiles, rules of origin, particularly value-added origin of Origin for U.S. rules, could be used as an incentive for U.S. and third-country firms to increase the European content of their products and services.For exam- Trade Interests ple, US. businessowners have demonstrated the potential for U.S.-made componentsto be sourced out of Japanesefinal products, particularly in the computer, consumer electronics, and auto parts industries. In order to maintain market access,someU.S. suppliers feel pressured to make costly capital investments in Europe. On the other hand, according to a U.S. businessassociation official, the relationship between exporting and investment in the ECis not a “zercFsum” game, as some fear. He believes that increased U.S. invest- ment in the ECis likely to draw increased U.S. exports rather than dis- place existing exports. For example, when a U.S. company expands its investment abroad it will typically rely on U.S. goods,such as com- puters, semiconductors, and scientific instruments, or use U.S.-made components in the final product. In fact, the salesof many small U.S. exporters in the M=involve componentsof products sold by larger U.S. companies with operations and investment in Europe. RecentCommerce statistics show that about 34 percent of all U.S. exports to the ECgo directly to the affiliates of U.S. companies with direct investments there. U.S. exporters complain about the lack of transparency and the unpre- dictability of the EC’Srules of origin system. Procedural rules for appli- cation of antidumping duties are reportedly less formal and, according to many foreign exporters, more political than those used in the United States. An ECofficial explained that origin determinations have to be negotiated on a product-by-product basis. For example, the effective value-added rates or other criteria used to determine the origin of photocopiers, semiconductors, and televisions are all different. Addi- tional rules are being considered for computer printers and petroleum products. These value-added requirements will influence how the EC administers tariffs, antidumping measures,and related screwdriver assembly provisions. In addition, the EChas the ability to waive the application of dumping duties depending on the amount of research and development that took place within the EC.According to one association official, these waivers Page35 chapt.m 3 Rulea of Origin Issuer, are a matter of total administrative discretion. This problem is exacer- bated by the fact that there is no multilateral recourse for settling dis- putes on rules of origin. USTR officials claim that the lack of transparency, the unpredictability, and the arbitrary nature of ECrules of origin could discourage U.S. companies from exporting to Europe. Alternatively, uncertainty about continued accessto the EC market could lead to decisions to invest in the ECbased on a desire to avoid trade barriers rather than on market considerations. On the positive side, U.S. auto parts manufacturers with operations in the EC may have opportunities for salesto European-basedJapanese customers as Japanesefirms expand their ECfacilities. On the negative side, industry experts point to the danger that ECauto trade policy could (1) divert some Japaneseauto exports to non-Ecmarkets, including the United States, (2) discourage large-scaleimports of Japaneseautos man- ufactured in the United States, and/or (3) limit exports of U.S.-made original equipment parts if Ec rule of origin requirements are set at an excessivelevel. Procedural ambiguities, combined with the apparent ECemphasis on such industries as high technology, electronics, and automobiles, have led some U.S. observers to suspect that the ECis using origin, particu- larly value-added origin rules, as instruments of protectionist trade pol- icy. They are concernedthat, with such wide discretion to apply rules of origin on a product-by-product basis, the EC could yield to political pres- sures to protect these critical industries. A State Department official warned that U.S. government statements that overemphasize the threat of “fortress Europe” could have the same effect as ECorigin regulations in terms of shifting U.S. investment to Europe. He believes that the U.S. government should consciously avoid policy statements or programs that could lead US. companiesto make investment decisions based solely on fear of or uncertainty about EC1992. U.S. international businessassociation officials believe that U.S. investment decisions should be connectedto market strategies, not to regulatory concerns.Similarly, an ECofficial said that U.S. business decisions should be based on economic considerations, not on fear. In general, government and private sector officials we met with believe that if U.S. companies use sound businessjudgment in their EC invest- ment decisions,the ECshould continue to be an important U.S. market in terms of reducing the trade deficit and improving U.S. competitiveness. Page 36 GAO/NSIALb90-60European Market Chapter3 Rules ofOriginIasuea According to industry experts, the absenceof a harmonized interna- On-Going and Possible tional rule of origin system has created trade restrictions. U.S. concerns U.S. Actions to Allay about rules of origin involve a broad range of products, including tex- U.S. Exporters’ tiles, chemicals, and electronics. To address the general problems and to resolve specific problems connectedwith EC policies, both private sector Concerns associationsand U.S. government agencieshave called for an interna- tionally accepteddefinition of rules of origin in the GATT. USTR'S goal is to ensure that the rules of origin used in the ECare transparent and pre- dictable and do not represent arbitrary measuresemployed as tools of commercial and industrial policy. The U.S. delegation to the current round of GAG negotiations has sub- mitted a three-part proposal on rules of origin to the GATT Negotiating Group on Non-Tariff Measures:(1) a work program for moving toward harmonization, (2) procedural rules, and (3) principles to govern their application. In October 1989, the EC Commission issued an internal discussion docu- ment that proposes international negotiations toward greater trans- parency and clarity in origin rules and recognizesthe need to incorporate the basic origin principles within the GAIT. The document explains the EC’Suse of the Kyoto Convention for its origin rule prac- tices and serves as a basis for GATT negotiations. The ECCommission envisions a GATT statement recognizing that origin rules must (1) be transparent, (2) be applied in a non-discriminatory fashion, and (3) pro- vide legal certainty for companies. To operate competitively in the European market, U.S. companies need to obtain available information on ECorigin rules and how they will apply to specific industries and products. They need advance knowledge of proposed EC regulations to make effective production, marketing, and investment decisions. U.S. companies have available to them several sourcesof information on Ec origin rules. l Commerce’sOffice of European Community Affairs has been monitoring and can provide information on changing origin regulations for semicon- ductors, printed circuit boards, photocopiers, and automobiles. This office will answer questions on rules of origin for other products on a case-by-casebasis. The Office also can provide general origin informa- tion to U.S. companies interested in offshore manufacturing or assembly. Page 37 GAO/NSUIMJO8OEuropean Market Chapter3 Rules of Origin hueil . The EC Commission delegation in Washington, DC, can provide U.S. com- panies with information on recently enacted EClegislation on rules of origin but generally does not give advance notice of pending legislation. l For advance warning on new ECpolicies on rules of origin, industry trade associations and U.S. subsidiaries in Europe are likely to have the most up-to-date information. According to Commerce,it is difficult to stay out in front on issuesrelating to ECrules of origin becauseinforma- tion often circulates informally before it is brought to the attention of the government. Our review identified a few examples of how changing ECrules of origin Conclusions and application of antidumping regulations could affect U.S. industry. Whether the regulations affecting U.S. semiconductorsand Japanese photocopiers will becomepart of a more general trend is not clear. The U.S. government is continuing to monitor the EC’Srules of origin policies for signs of further change. The problems surrounding the EC’Sapplication of origin rules-lack of transparency and unpredictability-are not new, and resolution will likely be a gradual process.The U.S. government is working through the GATT negotiations to make progress on these issues.It is also trying to help U.S. businessesstay informed of changesin ECorigin rules that may affect their industries in the transition to EC1992 and beyond. Page 38 GA0/NSlAD9080 European Market Chapter 4 Public Procurement Issues A key issue for U.S. exporters is the extent to which they will be able to participate effectively in the liberalized EC1992 public procurement market. The ability of firms basedoutside of the ECto participate in this market will continue to depend on the EC’Sobservanceof multilateral trade rules of government procurement. The primary agreement is the 1980 GATT Agreement on Government Procurement, which established many disciplines and obligations for government procurement among its signatories. Somein the United States have been disappointed, however, with the implementation of the code and the number of opportunities created for U.S. exporters. According to the ECCommission, ECmember state government depart- Current EC Public ments, local authorities, and public utilities tend to purchase their sup- Procurement Situation plies of consumablesand capital equipment primarily from domestic suppliers. Local contractors also receive the bulk of public construction projects contracts. The EChas rules that require public procurement and construction contracts to be opened up to competition from firms in other member states; however, the EChas stated that the rules have so far been inadequately applied or ignored. According to the ECCommission, ECgovernment leaders acceptedthe goal of liberalization of public purchasing and construction, and one pri- ority of the EC1992 program is the complete opening up of government procurement and large public sector construction projects. One reason for the high priority is the huge size of these sectors. The ECbelieves that more international competition in these procurement areas should lead to decisions that make better commercial and economicsense. According to the ECCommission, EClegislation requiring public contracts to be opened to competition from firms in other member states dates back to the 1970s.The basesof the legislation are the 1971 measure on public works and construction contracts and the 1977 measure on gov- ernment procurement of supplies of goods and equipment. These have subsequently been amended,but the fundamental principles are that (1) suppliers and contractors from all ECcountries should have equal opportunities in bidding for public-sector contracts, and (2) tendering and award procedures should be open and above board to discourage discrimination against firms in other ECmember states. Discrimination against potential or actual other ECbidders would be against the rules on intra-Ec free trade. Page 39 GAO/NSIADBO80 European Market Chapter 4 Pub& Procurement Issuea In 1980, according to the ECCommission, the EC procurement legislation was amendedto adapt EC law to the GAIT Procurement Code. This extended nondiscrimination principles to all code signatories for pro- curement by specific government agencies. ECprocurement legislation generally commits member state govern- ments not to practice discrimination against other ECsuppliers; however, certain purchasing entities and public authority construction projects were excluded from the legislation. Hence,according to the EC Commis- sion, ECmember states have continued to give preference to domestic suppliers and contractors in these areas. The EC has acknowledged that its exclusion of public utilities has proven to be a major loophole in its legislation when it stated that the procurement legislation failed to guar- antee complete transparency in tendering and award procedures. There- fore, often no way existed to detect, let alone prevent, discrimination against foreign firms. The ECCommission believes government buying practices significantly influence patterns of production and trade. The CongressionalResearch Service estimated total public procurement in the EC,including govem- ment departments, local authorities, and public utilities, at $630 billion in 1987, yet only a small percentage of ECgovernment contracts are sup- plied by foreign firms. For example, according to the Congressional ResearchService, in 1987 imports accounted for only 0.3 percent of pub- lic contracts in Italy, compared with 19 percent of all goods consumed there. Moreover, the water, energy, transport, and telecommunications sectors were excluded from the EC’Sguidelines becausethey presented too varied a mix of public and private ownership and control among mem- ber countries. These sectors were also excluded from the GATT Code largely becausethe EClacked jurisdiction over its member states’ procurements in these sectors. According to the ECCommission, public procurement in these excluded sectors in the ECwas largely reserved for national companies.Such a low level of imports underscoresthe fact that U.S. exporters, and exporters in general, do not effectively partici- pate in this market. Although it appears that U.S. suppliers have had limited successselling to ECgovernment purchasers, accessto the market is important to a number of U.S. industries becauseit is so large. For example, ECpublic purchases reportedly account for 90 percent of U.S. telecommunications equipment sales in the ECand up to 33 percent of the sales by major U.S. Page40 GAO/NSL4LHO8OEumpean Market Chapter 4 Public FVocurementhues computer and office machine manufacturers. ECgovernments are also significant purchasers of data processingservices and medical equip- ment. In some product areas, such as power generators and water treat- ment equipment, public utilities are among the most important potential Ec customers for U.S. firms. In March 1987, the ECCommission put forward a reform package to EC 1992 Proposed improve the transparency of the tender/award process,to introduce Changes in Public competitive tendering in the GATT Code-excludedsectors,to open up pro- Procurement curement of services to a greater extent, and to tighten up enforcement. More attention was also given to helping small and medium-sizedenter- prises attain a share of the public procurement and construction busi- ness.As originally proposed, the measureswould make major changesin ECpublic procurement procedures for supplies, public works, remedies, telecommunications, and energy, transport, and water.l The measures would cover both public and private companies,including post, tele- phone and telegraph companies,water companies,airports, maritime ports, railway companies,gas and electric utilities, and gas and oil explorers. By March 1, 1990, they would open procurement in the excluded sectors to intra-Ec competition. U.S. government officials com- mented that the March 1, 1990, date may not be realistic, based on EC progress to date. The ECCommission believes that the provisions of the Single European Act wilI also make progress toward opening up the public procurement and construction markets more likely. The act’s research and develop- ment provision stressesthe importance of public procurement, stating that to strengthen the scientific and technological baseof European industry, the ECwill support the cooperative efforts of firms to exploit the full potential of the ECinternal market, particularly through opening national public contracts. Unless the sectors currently excluded becomecovered by the GATT Pro- curement Code, as the U.S. government hopes will happen, the public procurement market will remain split under the ECCommission’spro- posed plan, due to the different bid requirements for the GATT Code- excluded sectors and Code-coveredprocurement areas.According to USTR,the ECCommission’s current proposal provides that entities in the ‘Supplies refers to the awarding of public supply contracts,and works refers to the awardingof public works contracts.Remediesrefers to the formal complaint and enforcementmechanismsand redressin generaland would apply only to contractscoveredby the suppliesand works measures. Page 41 GA0/NSlAD90-60 European Market Chapter 4 Public Procurement Issues excluded sectors would be permitted to continue to discriminate against suppliers of non-= products-they may exclude from consideration offers containing less than 50-percent ECcontent. If they do consider bids with less than 50-percent ECcontent, they must grant a 3-percent price preference to equivalent offers containing at least 50-percent Ec content. In this way, procurement in the excluded sectors is being com- pletely opened only to suppliers of ECproducts. An ECofficial told us that this proposal was influenced by the U.S. Buy American Act. The EChas indicated that the 50-percent content require- ment, unlike that of the Buy American Act, will be basedon the value of both goods and services in the contract, including research and develop- ment. One U.S. businessassociation believes that this policy could pres- sure companies to increase foreign research and development in the EC to meet such a content requirement. ECofficials have also said that there may be differences between contract price and contract value. Liberali- zation of ECgovernment procurement in the excluded sectors is of par- ticular interest to the US. telecommunications and heavy electrical equipment industries. Becausesales to ECgovernments in the heavy electrical equipment sector are currently close to zero, US. officials view any new market opportunity as a positive step. However, accord- ing to congressionaltestimony by the heavy electrical equipment indus- try, meeting the ECcontent requirement would necessitatesubstantial financial investment in Europe. Becausethe majority of these manufac- turers are small businesses,few have the resourcesto open a European plant. Thus, U.S. government and industry officials agree that the EC measure, as it applies to heavy electrical equipment, is unlikely to increase sales of U.S. heavy electrical equipment to ECgovernment enti- ties in the near future. According to Commerce,U.S. telecommunications industry officials are concernedthat the 3-percent price preference for products and services applied in conjunction with ECcontent rules may restrict the sales of telecommunications equipment in the EC. It appears that, without code coverageof these currently excluded sec- tors to gain nondiscriminatory bidding opportunities in these sectors, U.S. businesseswill have to increase the value of ECparts, labor, and services in their production, The ECcontent requirements create an incentive for the growth of US. investment, joint ventures, and licensing agreementsin the EC.There is debate, however, as to whether U.S. investment will come as a result of economic opportunity or as a result of fear of exclusion from the ECmarket. Page 42 GAO/NSIADBO4OEuropean Market Chapter 4 Public Procurement Iasuea U.S. suppliers in the excluded sectors are also apprehensive about how ECcontent will be calculated and whether the 5Opercent threshold might be raised. Reportedly, efforts are being made to raise the pro- posed content level to 60 percent and to increase the ECprice preference to 10 percent. However, according to a State Department official, other efforts are being made to delete the threshold altogether. The proposed ECtendering procedures to open public procurement mar- kets in the excluded sectors are similar to the GATT Government Procure- ment Code procedures. For example, all of the measuresinclude rules, such as compulsory a-wide advertising and objective criteria for dis- qualifying or eliminating bids, and prohibit discriminatory specifications. The GAW Government Procurement Code requires signatories to allow Multilateral Public suppliers of products from other signatories to compete for government Procurement contracts in sectors covered by the code that meet specified criteria. It Negotiations also establishes common and more transparent procedures for providing information on proposed purchases,open bids and awarding contracts, and settling disputes. The Committee that administers the code agreed in 1986 to (1) continue negotiations for increasing the number of agen- cies and procurements covered by the code,particularly in telecommuni- cations and heavy electrical and transportation equipment, (2) work toward code coverageof service contracts, and (3) adopt a series of amendments to improve the functions of the code. The code arnend- ments were approved on February 14,1988. The negotiations on the other two items are scheduled to end in 1990. Rules of origin comprise another area of GAIT negotiation that will have important ramifications for public procurement. In the GATT Code, liber- alization of government procurement has been negotiated on a recipro- cal basis, that is, the right of competitive treatment is extended to those countries that have provided comparable rights in return, and discrimi- natory treatment is retained for products from countries that have not done so. A rule of origin is applied to determine which products are eli- gible for competitive treatment under code liberalization agreements. Unlike the customs rule of origin, procurement rules of origin are not administered at the border but are considered by procurement officials as a factor in evaluating supplier bids before contracts are awarded. Page 43 GAO/NSIAB9Od30European Market Chapter 4 Public Procurement Ieeues Somerecent EC changesin public procurement implement ECcommit- ments made in the context of the 1986 renegotiation of the code. In addi- tion, the ECenvisions a substantial strengthening of existing internal member state commitments on public procurement as part of the Ec 1992 program. A USTRofficial feels that the political momentum of the 1992 initiative gives the ECreal prospects of gaining the needed authority to help push international negotiations forward. The United States seeksto reach agreement with the ECthat all U.S. and ECproducts will be given recip- rocal national treatment in public procurement. The USTRofficial told us that the United States would like to revise the GATT Government Pro- curement Code to require a standardized rule of origin and national treatment for any product that has been manufactured in a signatory country and contains at least 51percent signatory content. Negotiations to expand the code stagnated for several years, primarily becausethe EC had no internal jurisdiction over the procurement markets of the mem- ber states in the excluded sectors; however, according to USTR,negotia- tions are currently nearing a decision. BecauseU.S. manufacturers in Europe would be able to bid on any con- Implications for U.S. tract covered by the ECmeasures,they would presumably benefit from Exporters the requirements for broader coverage and increased transparency; however, it is not clear how quickly the ECpublic procurement market will be liberalized. U.S. exporters’ seeking to sell their products in the ECpublic procure- ment market face uncertainty in both their production decisions and in market access.BecauseECcontent rules are applied only to the excluded sectors, U.S. exporters’ using U.S.-sourcedcomponents face production uncertainty. For example, a product purchased for use in an agricultural warehouse does not have to meet the ECcontent rules, but the same product purchased for use by a monopoly, such as a railway warehouse, must meet the ECcontent rules associatedwith public procurement. Pro- ducers must base production decisions on the market that they expect to serve. In the excluded sectors, market accessfor U.S. exporters is uncer- tain at this time. A U.S. business association official wondered whether the new rules would be enforced for the former GATT Code-excludedsectors and whether transitional rules designedto open up the market gradually would apply to these sectors. He indicated that at this point no one Page 44 GAO/NSIAD-!W30European Market Chapter 4 Public Procurement Issuea knows which sectors might implement transitional rules or how long these rules would apply. U.S. exporters continue to find themselves in a totally unpredictable market accesssituation. According to a USTRofficial, U.S. exporters’ bids in the excluded sectors may be thrown out at any point in the procure- ment process.While not as onerous as being mandatorily locked out of the EC market, this possibility prevents suppliers from making long-term plans based on predictions of how much of the market will be open. Sup- pliers may put their money and other resourcesinto preparing bids that may never be seriously considered.In USTR’Sview, this situation is unlike the U.S. Buy American provisions in which foreign bids receive competitive consideration subject to predictable price preferences. Opening the ECpublic sector markets to non-m suppliers will ostensibly Conclusions provide additional export opportunities for U.S. firms, but many ques- tions surround the issue. What is certain is that most of the contracts covered by the proposed ECprocurement measuresare not currently covered by the GATTCode.Successin negotiations to expand coverageof the code could benefit the U.S. exporting community by removing this uncertainty and clarifying the application of ECcontent rules for public procurement. Page 46 GAO/NSIA.D9060 European Market Appendix I Major Contributors to This Report William M. Freeman, Project Director National Security and Barbara Keller-Cohen, Project Manager International Affairs Sara B. Denman, Evaluator Division, Washington, D.C. Jeffrey K. Harris, Evaluator European Office (483616) Page 40 GAO/NsuDgo60 European Market Requests for copies of GAO reports should be sent to: U.S. General Accounting Office Post Office Box 6015 Gaithersburg, Maryland 20877 Telephone 202-275-6241 The first five copies of each report are free. Additional copies are $2.00 each. 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European Single Market: Issues of Concern to U.S. Exporters
Published by the Government Accountability Office on 1990-02-13.
Below is a raw (and likely hideous) rendition of the original report. (PDF)