oversight

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)

                  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.




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                      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
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