The New Wave of IT-Focused Trade Barriers, Another Case Study: Discriminatory Procurement Policies

Earlier this month, a bipartisan group of US lawmakers sent a letter to the Indian government, expressing alarm at "unprecedented interference" in the procurement processes of government and commercial entities in India. The letter stated, in part, that "This policy will undermine investor confidence and would be inconsistent with India's international obligations, as well as, be a marked departure from opening the Indian ICT sector to the participation of foreign companies."

In fact, restrictions on procurement by government agencies and state-owned or state-influenced enterprises are part of broader set of IT-focused market barriers -- detailed in BSA's new policy report, "Lockout" -- which are keeping global companies out of emerging markets and hurting the very governments who are implementing them. The procurement-related restrictions include mandates or preferences for domestically owned or produced products, for products utilizing a particular technology or business model, or for products whose intellectual property is owned or developed locally.

The motivations behind discriminatory government procurement policies are multifaceted. On the one hand, some policymakers seem to be operating under the mistaken belief that insulating domestic suppliers is a viable way to diversify their economies toward higher-value, innovation-based industries. So they wonder: Why not use procurement processes as leverage?

In addition, state-controlled entities often play a significant role in the economies of emerging markets. For this reason, national governments increasingly are trying to protect them or use them to achieve political and policy goals.

These two factors may help explain why no major emerging economies are members of the WTO's Government Procurement Agreement (GPA), the core international agreement imposing trade rules on government-procurement practices. China, India, Turkey and a few others have indicated intent to join, but real, sustained progress is lacking. For example, when China first joined the WTO in 2001 it committed to join the GPA "as soon as possible," yet the negotiations continue.

The Indian government this year instituted procurement mandates for domestically manufactured electronic goods. These mandates require that at least 30 percent of purchases by government agencies be set aside for products that are manufactured in India and contain a minimum amount of domestic content (starting at 25 percent and increasing to 45 percent). Moreover, the policy extends these mandates to procurements by private-sector entities that are government licensees, such as telecommunications service providers and financial services firms, thus sweeping in a vast swath of the Indian economy.

This measure stems from a set of interrelated national policy initiatives intended to enhance India's IT, telecommunications, and electronics industries. While this is a laudable goal, the initiatives set a framework for achieving it the wrong way -- by discriminating against foreign ICT suppliers in a manner that is out of step with global best practices for bolstering innovation.

Polices such as these may be shrouded in pro-innovation language, but they're just as pernicious as other, more overt market-access barriers. Moreover, the negative impact extends far beyond the global companies being prevented from competing in emerging markets. Restricting procurement to domestic suppliers has the potential to cost these emerging economies more in the long run. For example, it limits the purchasers' ability to procure the best products to meet their needs. That is one reason why there is broad consensus governments benefit from keeping their procurement markets as open as possible.

BSA has recommended that the United States and other leading IT economies renew efforts to press trading partners to adopt transparent, nondiscriminatory government procurement policies. This should include urging them join the GPA on terms consistent with existing members. At the same time, strong provisions on government procurement should be made a priority in regional forums like APEC, and incorporated into new trade agreements such as the Trans-Pacific Partnership.

It is important for governments to lead by example. Putting in place transparent, nondiscriminatory government procurement policies will expand opportunities for global IT companies, give governments and state-owned or state-influenced entities the ability to choose the best products to meet their needs, and send a strong signal to the larger marketplace about the benefits of open markets.

This post was also featured on the Business Software Alliance's blog, BSA TechPost. The Business Software Alliance is a trade group that represents software makers against copyright infringement.