Government procurement with strings attached: The uneven control of offsets by the world trade organization and regional trade agreements

Abstract

This paper explores the practice of governments imposing domestic content-based requirements known as "offsets" on suppliers in order to secure public procurement contracts. Known to cause distortions in international trade, offsets are forbidden under the WTO's Government Procurement Agreement and in the procurement chapters of several RTAs, although these restrictions have severe limitations with full offset prohibitions only accepted by a handful of developed countries. Given the sensitivity of procurement policy and the need to stimulate local economies, Asian countries in particular show an unwillingness to address offsets in their international agreements. While other WTO agreements restrain the use of local content rules, these regimes are ill-suited to control the harmful effects of offsets in a procurement context because of their focus on traditional commercial markets. The paper suggests that an enlargement of offset prohibitions would be advisable given the expected expansion of global procurement markets commensurate with economic development.