Agencies Limit Foreign Role in Government Procurement of Equipment, Software

The National Development and Reform Commission (NDRC) has issued an order prohibiting foreign participation in equipment procurement for projects related to China's national high voltage electric grid, according to an Economic Observer report (in Chinese). The report says that, except for "key technology that can be provided by foreigners," the NDRC would prohibit foreign enterprises and joint ventures in which foreign enterprises hold controlling shares from manufacturing or supplying the estimated 250 billion yuan (US$33 billion) worth of equipment that will be required for the 15-year construction project. Instead, the government will use the project to spur the development of domestic enterprises. The NDRC order marks the first time the Chinese government has issued an order restricting foreign participation in the area of equipment purchases, according to the report.

Yan Xiaohong, Deputy Director of the National Copyright Administration, has said that the government is encouraging government agencies "to use more home-made software," according to a September 6 China Daily report. "Home-made software" includes software "developed by foreign software firms that have registered copyright, paid taxes, and achieved 50 percent of added value in China," according to the China Daily article.

The Chinese government first attempted to define "domestic" in March 2005, when the Ministry of Finance and the Ministry of Information Industry jointly issued draft Implementation Measures for Government Procurement of Software for public comment. The draft measures defined "domestic" software to include only those products that take final form in China, have copyright belonging to a Chinese natural or legal person or other organization, and have domestic development costs that are not less than 50 percent of the total development cost of the software product. In April 2005, Charles Freeman, then an Assistant U.S. Trade Representative, told the House Committee on Government Reform that these measures represented one case in which the Chinese government had implemented policies intended to "limit market access by non-Chinese origin goods and that aim to extract technology and intellectual property from foreign rights-holders," to "support the development of Chinese industries that are higher up the economic value chain than the industries that make up China's current labor-intensive base, or simply to protect less competitive domestic industries."

The National People's Congress Standing Committee enacted the Government Procurement Law (GPL) in June 2002, and it went into effect in January 2003. The GPL is only framework legislation, however, and contemplated sector-specific implementing regulations that would both define the scope of "domestic" goods and services and also provide for exceptions to the general preference for purchasing goods and services in China. Specifically, Article 10 stipulates that the government must procure "domestic" goods and services, except where the goods or services are not available in China, the items to be procured are for use abroad, or where otherwise provided for by other laws and administrative regulations. The Ministry of Finance issued three implementing measures for the GPL in August 2004 addressing bidding and tendering, public notice, and complaint handling. These measures did not provide, however, any guidance on exceptions to the general rule for domestic preferences or the scope of "domestic" goods and services.

The Ministry of Finance announced that China's government procurement scale in 2005 was 292.76 billion yuan (US$36.6 billion), up 37.1 percent from 2004, according to an August 11 Ministry of Commerce press release. When China acceded to the World Trade Organization (WTO) in December 2001, the government made several commitments regarding government procurement (described in the Working Party Report) that included beginning negotiations for membership in the WTO Government Procurement Agreement (GPA) "as soon as possible." China became an observer to the WTO Committee on Government Procurement in February 2002, and the Chinese government committed to commencing formal negotiations to join the GPA at the plenary session of the 17th U.S.-China Joint Commission on Commerce and Trade, held in Washington, D.C. in April 2006. Yu Guangzhou, Vice Minister of Commerce, announced on May 16 that the government planned to start negotiations for its entry into the GPA before the end of 2007, according to a May 17 Xinhua article (via Ministry of Commerce). Nevertheless, at least one Chinese expert has said that China's government procurement market may remain closed to foreign companies until 2010.

As the CECC noted in its 2005 Annual Report, the measures caused significant concern among foreign suppliers of software products and services, and at the July 2005 Joint Commission on Commerce and Trade (JCCT) meeting, the Chinese government agreed to withdraw the draft measures.