China Has Long Used Government Procurement To Foster Innovation

A FINANCIAL TIMES’ report that China ordered government agencies earlier this year to replace foreign, i.e., US computer hardware and software with indigenous alternatives over the next three years — the so-called 3-5-2 plan — is being cast in the Western press as a further technological decoupling of the world’s two largest economies. Yet it fits into a long-standing pattern of Beijing using government procurement to promote domestic innovation.

The Government Procurement Law (GPL) of 2002 requires, with some exceptions, central and local governments to buy goods and services produced in China. It excludes military procurement and does not cover state-owned enterprises (SOEs) and any public works they undertake; SOEs are subject to the Tendering and Bidding Law of 2000.

Official procurement statistics cover only procurement under the GPL, which is why government procurement in China looks low by international standards. In 2018, at $507 billion, it represented 4% of GDP, in contrast to the 10-15% typically seen in most countries. Local governments accounted for 95% of all government procurement under the GPL, according to the Word Trade Organization (WTO)’s 2018 biannual review of China’s trade policies. The GPL applies to most but not all provinces.

In 2006, it became formal policy to use government procurement to boost the creation and commercialization of home-grown ideas and technology, under the Medium- and Long-Term National Plan for Science and Technology Development (2006-20). During a visit to the United States in 2011 — following the release the previous year of draft implementation regulations for the 2002 law — then-President Hu Jintao said that policy would be ended and it became an agenda item of the Strategic and Economic Dialogue between the two countries.

Officially, no conditions regarding indigenous innovation have been attached to government procurement since 2016. However, in practice, the drive for domestic innovation, particularly in technology goods and services continued with strong policy support.

At the time, although China had started its application to join the WTO’s Government Procurement Agreement (GPA) as far back as 2007, it had not signed on. Thus was not in violation of its WTO membership. The GPA enshrines non-discrimination as a bedrock principle for member governments’ procurement.

China revised the GPL’s implementation measures in 2014 to bring the law more, if not wholly in line with the GPA, changes that took effect in March 2015. Further amendments were made in 2017.

However, most notably, the ‘buy domestic’ preference survives. One thing that has remained ambiguous throughout is what counts as domestically produced. Authorities have said that domestic and foreign-invested enterprises in China are treated the same and that there is no discrimination with regards to the degree of foreign affiliation or ownership as long as the goods or services are produced in China. However, none of that is codified, leaving ample scope for administrative interpretation, as a circular earlier this year implicitly acknowledged.

China has still not signed on to the GPA. Sticking points include non-sensitive military procurements, sub-central government entities and SOEs, all of which the United States wants to be included, which would mean they would have to fall under the GPL.

China has indicated that it may make some concessions in these areas. In October, state media said Beijing’s seventh revised offer for joining the GPA included some military procurement for the first time, and added more provinces, SOEs and universities to the institutions covered by the GPL. Those would likely be wrapped up in the some-day-one-day-maybe-never trade agreement being negotiated between the two countries. Meanwhile, China remains, in the WTO jargon,’ in the process of acceding’ while having observer status on the WTO’s government procurement committee as it has had since 2002.

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One response to “China Has Long Used Government Procurement To Foster Innovation

  1. Pingback: Prospective US-China Trade Deal Is Little Matter | China Bystander

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