International Agreements on Trade in Government Procurement: Formation and Effect

Abstract

Government procurement accounts for 14 to 19 percent of world GDP, and if entirely liberalized, could increase the value of world trade by up to 30 percent. However, governments commonly reserve the majority of their procurement markets for domestic suppliers, often erecting bureaucratic barriers to foreign firms' participation or offering domestic firms explicit price preference margins. This diversion to local firms creates scope for inefficiency. In recognition of this, recent years have seen the birth of public procurement agreements in which parties agree to accord each other's firms national treatment. These national treatment agreements (NTAs) include the plurilateral WTO Government Procurement Agreement with 43 signatory countries and an ever-expanding multitude of bilateral agreements.

This dissertation examines the pattern of NTA formation among countries and their resulting trade and welfare effects. I develop a multi-country Ricardian model of procurement auctions in which firms decide to submit bids based on private-knowledge cost parameters drawn from country-specific distributions. Governments and are free to systematically disadvantage endogenously-determined classes of bidders in order to maximize social welfare. In the first chapter of the dissertation, I use numerical simulations to quantify the effects of NTAs on government expenditure, industry profits, and national welfare and to predict the pattern of NTA formation. I empirically test these predictions on data from 68 countries from 1990 to 2010. Simple sign tests correctly predict over 75 percent of all NTA relationships and extended regression results account for over 84 percent of all observed variation.

In the second chapter, I extend the model to predict the volume of procurement trade between countries as a function of country-level productivity parameters and endogenous domestic preference margins. The model generates gravity-like estimating equations which I test empirically using U.S. data from 1996 to 2010. Results indicate that NTAs increase partners' procurement revenues by approximately 250 percent. However, these gains likely come from trade diversion.