International Trade: Foreign Sourcing in Government Procurement

Globally, government procurement constitutes about a $4 trillion market for international trade. However, little is known about foreign sourcing in government procurement—how much governments procure from foreign-located suppliers or how much they acquire in foreign-made goods. GAO was asked to review the extent of foreign sourcing in government procurement across countries. GAO focused on the United States and the other six main parties to the GPA and NAFTA, selected international agreements that open procurement markets on a reciprocal basis. This report, the fourth of a related series, (1) provides broad estimates of foreign sourcing by the U.S. government and central governments of the other six main parties, and (2) assesses foreign sourcing as a share of estimated central government procurement and of estimated procurement by all levels of government, and the extent to which central government contracts that are covered under selected international procurement agreements are foreign-sourced.

GAO analyzed the most recent comparable data available from two sources: (1) government procurement databases used in Canada, the European Union, South Korea, Mexico, Norway, and the United States, for 2015, and (2) 2014 trade data merged with data on the types of goods and services purchased by the public sector. Since Japan does not have a government procurement database, data for Japan were based on its 2015 GPA submission of 2013 data. GAO also interviewed cognizant government officials in Washington, D.C.; Ottawa, Canada; Mexico City, Mexico; Seoul, South Korea; and Tokyo, Japan.

The U.S. government awarded contracts valued at about $12 billion to foreign-located firms, of which about $5 billion went to firms with reported locations in the other six main parties to the World Trade Organization Agreement on Government Procurement (GPA) and the North American Free Trade Agreement (NAFTA) (see figure). Conversely, government procurement databases indicated the central governments of these parties awarded an estimated $7 billion to foreign sources, out of which about $2 billion was U.S.-sourced. Canada and Mexico awarded most of the U.S.-sourced contracts. GAO was able to determine that the U.S. government awarded more, by contract value, to foreign-owned firms located abroad than to foreign-owned, U.S.-located firms. Moreover, more than 80 percent of U.S. government contracts awarded to foreign-owned firms located abroad were Department of Defense contracts performed abroad. Overall, while available contract data enable broad cross-country comparisons, they do not necessarily show where the goods are produced, where the services are delivered, or where the profits go, among other economic effects.

Foreign sourcing by the seven GPA and NAFTA parties within the scope of the study, using two alternative methods, is less than 20 percent of overall central government procurement. Foreign sourcing by central governments, estimated from government procurement databases of the United States and the other six main parties, varied in value by party from about 2 to 19 percent of overall central government procurement. Foreign sourcing by all levels of government, estimated from data on trade and public sector purchases, showed that the governments' imports likely ranged from about 7 to 18 percent of the goods and services the governments purchased. In addition, contract data show that U.S., South Korean, and Mexican central government foreign sourcing was greater in value under contracts covered by GPA and NAFTA than under noncovered contracts, but the opposite was true for Canada and Norway. For the European Union and Japan, GAO found little difference or could not calculate an estimate.

Government procurement, which typically accounts for 10 to 15 percent of  a country’s gross domestic product, constitutes a significant potential  market for international trade, according to the World Trade Organization  (WTO). Over the past four decades, the United States has played a key  role in developing trade agreements that open government procurement  to international competition, including the WTO Agreement on  Government Procurement (GPA) as well as numerous U.S. free trade  agreements (FTA). In addition, the GPA and the North American Free  Trade Agreement (NAFTA) require that parties to the agreements submit  annual statistical notifications of government procurement covered by  these provisions (covered government procurement). These data are  important for providing transparency about the extent to which the GPA  and NAFTA parties have opened government procurement covered by  the agreements to foreign suppliers and for demonstrating the  agreements’ financial benefits. However, while data on covered  government procurement are available for the GPA parties, the feasibility  of calculating the actual levels of foreign source government procurement  that occur—how much governments procure from foreign-located  suppliers and how much they acquire in foreign-made goods and  services—has not been extensively explored. As a result, U.S. trade  policy is being made and international procurement negotiations  conducted with limited empirical data available about the country of origin  of the goods and services purchased by the U.S. federal government or  our trading partners’ central governments.

In response to your request for information on U.S. participation in  international government procurement agreements, we reviewed the  extent of foreign sourcing by the United States and the other six main  parties to selected international procurement agreements. Specifically, in  this report, we provide alternative broad estimates of foreign sourcing by the U.S.  government (USG) and the central governments of the other six main  parties to the GPA and NAFTA, and assess foreign sourcing as a share of estimated central government  procurement and of estimated procurement by all levels of  government, and the extent to which central government contracts  that are covered under the GPA and NAFTA are foreign-sourced.

To address these two objectives, we examined the extent of foreign  sourcing in government procurement across countries. We focused on  the United States and the other six main parties to selected international  procurement agreements, as we did in previous related reports: the  European Union (EU), Japan, Canada, South Korea, and Norway under  the GPA; and Mexico and Canada under NAFTA. We analyzed data  from two sources: (1) government procurement databases in Canada, the  EU, South Korea, Mexico, Norway, and the United States, for 2015; and  (2) 2014 trade data merged with data on the types of goods and services  purchased by the public sector. We limited our scope to 2015 for the  government procurement databases because that was the year for which  the most recent data were available in all six of the databases we  analyzed. Several of the government procurement databases include  data on procurement at all levels of government—national, state, and  local; however, since not all of the databases within our scope included  such data, we limited our analysis to central government procurement.  We analyzed data from the government procurement databases to  estimate direct cross-border procurement. Since Japan does not have a  government procurement database, data for Japan were based on its  WTO GPA submission for 2013, which is the last submission that  contains information on its foreign sourcing in government procurement.

We did not analyze any individual contracts to verify data in countries’  government procurement databases, including data such as contract  value. In addition, we did not make any independent legal determinations  with respect to individual contract coverage under the GPA and NAFTA.  Since there is no single internationally accepted definition of foreign  sourcing and there is no comparable unique field across the countries’  databases, we used alternative proxy measures. We identified some data  limitations in the countries’ databases, but these limitations were not an  impediment to using the data for broad comparisons, by orders of  magnitude, of government procurement based on firm location and  country of product and service origin, as available, for the countries  included in this report. For trade data, we relied on a dataset of linked  input-output tables from the World Input-Output Database (WIOD), which  were produced under a grant awarded by the European Commission. The  WIOD input-output tables contain yearly data from national statistical  agencies. We analyzed the data for 2000 through 2014, the most recent  year for which data were available in the WIOD. Despite certain  assumptions and limitations in the WIOD data, we determined that the  data were sufficiently reliable for the purposes of our reporting objectives.

We also interviewed cognizant government officials in Washington, D.C.;  Ottawa, Canada; Mexico City, Mexico; Seoul, South Korea; and Tokyo,  Japan, and reviewed available research literature to identify potential  methods, sources, and data limitations. (See app. I for more information  on our scope and methodology.)

We conducted this performance audit from March 2017 to May 2019 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

U.S. international trade agreements that cover USG procurement include  the GPA and bilateral and regional FTAs. The revised GPA has 20  parties (including the EU) covering 48 WTO member countries (including  the 28 EU member countries). Another 33 WTO members are  observers; of these, 10 are in the process of acceding to the agreement.  In addition to the GPA, the United States has 14 FTAs with 20 countries,  four of which (Canada, Israel, Singapore, and South Korea) are also  parties to the GPA. Almost all of the FTAs to which the United States is a  party include provisions covering government procurement.

The GPA aims to mutually open government procurement markets for  goods, services, and construction services among its parties, according to  the WTO. Under the GPA, foreign suppliers are able to compete  alongside with U.S. suppliers for USG contracts covered by the  agreement, and U.S. suppliers are able to compete for covered foreign  government contracts in accordance with the framework established by  the GPA. According to the office of the United States Trade  Representative (USTR), to implement U.S. obligations under the  international agreements that cover government procurement, the United  States—generally (and not always) — waives preferential purchasing  requirements for goods and suppliers from other countries that are parties  to the agreements in covered procurements over a certain threshold.  For example, USTR has waived the Buy American Act and other  preferential provisions for eligible products in acquisitions covered by  various trade agreements. However, Commerce officials noted that  small business set-aside requirements are not waived nor are the  provisions of the Berry Amendment.

Government Procurement Markets and the Procurement Opportunities That Parties to the GPA and FTAs Have Reported Opening to Foreign Firms

As part of our body of work on international government procurement, we  have previously reported the following:

The U.S. and EU government procurement markets are comparable  in size, and each is larger than those of all other GPA and U.S. FTA  partner countries combined. Some other parties to the agreements  also have large government procurement markets, including Japan,  South Korea, Canada, Mexico, and Norway.

The government procurement chapters of the GPA and selected U.S.

FTAs that we reviewed generally have similarities in text and  commitments, possibly because key parties negotiated multiple  agreements concurrently. However, the revised GPA generally  provides more comprehensive market access than the selected FTAs  we reviewed.

The United States reported opening more procurement opportunities  covered by the GPA to foreign firms than had other parties to the  agreement. Data for 2010 showed that the United States reported  $837 billion in GPA covered procurement. This amount is about  twice as large as the approximately $381 billion reported by the next  five largest GPA parties combined—the EU, Japan, South Korea,  Norway, and Canada—even though total U.S. procurement is less  than that of the other five parties combined.

Previously, we reported on the opportunities available to U.S. and foreign  firms seeking to compete for covered government procurement contracts  in the countries that are parties to the agreements. In the current report,  we analyze the value and number of actual contract awards, reported in  procurement databases, including contracts covered under the GPA and  NAFTA and those not covered. Covered contracts can be awarded to  domestic firms, to firms from countries that are parties to the GPA and  U.S. FTAs, or to other non-U.S. firms. Additionally, the Buy American Act  does not apply to products that are purchased for use outside the United  States, nor to the acquisition of services. Therefore, such contracts can  be awarded without the application of Buy American Act domestic  preference conditions to bids from any firm, including firms from non-GPA  and non-FTA countries.

Two Types of Data Sources Used to Estimate Foreign Sourcing in Government Procurement

To estimate foreign source procurement, we looked for information about  where the goods and services that governments purchase are produced  and the characteristics of the firms supplying those goods and services.  We identified two types of primary data sources that could be analyzed to  estimate foreign sourcing in government procurement: (1) government  procurement databases to estimate direct cross-border central  government procurement and (2) input-output tables merged with  international trade data to estimate total procurement by all levels of  government and the portion comprising imported goods and services.

Data from Government Procurement Databases on Contracts Awarded by Central Governments

Government procurement databases collect information on contracts  awarded by government entities to firms supplying goods and services.  Except for Japan, all the countries in our analysis maintain online  government procurement databases that can serve as a primary data  source to generate statistics on their foreign source central government  procurement. The USG and the other six main parties to the GPA and  NAFTA use these databases to report to the WTO their required  procurement statistics under the GPA. While Japan does not have a  government procurement database, Japan’s central government collects  procurement data from various ministry sources and reports the  aggregated data to the WTO. As table 1 shows, the U.S. Federal  Procurement Data System-Next Generation (FPDS-NG) provides more  data fields that can be used as proxies for measuring foreign source  procurement than the non-U.S. databases provide. FPDS-NG contains  data on four potential proxy measures of foreign sourcing—firm location,  firm ownership, product and service origin, and place of performance.  The database for the EU and Norway and the databases for Canada and  Mexico all contain contract award data related to firm location. South  Korea’s database and Japan’s WTO submission on its 2013 procurement  contain data on source country of goods and services. Therefore, two  data fields, one reflecting firm location and the other reflecting country of  product and service origin, appear to provide reasonable proxy measures  of foreign source procurement, although neither is available across all  data sources. (For more information on the characteristics of each  government procurement database, see app. II.)

Information about how much goods and services a country imports  provides the basis for another approach to estimating what portion of all  government procurement in that country is imported. The WIOD provides  such information, giving us a second type of data and an alternative  analytical approach for estimating foreign source government  procurement. The WIOD links data on an economy’s supply chain  interdependencies to data on its import and export flows, thus providing a  proxy estimate of the share of imports in procurement by all levels of  government. We based our method for analyzing linked input-output  tables on an approach used by the European Commission which  examines import penetration of government procurement within Europe.

Unlike the contract data we analyzed from government procurement  databases, the WIOD data capture procurement by all levels of  government. However, the input-output tables are organized by industry,  which requires a decision as to which industries make up the government  sector in any given country’s economy. Some industries, like “public  administration”, can safely be assumed to be part of the governmental  sector in every country. Other industries, like education or health care,  vary across countries in the degree to which they are part of the  government sector, if at all.

While this analytical method based on input-output tables can provide  broad estimates of how much governments are purchasing imported  goods and services, it relies on some important assumptions that may  affect the reliability of the results. For example, it assumes that the goods  and services purchased by all levels of government are imported to the  same extent as they are when purchased by other industries in the same  country. This assumption, known as the “proportionality assumption”,  recognizes that results from this method may overestimate the share of  imports in government procurement to the extent that the analysis does  not capture attempts by the government sector to limit foreign sourcing in  its procurement. On the other hand, other aspects of this method may  underestimate the share of imports in government procurement. For  example, the input-output data include intermediate inputs but do not  include purchases for investment, such as some government assets  because, according to the authors of the European Commission study,  input-output tables do not have the data to distinguish between  investments by the private and public sectors. Thus, the input-output data  could exclude investment made through construction services like those  purchased to build highways, schools, or other assets that have long-term  use, services that are included in covered procurement under both the  GPA and NAFTA.

The USG Likely Procured More Than Twice as Much from the Other Six Main Parties to the GPA and NAFTA as Vice Versa, but Exact Comparisons Are Not Possible

The value of U.S. government (USG) contracts awarded to firms located  in the other six main parties to the GPA and NAFTA likely exceeds twice  the estimated value of contracts from those parties to U.S. firms, but  exact comparisons are not possible. The USG awarded contracts  valued at about $12 billion to foreign-located firms in fiscal year 2015, of  which less than half went to firms located in the other six main parties.  Conversely, the government procurement data we analyzed indicated the  central governments of these parties awarded almost $7 billion to foreign  sources, of which less than a third were awarded to firms located in the  United States or for goods or services from the United States. Over three- quarters of these U.S.-sourced contracts were awarded by Canada and  Mexico. Only the USG’s procurement database contains data on firm  ownership. Analyzing these data, we found that the USG awarded more,  by reported contract value, to foreign-owned firms located abroad, than it  awarded to U.S.-based subsidiaries of foreign-owned firms. This was  mostly U.S. Department of Defense (DOD) contracts in support of the  U.S. military presence in those countries. Overall, while available contract  data enable broad cross-country comparisons, these data allow only  limited insight into the effects on the U.S. economy of foreign sourcing of  USG procurement. This is principally because the contract data do not  capture the economic roles of firms awarded contracts and thus do not  allow for a definitive assessment of the economic implications of foreign  sourcing, as we discuss later in this report.

USG Contracts Valued at About $5 Billion Went to Firms Located in the Six Main Parties, out of About $12 Billion Awarded to All Foreign-Located Firms

In 2015 the USG awarded about 511,000 contracts valued at about  $290.9 billion. Out of this total, about 47,000 contracts valued at about  $12.1 billion were awarded to firms located outside the United States (as  shown in the data by firm location). Similarly, the USG awarded about  50,000 contracts valued at about $16.5 billion for foreign goods and  services (as shown by country of product and service origin). See table 2.

Of the USG foreign source procurement awarded to firms in the other six  main parties to the GPA and NAFTA, firms located in the EU received  more than half in terms of contract value and slightly less than half by  number. In 2015 the USG awarded about 10,000 contracts valued at  about $5.3 billion to firms located in the other six main parties to the GPA  and NAFTA (see table 2 above). This $5.3 billion is about 40 percent of  the total value of USG contracts awarded to foreign-located firms. Firms  located in the EU received almost 5,000 USG contracts valued at $2.8  billion. Firms located in Japan, South Korea, and Canada were awarded  most of the remaining aggregate USG contract value ($1.1, $0.8, and  $0.6 billion, respectively) and number of contracts (about 1,500, 600, and  2,900, respectively) awarded to firms in the other six main parties to the  GPA and NAFTA. Firms located in Mexico and Norway received less than  1 percent of the aggregate USG contract value and number of contracts  awarded to firms in the other six main parties.

However, as table 2 also shows, the majority of foreign-sourced USG  procurement, in terms of both value and number of contracts, went to  firms located in countries that are not among the other six main parties to  the GPA and NAFTA. Germany, Japan, and South Korea are among the  top five countries whose firms received the most USG contract value in  fiscal year 2015. However, countries in the Middle East, including  Afghanistan, United Arab Emirates, and Saudi Arabia, were also among  the countries whose firms were main recipients of USG procurement in  terms of aggregate contract value (see app. III for additional information  on USG foreign source procurement by country).

Finally, table 2 shows that FPDS-NG data are similar when we use,  instead of firm location, the alternative measure of foreign sourcing based  on country of product and service origin. For example, the aggregate  value of contracts awarded by the USG for goods and services originating  in countries of the other six main parties was about 43 percent of the  overall value of USG foreign source procurement—the same proportion  we found when using firm location as proxy measure of foreign sourcing.  In addition, as with the results based on firm location, most of the USG’s  foreign source procurement as measured by country of product and  service origin went to countries outside the other six main parties to  international procurement agreements.

USG Awarded Less by Contract Value to U.S.- based Subsidiaries of Foreign-Owned Firms Than to Foreign-Owned, Foreign-Located Firms, Which Mainly Support DOD Operations Abroad

Foreign-located firms can be either foreign-owned or U.S.-owned, just as  U.S.-located firms can be either foreign-owned or U.S.-owned. Among the  government procurement databases we used, only the FPDS-NG  includes data on firm ownership. Some research on foreign sourcing in  government procurement differentiates between direct and indirect cross- border procurement based on knowledge about both the location and  ownership of the successful bidder:  In direct cross-border procurement, the successful bidder is both  foreign-owned and foreign-located.

In indirect cross-border procurement, the successful bidder is a U.S.- based domestic subsidiary of a foreign-owned firm.

According to a recent EU Commission study, between 2009 and 2015,  the EU’s indirect cross-border government procurement was more than 5  times greater in terms of both value and number of contract awards than  its direct cross-border government procurement. The study notes that  indirect cross-border procurement is often high when direct cross-border  procurement is low and suggests that may reflect actual or perceived  barriers to cross-border bidding, which lead firms to rely on their locally  based subsidiaries for cross-border sales. The study reported that indirect  cross-border government procurement (foreign-owned, domestically  located vendor) accounted for 21.9 percent of the number and 20.4  percent of the value of certain contract awards in the EU’s 28 countries,  while direct cross-border government procurement (foreign-owned,  foreign-located vendor) accounted for 1.7 percent of the number of  contracts and 3 percent of contract value.

In contrast to the findings of that EU Commission study, our analysis of  FPDS-NG data shows that indirect cross-border procurement by the USG  was smaller in terms of total award value and number of contracts than  direct cross-border procurement. This indicates that foreign firms selling  to the USG generally do not establish a local presence in the United  States. Specifically, foreign-owned firms located in the United States  (indirect cross-border procurement) received contracts valued at about  $3.6 billion, or less than 1 percent of the value of all USG contracts. By  contrast, firms that were both foreign-owned and foreign-located (direct  cross-border procurement) received contracts valued at about $11.8  billion, or about 4 percent of the value of all USG contracts ($290.9  billion). Therefore, USG direct cross-border procurement was about three  times greater than indirect cross border procurement for contracts  awarded in fiscal year 2015.

A possible explanation for this finding could be that foreign-owned and  foreign-located firms are awarded more USG contracts in terms of value  and number than U.S. subsidiaries of foreign-owned firms because those  contracts are covered by international procurement agreements. Foreign- owned and foreign-located firms are awarded more USG contracts because they may bid for large-value GPA covered USG contracts at a  higher rate than their U.S.-located counterparts, or they may generally be  more competitive for such contracts. However, for contracts not covered  under the GPA and NAFTA, the relative difference between the two  groups of foreign-owned firms becomes smaller in terms of aggregate  contract value. Therefore, the difference between direct and indirect  cross-border procurement is likely not due to agreement coverage as one  might expect. To better understand why the USG’s direct cross-border  procurement was larger than its indirect cross-border procurement, we  further analyzed the FPDS-NG data on firm location, firm ownership, and  place of performance—where the services were performed or where the  goods were produced.

Based on firm location, as stated earlier, foreign-located firms were  awarded about $12.1 billion in USG contracts. Measured by aggregate  contract value, almost all of the USG contracts awarded to those firms  were performed abroad (i.e., outside the United States)—$11.9 out of  $12.1 billion or 98 percent. USG contracts performed abroad are  commonly awarded to U.S.-located as well as to foreign-located firms.  In 2015, the USG awarded contracts performed abroad valued at about  $23.3 billion, of which about half was awarded to U.S.-located firms.

In particular, as figure 1 suggests, while U.S.-located firms received  contracts performed abroad valued at $11.4 billion, foreign-located firms  were awarded USG contracts valued at $11.9 billion. Almost all of those  USG contracts—$11.7 out of $11.9 billion or 98 percent—were awarded  to firms that were foreign-owned as well as foreign-located (i.e., direct  cross-border government procurement). The vast majority of the value  of these USG contracts to foreign-owned, foreign-located firms was for  DOD contracts performed abroad. In particular, DOD awarded about 84  percent of the value of USG contracts—$9.8 billion out of $11.7 billion— that were performed abroad and awarded to foreign-owned, foreign-located firms. The vast majority of those contracts ($7.5 billion or 77  percent) were covered under the GPA and NAFTA. (See app. III for a  breakdown by agency of all USG contracts performed abroad and  awarded in fiscal year 2015 to foreign-owned, foreign-located firms.)

Foreign-owned firms located in six countries received the majority (57  percent) of DOD’s $9.8 billion in aggregate award value of contracts  performed abroad. Specifically, firms located in three countries in the  Middle East—Afghanistan, Saudi Arabia, and United Arab Emirates— together received 28 percent of that award value; firms in Japan and  South Korea together received 18 percent; and firms in Germany  received 11 percent. About a quarter of DOD’s $9.8 billion in aggregate  award value were for purchases of fuel, oil, lubricant, and wax. About 9  percent were for education and training services, and about 7 to 8 percent  each were for construction of buildings and housekeeping services. For  example, fuel was the main product procured by DOD in United Arab  Emirates, while in Saudi Arabia most DOD procurement was for  education and training services. (See app. III for a breakdown of DOD  contracts performed abroad and awarded to foreign-owned and foreign- located firms, by country.)

Central Governments of the Other Six Main Parties Awarded Almost $2 Billion to U.S.-Located Firms or for U.S.-Made Products out of About $6.5 Billion in Foreign-Awarded Contracts

Our analysis of available procurement contract data from 2015 shows that  the central governments of the other six main parties to the GPA and  NAFTA, apart from the USG, awarded contracts valued at about $170.5  billion. About 4,000 out of a total of 245,000 of these contracts with an  estimated total value of about $6.5 billion were awarded to foreign  sources, that is, to foreign-located firms or for imported products and  services. Some of these contracts awarded by the other six main parties  were covered by the GPA and NAFTA, while others were not.

Furthermore, the central governments of the other six main parties  awarded about 2,000 U.S.-sourced contracts worth about $1.8 billion (see  fig. 2). U.S.-sourced contracts are contracts awarded to U.S.-located  firms or for products made in the United States. Canada and Mexico  awarded most of the U.S.-sourced contracts. Specifically, central  government contracts awarded to U.S.-located firms by Canada and  Mexico accounted for almost 80 percent of the value and number of all  U.S.-sourced contracts.

Over 60 percent of the value and number of U.S.-sourced contracts  awarded by the central governments of the other six main parties were for  the procurement of goods. In particular, Canada awarded more than 20  times more in contract value to purchase goods than it did to purchase  services from U.S.-located firms. However, for contracts covered under  trade agreements, the other six main parties collectively awarded more  U.S.-sourced contracts for services than for goods; these contracts were  awarded primarily by the EU and Mexico. U.S.-located firms were  awarded virtually no construction services contracts. This result is  consistent with our findings for procurement flows among all countries  among the other six main parties to GPA and NAFTA and may be  explained by the proxy measure used—firm location, which accounts only  for direct cross-border procurement. For example, the EU commission  paper cited previously finds that for construction works the share of direct  cross-border procurement in the total value of awards was 1.7 percent  compared with 12.3 percent for indirect cross-border procurement.

While Available Contract Data Enable Broad Cross- Country Comparisons of Foreign Sourcing by Central Governments, They Allow Limited Assessment of Economic Implications

Select Data Elements Available in Government Procurement Databases Allow for Broad Cross-Country Comparisons, but Not Precise Estimates

The data available from the government procurement databases we  analyzed provide relevant and useful information for assessing foreign  sourcing in government procurement, but these data do not allow for  precise cross-country comparisons based on the GPA provisions on rules  of origin. Data and reporting on country of origin for goods and services is  limited for a number of reasons. Most of the databases we analyzed  contain fields on contract award value and type of contract, as well as  fields on firm location or country of product or service origin—proxy  measures of foreign sourcing that, as we have found, allow for broad  cross-country comparisons. However, precise estimates from the  available data are not possible because no single internationally accepted  definition exists to distinguish procured goods and services that are  “foreign” from those that are “domestic” and the information in  government procurement databases is not uniform. There is no agreed- upon definition of the country of origin for goods and services for  statistical reporting purposes in the GPA even though a similar term— country of production—is used in the 1994 GPA’s general principles on nondiscrimination. Instead, the GPA generally expresses that a party  shall apply the rules of origin that it applies in the normal course of trade  when determining the country of origin for goods and services in covered  procurement.

Another factor that limits cross-country comparisons of country of origin  data by parties to the GPA is the recent revision to the GPA itself, which  no longer requires the parties to provide country of origin statistics, as we  previously reported. According to the 1994 GPA, parties were to provide  statistics on the country of origin for products and services purchased by  its entities, to the extent that such information is available. However, the  revised GPA, which went into effect in 2014, does not require parties to  report available information on the country of origin of purchased products  or services. While all the GPA members included in our scope reported  the amount of covered procurement to the WTO, only Japan (until 2013)  reported statistics on the “nationality of the winning tenderer”. The WTO  Committee on Government Procurement’s Work Programme on the  Collection and Reporting of Statistical Data is currently examining the  issues surrounding how countries define country of origin for the  procurement of goods and services.

Finally, while the United States collects a variety of relevant data on  foreign sourcing, those data have certain limitations for cross-country  comparisons since the data are collected for different purposes. While  U.S. agencies collect country data on successful bidders and the country  of origin of goods and services in response to the Buy American Act and  report these in FPDS-NG, the agencies do not collect data on country of  origin determinations in response to relevant provisions of the GPA or  NAFTA. For example, the U.S. Federal Acquisitions Regulation (FAR),  in implementing statutes including the Buy American Act, applies different  tests to determine the country of origin of an end product and defines end  products to include “domestic”, “foreign”, or “U.S.-made”. The test to  determine country of origin for an end product under the Buy American  Act is different from the test to determine country of origin in the  procurement of an end product under trade agreements.

According to the FAR, for manufactured products, the Buy American Act  uses a two-part test to define a domestic end product: (1) the article must  be manufactured in the United States, and (2) the cost of domestic  components must exceed 50 percent of the cost of all the components.  According to the FAR, for procurement under trade agreements, the test  to determine “country of origin” is “substantial transformation”, (i.e.,  transforming an article into a new and different article of commerce, with  a name, character, or use distinct from the original article). The  substantial transformation test can also be used to determine whether a  product is a U.S.-made end product. The FAR also defines a foreign  end product as an end product other than a domestic end product.  Therefore, under the FAR, contracting officers use different tests and  different descriptors to designate country of origin. Since corresponding  data fields for these descriptors are not available in FPDS-NG, the data  do not allow for exact cross-country comparisons of foreign sourcing  under the GPA and NAFTA.

Available Procurement Contract Data Allow Limited Assessment of the Economic Implications of Foreign Sourcing

In all countries included in this report, available contract data do not allow  for a definitive assessment of the economic implications of foreign  sourcing in government procurement, such as impacts on wages and  profits. As figure 3 shows, using the United States for illustrative  purposes, foreign versus domestic sourcing in government procurement  could be viewed in four different ways —firm location, firm ownership,  product and service origin, and place of contract performance. For  example, FPDS-NG data shows that a task order under a DOD contract  for facilities support performed in Iraq reports the United Arab Emirates as  the country of product and service origin for safety and rescue equipment,  while also reporting the firm location and ownership as the United States.  FPDS-NG data showed that another task order under the same contract,  for housekeeping services, reports the place of performance as Kuwait  but reports the United States as the country of product and service origin,  the firm location, and the country of firm ownership. As another example  from FPDS-NG data, a contract awarded by the U.S. Agency for  International Development for internet services performed in Malawi and  awarded to a foreign-owned business reports the United States as the  country of service origin but the United Kingdom as the firm location.  Each of the various different ways relevant to the sourcing of USG  contracts can be viewed on a continuum based on the extent of foreign  involvement associated with the production and service delivery  processes.

Country of firm location. As found in the procurement databases,  suppliers can be located, for example, domestically in the United  States or abroad. However, the economic effects related to the  country of firm location depend on what is produced in the country  relative to what is produced elsewhere. For example, the supplier may  be an end product manufacturer doing less skill-intensive assembly  and packaging, a high technology and skill-intensive manufacturing  firm that substantially transforms a product that is subsequently used  as an input in the production process, or a broker providing unskilled  labor for product distribution. In each of these examples, the country  of firm location could experience different economic effects from the  awarded contract.

Country of firm ownership. Suppliers could be domestically or foreign  owned, and who owns the firm determines who accrues the firm’s  profits. However, determining ownership is challenging because a  supplier awarded a contract may have various ownership structures.  For example, the supplier may be a sole proprietor or a corporation  with shareholdings, subsidiaries, ultimate owners, or may be a  participant in a corporate group. The supplier may have established a  presence in the United States through a foreign-owned subsidiary or  may participate in a partnership such as a joint venture with a U.S.  firm.

Country of product or service origin. Goods and services purchased  under government procurement contracts may be domestically  produced or imported. In this case, the effects can be analyzed in the  same way as trade flows in general. However, the country of product  or service origin is more challenging to determine for government  procurement contracts compared with general trade in goods and  services, since government contracts typically cover more than one  good or service. Therefore, the country of origin for certain goods  included in a contract may be different from the country of origin for  other goods under the same contract.

Country of contract performance. USG contracts can be executed  within the United States or outside the United States. For example,  the country of contract performance may determine where the service  is delivered as opposed to the location or ownership of the firm that  delivers the service. The place of performance may lead to benefits  and costs accruing to the location where the contract is performed.  For example, if a service is delivered or the products are produced  outside the United States, the contract likely employs local labor and  therefore benefits the local labor market.

Because available data in government procurement databases do not  specify the supplier firm’s economic role, the economic effects of the  awarded contract remain uncertain. The potential effects of the awarded  contract on other firms, workers, the government, or consumers in the  domestic and foreign economies may vary depending on the supplier  firm’s economic role.

Foreign Sourcing Is a Minor Share of Government Procurement, and Our Analysis Did Not Find a Consistent Relationship with Coverage under the GPA and NAFTA

We estimate that foreign sourcing is generally a small share of  government procurement for the United States and the other six parties to  the GPA and NAFTA. Foreign sourcing by the USG and the other parties’  central governments, estimated by government procurement databases,  varied in value from about 2 to 19 percent of overall central government  procurement. Foreign sourcing by all levels of government, estimated by  data on trade and public sector purchases by the United States and the  other six main parties, shows that government imports ranged from about  7 to 18 percent of the goods and services purchased by these countries’  governments. In addition, our analysis of central government contract  data found that foreign sourcing is sometimes but not always greater, in  terms of value and number of contracts, for contracts covered by  procurement agreements than for contracts not covered by those  agreements.

Foreign Source Procurement by Central Governments Estimated from Country Databases Varied in Value from 2 to 19 Percent of Overall Central Government Procurement

Our analysis of available data on firm location from government  procurement databases shows that foreign sourcing in 2015 ranged in  value from 2 to 19 percent of overall central government procurement  (see fig. 4). The central governments of the EU, Mexico, and the United  States awarded less than 5 percent of the aggregate value of their  procurement contracts to foreign-located firms. The proportions for  Canada and Norway were about 11 and 19 percent, respectively. Both  Canada and Norway can be characterized as small, open economies  bordering much larger, open trading partners, which may contribute to  their relatively larger shares of foreign sourcing in central government  procurement. Canada’s central government awarded about 10 percent  of the value of all its contracts to firms located in the United States.  Similarly, Norway’s central government awarded about 19 percent of the  value of all its contracts to firms located in the EU.

Our analysis of available data on country of product and service origin  shows that Japan procured less from foreign sources (2 percent) than  both the United States (6 percent) and South Korea (3 percent). See  figure 5.

We obtained similar results in terms of number of foreign-sourced  contracts. Less than 5 percent of the number of central government  contracts was sourced from abroad in the EU, Japan, South Korea, and  Mexico. For the United States, Norway, and Canada, the numbers of  foreign-sourced contracts based on firm location comprise higher  percentages (9, 8, and 13 percent, respectively). Canada’s central  government awarded about 9 percent of the total number of contracts it  awarded to firms located in the United States. Similarly, Norway’s central  government awarded about 7 percent of the total number of contracts it  awarded to firms located in the EU.

Except for the United States, most of the central governments of the other  six main parties to the GPA and NAFTA awarded few construction  services contracts to foreign-located firms. One possible explanation is  that, given the higher dollar value threshold of contracts in this sector,  foreign-owned firms may have a greater incentive to establish a local  presence through subsidiaries in the host countries. The data in the non- U.S. databases do not provide enough information to explore that  hypothesis. However, FPDS-NG data show that construction services  contracts are the main contract type awarded to foreign-located firms by  the USG, which awarded about 3,090 construction services contracts  worth $1.8 billion (or about 20 percent and 8 percent of all construction  services contracts, respectively) to foreign-located firms. Less than 1  percent of these contracts’ award value was for contracts performed in  the United States and over 70 percent of these contracts’ award value  was for contracts covered by the GPA and NAFTA.

In addition, the USG awarded a roughly equal share (about 4 percent of  all contracts in terms of value) of goods and services contracts to the  other six parties to the GPA and NAFTA. Canada, on the other hand,  awarded a relatively large percentage of the value of all goods contracts  (30 percent) to firms located abroad.

Foreign Source Procurement Estimated by an Alternative Method Shows Import Percentages by All Levels of Government Range from 7 to 18 Percent of All Government Purchases

We also assessed the degree of foreign sourcing in terms of government  import percentages to identify patterns in government procurement that  may differ from those based on the location of the supplier and origin of  goods and services. Using linked input-output tables and an alternative  analytical approach, we were able to broadly estimate the domestic and  foreign sources of inputs to the government sector for the United States  and the six main parties to the GPA and NAFTA. This alternative  approach to estimating foreign source government procurement is based  on macroeconomic data on trade flows of goods and services between  countries and the types of goods and services purchased by the public  sector. Unlike the approach above based on government procurement  contract data, this approach allows us to calculate broad estimates of  domestic and foreign sourcing in procurement by all levels of  government—central, state, and local.

Table 3 shows our broad estimates based on a narrow definition of the  government sector, which includes only “public administration”. In the  table, the columns are the purchasing countries or the EU. The rows  indicate where the goods or services are being purchased from. As the  table shows, for all the countries and the EU, foreign sourcing generally  accounts for a small portion of all governmental purchases. For example:

Out of the estimated $1.2 trillion that the central, state, and local  governments in the United States purchased, $100 billion was  imported from outside the United States—a total foreign source  percentage of about 9 percent, including $26 billion (2 percent) from  the EU.

Out of the $460 billion that the EU governments at every level  purchased, $36 billion was imported from outside the EU—a total  foreign source percentage of about 8 percent, including $10 billion (2  percent) from the United States.

Out of the $178 billion that governments in Japan purchased, $12  billion was imported from outside Japan—a total foreign source  percentage of about 7 percent.

In general, the smaller economies in terms of government purchases— Canada, South Korea, Mexico, and Norway—imported a relatively larger  percentage of such purchases than the United States, EU, and Japan.  Specifically, Canada, South Korea, and Norway imported about 9 to 13  percent of their governments’ purchases. Mexico imported a notably large  share of about 18 percent. Of the estimated $24 billion in purchases by  Mexico’s government sector, about 6 percent was from the United States  and about 3 percent from the EU. This inverse relationship between the  size of an economy and the relative percentage import share of  government purchases has been noted by others that have used the  input-output methodology.

Basing estimates of foreign source government procurement on the  narrow definition of the government sector may not be as appropriate in  countries where the government plays a large role in various additional  sectors. Figure 6 shows the size of the government sector under the  narrow definition as well as two broader definitions which add additional  industries. The “typical definition” as defined in the EU study also includes  the education and health care sectors. The “broad definition” also  includes a portion of the energy and the telecommunications sectors.  The relative sizes of the parties change under the different definitions, as  shown in the figure. For example, while the EU government sector is less  than half the size of the U.S. government sector under the narrow  definition ($460 billion for the EU compared with $1,159 billion for the  United States), under the broad definition they are comparable in size  ($2.4 trillion for the EU and $2.6 trillion for the United States).

Figure 7 shows the estimated percentages of each country’s and the EU’s  government sector purchases that are imported under the narrow, typical,  and broad definitions as described above. Under all three definitions, the  United States and EU have some of the smallest percentages of imported  government purchases, between 8 and 10 percent. Mexico has one of the  largest percentages, between 17 and 22 percent. Canada and Norway  are in the middle, from about 12 to 16 percent. For South Korea and  Japan, the estimated percentages of government sector purchases that  are imported increased under the broad definition—from 7 percent to 17  percent for Japan, and from 9 percent to 22 percent for South Korea.

Available Contract Data Indicate Foreign Sourcing Is Not Always Greater for Contracts Covered by the GPA and NAFTA Than for Other Contracts

Our analysis of 2015 data from central government procurement  databases finds evidence that foreign sourcing was sometimes, but not  always, greater for contracts covered by the GPA and NAFTA than for  contracts not covered by those agreements. Given the goals promoted  by the GPA and NAFTA, one might expect that procurement covered by  such agreements would likely result in a higher number or larger  aggregate value of contracts awarded to foreign-located firms or for the  purchase of foreign goods and services. For the United States and two of  the other six main parties to the GPA and NAFTA—Mexico and South  Korea—the results bore out that expectation: for all three, more central  government foreign sourcing in terms of contract value occurred when  procurement was covered by the agreements. However, our analysis also  shows that for two other parties, Canada and Norway, the opposite was  true; for the remaining two parties, the EU and Japan, we found little  difference or could not calculate an estimate. Our previous work showed  that only about a third of the estimated average annual government  procurement at all levels of government from 2008 through 2012 was  covered by the GPA and NAFTA ($1.5 out of $4.4 trillion).

The available data from the government procurement databases that we  analyzed show that the USG and the central governments of Mexico and  South Korea awarded at least twice as much to foreign sources for  contracts covered by international agreements—ranging from 2 to 6  percent of the value of covered contracts compared with less than 1 to 2  percent for non-covered contracts (see table 4). In particular, for contracts  awarded by the USG, foreign-located firms received more than twice the  value of covered compared with non-covered contracts—about $8.8  billion compared to $3.4 billion, respectively. Results for the USG are  similar when looking at the amount of foreign source procurement based  on product and service origin. Conversely, U.S.-located firms were  awarded a higher aggregate value of non-covered contracts from the  USG, compared with covered contracts. (See table 4.)

For Canada and Norway, more central government foreign sourcing in  terms of contract value occurred when procurement was not covered by  trade agreements than when it was. For covered contracts, Canada’s  central government awarded 1 percent of the value of all contracts to  foreign-located firms compared with 10 percent of the value for non- covered contracts. Similarly, Norway awarded foreign-located firms  more than 5 times more in non-covered than covered contracts as  measured by aggregate contract value.

For the EU and Japan, data on the value of foreign sourced contracts and  their agreement coverage are either not available or incomplete. The  available EU data have a significant number of foreign unclassified  contracts and do not include contracts below the GPA threshold values,  which limits the reliability of any comparison for covered versus non- covered contracts. In addition, Japan’s 2015 GPA submission of 2013  procurement data did not report on the amount of foreign source  procurement broken out by covered and non-covered contracts, because,  according to Japanese officials, this is not a GPA statistical reporting  requirement. Therefore, we could not calculate a similar comparison of  the value of covered versus non-covered procurement for Japan.

Finally, with regard to the number of contracts awarded, our analysis of  available data from country databases does not show a consistent  relationship with international procurement agreement covered awards to  foreign-located firms or for foreign-sourced goods or services. In South  Korea and the United States, the number of contracts not covered by  trade agreements and awarded for foreign sourced products was greater  compared with covered contracts. Conversely, in Canada, EU, Mexico,  and Norway, the number and share of contracts covered by trade  agreements and awarded to foreign-located firms was greater compared  with non-covered contracts. In percentage terms, foreign-located firms  received the same share (9 percent) of covered and non-covered  contracts awarded by the USG.

We provided a draft of this product to USTR, Commerce, OMB, and GSA  for comment. Commerce provided technical comments on this report,  which we incorporated, as appropriate. USTR, OMB, and GSA did not  comment on our draft report.

As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the U.S. Trade  Representative, the Secretary of Commerce, the Director of the Office of  Management and Budget, the Administrator of the General Services  Administration, and other interested parties. In addition, the report will be  available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-8612 or gianopoulosk@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix V.

Appendix I: Objectives, Scope and Methodology

This report examines the extent of foreign sourcing in government  procurement by the United States and the other six main parties to  selected international procurement agreements. Under the World Trade  Organization (WTO) Agreement on Government Procurement (GPA), the  other main parties, besides the United States, are the European Union  (EU), Japan, Canada, South Korea, and Norway. Under the North  American Free Trade Agreement (NAFTA), the other main parties are  Mexico and Canada. The report (1) provides alternative broad estimates  of foreign sourcing by the U.S. government (USG) and the central  governments of the other six main parties to the GPA and NAFTA, and  (2) assesses foreign sourcing as a share of estimated central government  procurement and of estimated procurement by all levels of government,  and the extent to which central government contracts that are covered  under the GPA and NAFTA are foreign-sourced.

We analyzed data from two types of sources: (1) government  procurement databases in Canada, the EU, South Korea, Mexico,  Norway, and the United States, for 2015, and (2) 2014 trade data  merged with data on the types of goods and services purchased by the  public sector. Since Japan does not have a national procurement  database, data for Japan were based on its WTO GPA submission for  2013, which is the last submission that contains information on its foreign  sourcing in government procurement. We also interviewed cognizant  government officials in Washington, D.C.; Ottawa, Canada; Mexico City,  Mexico; Seoul, South Korea; and Tokyo, Japan, and reviewed available  research literature to identify potential methods, sources, and data  limitations. We also interviewed government officials at the EU mission in  Washington, D.C. and exchanged information with officials  knowledgeable of the EU government procurement database.

Analysis of Data on Contracts Awarded from Government Procurement Databases

We collected and analyzed data from the following five databases:  for the United States, the Federal Procurement Data System-Next  Generation (FPDS-NG);  for the EU and Norway, Tenders Electronic Daily (TED);  for Canada, Contract History;  for Mexico, the Government of Mexico e-Procurement System  CompraNet; and  for South Korea, the South Korea ON-line E-Procurement System  (KONEPS).

Several of these government procurement databases included data on  procurement at all levels of government—national, state, and local— while others did not. Therefore, we limited our analysis to data on central  government procurement. For a detailed discussion of the characteristics  of each database, see appendix II.

To identify data fields that could be reasonably compared across  databases, we followed a number of methodological steps:  First, we looked for fields that capture the total award value of the  contract at the time of award (2015); the type of contract in terms of  goods, services, and construction services; the contract award date; the  contract duration; and the type of tendering procedure. We took into  account the following considerations:

Units of analysis. We established appropriate units of analysis across  databases. Several databases contained a number of fields that were  potentially relevant to our work. Specifically, in FPDS-NG the unit of  analysis is the contract award. The database contains data at the  contract action level (contracts, task orders, and their modifications).  We used contract awards for the number of reported contracts, but for  certain data on indefinite delivery vehicles (IDVs) such as  government-wide acquisition contracts, indefinite delivery contracts,  and blanket purchase agreements, we relied on data for task orders  awarded in fiscal years 2015 through July 2018 (see discussion of  contract valuation and multiple-year, multiple-award contracts below)  because they contained information on place of performance, country  of product and service origin, and place of manufacture, which were  the relevant fields for foreign sourcing. The TED database contains  information on contract notices, contract award notices, and contract  awards above certain thresholds set by relevant EU legislation. While  the EU and Norway use contract award notices to estimate the value  of covered procurement in their GPA statistical notifications, we used  contract awards because they allowed us to estimate actual foreign  sourcing. The databases for Canada, Mexico, and South Korea  contain a contract identifier, which is the sole and unique unit of  analysis that is available.

Contract valuation. We established comparable fields across  databases that represented the estimated maximum total value of a  procurement awarded in 2015 over its entire duration. For FPDS-NG,  we developed a methodology that is consistent with the methodology  laid out in the revised GPA and avoids the inconsistencies of the  revised U.S. methodology, which we previously reported. In  particular, in October 2015, the Office of the U.S. Trade  Representative (USTR) notified the WTO that the United States had  revised its methodology for preparing GPA statistical reports on U.S.  federal procurement. To more precisely reflect the value of the federal  procurement market at the time of each report, the revised  methodology presented the total amounts obligated under GPA  covered contracts over a 6-year period—that is, the year the contract  was awarded plus 5 years after the award. As we previously reported,  the revised methodology has both advantages and disadvantages. It  improves the accuracy of reporting but introduces a 6-year delay,  whereas the revised GPA requires reporting within 2 years of the end  of the reporting period. In addition, the revised valuation  methodology is not consistent with the one used by other countries  and creates an internal inconsistency:  In measuring actual obligations for procurement contracts rather  than the value at the time of award, the revised U.S. methodology  is inconsistent with the methodology used by other large GPA  members, such as the EU, Norway, Canada, and Mexico, which  report contract values at the time of award rather than actual  obligations or expenditures.

The United States continues to report the number of covered  contracts to the WTO based on their award value, which leads to  an inconsistency between the reported numbers and values of  reported U.S. government procurement contracts. The contracts  comprising the reported value of covered procurement are  determined at a later time under the revised methodology and can  result in a different set of contracts being used to determine the  reported value.

Our current methodology uses base and all options value for all  contracts awarded in fiscal year 2015 unless the contract was an  IDV. For IDVs we used the base and all options value of task orders  awarded in fiscal years 2015 through July 2018 under those IDVs to  avoid overestimating the total value. We used the aggregate base  and all options value for task orders under those contracts because  the alternative—using the base and all options value on the base  IDVs—is inflated due to problematic data entries for multiple  awards. As a result, our methodology produces an estimate that is  consistent with methods used by other parties, internally consistent,  and in accordance with the methodology for valuation in the revised  GPA. As we noted earlier, the result is close to the obligations value  currently reported in the Trade Agreements Report used by USTR to  report to the WTO.

In TED, we used the contact award value field, because it captures  the appropriate measure and according to EU documentation was  corrected for errors in the data. For the EU and Norway, we found  that for above-threshold procurement approximately 15 percent and  12 percent of the contract award values were missing, respectively.  We took additional steps to address these missing values to generate  estimates of the total contract award values. Specifically, we  implemented a Predictive Mean Matching (PMM) multiple imputation  methodology for the EU and used post-stratification estimation  techniques for Norway. (See app. IV for more details on both  methods.) However, we excluded the value of below-threshold  procurement for the EU and Norway because it is reported on  voluntary basis and suffers from missing and implausible values. In  particular, for the EU, about 42 percent of the contract award values  below threshold are missing and another 10 percent are below  €1,000. For Norway, 80 percent of the contract award values below  threshold are missing. Nevertheless, as a robustness check of the  results from our analysis, we applied our imputation methodology  discussed in appendix IV to the entire TED dataset and found that  once those values are estimated, the amount of procurement awarded  by the EU to U.S.- located firms increases by less than 10 percent.  However, we do not consider the estimate sufficiently reliable to be  included in our aggregate analysis.

In Contract History, we used the contract value field because,  according to Canadian officials, it includes the original total value of  the contract at the time of the award. In addition, those officials noted  that this field was used by Canada in its reporting of covered  procurement for its WTO statistical notifications. In CompraNet, we  used the contract amount field since, according to Mexican officials,  this field reflects the total value of the contract award. In KONEPS, we  used the total awarded value field, since it was the only field available  for our analysis and contained the value awarded for a given year  (see adjustments we made for multiple-year contracts below).

Currency denomination. We converted contract values reported in  different currencies in the databases into dollars using the period  average exchange rate for 2015 as provided by the International  Monetary Fund’s International Financial Statistics.

Contract modifications or amendments. Since we defined the value of  the award at the time of award, we selected contracts awarded in  2015 and excluded any subsequent modifications or amendments in  all the databases.

Contract types. We used the product and service classifications that  each database used to group contracts by type. Different databases  used different classification schemes, and we did not independently  reclassify any contracts to a uniform classification system, since such  a system does not exist and a concordance among all schemes is not  possible. In FPDS-NG, we used the U.S. product and service codes to  classify federal government contracts in product groups and  categorized reported procurement as either goods, services, or  construction services. In TED, we used the type of contract field,  which categorized reported procurement as supplies, services, and  works based on the EU common procurement vocabulary in TED. In  Contract History, we used the grouping of goods, services, and  construction, which Canadian officials provided to us based on the  global shipment identification number codes and description in the  database. In CompraNet, we used the type of contract field, which  indicates if the contract is for goods, services, or public works. In  KONEPS, the data on foreign procurement included goods only, and  no classification scheme was available for foreign procurement  contracts.

Multiple-year, multiple-award contracts. Some countries’ procurement  practices include contracts awarded for multiple years, and we  accounted for the valuation of those contracts by estimating their total  cumulative value over multiple years at the time of award in 2015. In  FPDS-NG, we accounted for the value of multiple-award contracts by  using the base and all options value of task orders awarded in fiscal  years 2015 through 2018 for IDVs initially awarded in fiscal year  2015. In TED, available documents noted that member states can  use alternative multiple-year tools such as framework agreements and  dynamic purchasing systems for a certain time period or for repeat  purchases, respectively. While the indicator field for these data in  TED was not sufficiently populated for further analysis of those types  of contracts, the contract valuation field we used had already  accounted for the total value of the contract, and thus no further  adjustment was warranted. Officials in Canada provided data on  multiple-year contracts, including call-ups and standing offers.  However, since the contract value field we used accounted for the  total value of the contract, no further adjustment was needed. For  Mexico, CompraNet contains information on framework agreements  and multiple-year contracts, but since the contract value field  indicated the total value of the contract award, no adjustment was  needed. South Korea also uses multiple-year contracts, and we made  several adjustments to estimate South Korea’s total value of 2015  awards. We identified multiple-year contracts in KONEPS in 2015;  based on solicitation numbers, we then removed the value of  contracts originally awarded in prior years, while adding the value of  multiple year contracts with solicitations in 2015 and awards in 2016  and 2017.

Type of tendering procedure. In all databases we included in our  analysis contracts under open and limited tendering procedures.

Second, we identified data fields among the five databases that could  potentially be used as proxy measures of foreign sourcing in government  procurement:  contractor data related to firm location  contractor data related to firm ownership data on country of product and service origin  However, we did not identify a data field common to all five databases  that could be used as a proxy measure of foreign sourcing. FPDS-NG  contained data on all four measures listed above. TED, CompraNet, and  Contract History contained contractor data related to firm location.  KONEPS and Japan’s WTO submission on its 2013 procurement  contained data on country of product and service origin. Therefore, two  data fields—firm location and country of product and service origin—were  available in two groups of countries as reasonable proxy measures of  foreign source procurement.

Finally, we analyzed the contract data from the government procurement  databases by GPA coverage. Some databases contain a field for GPA  coverage, the data for which we deemed to be reliable for our purposes;  for the databases that did not, we developed a proxy measure for GPA  coverage. FPDS-NG contains a field on trade agreement coverage, but  we found it to be unreliable as reported in previous work; therefore, we  constructed a method to identify GPA covered procurement using an  approach that USTR confirmed is consistent with the steps applied by the  USG in developing its GPA statistical notifications. TED contains an  identifier for GPA covered procurement, and we used this field to estimate  GPA covered procurement for Norway and the EU after taking steps to  address missing values for this identifier using other information in the  dataset. Contract History contains a field that lists all internal and  international agreements applicable to a contract in Canada. Therefore,  covered procurement includes all contracts covered under the GPA,  NAFTA, and other Canadian international procurement agreements. For  Mexico, CompraNet contains a data field on type of procedure, which  indicates the eligible firms that can bid on a contract. The data in this field  indicate that the contract is (1) open to national firms only; or (2)  international procurement under trade agreements, that is, open to both  national (Mexican) firms and foreign firms from FTA partner countries; or  (3) international procurement open to national firms, foreign firms from  FTA partners, and all other foreign bidders. We treated international  procurement in CompraNet as a proxy for GPA covered procurement. We  grouped all contracts awarded in 2015 into two categories: non-covered  procurement, which includes contracts open to national firms only, and  covered procurement, which includes contracts open to foreign bidders  (i.e. all contracts in categories 2 and 3 described above). KONEPS does  not have a data field that specifically identifies covered procurement.  Therefore, we defined a proxy for covered procurement as procurement  above the revised GPA thresholds by covered entities. However, we were  unable to make an adjustment for goods and services excluded from the  agreement, since KONEPS does not classify foreign procurement by  product service codes.

To analyze the extent to which central government contracts that are  covered under the GPA and NAFTA are foreign-sourced, we compared  the proportion of foreign-sourced award values for contracts covered  under the GPA and NAFTA to the same proportion of foreign-sourced  contracts, which are not covered by those agreements. Our analysis  describing the relationships between trade agreement coverage and  procurement award values did not account for additional factors and was  limited due to the data available. As we previously reported, the countries  within our scope represent over 90 percent of the GPA countries’ total  government procurement. Moreover, we previously performed  consistency checks across time periods for these countries and  determined that covered procurement out of total central government  procurement appeared relatively stable over time. However, a more  robust test of the relationship between foreign sourcing and selected  international agreement coverage would use a larger cross-section of  data over time and control for factors such as types of goods and services  procured, size of the economy, type of tendering procedure, and other  specific details of each agreement, among others.

To determine whether the procurement contract data from the five  databases were reliable for our purposes, we identified in relevant  countries the appropriate data sources used to prepare the countries’ and  the EU’s submissions of statistical notifications to WTO and other  government procurement reports. To ensure consistency between our  methods for estimating foreign sourcing with the methods used by the  countries and the EU in their estimates of covered procurement for their  GPA statistical notifications, we discussed with government officials in  Canada, Japan, Mexico, and South Korea their process and data used to  create their statistical notifications and other WTO reports, and we took  steps to replicate existing report totals of EU covered procurement. We  performed a sensitivity check for the U.S. data in FPDS-NG, where more  than one relevant data field was available, to determine whether the  definitional differences in the data fields were likely to materially affect our  results about foreign sourcing. The results were similar across all six  fields that could be used as alternative proxy measures of foreign source  procurement in FPDS-NG data (see app. III, tables 11 and 12).

In addition, we conducted electronic tests of all five procurement  databases to identify whether the data were complete and internally  consistent. We determined that the country procurement databases were  sufficiently complete and internally consistent after taking the additional  steps for the EU and Norway as described earlier, related to missing  contract award values (see app. IV). We also shared our analyses of the  data with cognizant officials from the corresponding countries who were  willing to verify our methodology and replicate our analysis. Procurement  and trade officials and researchers in Canada, Mexico, South Korea and  Japan answered our questions relevant to data quality including data  collection, cross checks of data entries, access controls, internal reviews,  primary users, completeness and updates to the data, missing values,  reporting mistakes, electronic safeguards and procedures for follow-up if  errors are found. In Canada and Mexico officials replicated and confirmed  our methodology and results. Results for South Korea and Japan were  consistent with alternative available official publications.

The various limitations in the procurement contract data that we identified  and addressed, to the extent possible, affected our ability to obtain  precise estimates of foreign sourcing in government procurement, but  they were not an impediment to using the data for broad comparisons of  orders of magnitude. Such comparisons include the amount of foreign  sourcing, measured using firm location and country of product and  service origin, by the USG and central governments of the other six main  parties to the GPA and NAFTA. The data also allowed broad  comparisons of bilateral procurement flows among the parties, as well as  comparisons by type of contract and agreement coverage, as available,  for the seven parties to the GPA and NAFTA within our scope.

Analysis of Trade Data Linked to Data on the Goods and Services Purchased by the Public Sector

To obtain information on the aggregate levels and percentages of  procurement by all levels of government that are imported, we relied on  input-output tables from the World Input Output Database (WIOD) for  2014. The input-output tables have an industry by industry format, with  each country’s industries listed separately. The data in each table are  derived from publically available data from both national statistics  agencies and international organizations such as the United Nations and  the Organisation for Economic Co-operation and Development. We  relied on the WIOD to ensure that the combined data from different countries was collected to be consistent. These data do not allow for  distinctions between different levels of government.

To assess the reliability of estimates based on the WIOD data, we first  reviewed available documentation for the database. In cases where we  had questions, we received written responses from WIOD officials. In  addition, we compared estimates based on the WIOD to estimates based  on other databases and found similar results. In general, we found that  the data were sufficiently reliable for our purposes.

To estimate the level and percent of procurement from the database, we  took the following steps. First, we identified the industries associated with  the governmental sector. Then, for that industry (or combination of  industries), we obtained both the total level of purchases (or inputs), and  the inputs that came from within that country, or other countries of  interest. To obtain an estimate for the EU, we combined the purchases  over the 28 member countries then in the EU. In general, we followed a  procedure outlined in a 2017 paper produced by the European  Commission. In this paper, the authors describe how input-output tables  can be used to measure cross-border penetration in public sector  procurement.

An essential step in our method is defining which industries make up the  government sector. Moreover, because the composition of the  government sector and the patterns of government purchases vary by  country, different measures of the government sector are more  appropriate for different countries—since what goods and services the  government provides or performs affects what it procures from the private  sector. For example, for the EU, the government funds the majority of  services in the area of public administration, defense, social security,  education, and health care. In contrast, the USG funds a smaller share of  health care services.

We followed the model laid out in the European Commission paper and  defined the government sector in three ways:  1.  Narrowly Defined –  (O84) Public administration and defense; compulsory social  security  2.  Typically Defined –  (O84) Public administration and defense; compulsory social  security  (Q) Human health and social work activities  3.  Broadly Defined –  (O84) Public administration and defense; compulsory social  security  (Q) Human health and social work activities  (D35) Electricity, gas, steam and air conditioning supply  (E36) Water collection, treatment and supply  (E37-E39) Sewerage; waste collection, treatment and disposal  activities; materials recovery; remediation activities and other  waste management services  (1/3) * (H49) Land transport and transport via pipelines  (1/2) * (H53) Postal and courier activities  (1/2) * (J61) Telecommunications  However, our procedure deviated from the European Commission report  with regard to an additional category of expenditure in the report, final  consumption by government. As in our prior reports, we did not include  this category. This category includes both spending on social benefits,  health care, and education as well as spending on collective items such  as defense. We did not include this category in prior reports partly due to  data reliability concerns about consistency in measurement of spending  on social benefits across countries. However, if we had included it, that  would have caused our estimates of import penetration to be smaller,  because the WIOD tables do not include any cross-border expenditures  for this category. For example, the percentage for the United States  would have changed from about 8 percent to about 4 percent.

To construct consistent data from different countries over time, certain  assumptions were made by the WIOD. An assumption that has important  implications for our analysis is known as a “proportionality assumption,”  which is typical in the construction of input-output tables. This assumption  requires that the percentage of a product that is imported is constant  across all industries. In the example provided by the WIOD: “If 20 percent  of Czech absorption of electronics is sourced from Germany, then 20  percent of any Czech final or intermediate use of electronics is assumed  to originate from Germany.” The WIOD has attempted to improve on the  proportionality assumption by making it at a more disaggregated level, but  according to the WIOD, the proportionality assumption remains a  limitation of the data set and consequently of our analysis. Importantly  for our analysis, the proportionality assumption implies that the results we  obtained from this method may not capture attempts by the government  sector to award a larger share of its procurement to domestic firms  relative to other industries.

Another important limitation for our analysis is the scope of the industry  data reported by the WIOD. Specifically, the input-output data include  intermediate inputs but exclude purchases by government for investment.  Such purchases could include some government assets that would be  considered procurement covered by the GPA and NAFTA. For example,  the input-output data could exclude construction services like those  government purchases to build highways or schools that have long-term  use, which are procurements potentially covered by the GPA and  NAFTA.

Finally, while we followed a method described above that has been used  to study procurement, there are alternative methods that could have also  been used based on input-output data. For example, according to  industry officials at the U.S. Bureau of Economic Analysis, the “Trade in  Value Added” methodology is such a method, and such data are  maintained by the Organisation for Economic Co-operation and  Development.

We conducted this performance audit from March 2017 to May 2019 in  accordance with generally accepted government auditing standards.

Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Appendix II: Characteristics of Central Government Procurement Databases

The following appendix contains descriptive comparative information  about the five databases included in our review:  for the United States, the Federal Procurement Data System-Next  Generation (FPDS-NG);  for the EU and Norway, Tenders Electronic Daily (TED);  for South Korea, the South Korea ON-line E-Procurement System  (KONEPS);  for Mexico, the Government of Mexico e-Procurement System  CompraNet; and  for Canada, Contract History.

For each database, we provide its formal name and function, contract  and/or agency coverage, and data field(s) related to firm location, firm  ownership, source country of goods or services, location of contract  execution, contract valuation, trade agreement coverage, and type of  contract in terms of goods, services or construction services.

Appendix III: Additional Results Related to Foreign Sourcing by the U.S. Federal Government

The following appendix provides supplemental information from our  analysis of foreign sourcing by the United States in fiscal year 2015  based on data from the Federal Procurement Data System-Next  Generation (FPDS-NG). FPDS-NG contains data on four potential proxy  measures of foreign sourcing—firm location, firm ownership, product and  service origin, and place of performance. The database contains six fields  that correspond to these four proxy measures. See tables 11 and 12. For  cross-country comparisons, we use two of the six measures—vendor  country code (13QQ) and country of product and service origin (9E). We  disaggregate the data by country and list the top 20 countries, which are  recipients of USG contracts based on firm location. See tables 13 and 14.  Since about 10 percent of USG contracts are performed outside the  United States, we also provide a breakdown of those contracts that are  awarded to foreign-owned and –located firms by agency. See table 15.  Finally, since most of these contracts by contract value are awarded by  the Department of Defense (DOD), we also provide a country breakdown  of DOD contracts performed outside the United States and awarded to  foreign-owned and –located firms. See table 16.

Appendix IV: Methodology for Addressing Missing Contract Award Values in the Tenders Electronic Daily Database

To report on European Union (EU) procurement data in the Tenders  Electronic Daily (TED) database for 2015, we took steps to address  missing contract award values, which amounted to approximately 15.2  percent of the 38,233 in-scope contract award values. To address these  missing contract award values, we implemented a multiple imputation  methodology that imputes a range of values for each missing contract  award value and allows for estimation of additional uncertainty induced by  the imputation methodology. After determining that the data were likely to  be conditionally missing at random, we used predictive mean matching  (PMM) to address missing values as described below. We determined  that using PMM was appropriate because it can provide more robust  results when the relevant variable is not normally distributed; PMM, as a  form of multiple imputation, allows us to assess the variability introduced  through the process of addressing missing data; and PMM, when properly  specified, does not distort averages or variance in the underlying data.

As we discuss below, the method for addressing missing values used by  the EU has none of these features.

In PMM, a regression model is first fit to complete cases in the dataset to  predict values for the variable of interest for the entire dataset (i.e.,  including complete and incomplete cases). These predicted values are  used to identify complete observations (“donors”) that are close (a  “match”) to a given observation that is missing a value for the variable of  interest. The PMM model draws matches using the posterior predicted  distribution of the regression model. When PMM is used in conjunction  with multiple imputations, this process is repeated multiple (m) times for  each missing value. As a result, each of m imputations may match to a  different donor. The donor’s observed value for this variable is donated to  fill the blank data cell—not the predicted value used to match to this  donor. The strength of the predictive model used to identify these  matches will affect variation in the set of m imputed values because a  better predictive model will identify donors that have observed values  more consistently close to their predicted values.

In order to specify our PMM model, we first explicitly tested the Ordinary  Least Squares regression model used to match donors as part of the  process discussed above. We performed standard regression  diagnostics, including an examination of the included variables and  residuals to avoid overfitting. We found that our model was able to explain  86 percent of variation in contract award values and appeared to have  well-behaved (homoscedastic) residuals.

We drew m=30 imputed values for each missing observation using the  PMM process described above, which allowed us to generate estimates  of the total contract value amounts and measure the uncertainty induced  in those estimates by the imputation methodology. We used these  measures of uncertainty to construct 95 percent confidence intervals and  express these values as a percentage relative to the estimate itself. To  assess the quality and reliability of the multiple imputations that followed  from this predictive model, we performed four main sensitivity checks,  which are included in tables 17 and 18.  1.  We examined the proportion imputed for each subset of the data that  we planned to report. The column headed “Percent imputed contract  awards” shows the proportion of the count of contracts in a given data  subset that were imputed using the methodology described above.  We looked to avoid any individual subset being substantially greater  than the overall average of 15 percent imputed. In practice, we  individually checked any subset exceeding 30 percent imputed.  2.  We evaluated the level of uncertainty induced by the imputation  methodology across important subgroups of the data. The column  headed “95 percent confidence interval +/-” indicates the percent of  the “Contract award value estimate” that, when added and subtracted  to this estimate, forms the 95 percent confidence interval. The level of  uncertainty expressed in the relative confidence interval results from  between-imputation variance, which could indicate extreme or  inconsistent matches. We looked for confidence intervals that were, in  our judgment, narrow as a proportion of point estimates. In practice,  nearly all of the subgroups we are choosing to report have confidence  intervals smaller than plus or minus 3.5 percent of point estimates.  3.  We evaluated the percent of imputed values across important  subgroups of the data. “Percent of imputed value duplicates” is a  diagnostic column to test for sparseness of imputation matches  among the 30 imputed values for each imputed contract award. We  determined the number of duplicate imputation draws among the 30  imputed values for each observation, which could indicate sparseness  in the number of suitable matches or overfitting of the model. We  intended to inspect any finding with more than about 5 out of 30 (17  percent) duplicated imputation draws; in practice, however, this  threshold was not reached for any subsets of the data that we have  chosen to report.  4.  We compared estimates resulting from our imputation methodology to  published EU reports across important subgroups of the data.  “Alternative estimate (EU’s missing value methodology)” shows the  results of replicating a methodology for correcting missing data  described in EU documents and used for some EU reports. The EU  methodology is based primarily on the average value of contracts that  are present in the dataset. This provides a general point of  comparison, allowing us to determine which subsets of the data are  likely to be responsible for estimation differences with prior EU  publications. This comparison methodology therefore provides a  benchmark but not a diagnostic for the imputation models. There are  several important differences between our imputation methodology  and the EU’s methodology.  a.  Calculation of confidence intervals: The EU’s methodology results  in the same value substituted for every contract award of a given  type (construction goods, and services). As such, it is not possible  to estimate confidence intervals for a given observation or group  of observations using this methodology. In contrast, the multiple  imputation models include estimates of uncertainty.  b.  Distortion of subgroup averages: The EU’s methodology is not  sensitive to differences in group averages apart from contract  type. As a result, it may distort subgroup averages. For example, if  hypothetical Country A has services contracts that average $100  but the overall average for services contracts is $1,000,  substituting the overall average into missing values for Country A  as the EU methodology would have the effect of significantly  distorting Country A’s characteristics. In contrast, the imputation  models we used are designed to be sensitive to all significant  reported differences in contract awards because we included all  reported variables in our imputation models.

To report on Norway procurement data in the TED database for 2015, we  needed to take steps to address missing contract award values (153 of  1,319 missing, or about 11.5 percent). The scale of the missing values is  thus smaller than for the EU data, while the dataset as a whole is too  small, in our judgment, to support correction through an imputation model.  Our statistical tests found no evidence that contract award values were  conditionally missing at random. Thus, we assume that the data are  missing completely at random and corrected the missing data using post- stratification estimation techniques. To do so, we treated the database of  contract awards as the full population of such contract awards, which  provides the full joint distribution of contract attributes. We treated the  complete observations (88.5 percent of the total) as our sample of this  population. Post-stratification adjusts the sampling weights for this  sample so that the joint distribution of post-stratifying variables, which we  selected based on our reporting needs, matches the known population  joint distribution.

Based on the resulting confidence intervals, we determined that the post- stratification sampling results in data are sufficiently reliable for subsets  defined by foreign status and contract type (see table 20) or by foreign  status and GPA coverage (see table 21).

Appendix V: GAO Contact and Staff Acknowledgments

Kimberly Gianopoulos, (202) 512-8612 or gianopoulosk@gao.gov.

In addition to the contact named above, Adam R. Cowles (Assistant  Director), Marisela Perez (Analyst-in-Charge), Gergana T. Danailova- Trainor, Ben Bolitzer, Andrew Kurtzman, and Julia Kennon made major  contributions to this report. James Ashley, Peter Choi, David Dayton,  Christopher Keblitis, Grace P. Lui, John Yee, and Timothy Young  provided technical assistance.

Governments around the world spend trillions of dollars to purchase goods and services—and some of those purchases are made from foreign firms.

The U.S. and key trade partners have signed pacts like the WTO Agreement on Government Procurement and NAFTA to open their government purchasing to international competition.

Among governments we reviewed, 2–19% of their procurement was from foreign sources.

In 2015, the U.S. likely procured over twice as much from key trade partners as those countries did from U.S. firms—an estimated $5 billion vs. $2 billion in contracts. Canada and Mexico awarded most of the foreign contracts that U.S. firms won.