2. Government procurement under the WTO Government Procurement Agreement (WTO GPA)

In search of a comprehensive framework for liberalizing procurement markets and setting minimum standards, a number of GATT contracting parties negotiated a government procurement Code during the Tokyo Round.Footnote ⁷ The Procurement Code established a rudimentary regulatory framework to open and provide for non-discrimination and the principle of competition among the various parties’ procurement markets.Footnote ⁸ Twice since then, in 1994 and 2012, the signatory parties’ have addressed various substantive and procedural ambiguities that emerged from the original Code's text,Footnote ⁹ while expanding the scope of its coverage.

The WTO GPA is composed of the text of the Agreement's general obligations along with the signatory parties’ schedules of market access commitments. While the text of the WTO GPA establishes rules requiring that open, fair, and transparent conditions of competition apply, they do not automatically cover all the procurement activities of each party. These rules apply only to those procurement activities conducted by covered entities that are purchasing listed items valued higher than the specified threshold values. As the Agreement has developed, more governments have joined and the scope and coverage of the previous treaties has significantly expanded to include the procurement of services and construction services, alongside goods, and to cover sub-central entities and a number of utilities.Footnote ¹⁰ As of 2015, the annual value of procurement activities opened up to international competition by the 43 GPA parties was estimated at US$ 1.7 trillion.Footnote ¹¹

Article IV of the revised 2012 WTO GPA sets out the cornerstone principles and requirements for non-discrimination and competition. This article covers both the national treatment and most-favoured-nation requirements for the WTO GPA signatory parties’ procurement measures. It requires that a party provide immediately and unconditionally to the products, services, and suppliers of the other signatory parties treatment no less favourable than that accorded to its own domestic products, services, and suppliers, although again this is limited to those activities explicitly included under the rules. These requirements are bolstered by minimum standards to ensure that the tender process is open and competitive, and includes commitments to publish and widely advertise sufficient information about procurement opportunities. The WTO GPA also explicitly prohibits the use of offsets or domestic content requirements under Article IV:6, although there are limited transitional exemptions to this prohibition available for developing countries pursuant to Article V.

The WTO GPA includes general and security exceptions to the Agreement's obligations under Article III:

Secondary or horizontal policy objectives including the protection of public order, public morals, and the environment are therefore permitted even if they contravene the WTO GPA Article IV's General Objectives, subject to certain non-discrimination requirements. The language of the WTO GPA Article III exceptions differs from that under the GATT and GATS general and security exceptions, as discussed in Section 4 below. But the WTO GPA still incorporates similar requirements for non-discrimination and competition in the application of a non-compliant measure that has been provisionally justified as a permitted public policy exception. As such, the WTO GPA Article III seeks to regulate non-compliant but provisionally justified domestic policy objectives into an international framework for progressively liberalizing government procurement markets.

The WTO GPA also incorporates two different dispute settlement mechanisms – at the domestic and the plurilateral level. Under the WTO GPA Article XVIII Domestic Review Procedures, the signatory parties must offer non-discriminatory, effective, timely, and transparent rules that include procedures before national courts or domestic administrative bodies to permit the injured party to oppose the tender procedure or the award of the tender. It is widely acknowledged that an effective domestic review mechanism for disappointed bidders establishes an invaluable transparency, self-policing, and accountability mechanism within the government procurement system itself.Footnote ¹² The most effective means of enforcing procurement rules is to enable citizens – as the suppliers that deal with the government's procuring agencies – to police compliance with the requirements of the Agreement. As beneficiaries of the regime, they are in the best position to detect violations and they will also typically have the most incentive to challenge them. The WTO GPA Article XVIII recognizes this with the requirement that domestic parties must also be able to challenge a bid believed to breach the rules of a particular procurement tender process.

While this dispute settlement system appears, at first blush, to be relatively strong and binding, the full extent of the corrective powers of these review bodies is somewhat unclear. This is particularly with regard to whether the review body must possess the authority to set aside an awarded signed contract that violates the Agreement. There is no requirement for a standstill period to allow for a postponement of the contract signature for a minimum time period after notification of the award in order to allow an effective bid challenge. This curtails the power to get redress.Footnote ¹³ Moreover, while compensation can be given, it must be limited to costs for tender preparation or protest only, further diluting the effectiveness of the domestic review procedures. Some have suggested that this has resulted in them being used less than expected due to a lack of trust in the system or for fear of jeopardizing future tendering opportunities.Footnote ¹⁴

The WTO legal system – as an inter-governmental body – does not provide standing for aggrieved individuals or companies to bring a complaint to the WTO DSB concerning the (non) implementation of the WTO GPA.Footnote ¹⁵ This right is reserved for governments qua contracting parties of the agreement. Any signatory party that considers that any benefit accruing to it from the provisions of the Agreement is being nullified or impaired – either directly or indirectly – may notify the WTO DSB and the DSB shall have the authority to settle the dispute within the terms of the WTO DSU.Footnote ¹⁶ Following the incorporation of the so-called Trondheim Provision into the 1994 WTO GPA, the WTO DSB has possessed the competence to authorize the suspension of concessions and other obligations under the WTO GPA, or consultations concerning remedies when the withdrawal of measures found to be in contravention of the WTO GPA is deemed impossible. This is set out in Article XX of the revised 2012 WTO GPA. Yet Article XX.3 also highlights the WTO GPA's position as a plurilateral agreement, listed under Annex IV and hence separate and outside of the WTO ‘covered agreements’. As Article XX.3 stipulates, there is no possibility under the WTO GPA of suspending benefits from another WTO agreement. This consequently lessens the remedies available for enforcing WTO GPA rules in the event of non-compliance.

Despite the cumulative nature of the WTO agreements, the ability of this regime to complement the other WTO agreements is not only legally constrained but also beset by more practical, methodological complexities. For, under the WTO GPA, procurement is defined pursuant to Article II as:

That is, for the purposes of the coverage of the WTO GPA, it does not matter whether the procurement is for goods or services or both. Rather it is the value thresholds and the particular entities at central and sub-central levels of government, set out in the Appendix, that are the major determinants of the coverage of the agreement. This results in further discrepancies between the applicable agreements. For, on the one hand, the government procurement of services is explicitly exempt from the GATS national treatment and most-favoured-nation obligations under Articles XIII:

Yet, on the other hand, subsidies applied to services markets are still subject to non-discriminatory obligations under GATS Article II, if scheduled under the GATS, and if not scheduled under the GATS, subsidies applied to services markets are subject to the national treatment obligation under GATS Article XVII. However, a comprehensive agreement for regulating subsidies in services markets akin to the ASCM is still not available under the GATS, despite Article XV:

If a challenged procurement measure falls under the scrutiny of the ASCM, the scope of those obligations applies only to the goods part of a procurement that may include both goods and services elements. Yet governments can procure services in combination with physical goods, such as processing, assembly, or labelling. Identifying and unbundling the goods-only portion of a build‒operate‒transfer projectFootnote ¹⁷ in order to determine if a benefit has been conferred under the ASCM is complex. In the US–Large Civil Aircraft dispute, the Panel considered whether excluding purchases of services from the scope of ASCM Article 1.1(a)(1) would run counter to the overall object and purpose of the Agreement by creating ‘an enormous loophole in the coverage of the SCM Agreement and provide WTO Members with a roadmap for distorting trade in goods through “service contracts” with their goods producers’.Footnote ¹⁸ The Panel considered that:

However, on appeal the Appellate Body concluded that the Panel's interpretation that ‘transactions properly characterized as purchases of services are excluded from the scope of Article 1.1(a)(1)(i) of the SCM Agreement’ to be moot and of no legal effect.Footnote ²⁰ It is consequently evident that while the WTO GPA works coherently as a stand-alone agreement, both legal and methodological difficulties arise when regulating the same procurement measure under the other applicable WTO agreements.

3. GATT Non-discrimination and government procurement

The GATT negotiating history indicates that early draft texts of the ITO Charter, as proposed by the US negotiators, contained provisions requiring the extension of national treatment to imported goods in the case of government purchases and government contracts. These provisions were deleted from the London Draft Charter as it appeared to the Preparatory Committee:

Accordingly, although government procurement regulation can be characterized as an internal regulatory measure, it was explicitly carved out from the subsequent GATT Article III national treatment obligations by virtue of GATT Article III:8(a), which states:

Nevertheless, the WTO Canada–Feed-in Tariffs (FIT) dispute highlighted some of the complications that emerge when determining whether a challenged government purchase is or is not a government procurement – as defined under the GATT Article III.8(a)Footnote ²² derogation ‒ and which are of immediate relevance to this analysis. The FIT dispute emerged when Japan and the EU challenged the legality of the domestic content requirements set out in the FIT scheme established by the Canadian Province of Ontario.Footnote ²³ The FIT programme pays generators of electricity produced from certain types of renewable energy a guaranteed price for electricity delivered into the Ontario electricity system under 20-year or 40-year contracts.Footnote ²⁴ However, only facilities geographically located in Ontario that inter alia generate electricity exclusively from specified sources of renewable energy were deemed eligible to participate in the Ontario Power Authority's scheme.

The EU challenged this measure on the grounds that the GATT III:8(a) derogation could not apply to the FIT programmeFootnote ²⁵ given that only those government departments directly using the procured goods or services are immune from Article III's national treatment obligations.Footnote ²⁶ The EU claimed that the meaning of procurement for governmental purposes as set out in Article III:8(a) is narrow. It is restricted to acquisitions made to meet ‘the needs’ of government. To qualify as a government procurement, any purchase must pass a ‘needs’ test to ensure that it is indeed intended ‘for the direct benefit or use of the government’.Footnote ²⁷ The EU challenge also proposed a broad reading of Article III:8(a) when defining ‘not with a view to commercial resale or with a view to use in the production of goods for commercial sale’. The EU claimed that if the purchased product is sold or introduced into the market regardless of whether this is done for profit, it should be deemed to be ‘with a view to commercial resale’, and thus disqualified from the derogation. As such, this interpretation sought to exclude more types of government procurement that distort competition in open markets from the safe haven of the Article III.8(a) derogation.

In its defence, Canada claimed that the EU's interpretation of Article III:8(a) contravened the customary rules of international treaty interpretation.Footnote ²⁸ Rather, not only was the FIT procurement exempt from GATT national treatment obligations by virtue of Article III:8(a)Footnote ²⁹ but, moreover, the FIT regulation did not infringe upon Canada's obligations as a signatory party of the WTO GPA. In effect, Canada's defence was primarily the assertion that when negotiating the coverage of the WTO GPA, Canada had not committed Ontario's electricity purchases in the schedules of entities or markets that fall under the scope of the WTO GPA. Consequently, the FIT regulation could not be prohibited by Canada's commitments under either GATT or WTO GPA legal obligations.

On appeal the Appellate Body clarified that the term ‘governmental agencies’ also refers to those ‘arms-length’ entities acting for or on behalf of government in the public realm, within the competences that have been conferred on them to discharge governmental functions. There need not be a so-called charge to the public account. Further, the concepts of ‘procurement’ and ‘purchase’ should not to be equated, for procurement is a broader concept than just a purchase:

The Appellate Body found that the scope of the derogation under Article III.8(a) should be limited to products purchased for the use of government, consumed by government, or provided by government to recipients in the discharge of its public functions.Footnote ³¹ This finding is broader than the interpretation submitted by the EU. Further, both the terms: ‘for governmental purposes’ and ‘not with a view to commercial resale’ qualify and limit the scope of ‘products purchased’. In other words, a purchase that does not fulfil the requirements of being made ‘for governmental purposes’ will not be considered to fall within the derogation of Article III:8(a). This condition is regardless of whether the procurement in question complies with the requirement of being made ‘not with a view to commercial resale’Footnote ³² because these are cumulative requirements.Footnote ³³

Having determined the nature of the measure being challenged, the Appellate Body undertook a like-product analysis. This would allow for some conclusions to be made as to whether Canada's FIT programme was disrupting international competitors’ sales of renewable energy generating equipment, as claimed by the EU and Japan. It sought to determine whether the particular product being procured by a governmental agency was similar to the product that was being treated more favourably as a consequence of the offsets set up under the FIT programme. The Appellate Body identified whether the product of foreign origin allegedly being discriminated against was in a competitive relationship with the product being purchased. The Appellate Body concluded that the product being procured was electricity, whereas the product discriminated against for reason of its origin was generation equipment, and that these two products are not in a competitive relationship. Therefore, the scheme was not covered by the Article III.8(a) derogation.

Consequently, the FIT scheme fell under application of the GATT Article III.4 national treatment obligations and in favouring domestic over foreign products, the FIT scheme was found to be in violation of GATT Article III.4.

The Appellate Body then demonstrated the cumulative nature of the WTO agreements by proceeding to assess the legality of the same measure under the ASCM. This move indicated definitively that with or without the GATT Article III.8(a) derogation and, moreover, whether or not a WTO GPA party has excluded a specific procuring entity or market from its Appendix 1 Annexes, there is no safe haven from the application of the ASCM to those government procurement measures that relate to goods. This provides a partially integrated approach to regulating government procurement measures that distort competition in both public and open markets. In sum, even if a GPA party deliberately excludes a particular procurement measure from its GPA obligations, this does not generally free it from the obligations of the GATT or ASCM.

4. The GATT Article I.1 most-favoured-nation principle and government procurement

As a cornerstone principle of the WTO, GATT Article I.1 provides that the most-favoured-nation obligation applies to any kind of duty or administrative procedure that affects trade in goods. Pursuant to this, WTO Members cannot normally discriminate between their trading partners. If a Member grants a country an advantage such as a lower tariff on one of its products, it must grant this advantage immediately and unconditionally to all WTO Members. The Appellate Body in Canada‒Autos emphasized the context and character of the MFN principle:

There are various explicit exemptions and conditions to the most-favoured-nation principle in the GATTFootnote ³⁶ that limit or ‘dethrone’ its all-pervasive character.Footnote ³⁷ Yet nowhere is government procurement explicitly excluded from the GATT Article I.1 most-favoured-nation obligations. Despite the lack of explicit exclusion of government procurement from the Article I most-favoured-nation obligation, prevailing opinion holds that government procurement is nevertheless exempt from the ambit of the provision. Article I:1 explicitly refers to four types of measures and it is the fourth of these – ‘with respect to all matters referred to in paragraphs 2 and 4 of Article III’ ‒ that we are concerned here. Article III paragraphs 2 and 4 state that:

As stipulated, Article III:4 addresses all laws, regulations, and requirements affecting their internal sale: offering for sale, purchase, transportation, distribution, or use. This, as noted above, is eminently applicable to government procurement qua a law or regulation affecting the internal sale of a product. In other words, the category in question incorporates government procurement measures within the scope of the Article I.1 most-favoured-nation obligations.

However, the leading interpretation submits that even though procurement is not explicitly exempt from the obligations of Article I.1, or Article III paragraph 2 or 4, it is nonetheless excluded from the scope of Article I.1 by virtue of the derogation for public procurement provided in Article III:8(a). John Jackson notes that ‘government procurement practices have traditionally been considered unreached by the language of GATT Article I, and the language of GATT Article III and the preparatory work of GATT seem to support this approach’.Footnote ³⁸ Mary Footer looks to the context of the treaty negotiation and points out that while early draft texts both for an International Trade Organization (ITO) and the GATT contained provisions requiring the extension of national treatment to imported goods, in the case of government purchases and government contracts these clauses were deliberately not included in the final texts.Footnote ³⁹ This position is also supported by Sue Arrowsmith,Footnote ⁴⁰ and by Haufbauer, Shelton, Erb, and Starr.Footnote ⁴¹ They all submit that Article III, paragraph 8(a) should be read so as to free government procurement practices entirely from the disciplines of Article I.1, in addition to those of Article III.

It is reasoned here, however, that this interpretation is not self-evident and therefore open to questioning. The EC–Vessels dispute is the only case to offer instruction on this point of law. Here, the Panel was concerned with the different question of whether and how the Article III:8(b) subsidy exemptionFootnote ⁴² affects the scope of ‘all matters referred to in paragraphs 2 and 4 of Article III’. The Panel considered that the phrase ‘matters referred to in’ in Article I:1 refers to the subject matter of those provisions in terms of their substantive legal content. If it is explicitly provided that a particular measure is not subject to the obligations of Article III, then the measure does not form part of the ‘matters referred to’ in Articles III:2 and 4 and therefore cannot be covered by the expression ‘matters referred to in paragraphs 2 and 4 of Article III’ in Article I:1.Footnote ⁴³ The Panel thus concluded its analysis by concurring that:

GATT Articles I and III both aim to prohibit less favourable treatment of directly competitive goods. The basic policy of Article III – to eliminate market distortions caused by internal measures – is as compelling with respect to national treatment type discrimination as it is to most-favoured-nation type discrimination.Footnote ⁴⁵ Therefore, it could be reasoned that the same range of goods should be covered by both obligations. Analysing the differences and complementarities of Articles I and III in enshrining non-discrimination, Horn and MavroidisFootnote ⁴⁶ submitted that most-favoured-nation has more stringent requirements with regard to product similarity than national treatment, since it only refers to ‘like’ products. National treatment, on the other hand, applies not only to ‘like’ products, but has also been interpreted to apply in the case of ‘directly competitive or substitutable goods’. They further note that most-favoured-nation applies to both internal and border measures, and is therefore wider than national treatment, which only applies to internal measures. As a result, the authors characterize the two provisions as ‘orthogonal’ in the sense that most-favoured-nation refers to the treatment rendered to different foreign products, whereas national treatment compares the treatment given to foreign products to that of domestic products. This analysis suggests that while the scope of the application of the two articles is similar, the important difference lies rather in how they determine whether the products in question are ‘like’.

While this logic may be economically persuasive, it still remains questionable whether the coverage of the two rules should be interpreted to be the same. The two types of discrimination have very different political considerations. Discrimination in favour of a domestic firm cannot be deemed equivalent to discrimination among different WTO Members. The latter is more divisive in undermining the cohesion, solidarity, and non-politicization of trade among WTO Members than the former. This is recognized in the GATT Article XX, where deviations from the national treatment standard are under specific conditions permitted, but not with regard to most-favoured-nation obligations. Under the chapeau of Article XX, there is a requirement, inter alia, that any measure deemed exempt from GATT obligations under one of the Article XX(a)–(j) exceptions must nevertheless not be applied in a manner that would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail. Article XX, in effect, offers a refuge from the requirement for national treatment, but not from the obligation towards the most-favoured-nation principle.

Moreover, this interpretation of the scope of Article I.1 ignores several Appellate Body Reports that stipulate that if the drafters of an agreement especially intended to exclude a particular aspect from the application of a rule, they would have done so expressly.Footnote ⁴⁷ It is also pertinent to note here the negotiating history of the WTO GPA, which indicates that the Tokyo Round closed with the signatories taking a decision with regard to the six-plurilateral agreements.Footnote ⁴⁸ In doing so, they sought to ensure that the application of the GATT Article I most-favoured-nation principle to procurement rules was not to be undermined by the most-favoured-nation and national treatment obligations operating as between the limited parties to the Tokyo Procurement Code. The signatories stated that:

This provision mirrors Article II.3 of the Marrakesh Agreement:

Article II.3 Marrakesh Agreement confirms that the Procurement Code and now the WTO GPA create a framework of obligations and minimum standards for opening up procurement markets between a limited number of parties. These obligations do not apply on a multilateral basis to the wider membership of the WTO. Article II.3 Marrakesh does not operate to suspend the existing prohibition on discrimination as between the wider WTO Membership, pursuant to GATT Article I.1 most favoured nation obligation.

Given that GATT Article I does not include an explicit derogation either for government procurement or for subsidies, and in light of the available negotiating history, this prevailing interpretation deprives WTO Members of the protections of the most-favoured-nation obligation and diminishes their rights to non-discrimination as between the Members, contra DSU Article 3.2:

In such cases of interpretative uncertainty, the WTO DSU requires that any clarification of WTO rules should take place pursuant to customary rules of interpretation, most notably those embodied in Articles 31, 32, and 33 of the Vienna Convention on the Law of Treaties (VCLT).Footnote ⁵⁰ For as the Appellate Body has pronounced:

Under the General Rule of Interpretation set out pursuant to VCLT Article 31.1, a treaty should be interpreted in accordance with the ordinary meaning to be given to the terms of the treaty, and also in the light of its object and purpose. It is submitted here that to read the Article III.8(a) derogation into ‘all matters referred to in paragraphs 2 and 4 of Article III’ is to go against the ordinary meaning that should be accorded to the provision. Such an interpretation is opaque and convoluted. There is scant indication of any explicit intentions from the drafters’ as to this reading, and, moreover, it works against the object and purpose of the GATT.

The rationale for this prevailing view seems to be premised chiefly upon an un-appealed Panel Report to the WTO EC–Vessels dispute. Neither the WTO Panel nor Appellate Body Reports are covered by the rule of stare decisis that binds domestic courts to previous reports.Footnote ⁵² This rule was excluded from the pre-Uruguay Round GATT dispute settlement system, and continues to be from the post-Uruguay Round WTO system.Footnote ⁵³ Still, WTO Panel and Appellate Body reports have been described as ‘stones in the growing edifice even if in theory the builders are free not to continue to build upon them’.Footnote ⁵⁴ The Appellate Body has expressed its deep concern over a Panel's decision to depart from prior Appellate Body rulings on the same question of law because:

The Appellate Body in China–Rare Earth also confirmed that ‘absent cogent reasons’Footnote ⁵⁶ an adjudicatory body must resolve the same legal question in the same way in a subsequent case. If a party asks a panel to deviate from a prior finding on a question of law on the basis of novel legal arguments, a full exploration of those arguments may assist the DSB in the event of an appeal, particularly where those arguments raise complex legal issues. This could be of particular significance with respect to unilateral ad hoc procurement measures such as ‘matching clauses’.Footnote ⁵⁷

5. Government procurement and secondary policy objectives under the GATT

Even if a government procurement measure is found to be inconsistent with GATT requirements, it may be defended as necessary under the General or Security Exceptions set out under GATT XX and XXI respectively. These exceptions acknowledge and accommodate other necessary policy goals pursued by domestic laws and policy choices, and formulated in response to societal values and preferences. Furthermore, the various exceptions that Members choose to pursue may have little in common, due to the specificity of their domestic circumstances.

However, it is incumbent upon the respondent party to provide an affirmative defence to establish that the ‘offending’ procurement measure is justified under the scope of one of the domestic policy objectives of Article XX.Footnote ⁵⁸ Despite the availability of this legal avenue to defend legitimate domestic non-economic policy objectives, these derogations involve huge entanglements with domestic governance and administration.Footnote ⁵⁹ The burden of proving that a measure is ‘necessary’ within the meaning of Article XX resides with the responding party, while the complaining party has the onerous task of identifying any alternative measures that, in its view, the responding party should have taken.Footnote ⁶⁰

This legal avenue has clear legal parallels under the WTO GPA's Article III Security and General Exceptions. That is, a challenged measure justified under either the GATT Article XX or XXI, or the WTO GPA Article III exceptions, would – all things being equal – undergo a similar legal analysis if a panel were to determine whether a violation of the obligations of the agreement could be justified as necessary to pursue a legitimate domestic public policy objective. This provides for some degree of legal uniformity and legal certainty.

In sum, the WTO legal framework and case law implicitly acknowledges the possibility of making a distinction between measures regulating government procurement and other trade measures. This results in a narrow interpretation of the derogation under Article III.8(a), which subjects some types of government procurement activity to both the national treatment and most-favoured-nation obligations. Nevertheless, even if a GATT non-compliant government procurement measure is challenged, the GATT provides general and security exceptions – as does the WTO GPA – through which to pursue necessary domestic policy objectives, subject to certain non-discrimination requirements.

6. The ASCM and government procurement

In light of the GATT Article III.8(b) derogation for subsidies, a plurilateral Subsidies Code was also sought out and negotiated by certain GATT parties during the Tokyo Round. However, unlike the plurilateral Procurement Code and its successor the WTO GPA, the Subsides Code subsequently expanded into the multilateral ASCM during the Uruguay Round negotiations. The ASCM provides an unprecedented definition of a subsidy in Article I.1(iii):Footnote ⁶¹

The ASCM therefore clearly states that a subsidy exists if there is ‘a financial contribution by a government or any public body within the territory of a Member’. Government procurement is explicitly listed under Article I.1(a)(1)(iii) as one of the categories of government measures deemed to be a financial contribution.

Four examples of a benefit are set out as guidance for calculating benefits under Article 14 ASCM. To be characterized as a benefit, the measure has to make the recipient ‘better off’. The most appropriate basis from which to identify a measure's trade-distorting potential is for a comparison with the marketplace.Footnote ⁶² If no benefit can be found, such as when a government body purchases goods and services at a market price, there can be no benefit and therefore no subsidy exists.Footnote ⁶³

For as Luca Rubini notes:

It thus caused controversy when the Appellate Body in the WTO Canada–FIT dispute opined in the face of substantial existing legal reasoningFootnote ⁶⁵ that Ontario's local content requirements were not conferring a benefit under the ASCM Article 3 Prohibition:

It was previously held that any intervention contingent on the use of domestic offsets or export performance is prohibited under ASCM Article 3 and no burden of proof was required as to its specificity or its adverse effects. These measures are designed to directly effect trade and are inherently likely to have adverse effects on the interests of other Members. Such a prohibited subsidy must be withdrawn. Indeed, Article 4 ASCM even sets up a rapid (three-month) dispute settlement mechanism for complaints regarding such prohibited subsidies.

The Appellate Body findings in the Canada–FIT dispute were subsequently denounced as an anticlimactic denouement, which confuse when benefits are to be pursued under WTO subsidy law.Footnote ⁶⁶ This controversy is related to the on-going difficulty caused by the expiration of the provisional ASCM Article 8. This rule rendered certain subsidies as immune from WTO remedies and the imposition of countervailing duties. Hence, the ASCM now differentiates only between actionable and prohibited subsidies; but unlike under the GATT and WTO GPA, it cannot exempt a subsidy effected through a discriminatory government procurement measure that is deemed necessary to achieve another domestic policy objective. All that continues to be known about the applicability of the GATT exceptions to the ASCM is that the relationship between the GATT and other Annex 1A agreements, which includes the ASCM, shall be considered on a case-by-case basis.Footnote ⁶⁷

Adding to the lack of doctrinal agreement as to whether a government procurement that is deemed to confer a subsidy prohibited under the ASCM can be defended under the GATT or WTO GPA exceptions, there is now further ambiguity as to when an offset will be considered a benefit.Footnote ⁶⁸ Obfuscation is also caused by the combination of the Panel's margin of discretion: first, to determine the sequencing of the agreements being interpreted during a disputeFootnote ⁶⁹ and, second, to exercise judicial economy to curtail the interpretation of several applicable agreements if a measure has already been found to violate one of them. For as the Appellate Body stated in the Wool Shirts and Blouses dispute:Footnote ⁷⁰

However, as the Panel Report to the India–Autos dispute observed, the order selected for examination of the claims may have an impact on the potential to apply judicial economy.Footnote ⁷¹ While some judicial discretion is unavoidable because no law can anticipate every situation or breach, the degree of discretion afforded could be seen to produce a commensurate degree of legal uncertainty. It is also clear that too much uncertainty, coupled with an undefined use of judicial economy, can operate to undermine transparency and good policymaking, and, moreover, the future use of the WTO DSB to resolve trade disputes falling under these agreements.

7. Do RTAs do it differently?

The WTO's partially integrated, cumulative approach can usefully be contrasted with those RTAs that include government procurement rules. At the regional level, over 87 trade agreements have been concluded incorporating a wide variety of different government procurement legal frameworks.Footnote ⁷² However, these regimes appear to be more fragmented than under the WTO. For example, of those RTAs concluded by the US, only the NAFTA incorporates rules to regulate and remedy the provision of subsidiesFootnote ⁷³ as well as provisions to regulate government procurement. Chapter Ten Article 1003 regulating government procurement sets out the national treatment and non-discrimination provisions that seek to prevent a party from discriminating against the suppliers of another party to favour domestic suppliers. Article 1006 prohibits offsets or local content requirements. These obligations and other requirements relating to tender procedures are enforced through the requirement for domestic bid challenge procedures under Article 1017. In addition to the General Exceptions provided for under Article 1018,Footnote ⁷⁴ the covered procurement set out in the US’ schedules explicitly excludes all classes of research and development, telecommunications services, all classes of utilities, transportation, travel, and relocation services.

Direct control of subsidies in the NAFTA, as in the WTO, is confined to goods and not services.Footnote ⁷⁵ NAFTA Chapter 19 on the Review and Dispute Settlement in Antidumping and Countervailing Duty Matters establishes the rules of procedure for investigations and reviews, along with an agreement to consult on developing more effective rules and disciplines concerning the use of government subsidies.Footnote ⁷⁶ NAFTA Article 1502 on Monopolies and State Enterprises further notes in paragraph 3 that each party shall ensure that Monopolies and State enterprises do not act in an anticompetitive or discriminatory manner towards the firms or investments of the other parties. However, Article 1502 paragraph 4 explicitly carves out government procurement from these obligations.Footnote ⁷⁷ As a result, the regulatory framework for preventing anti-competitive State measures in public and private markets remains based on a traditional un-integrated or parallel track approach.

In the EU under the Treaty on the Functioning of the European Union (TFEU), compliance with the government procurement rules set out in the government procurement directivesFootnote ⁷⁸ precludes the legal existence of any ‘undue economic advantage’ in the award of a public contract. This provides a somewhat tautological method that accepts that if a tender award has followed the government procurement directives’ rules, it cannot legally constitute State aid. Thus on the one hand, the revised 2014/24/EU Public Sector Procurement Directive stipulates under Article 18 that procurements of goods and services should not be designed with the intention of artificially reducing competition through discriminating for or against certain economic operations.Footnote ⁷⁹ On the other hand, although Article 107 State aid control covers both goods and services it is inapplicable to public procurement markets because an awarded public contract is presumed not to constitute State aid.Footnote ⁸⁰ However, recipients of legal and authorized State aid are not automatically excluded from bidding for public tenders.Footnote ⁸¹

The consequences of this are that while such State aid is deemed legal, these procurement procedures cannot unequivocally be said to guarantee a market price. There is no legal mechanism with which the Commission can pronounce ex ante that State aid is or is not being provided through a particular procurement tender. In effect, this approach relies on government procurement rules to provide transparency and due process but without definitively preventing the provision of economic advantages. The benefits that this approach provides in its coverage of services,Footnote ⁸² relative simplicity, and legal certainty should be balanced against the potential loss of welfare gains caused by these permitted government distortions to competition.

In sum, despite the relative strength of State aid control in the EU in its coverage of both goods and services, it is unable to comprehensively limit the use of government procurement as a means to grant disguised State aid. Nor does it provide a convincing approach to preventing government restrictions on competition from affecting either both government procurement or open markets. It therefore offers a less integrated approach than the WTO. For,1 unlike under the TFEU, the cumulative nature of the WTO agreements does not allow the ASCM to make the same legal presumptions about the compliance of a procurement that is concurrently regulated by the WTO GPA.