US Trade Agreement could be open sesame

In all the furore over the draft version of the US Australia Free Trade Agreement, surprisingly little attention has been given to one of its most significant features. Should the Agreement be ratified by Congress and the Australian parliament, Australia at long last will have a level playing field when it comes to government tenders to much of the US public sector.

There are over 60 nations which are "designated countries" under the US Trade Agreements Act. This allows US Federal Government agencies to buy directly from local companies in one of those countries. Without this designation, US Federal agencies are unable to consider bids from overseas companies in their own right.

Incredibly, until now Australia has ranked behind the over 60 countries with designated status, because we have not been a designated country. To get into the US Government market, Australian groups have had to engage in a string of costly and complicated organisational contortions. These include signing up with US domestic companies to bid in their own name (for a sizeable slice of the returns), having most of the manufacturing and certainly the assembly done in the States, or even moving to one of the over 60 foreign countries ahead of Australia in the “designated status” queue.

It is hard to imagine something much more one-sided than this situation. A whole range of US Government suppliers have had untrammelled access to Australian Government tenders. But in the reverse direction, Australian companies have been severely hampered in their efforts to gain access to the US Government market.

Since this is the biggest single public procurement market on the planet, this has been a huge disadvantage to industrial and commercial development in Australia. Remember that the US Government market is an English-language market, operating under a similar legal and commercial system, with common business practices, excellent telecommunications connections and frequent direct air service connections to Australian capitals. It is thus a logical first market for toe-in-the-water companies, seeking to expand their government business for the first time beyond the Australian and New Zealand markets.

On top of this, lack of "designated country" status obviously hampers any efforts to secure offset sales by Australian entities to recoup part, at least, of the huge dollar outflows required to purchase Joint Strike Force fighters, 67 tonne Abrams tanks, Aegis weapons systems for air warfare destroyers and all the panoply of highly expensive defence equipment listed in the Defence Capability Statement. Any offset sales (such as ailerons or tailplanes for aircraft) have typically had to be made through local Australian subsidiaries of US multinationals.

This just compounds the angst at being impeded in access to government tenders in this valuable market, until now.

The potential advantages of the Free Trade Agreement, should it be ratified, and the severe drawbacks of the present situation are starkly outlined in a long explanatory document from Australia's Department of Foreign Affairs and Trade.

“Australian companies currently wishing to sell to the US Federal Government must establish operations in the US, or in a designated country, or establish partnering arrangements with US firms,” it says. “By contrast, access to the Australian market is open, based on non-discrimination, without any legal or policy barriers to foreign suppliers. By virtue of the non-discrimination provisions in Article 15.2, Australia will become a designated country under the US Trade Agreements Act.

“The non-discrimination provisions will also require the US to provide Australia with a waiver from the Buy America Act for contracts to which the Chapter applies … The Buy America Act imposes a 6 per cent penalty on foreign goods (not services). The waiver will enable Australian suppliers, for the first time, to compete in the US procurement market on equal terms with suppliers from the US and from over 60 other designated countries.”

In return, Australia will make some minor changes in tender procedures, backed up by compliance requirements to ensure Australian Government bodies fall into line. Selected tendering, with the client pre-selecting who can tender, and the even more restrictive limited tendering will only be allowed under special circumstances (detailed in Articles 15.7 and 15.8). There will be a presumption for open tendering, notices of intending procurement, and for tenders to remain open for at least 25 days (if on the internet), 30 days otherwise.

If this comes off, this will be a huge gain for large segments of the Australian export economy. In retrospect, one might ask why the previous imbalance was allowed to continue so long, uncorrected. Over 60 other countries have managed to secure exemptions, ahead of us, and have their “designated country” status firmly wrapped up and locked away. For those interested in public sector tenders, this is one of the most significant economic developments in a long time.

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Christopher Jay is a writer for the Australian Financial Review. He is a regular contributor to its Tenderwatch column in the Friday Government & Business Section.

As published in TenderSearch Magazine - Autumn/Winter 04 Issue