Trade and geopolitics
“Securing fairness”: Europe unsheathes the International Procurement Instrument
Published 02 August 2022
The EU's recent adoption of the International Procurement Instrument (IPI) aims to arm the bloc with greater leverage in market access talks. Largely motivated by China's increasing industrial heft, invocation of the IPI as part of Brussel's broader legislative agenda could redefine EU-China relations, despite plentiful political and economic complications.
On 23 June, the European Union formally approved the International Procurement Instrument (IPI). The IPI's purpose is to improve European companies' access to foreign public procurement markets, targeted specifically at emerging markets. The instrument’s larger intent, as described in official EU documents, is to “secure fairness.”[1]
The IPI’s adoption is in line with Europe's evolution towards a more assertive role in global trade, as it arms itself with greater leverage in market access talks. The IPI is symptomatic of a Europe that is increasingly wary of China and frustrated with the results of endless dialogue.
During the past decade, proposals for such a mechanism have struggled to grain traction because of concerns that the IPI would have inadvertently extended protectionism over European markets. Of course, much has changed in ten years. Brexit, deadlock at the World Trade Organization (WTO), and trade disputes with the US have eroded the EU’s faith in the open multilateral trading order. China’s increasing industrial heft and reluctance to fully embrace market reforms is also a big part of this story.[2]
Nuts and bolts
Under the WTO’s plurilateral Agreement on Government Procurement (GPA), the EU has generally allowed even non-signatories to the agreement to participate in its public procurement tenders. This imbalance is potentially highly lucrative. According to the European Commission’s figures, the global public procurement market is worth €8 trillion, of which Europe accounts for €2.4 trillion.[3]
Yet more than half of the global market is closed to EU companies, which in 2019 won only €10 billion in tenders outside the EU – not even 1% of the €5.6 trillion worth of tenders conducted outside the EU. The EU has cited Indonesia and Turkey as examples of economies that largely shut out European competition from tenders. In both cases, EU companies won only about 1% of tenders.[4] European companies remain “essentially excluded” from Chinese public procurement, according to analysis from the Mercator Institute for China Studies (MERICS).[5]
The IPI will apply to tenders worth at least €15 million and €5 million for goods and services. This represents 70% of total EU procurement contracts by value. The mechanism empowers EU authorities to unilaterally double the value of tenders originating from offending countries, effectively pricing them out of European markets. In extreme cases, companies from certain countries can even be blacklisted from tendering.
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The China factor
Although China agreed to join the GPA as part of the terms of its entry into the WTO, critics argue that it has yet to submit a credible package of concessions to accompany its entry.[6] Beijing’s sixth revised negotiating offer would have applied to only 20 of the roughly 150,000 state-owned enterprises in China.[7]
Beijing has typically opted for an informal rather than explicit approach to restricting foreign tendering access. For example, an informal guidance was issued for at least 70% of 4G orders to be allocated to Huawei and ZTE in telecommunications procurement.[8]
In some sectors, only a few foreign enterprises are aware of prerequisite technical standards. According to Joerg Wuttke, president of the European Union Chamber of Commerce in China, this has been a common practice in the railway and energy sectors.[9]
The results of this approach are no less significant than explicit mandates. The lack of effective foreign competition in public procurement has enabled Chinese firms to gain 70% to 100% of domestic market share across telecommunications, solar, and rail rolling-stock sectors.[10]
In turn, this market share facilitated the development of huge economies of scale. When combined with government support measures including subsidies and export credits, these economies of scale helped Chinese players dwarf competitors globally. As a result of its scale, Huawei is typically able to offer 5G products at a 10% to 30% discount to foreign competitors.[11]
Reaction in Europe
By 2020, Europe was feeling the effects of China’s growing heft as Chinese companies were winning €2 billion worth of European public procurement contracts, up from €750 million in 2019.[12] Had Huawei not been excluded from tendering, the figure would be considerably higher.
Following Brussels’ EU-China Strategic Outlook in March 2019, Berlin and Paris lobbied more forcefully for reciprocity. However, ongoing negotiations on the EU-China Comprehensive Agreement on Investment (CAI) undermined efforts to revive the IPI.[13]
When Beijing retaliated against Europe in early 2021, in response to EU sanctions over alleged human rights violations in China's western region of Xinjiang, efforts to ratify the CAI lost all traction. It was only when China lost this leverage that serious efforts were made to accelerate the IPI. China’s perceived role in backing Russia’s invasion of Ukraine has also steeled European resolve.[14]
The IPI is not solely about China. However, officials and industry experts say only China has the requisite technological clout and domestic market size capable of materially undermining the global competitiveness of European firms. Other countries with similar practices and policies as China do not have the heft to move the needle as much. China does this by shielding firms from competition domestically whilst encouraging them to also tender overseas.
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The IPI must be perceived in the broader context of Brussel’s legislative agenda. It is the most advanced of a series of instruments which could, in their maturity, redefine the Brussels-Beijing relationship.
During the last year, the EU has announced plans for an “Anti-Coercion” Instrument and reached provisional political agreement on a mechanism to combat the effects of distortionary subsidies. The EU’s Carbon Border Adjustment Mechanism (CBAM) will go into full effect in 2026. China is likely the most consequential target of these measures.[15]
Wary of repercussions
Whether the IPI is actually invoked against Chinese companies will serve as a litmus test on how far the dial has really shifted on EU-China relations.
Political and economic complications are plentiful. Facing soaring inflation and possibly a recession, European capitals will be wary of economic blowback from China. Though clearly leaning towards the US, most EU countries still seek an element of equidistance between Washington and Beijing. A second Trump presidency is not inconceivable. Europe will be reluctant to fight trade disputes on two fronts.
Nor is the IPI likely to be a panacea. Preferential procurement access for domestic firms appears to be an entrenched part of China’s political economy and broader industrial strategy.[16] Even if the IPI is invoked, there is no guarantee that it will catalyse greater reciprocity.
As questions increasingly loom over Europe’s future industrial competitiveness vis-à-vis China, the IPI’s invocation may be a defensive measure that European policymakers are increasingly tempted to take.[17]
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[1] News European Parliament, “International public procurement instrument: securing fairness for EU firms”, EU Parliament, https://www.europarl.europa.eu/news/en/press-room/20220603IPR32143/international-public-procurement-instrument-securing-fairness-for-eu-firms.
[2] János Allenbach-Ammann, “With China in mind, EU agrees on rules to force open tenders”, Euractiv, https://www.euractiv.com/section/economy-jobs/news/with-china-in-mind-eu-agrees-on-rules-to-force-open-tenders/.
[3] European Commission, “Public procurement”, https://ec.europa.eu/growth/single-market/public-procurement_en.
[4] European Commission, “International procurement instrument – factsheet”, European Commission, https://trade.ec.europa.eu/doclib/docs/2019/march/tradoc_157728.pdf.
[5] Ibid.
[6] Stephen Ezell, “False Promises II: The Continuing Gap Between China’s WTO Commitments and Its Practices, ITIF, https://itif.org/publications/2021/07/26/false-promises-ii-continuing-gap-between-chinas-wto-commitments-and-its/.
[7] Ibid.
[8] Agatha Kratz & Janka Oertel, “Home advantage: How China’s protected market threatens Europe’s economic power,” European Council on Foreign Relations, https://ecfr.eu/publication/home-advantage-how-chinas-protected-market-threatens-europes-economic-power/.
[9] Cissy Zhou, “Standard-bearer: China races U.S. and Europe to set tech rules”, Nikkei Asia, https://asia.nikkei.com/Spotlight/Asia-Insight/Standard-bearer-China-races-U.S.-and-Europe-to-set-tech-rules.
[10] Agatha Kratz & Janka Oertel, “Home advantage: How China’s protected market threatens Europe’s economic power,” European Council on Foreign Relations, https://ecfr.eu/publication/home-advantage-how-chinas-protected-market-threatens-europes-economic-power/.
[11] Ibid.
[12] Eleonora Sartori, “EU-China trade – leveling the playing field at last?”, MERICS, https://merics.org/en/opinion/eu-china-trade-leveling-playing-field-last.
[13] Ibid.
[14] Finbarr Bermingham, “EU-China summit was a ‘dialogue of the deaf’, says top Brussels diplomat”, SCMP, https://www.scmp.com/news/china/article/3173188/eu-china-summit-was-dialogue-deaf-says-top-brussels-diplomat.
[15] John Seamen et al., “Dependence in Europe’s relations with China”, MERICS, https://merics.org/sites/default/files/2022-04/etnc_2022_report.pdf.
[16] Alexander Brown & Gregor Sebastian, “Medical equipment production + Tech-focused SMEs + Robotics”, MERICS, https://merics.org/en/merics-briefs/medical-equipment-production-tech-focused-smes-robotics; Editorial, “Editorial: Enabling the Establishment of a Unified Domestic Market”, Caixin, https://www.caixinglobal.com/2022-04-18/editorial-enabling-the-establishment-of-a-unified-domestic-market-101872272.html.
[17] Diana Choyleva, “China is steadily wiping out Germany industry”, Nikkei Asia, https://asia.nikkei.com/Opinion/China-is-steadily-wiping-out-German-industry.
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Author
Henry Storey
Henry Storey is a senior analyst at Dragoman, a Melbourne-based political risk consultancy. He is also a regular contributor of The Interpreter published by The Lowy Institute.
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