Provinces become battleground in China's WTO offer

A worker walks at Tianjin Port in northern China May 13, 2010. Talks over China's offer to join the World Trade Organisation's government procurement agreement will likely focus on purchase practices by the country's many provinces, where local protectionism tends to be more prevalent.

BEIJING (Reuters) - Talks over China's offer to join the World Trade Organisation's government procurement agreement will likely focus on purchase practices by the country's many provinces, where local protectionism tends to be more prevalent.

Like most WTO members, China has not yet joined the GPA, which requires a separate negotiation process. Members of the sub-group, mostly wealthy developed countries, pledge to give each other reciprocal access to government tenders and purchases.

People who have seen China's revised offer, submitted this month, say a space has been left blank under the heading "sub-central government entities", which is supposed to outline the levels of government that must abide by the agreement.

China pledged to make an offer to join the GPA last year at a Sino-U.S. summit, after an initial proposal in 2007 was rejected as inadequate by other member countries.

The revised offer is much more acceptable to trading partners, with a five-year phase-in, instead of 15 years, and more central government bodies covered by the agreement.

"I don't see the entry as being altogether smooth. A lot of negotiation will still be needed, but altogether, the environment is so much better than when China entered the WTO," said Zheng Zhihai, the vice chairman of the China Society for WTO Studies, under the Ministry of Commerce.

"At the end of the day, it will go through because it suits the interests of both sides."

European, American and Japanese firms are lobbying for an open Chinese market and, in theory, joining the GPA would be to China's benefit by granting reciprocal access in those countries.

But in practice, the benefits of the GPA for Chinese firms would be limited, since their biggest projects are in developing Middle East and African countries which are not GPA members.

LOWER-LEVEL BODIES NOT INCLUDED

Trading partners are dismayed that lower-level government bodies or state-owned enterprises are not included in China's initial offer.

State-owned enterprises, a hybrid between a government-run body and a competitive corporation, are also not currently included in China's GPA offer.

Many SOEs, like Baosteel (600019.SS) or PetroChina PTR.O, have actively sourced foreign equipment and technology during upgrades to international standards. But negotiators may be more concerned about insular state-owned monopolies like the State Grid Corp., which function more like government arms.

The initial threshold for the size of deal that must be open to outsiders is also higher than that of other GPA members.

China's provinces have in the past imposed restrictions on buying goods made in other provinces to protect local producers.

Unlike China's hard-fought entry into the WTO, spearheaded by the Ministry of Commerce, talks on the GPA will be led by the Ministry of Finance, due to its authority over the state budget.

In practice, government bodies tend to actively buy foreign goods, since officials often feel the guaranteed quality offsets the higher price, said Tu Xinquan, a WTO specialist at the University of International Business and Economics in Beijing.

"The issue for government negotiators is that right now I voluntarily open. But the GPA would force me to be open," Tu said. "That could limit the government's freedom of action."

The lost policy latitude would include initiatives like "indigenous innovation" regulations, designed to support Chinese firms entering the high-tech sector or moving up the value chain.

Those alarmed foreign companies as they encourage government bodies to preferentially source Chinese-owned and manufactured technology, goods and services.

(Editing by Ken Wills and Ron Popeski)