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CHAPTER TEN (GOVERNMENT PROCUREMENT)

OF THE

NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA)

What is Chapter Ten of the NAFTA and what does it do?

Who benefits from Chapter Ten of the NAFTA?

How can Chapter Ten of the NAFTA help my company?

Can the U.S. Government help me if I have a problem?

How can I get more information?

What is Chapter Ten of the NAFTA and what does it do?

Chapter Ten of the North American Free Trade Agreement (NAFTA) requires each of the three NAFTA countries to accord non-discriminatory, "national" treatment to suppliers of goods and services in the other two countries in public sector procurement that is covered by the Chapter. These suppliers must be treated no less favorably than domestic companies competing for the same procurement opportunities. The Chapter also provides that procedures relating to government procurement must be transparent, effective and fair.The Chapter also provides that procedures relating to government procurement must be transparent, effective and fair.

Canada, Mexico and the United States are the parties to the NAFTA.

The NAFTA entered into force on January 1, 1994 and is scheduled to be fully implemented by 2008. It has no expiration date.

For the United States and Canada, Chapter Ten of the NAFTA built on commitments already made in the U.S.-Canada Free Trade Agreement and the 1979 GATT Government Procurement Code. Chapter Ten represented Mexico's first commitment to eliminate discriminatory government procurement practices with respect to foreign goods, services and suppliers.

Who benefits from Chapter Ten of the NAFTA?

Any American company interested in exporting products or services to the Canadian or Mexican public sector can benefit from Chapter Ten of the NAFTA. U.S. suppliers of oil and gas field equipment and services, heavy electrical equipment, communications and computer systems, electronics, steel, pharmaceuticals, medical equipment and construction services are among the principal beneficiaries.

How can Chapter Ten of the NAFTA help my company?

Coverage of the Chapter

Chapter Ten of the NAFTA covers virtually all federal government agencies in the three countries, as well as a significant number of government-controlled enterprises ("parastatals") such as the Tennessee Valley Authority in the United States, Canada's St. Lawrence Seaway Authority, and Mexico's Petroleos Mexicanos (PEMEX, the national oil company) and its Comisión Federal de Electricidad (CFE, the national electric company).

The federal government entities that are covered in each of the three countries are listed in Annex 1001.1a-1 of Chapter Ten, and the government-controlled enterprises are listed in Annex 1001.1a-2.

State and provincial government entities are not subject to Chapter Ten. The U.S. government encourages states to adopt NAFTA procurement disciplines, but the final decision rests with individual states. The Mexican and Canadian governments are currently working with their state and provincial governments to seek their voluntary, reciprocal participation.

Chapter Ten applies to the goods listed in Annex 1001.1b-1, the services listed in Annex 1001.1b-2 and the construction services listed in Annex 1001.1b-3.

To be covered by Chapter Ten, contracts for goods and services must meet minimum dollar thresholds. These thresholds are reviewed every two years and adjusted, as needed, on the basis of the U.S. inflation rate. The current rates can be found in the Federal Register Notice, published by the Office of the United States Trade Representative under the Procurement Thresholds for Implementation of the Trade Agreements Act of 1979, under the heading NAFTA, Chapter 10.

You can obtain information on specific government procurement opportunities in Canada and Mexico by visiting the web sites of their official electronic tendering services. Canada's is MERX (offsite link)and Mexico's (which is in Spanish) is COMPRANET (offsite link).

What is not covered

Chapter Ten has certain "denial of benefits" provisions. Under Article 1005, a party to the NAFTA can deny benefits to a supplier that does not have substantial business activities in any NAFTA territory, in other words if the company is just a shell. A NAFTA party can also deny benefits to a supplier that is owned by nationals of a country with which it does not have diplomatic relations, or by nationals of a country that is subject to economic sanctions (for example, North Korea).

Parties to the NAFTA can make exceptions to the rule of nondiscriminatory treatment in government procurement for strategic or national security reasons, or to protect health, safety, morals, the environment or intellectual property.

The parties to the NAFTA reserve the right to favor domestic suppliers for programs designed to benefit small and minority business, and for research and development activities. The U.S. Department of Agriculture may exclude purchases for farm support programs and food programs, and the U.S. Agency for International Development (USAID) may exclude procurement related to foreign assistance programs (as long as the procurement is not for the direct benefit or use of USAID).

Beginning in 1994, when the NAFTA went into effect, Mexico's national oil and electric companies (PEMEX and CFE) were allowed to set aside one half of their procurement each year for domestic suppliers. The rest of their procurement was subject to the obligations of this NAFTA Chapter. The amount of the set-aside was phased out entirely in 2003.

Mexico has also been allowed every year to set aside for domestic suppliers a total of $l billion of the procurement of all other government entities (except PEMEX and CFE). This general set-aside increased to $1.2 billion at the beginning of 2003. At that point PEMEX and CFE will be eligible for up to $300 million of the total.

A final exception allows Mexico to impose local-content requirements for turnkey construction projects. For capital intensive projects, Mexico can set aside as much as 25 percent for local inputs, and it can require as much as 40 percent Mexican content for labor intensive projects .

The Procurement Process

The NAFTA requires procuring entities to follow fair, competitive and transparent procedures with respect to the qualification of suppliers, time limits, documentation, awards of contracts and other aspects of the procurement process. The main requirements are:

No party may select a valuation method or divide a procurement into separate contracts in order to avoid the threshold requirements or other provisions of Chapter Ten.

Procedures for submitting bids must be transparent and well-publicized. Bidding documentation must be straightforward and manageable. Time limits for bidding must be adequate. Confidentiality must be ensured.

Procuring entities must apply the same rules of origin that their governments apply in the normal course of trade.

Technical specifications should be based on performance criteria rather than design or descriptive characteristics; they should not require or refer to specific trademarks, names, patents, designs, origins, producers or service providers (unless there is no other feasible means of description); and advice should not be sought or accepted in the preparation or adoption of technical specifications from any person that may have a commercial interest in a specific procurement.

Limited tendering (where a procuring entity contacts suppliers individually) must be as competitive as possible and used only in limited circumstances. It is allowed when there is evidence of collusion among suppliers, when there is a justifiable reason to protect patents, copyrights or other proprietary rights or in the absence of competition for technical reasons.

Selective tendering (in which procuring entities maintain a list of qualified suppliers) is allowed if it is consistent with the efficient operation of the procurement system and if there is maximum opportunity for participation by suppliers from other NAFTA countries as well as domestic suppliers.

Offsets

The NAFTA prohibits the use of "offsets" in procurements covered by Chapter Ten. Offsets are contract conditions that encourage domestic development or improve a country's balance-of-payments accounts by requiring, for example, local content, the licensing of technology, local investment or counter trade.

Dispute Settlement

To promote fair and open procurement, each Party is required to maintain a "bid challenge" mechanism. Suppliers have the right to challenge both bidding procedures and contract awards, and are assured that an independent body in each NAFTA country will review such challenges and recommend action to correct any discrepancies.

The NAFTA does not specify how the review should be conducted or what role interested parties should have. If the reviewing authority finds that there has been a violation under the NAFTA, it can issue a "recommendation" that the procuring agency should re-evaluate the bids, allow suppliers to re-compete or even terminate contracts. According to Article 1017, the procuring agency "shall normally follow the recommendations of the reviewing authority", but it is not required to do so.

Can the U.S. Government help me if I have a problem?

Yes. If you encounter difficulties selling goods or services to Canadian or Mexican government agencies or government-controlled enterprises because they have failed to comply with Chapter Ten of the NAFTA, contact the Office of Trade Agreements Negotiations and Compliance's hotline at the U.S. Department of Commerce. The Center can help you understand your rights under Chapter Ten and can alert the appropriate U.S. Government officials to help you resolve your problem. The U.S. Government can, if appropriate, raise the particular facts of your situation with the government of the other country involved and ask officials of that government to review the matter.

How can I get more information?

The complete text of Chapter Ten (Government Procurement) of the NAFTA is available from the Office of Trade Agreements Negotiations and Compliance's web site.

If you have questions about Chapter Ten or how to use it, you can e-mail the Office of Trade Agreements Negotiations and Compliance which will forward your message to the Commerce Department's Designated Monitoring Officer for the Agreement. You can also contact the Designated Monitoring Officer at the following address:

Designated Monitoring Officer-

NAFTA Chapter 10 - Government Procurement

Office of North America

U.S. Department of Commerce

14th Street & Constitution Avenue, N.W.

Washington, D.C. 20230

Tel: (202)-482-1545

General information on International government procurement opportunities is available on the International Government Procurement web page of the Department of Commerce's Office of Trade Agreements Negotiations and Compliance.