ASIL Insights

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On December 10, 2003, the U.S. Department of Defense made public its decision to limit competition for contracts worth $18.6 billion for Iraqi relief and reconstruction to contractors from the United States and certain other countries that were part of the U.S.-led coalition in the war in Iraq. [1]   A memorandum (titled "Determination and Findings") signed by Deputy Secretary of Defense Paul D. Wolfowitz states that "it is necessary for the protection of the essential security interests of the United States to limit competition" for 26 separate reconstruction contracts to be awarded by the Department of Defense and the Coalition Provisional Authority ("CPA") in Iraq to contractors from 63 different countries. [2]   Thus, contractors from major U.S. trading partners such as Canada, Germany, France, and Russia are not presently eligible to compete for these contracts. [3]

The Department of Defense's announcement has led to considerable speculation as to whether this action is consistent with World Trade Organization (WTO) procurement rules.  It may indeed seem at first impression that a decision to deny enterprises from some fellow WTO Members and valued trading partners access to lucrative business opportunities is inconsistent with basic WTO principles.  In reality, however, the issue is much more complicated.  There are several difficult questions that would have to be resolved to challenge the Department of Defense's policy successfully under WTO rules.

The WTO Rules:

The two core WTO rules are the most favored nation (MFN) principle, contained in Article I of the General Agreement on Tariffs and Trade (GATT), by which WTO Members agree to treat all other WTO Members equally, and the national treatment principle, contained in Article III of the GATT, by which WTO Members agree to treat goods of other Members no less favorably than domestic goods.  Article III:8(a) of the GATT provides an express exemption from the national treatment requirement for "laws, regulations or requirements governing the procurement by governmental agencies of products purchased for governmental purposes and not with a view to commercial resale."  A threshold issue in addressing the WTO consistency of the Determination and Findings, therefore, is whether any of the contracts at issue fall within this exemption.  Since most of the contracts appear to involve the purchase of services rather than products, this may not apply. 

In contrast to GATT Article III, GATT Article I contains no express exemption from the MFN principle for procurement.  A procurement policy that favors some countries over others, therefore, may raise MFN concerns.  Since Article I applies to "customs duties and charges of any kind imposed on or in connection with importation or exportation or imposed on the international transfer of payments for imports or exports," arguably this does not apply to procurement issues.  However, Article I provides that the MFN requirement applies also to the "matters referred to in paragraphs 2 and 4 of Article III."  Paragraph 4 of Article III, which refers to "all laws, regulations and requirements affecting the[] internal sale, offering for sale, purchase, transportation, distribution or use" of imported products could be interpreted as applying the MFN principle to procurement rules.  It is an open question as to whether the exception for procurement contained in Article III:8 would provide a defense to an MFN claim based on the cross-reference to Article III:4 in Article I.  A practical issue may also arise as to whether these provisions cover the Iraqi reconstruction contracts, which -- as noted above -- appear to involve primarily the purchase of services rather than the importation of goods. 

The WTO's specific rules on government procurement are found in the Agreement on Government Procurement ("GPA"). [4]   Most of the instruments that make up the WTO Agreements are multilateral agreements that apply equally to all WTO Members.  The GPA, however, is merely a plurilateral agreement that binds only those WTO Members that have expressly agreed to be bound by it.  Only parties to the GPA may challenge the consistency of another party's actions with its obligations under the GPA.  The United States is a party to the GPA, as are most of the United States' major trading partners, including the European Communities (and its member states), Canada, Japan and Korea, but not Russia. 

Article II of the GPA incorporates the core WTO principles of national treatment and non-discrimination, which means that bidders from parties to the GPA may not be treated less favorably than either U.S. bidders or bidders from other parties to the GPA.  However, the GPA does not cover all government procurement activities.  Rather, it is based on a system of affirmative commitments - parties are bound only to the extent that they have affirmatively agreed to subject particular procurement opportunities to the GPA rules.  The commitments made by each party to the GPA are listed an appendix to the agreement.  Each party to the GPA submits an Appendix I, which contains annexes that identify the party's (i) central government entities; (ii) local government entities; and (iii) other public entities that the party commits to be bound by the GPA. [5]   This Appendix also includes annexes that identify (iv) a positive and negative list of the types of services to be covered by the party's commitments; and (v) the types of construction services that will be covered by the party's commitments. 

Thus, an analysis of whether the procurement of a particular government contract - such as contracts to be issued under the Department of Defense's new policy - complies with the GPA requires a careful analysis of whether the contract (i) is issued by a entity covered by the United States's GPA commitments and (ii) involves a contract for a type of good or service also covered by those commitments. [6]  

Are the Department of Defense and the CPA Covered by U.S. Commitments?

Annex 1 of the U.S. commitments lists the "Department of Defense, including the Army Corps of Engineers" as the last of 87 Federal government entities covered by the United States' commitments.  Since the Determination and Findings states that the 26 contracts are to be awarded by the "Coalition Provisional Authority (CPA) and by the Department of Defense, on behalf of the CPA," it could be argued that these contracts are covered by the U.S. commitments.   Certainly, any contracts awarded by the Department of Defense itself would presumptively be covered.

Complexities arise, however, regarding the CPA.  A statement by the Office of the United States Trade Representative ("USTR") on December 10, 2003, asserts that "Purchases on behalf of the Coalition Provisional Authority (CPA) are not covered by international trade procurement obligations because the CPA is not an entity subject to these obligations." [7]   The mere fact that the CPA is not specifically listed in the U.S. commitments may not, however, be dispositive of whether it is covered by the GPA.  Article I.3 of the GPA provides that: 

Where entities, in the context of procurement covered under this Agreement, require enterprises not included in Appendix I to award contracts in accordance with particular requirements, Article III shall apply mutatis mutandis to such requirements.

There is little jurisprudence in the WTO dispute settlement system interpreting the term "require" in this context.  The WTO Appellate Body has yet to address this issue.  The most relevant guidance is found in the Korea - Government Procurement case, in which the United States challenged certain Korean procurement practices.  In examining whether an entity listed in Korea's GPA commitments controlled another, non-listed entity, the Panel noted that "it would defeat the objectives of the GPA if an entity listed in a signatory's Schedule could escape the Agreement's disciplines by commissioning another agency of government, not itself listed in that signatory's Schedule, to procure on its behalf." ^[8]   The Panel looked at whether the second entity was "essentially a part" of the listed entity, and whether the two entities were legally unified. ^[9]   The Panel went on to list a number of "indicia of control" that may be relevant to the determination. ^[10]  

The relationship between the Department of Defense and the CPA raises more complex questions, however, that are not wholly answered by the analysis in Korea - Government Procurement.  The legal nature of the CPA is uncertain, at least for these purposes.  The United States' argument that the CPA is an international entity, rather than an entity of a party of the GPA, raises legal issues of first impression before the WTO that would undoubtedly be strongly contested.  It should be noted, however, that the Determination and Findings appear to assert U.S. control over the award of contracts by the CPA and contain mandatory language that could well be interpreted as "requiring" the CPA to "award contracts in accordance with particular requirements" within the meaning of Article I.3.  Ultimately, the question would turn on the determination of whether the CPA should be treated as a U.S. entity and whether it exercises independence in the contracting process.

Are These Contracts Covered by the U.S. Commitments?

The second issue is whether these contracts are the types of contracts covered by the U.S. commitments.  There are some exceptions to the U.S. commitments that may apply to these contracts.  Several categories of purchases by the Department of Defense are excluded from the U.S. commitments for national security reasons.  Moreover, Annex 4 of the U.S. commitments excludes "all services purchased in support of military forces located overseas."  

The new Department of Defense policy covers 26 contracts involving very different activities, including, among others, equipping the new Iraqi Army, office management services, communications services, and construction activities. [11]   Arguably, some of these services could be considered as required to support the continued presence of U.S. military forces in Iraq. 

In its statement supporting the Determination and Findings, the USTR also suggested that these contracts were analogous to foreign aid for the benefit of the Iraqi people.  The United States has expressly excluded "any form of government assistance, including cooperative agreements, grants, loans, equity infusions, guarantees" from the scope of its commitments.  It is not clear whether this exclusion was intended to cover the types of contracts, including contracts for construction of public works projects, listed in the Department of Defense memorandum. Whether the exclusions contained in the U.S. commitments would apply to any of these 26 contracts, therefore, would depend on the details of each contract.    

Is There A National Security Exception?

Article XXI of the GATT provides, inter alia, that nothing in the GATT (now WTO) Agreements shall be construed "to prevent any [Member] from taking any action which it considers necessary for the protection of its essential security interests."  This principle is re-stated, almost verbatim, in Article XXIII:1 of the GPA.  The Determination and Findings makes an explicit finding that limiting competition for these contracts is "necessary for the protection of the essential security interests of the United States." [12]   The statement of the USTR quoted above, regarding the status of the CPA under WTO procurement rules, implies quite directly that were the CPA to be treated as an entity covered by the U.S. commitments, the United States would rely on the essential security exception of GPA Article XXIII. 

The "essential security interest" exceptions have broad potential to undermine substantive WTO obligations, in that they permit WTO Members to avoid these obligations at their own discretion, subject to challenge through the WTO dispute settlement process.  WTO Members have been careful to avoid excessive reliance on these exceptions, which hold the potential to precipitate tit-for-tat recourse to the exceptions by their fellow Members.  No WTO panel has had to review a Member's assertion that otherwise WTO-inconsistent actions were necessary to protect its essential security interests, so it is unclear what standard would be used to make this determination.  It's doubtful that any WTO panelists, versed in trade rather than security policy, would relish the task. [13]    

For these reasons, the United States may prefer not to have to defend measures restricting competition on some of these contracts on "essential security interests," were this issue to come before a WTO dispute settlement panel.  For example, it may be difficult to show how the award of a contract to provide management services in the Iraqi health sector could undermine essential security interests of the United States.  It seems likely, however, that the United States would rely heavily on its security concerns in any diplomatic negotiations regarding this procurement policy. 

About the Authors: 
The authors are both partners in the International Trade and Dispute Resolution practice in the Washington, D.C. office of Sidley Austin Brown & Wood, LLP.  The authors' law firm has represented both U.S. and other interests before the WTO.

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