- The Washington Times - Tuesday, December 30, 2003

There was a media firestorm when it was “discovered” that the United States was only going to allow American and allied companies to bid on $18.6 billion of Iraq reconstruction projects. Yet, this was old news. When the Pentagon set up its Office of Reconstruction and Humanitarian Assistance, its mandate was to make contracts only with American firms. The U.S. Agency for International Development had similar rules. As USAID Administrator Andrew Natsios said in April, “Some countries have complained that they were not invited to bid for these projects, which are funded by U.S. taxpayers.” He then noted that “foreign aid agencies in most countries try to award contracts to their own companies, supporting business at home while delivering assistance abroad — just as Americans want to see their tax dollars support jobs at home.”

As Washington administers postwar Iraq, it must combine economics with geopolitics. If foreign governments and corporations are free to act against U.S. interests without cost to themselves, how can they be deterred from doing so again? France, Germany, Russia and China bet on the wrong horse when they backed Saddam Hussein against the U.S.-led coalition and deserve to lose their stakes. Economic policy should be used to strengthen coalition-Iraqi ties, not open the door for foreign interests to establish factions hostile to coalition objectives.

Accusations that Bush administration policy is “spiteful unilateralism” are pure nonsense. The alignment of Britain, Italy, Spain, Japan, Poland and some two dozen other countries supporting the United States is just as multilateral as the opposing alignment. The claim that France and Germany would reject U.S. initiatives to lessen Iraq’s international debt burden also proved wrong, as special envoy James Baker received pledges from both France and Germany that they would cooperate in writing down Iraq’s debts. Indeed, the U.S. hardline on contracts may have strengthened Mr. Baker’s hand by demonstrating Washington’s willingness to impose economic costs on noncooperative governments.

The European Commission may still file a complaint with the World Trade Organization. Under the Government Procurement Agreement (GPA), governments in most cases must allow international bidding, and treat domestic and foreign firms equally. Signed as part of the Uruguay Round that created the WTO, the GPA is actually a separate agreement that only 28 nations have signed. Unfortunately, the United States is one of them (though Iraq is not).

Governments have long used procurement to support domestic industry, particularly public infrastructure, national defense and other strategic sectors. It is both good politics and sound economics for money taken out of the economy through taxes or borrowing to be plowed back into the economy via procurement. The United States, with a $2 trillion federal budget, is well positioned to make use of such policies itself. Instead, the Clinton administration chose to give up this sovereign advantage in the hope of opening foreign markets. The results have not been encouraging.

Article V of the GPA takes into account “the development, financial and trade needs of developing countries” so that they can continue to restrict procurement to “promote the establishment or development of domestic industries.” In developing countries, the general population is too poor to present an attractive market. The only customer with money is the government. Thus, opening procurement in developing countries would make sense as a U.S. objective, but the GPA did not do this. Even with substantial exemptions from GPA rules, most developing countries have refused to sign the agreement.

GPA Article XVI bans the use of offsets “in the qualification and selection” of suppliers. Yet, as the U.S. Commerce Department’s Bureau of Industry and Security has reported,I “Today, virtually all of the defense trading partners of the United States impose some type of offset requirement. … Developed countries with established defense industries are using offsets to channel work or technology to their domestic defense companies. Countries with newly industrialized economies are utilizing both military and commercial related offsets that involve the transfer of technology and know-how.”

The GPA allows “the protection of essential security interests relating to the procurement of arms, ammunition or war materials, or to procurement indispensable for national security or for national defense purposes.” The United States, however, is abandoning support for its own defense industry. When the House Armed Services Committee earlier this year proposed reforms to bolster the domestic production of critical weapons systems and technology for U.S. armed forces, U.S. Trade Representative Robert Zoellick objected because it was inconsistent with his trade philosophy.

Despite the exemptions for developing countries and national defense, the GPA extols the same principle of nondiscrimination underlying the entire WTO system that Mr. Zoellick embraces. But nondiscrimination between citizens and aliens, friends and foes, is an entirely wrongheaded notion. There is a natural hierarchy, moral as well as practical, that will lead a responsible government to discriminate. First comes concern for one’s own country and its people, as national capabilities create the foundation for both prosperity and security. Then comes consideration due allies for mutual support. Neutrals deserve no special consideration unless induced to become allies. And rivals are to be denied the economic and other means needed to advance their opposing agendas. The Iraq model fits reality and should be continued, the WTO model is a dangerous sophistry that should be abandoned.

William R. Hawkins is senior fellow for National Security Studies at the U.S. Business and Industry Council.

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