The WTO Agreement on Subsidies and Countervailing Measures (ASCM) recognizes that a subsidy can exist when a government purchases goods "and a benefit is thereby conferred." The benefits the drafters of the ASCM had in mind were those resulting from purchases that take place under circumstances that do not accurately reflect normal market con?ditions.
Governments practice preferential purchasing routinely, expressly favouring domestic over foreign suppliers of similar-quality goods - e.g., by paying domestic suppliers higher prices or offering special financing arrangements. The conflict of interest faced by governments is under?standable. They are expected by taxpayers to be savvy buyers, but are also under constant pressure to support domestic producers.
The magnitude of government procurement is enormous. A study from 2000 estimated that each year OECD countries spend USD 4, 733 billion procuring goods and services, particularly for state-run health services, public works, and the military. Much of these purchases are made at market prices, but it is believed that a significant fraction of them include an element of subsidy.
The WTO has been trying to establish ground rules for government procurement since the 1980s. The latest rules are set out in the Agreement on Government Procurement (AGP), signed in 1994. Being a "plurilateral" agreement it applies only to its signatories, which are mainly OECD economies. By establishing recommended procedures for tendering, negotiating and awarding government contracts, it outlines a desirable system of government procurement. However, monitoring and enforcement of the AGP is weak, and there are many ways in which governments can bypass its disciplines, such as by excluding certain types of purchases (e.g., for the military) or setting thresholds - higher than the lower limits contained in the Agreement itself - below which the AGP does not apply.
