How Government Procurement Practices Affect International Trade

20 ноября 2020, 18:10

Government procurement, otherwise known as government purchasing, is the attainment of products and services by government agencies. Consisting of 10 to 15% of GDP in the US, government procurement is a huge part of the business market. Many businesses benefit economically from this process, which works to boost the domestic economy. In fact, it often prefers suppliers in the local market and provides a guarantee for importers in case they fail at completing their responsibilities in international trade relations. Government procurement might be implemented directly by governmental institutions, or private companies might provide these government purchases. So how exactly does this affect international trade?

In democratic countries, transparency is an important principle. The government declares its political priorities, prompting all relevant economic units to be aware of these preferences and make their own decisions regarding trade actions. In the case of government procurement, companies can know what the exact strategies are, which can help them shape their commercial preferences correspondingly. For instance, if the government purchases a large amount of steel for a national security service production, importers become aware of a price increase in local steel markets. However, if the government makes this purchase from a foreign company as an import, that might create value loss in national currency, and inflation occurs if purchases are large enough to influence exchange rates. The purchase of steel affects local steel markets directly while this purchase creates a big impact on macroeconomic indicators. Therefore, even companies and individuals that are not involved can be influenced indirectly. 

            In relatively less democratic countries, transparency in government procurement is not as well-developed. Therefore, only a limited number of companies and individuals have access to certain information. In other words, a lack of transparency is a method for non-democratic management to provide an advantage to its supporters. This kind of government procurement creates inequality in accessing business opportunities, and government partners receive a relatively higher income than others. However, the macroeconomic influences of public purchases influence everybody. For example, in Turkey, the law for the regulation of public procurement has been changed over 300 times in 25 years to provide an advantage for supporter companies. As a result, five Turkish companies are currently among the top 10 companies that receive the highest financial resources from the government. Public procurement practices have not benefited everyone, and Turkey has been experiencing a deep economic crisis in recent years due to the strategies implemented by the government.             It is evident just how much public procurement strategies can influence local trade relations and international trade. If a country is not democratic, public procurement creates a high level of inequality in trading, which leads to adverse influences on macroeconomic indicators. Subsequently, all the parties involved in international trade are affected as well. For democratic countries, inequality becomes minimized while the government becomes the strongest agent in the national economy. However, in these countries, governments produce only some public goods, and there is minimum governmental intervention in markets. Therefore, government procurement is transparent for every party involved in local and international markets, creating no surprises for individuals and companies. This allows countries to minimize the adverse influence of public procurement at a minimum level, benefiting those involved.

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