The World Trade Organisation (WTO) manages government procurement through the Government Procurement Agreement (GPA), which was signed in 1994. A revised version of the Agreement to be signed upon completion of the Doha Round, was finalised in 2006.
A total of 41 WTO members, including the 27 EU Member States are parties to the 1994 Agreement.
As a general rule, the GPA forbids the Parties to request offsets, but acknowledges two exceptions:
Article XVI – Offsets – Paragraph 2 – Nevertheless, having regard to general policy considerations, including those relating to development, a developing country may at the time of accession negotiate conditions for the use of offsets, such as requirements for the incorporation of domestic content. Such requirements shall be used only for qualification to participate in the procurement process and not as criteria for awarding contracts. Conditions shall be objective, clearly defined and non-discriminatory. They shall be set forth in the country’s Appendix I and may include precise limitations on the imposition of offsets in any contract subject to this Agreement. The existence of such conditions shall be notified to the Committee and included in the notice of intended procurement and other documentation.
Article XXIII – Exceptions to the Agreement – Paragraph 1 – Nothing in this Agreement shall be construed to prevent any Party from taking any action or not disclosing any information which it considers necessary for the protection of its essential security interests relating to the procurement of arms, ammunition or war materials, or to procurement indispensable for national security or for national defence purposes.
Offset requirements favour local suppliers, contradicting one of the fundamental EU principles, namely non-discrimination on the ground of nationality among Member States, as stipulated in Article 18 of the Treaty on the Functioning of the European Union (TFEU). Yet, the Treaty protects the essential security interests of a Member State. This exception is found in Article 346 TFEU. Consequently, although no Member State requires offset on civil contracts, offset is a common requirement for defence contracts and the practice has in the past been used by Member States to develop their defence industries and decrease their reliance on foreign resources in the defence sector.
In 2008 the European Defence Agency (EDA) published a Code of Conduct on Offsets aiming, inter alia, to bring a common framework and more transparency to Member States’ offset practices. This Code is not legally binding.
Yet, the transposition period of the 2009/81/EC directive, which creates a common framework for EU defence procurement markets, gave the European Commission the opportunity to express its views on offset requirements emanating from Member States. Although aware its interpretation needs to be confronted to the European Court of Justice (ECJ) before it becomes fully applicable, the European Commission states in a specific Guidance Note on Offset that Member States’ use of Article 346, thanks to which they justify their offset practices, is too broad.
To date, no ECJ jurisprudence directly links offset and Article 346.
At EU level
For civil contracts, the 2004/17/CE directive, which manages public procurement in the water, energy, transport and postal services sectors, authorises awarding entities to decline an offer if the European content is lower than 50%:
Article 58 – Any tender submitted for the award of a supply contract may be rejected where the proportion of the product originating in third countries […] exceeds 50% of the total value of the products constituting the tender.
For defence contracts, the above mentioned 2009/81/EC directive authorises awarding entities to demand that the first tier supplier subcontract up to 30% of the market value of the contract. . The Directive does not include any reference to nationality for the subcontracts.