BRUSSELS (Reuters) - The European Union could block non-EU companies from bidding for government contracts if European firms continue to struggle to win public tenders abroad, the European Commission said on Wednesday, in a move that could sharply escalate trade tensions.
European software companies in particular have complained of being sidelined in bids for government contracts in China, while the European Commission also has concerns about U.S. legislation that favors homegrown firms.
To fight back against what it regards as unfair competition from major economic competitors, EU commissioners for the internal market and trade policy have put forward proposals that could lead to a dramatic shift in public procurement, which can range from building highways to running data networks.
Such contracts are among the most lucrative in the world, worth well over 500 billion euros ($661 billion) a year according to EU figures.
"The EU should no longer be naive and should aim for fairness and reciprocity in world trade," said Michel Barnier, EU commissioner for the internal market, who drew up the proposal together with Karel de Gucht, trade commissioner.
Under the proposal, European public authorities could exclude foreign firms from competing for EU contracts worth more than 5 million euros if there is evidence European companies are routinely overlooked by public bodies abroad.
The draft law has already received sharp criticism from countries inside and outside the European Union - Germany, Sweden and Britain said it would close rather than open markets and raise costs at a time when budgets are being tightened.
The EU will need a qualified majority of countries and a majority of members in the European Parliament to approve the proposal before it can become legislation.
"This is not the best deal for the taxpayer," said one European diplomat. "If we restrict the number of bids the price might not be the best which means the taxpayer may have to pay more."
Germany is concerned that its automotive, engineering and IT companies will be badly affected because the policy allows public authorities to exclude joint EU and non-EU company bids where the third country has the larger share of the work.
"This possibility of exclusion of tenders from EU companies would cause very serious problems for German and other EU companies," said a leaked document seen by Reuters.
The Commission has been reluctant in the past to tackle suspected protectionism in other markets and has relied on public procurement agreements at the World Trade Organization to create a level playing field.
But EU research shows only 10 billion euros of EU exports - 0.08 percent of EU GDP - finds its way to global procurement markets.
In January the EU urged China to join the WTO's agreement on government procurement but it refused, saying developed nations kept raising the bar on what they expected from Chinese companies.
Commission figures show the EU makes 352 billion euros ($457 billion) worth of public procurement contracts open to foreign bidders. By comparison, the U.S. market offers only 178 billion euros to outside bidders and Japan 27 billion.
Figures on contracts awarded by China from its 83 billion euro public procurement market are more difficult to come by, a Commission official said. Contracts in India, Brazil and Argentina were worth a combined 212 billion euros in 2007.
A Chinese official said the Commission's plan was unlikely to convince it to accept bids from more European manufacturers.
"The EU's new pact ... won't have an immediate effect on Chinese companies bidding for EU contracts and won't scare China into making concessions over the government procurement agreement proposal, as they expect," Suo Bicheng of China's Ministry of Commerce told the China Daily newspaper.
The EU says it is also irked by "Buy American" measures creeping into U.S. policy, in particular the 2011 Jobs Bill and the 2009 American Recovery and Reinvestment Act.
The Chinese ambassador in Brussels, Wu Hailong, rejected accusations that European companies get a bad deal in China.
"Provided that they receive equal access to our market and receive market exposure on an equal footing there is still the possibility that Chinese consumers choose domestically produced products," he said. "And it is reasonable that they may go for low prices."
The Business Software Alliance (BSA), an industry lobby group, said that in spite of efforts by China to tone down requirements for government contracts, in practice the group's members, including Microsoft (MSFT.O), were still overlooked.
"One of our biggest challenges is that the fastest growing market for technological products is being walled off to foreign companies," said David Ohrenstein from the BSA in Washington.
($1 = 0.7564 euros)
Additional reporting my Michael Martina; Editing by Rex Merrifield and David Holmes