Secondly, in practice governments do not use finely-tuned preferences which are sensitive to sectoral cost differences between countries. Frequently, uniform preferences are granted to a wide range of sectors.14 Therefore, procurement costs are unlikely to be minimized even in industries where the country has a comparative disadvantage. In industries where it has a comparative advantage, procurement cost would be lower in the absence of preferences - and still lower if preferences were given to foreign firms.
Thirdly, some governments do not use price preference policies but exclude foreign bidders through other means.15 Price preferences can be effective in reducing procurement costs because they lead to greater "effective" competition. On the other hand, policies which implicitly or explicitly exclude a whole class of bidders reduce competition and therefore are bound to increase procurement costs.
Some of these arguments against preferences motivated by cost differences also apply to preferences motivated by profit-shifting considerations. On the whole, the main weaknesses of this literature are similar to those of the argument for protection based on strategic trade considerations (see Krugman, 1987). The first is the partial equilibrium nature of the analysis. While Branco (1994) does take into account the social cost of distortionary taxation, the resource allocation effects of procurement preferences are not examined. These may turn out to be significant when procurement preferences cause excessive investment in industries in which the country does not have a comparative advantage.
(For instance, the Buy American Act in the United States stipulates preferences of 50 per cent for defence items, and 6 to 12 per cent for non-defence procurement - with the 6 per cent differential applied for large businesses and the 12 per cent factor for small businesses (see Francois et al., 1995).
(Some of these practices are documented in Industrial Structure Council of Japan (1996, pp. 157-73), Services of the European Commission (1996, pp. 15-17), United States Trade Representative (1996), and the Trade Policy Reviews of various countries conducted by the World Trade Organization.