20 per cent domestic preference: Industrial policy or protectionism

The Jordanian government's decision to increase the domestic preference margin in public procurement from 15% to 20% has sparked an important economic debate. Supporters view it as a necessary measure to strengthen the domestic industry, while critics see it as a policy that could increase the cost of government purchases. As with most economic policies, the answer is not black and white. It depends on how one views economic development and the role of government in fostering productive capacity.

At first glance, increasing the preference margin may appear to mean that the government will pay higher prices for some goods and services. If a foreign supplier submits a bid worth JOD 100,000 and a Jordanian company submits a bid worth JOD 120,000, the new preference margin may allow the contract to be awarded to the domestic producer. Critics, therefore, argue that public funds should always be spent at the lowest possible cost.

However, this analysis stops at the point of purchase and ignores what happens afterward within the economy. The government is not simply another buyer in the marketplace; it is often the single largest purchaser in the national economy. When the government buys locally produced goods, a substantial portion of the contract value is transformed into wages for Jordanian workers, profits that are reinvested domestically, purchases from local suppliers, and tax revenues that flow back to the Treasury. By contrast, when a government agency purchases imported goods, a significant share of the value leaves the country immediately, with only a limited portion remaining in the local economy through transportation, warehousing, or distribution services.

The importance of this policy becomes even greater in a relatively small economy such as Jordan's. Jordanian firms do not compete against foreign firms operating under similar conditions. Instead, they compete against companies based in much larger economies that benefit from what economists call economies of scale. A multinational manufacturer producing for tens or hundreds of millions of consumers can spread its fixed costs over enormous production volumes, significantly reducing the cost per unit. This creates a structural advantage that most Jordanian firms simply cannot match.

As a result, many companies considered large by Jordanian standards remain small when compared with regional or global competitors. It is therefore unrealistic to expect firms operating in a relatively limited domestic market to compete immediately and on equal terms with multinational corporations that enjoy larger markets, greater financial resources, extensive distribution networks, and, in many cases, direct or indirect government support.

This is precisely where public procurement assumes a developmental role. Governments do not use procurement solely to acquire goods and services; they also use it as a tool to strengthen domestic productive capacity, expand industrial activity, and support employment. When local manufacturers receive additional government orders, they increase production, hire more workers, invest in new equipment, and accumulate technical expertise and know-how.

Importantly, this approach is far from unique to Jordan. It reflects the development strategy adopted by many countries that successfully built strong industrial bases. South Korea's economic transformation was driven by a combination of selective protection, targeted financing, industrial policy, and government procurement designed to nurture national champions capable of competing globally. China similarly relied on industrial policy, government procurement, directed finance, and export incentives to build its manufacturing base before emerging as the world's second-largest economy.

Even countries that today present themselves as champions of free trade did not achieve their industrial leadership through free trade alone. During the nineteenth and early twentieth centuries, the United States relied heavily on protective tariffs and industrial policies to shield its emerging industries from foreign competition. Likewise, the United Kingdom, often regarded as the birthplace of the Industrial Revolution, employed a variety of trade and navigation policies that favored domestic producers throughout much of its rise. The Netherlands and other European commercial powers also benefited from policies designed to support national enterprises and strengthen domestic markets.

Moreover, the modern global economy is far from a pure free-market system. The United States continues to implement "Buy American" provisions and provides substantial support to strategic sectors such as semiconductors, advanced manufacturing, and clean energy. The European Union has adopted industrial policies and subsidy programs aimed at strengthening domestic industries. China, despite being the world's largest exporter, grants significant preferences to domestic firms in many public procurement activities.

It is also noteworthy that the World Trade Organization's Government Procurement Agreement (GPA) is not mandatory for WTO members. It is a plurilateral agreement, meaning that countries choose whether to join. Consequently, the majority of developing countries have not become full members. Large emerging economies such as India have deliberately remained outside the agreement because they view government procurement as a critical instrument for industrial development, employment creation, and technology transfer rather than merely a mechanism for obtaining the lowest price.

In Jordan's case, raising the domestic preference margin from 15% to 20% does not represent a departure from international practice. Rather, it reflects a growing recognition that government purchasing power can be used strategically to support domestic production. Every additional dinar directed toward local industry strengthens not only individual firms but also the broader ecosystem of suppliers, workers, service providers, and supporting industries connected to production.

Of course, this does not mean that domestic preference should become permanent or unconditional protection. Its purpose should be to enhance competitiveness, not replace it. Preference margins should be linked to product quality, local content, value added, and the ability to create employment within the national economy. Successful protection is protection that ultimately leads to competitiveness rather than sheltering inefficiency.

Ultimately, raising the domestic preference margin to 20% appears to be a reasonable policy choice under current economic conditions. It represents more than a simple increase in protection; it reflects an effort to use public procurement as an instrument of industrial and developmental policy. While some government purchases may become marginally more expensive, the broader economic returns—in terms of employment, investment, income generation, tax revenues, and domestic value added—may well outweigh these costs. International experience teaches us that countries that successfully built strong industrial sectors did not simply advocate competition; they first invested in building the capacity to compete.

Published in Jordan Times/ 10 June, 2026

https://jordantimes.com/opinion/yusuf-mansur/20-per-cent-domestic-preference-industrial-policy-or-protectionism