The New South Wales state government this week unveiled a policy that allowed Australian firms to bid up to 25 per cent higher than overseas rivals for government contracts and still win the tender.

Federal Trade Minister Simon Crean called the policy 'misguided' and said the United States and European Union had already raised concerns.

'It is also moving in the direction of protectionism and it will invite retaliatory action by our trading partners,' he told reporters.

'Already, we have had significant queries by the EU and the US as to what this means.' Mr Crean said he understood the policy - relating to state contracts A$4 billion (S$4.66 billion) worth of goods and services annually - was designed to protect Australian jobs.

But he warned: 'It will have the exact opposite result. If we go down a path that invites retaliatory trade action, it will in fact cost jobs.'

'Under free trade agreements, we seek access to other countries' government procurement markets. What sort of a signal are we sending if we're restricting ours by effectively imposing a 25 per cent tariff, but still expecting access to theirs?' -- AFP