World Trade Organisation director-general Pascal Lamy says it would not be in New Zealand's best interests to favour domestic companies when awarding government contracts.
The comments follow the recent cancellation of a sub-contract held by Levin-based company Swazi Apparel of wet weather gear for the New Zealand Army.
The equipment will now be manufactured in China.
Mr Lamy says he understands why governments are coming under pressure to support local industries.
But he says countries risk undermining their own export markets if they bar foreign companies from competing for government contracts.
He says New Zealand is better off concentrating on industries where it is internationally competitive.
Mr Lamy says WTO officials are working hard to re-start the Doha round of trade talks, which he says provide the best chance of avoiding a deeper economic crisis.