Canadian Government Moves to Counter ‘Buy American' Protectionism

Written By Milos Barutciski and Jesse I. Goldman

Canadian Trade Minister Stockwell Day confirmed on August 24, 2009, that he has written to U.S. Trade Representative Ron Kirk to offer guaranteed access for U.S. goods to provincial public procurement in exchange for a quick resolution of protectionist ‘Buy American' requirements introduced in the American Recovery and Reinvestment Act of 2009¹ as well as a longer-term opening of government procurement markets at the state, provincial and municipal level.

Minister Day's offer comes on the heels of the annual North American Leaders Summit leaders where, in a joint statement, Prime Minister Harper and Presidents Obama and Calderón pledged “to abide by our international responsibilities and avoid protectionist measures.” That statement reflects ongoing concerns about the trade-restricting impact of the ‘Buy American' provisions of the Recovery Act as signed into law on February 17, 2009, by President Obama. It is intended to stimulate the American economy by injecting approximately $787 billion in spending and tax cuts. These provisions give broad preference to U.S. products in federally funded projects at the federal, state and municipal levels and exclude Canadian goods.

‘Buy American' Provisions

The Recovery Act contains two separate ‘Buy American' provisions. The more important provision relates to the construction of public infrastructure (§1605),² which restricts use of funds for manufactured goods to those produced in the U.S.

The section provides for exceptions (or waivers) on a discretionary basis, according to the following criteria:

1. applying the ‘Buy American' requirement would be inconsistent with the public interest;
2. iron, steel, and the relevant manufactured goods are not produced in the U.S. in sufficient and reasonably available quantities and of a satisfactory quality; or
3. inclusion of iron, steel, and manufactured goods produced in the U.S. will increase the cost of the project by more than 25 percent.

§1605 also states that ‘Buy American' provisions should be applied in a manner consistent with international obligations. Under the WTO Agreement on Government Procurement (GPA), Canada and the U.S. have accepted basic obligations relating to the procurement of goods and services by federal government entities. WTO members are not allowed to discriminate against goods or suppliers of one another for covered procurement activities. Canada and the U.S. have made similar federal commitments under NAFTA. In addition, the U.S. has made commitments with respect to sub-federal procurements of 37 states, subject to reciprocity by other GPA parties. Many key U.S. trading parties have reciprocity agreements, but not Canada. As Canada has not made any provincial commitments under the GPA, Canadian suppliers do not benefit from the broader access to procurement markets afforded by the 37 states covered by the GPA.

Effects on Canadian Suppliers

The impact of ‘Buy American' on Canadian suppliers depends on whether funds allocated under the Recovery Act are being spent on federal procurement, specified sub-federal procurement (for highways, public transportation and certain airport projects), or other sub-federal procurement projects.

Status Quo for Federal and Transportation Infrastructure Procurements

Canadian suppliers or subcontractors bidding on U.S. federal government construction procurement contracts that are above the GPA thresholds³ should be unaffected by the ‘Buy American' provisions. However, as recent U.S. Department of Defence and Customs and Border Protection procurement policies evidence, even this can be tenuous. If they are below GPA content thresholds, the ‘Buy American' provisions will apply unless waivers can be obtained. The narrow scope of the waiver power suggests, however, that waivers will have limited applicability to Canadian exports.⁴

The ‘Buy American' provisions will not have any impact on sub-federal procurement for highways, public transportation and certain airport projects. Those are already covered by domestic preferences imposed on federal transfers under the Surface Transportation Assistance Act (STAA). Due to the restrictive nature of the STAA, foreign supplier participation is expected to remain low, although Canadian businesses that have been successful in securing these types of contracts in the past should not be affected by the Recovery Act.

Restrictive Impact on State and Municipal Procurement

For state and municipal procurements other than highway, public transportation and certain airport projects covered by the STAA, sub-federal entities are required by the Recovery Act to discriminate in favour of U.S. over Canadian suppliers. This means that sub-federal entities that were previously free to purchase Canadian goods if they were competitively priced are no longer permitted to do so for projects financed by federal stimulus funding.

The effect of the ‘Buy American' provisions of the Recovery Act has been to severely restrict the ability of Canadian suppliers to access public procurement markets during the current economic downturn. The scale of stimulus spending by the U.S. government through the Recovery Act means that Canadian firms have been excluded from critical public markets at a time when private demand is soft.

Even more significant is evidence suggesting that some U.S. distributors have chosen not to stock Canadian goods to avoid confusion in supply arrangements for state and municipal projects. Moreover, the complexity of applying disparate procurement rules in different state and federal procurements leads to restrictive purchasing practises even when Canadian goods are fully eligible for contracts not funded by the federal stimulus spending. As a result, there is concern that the ‘Buy American' provisions are having a broader impact than their strict legal application would entail.

The Canadian Government Initiative

Trade Minister Day's proposal involves a two-stage approach. In the short term, the objective appears to be to obtain a waiver or some other form of exemption for Canadian goods from the ‘Buy American' provisions of the Recovery Act. The intent is to mitigate the impact of the protectionist U.S. measure before the federal stimulus funds are exhausted and to allow Canadian suppliers to begin bidding on U.S. federally funded state and municipal procurements. In view of recent threats by some Canadian municipalities to close their own procurements to U.S. goods, the offer by Canada to avoid protectionist measures may have some attraction for U.S. suppliers facing the softest domestic demand in several decades.

While the Canadian initiative may have business support in the U.S., it will face tough political opposition. The U.S. administration may well be reluctant to grant a one-off waiver to Canada at the risk of provoking members of Congress whose support will be required for other priorities. If the administration were to grant Canada a waiver, it would also face similar procurement initiatives from other key trading partners. The longer-term Canadian objective is to negotiate bilateral (not NAFTA based) commitments to keep public procurement markets at all levels permanently open so that future economic downturns do not result in similar protectionist legislation. There may also be more scope for further procurement liberalization in the context of ongoing negotiations to revise the GPA.

It is ironic that Canada, which has enjoyed the longest and deepest free trade relationship among the U.S.' trading partners, has been excluded from state and municipal procurement by the ‘Buy American' provisions while other U.S. trading partners which have made reciprocal commitments at the sub-federal level under the GPA are exempt and maintain access to U.S. procurement markets. The impact of ‘Buy American' appears to have provoked greater openness among provincial governments which have historically been reluctant to open their procurement markets to suppliers from other provinces, let alone U.S. and other non-Canadian suppliers.

Notes

1. American Recovery and Reinvestment Act of 2009 (Pub. L. No. 111-5) [hereinafter Recovery Act]
2. The second ‘Buy American' provision (§604) encompasses procurement of miscellaneous items identified by the U.S. Department of Homeland Security. The provision, as with §1605, requires that it be applied in a manner consistent with U.S. obligations under international agreements. Since the U.S. has made international commitments to Canada relating to most procurements by DHS, Canadian goods and suppliers should be exempt from §604 requirements.
3. Typically, international trade agreements only apply to contracts above specified minimum thresholds. These minimum thresholds can vary by product and by trade agreement. For example, in the NAFTA, the threshold for federal government entities for goods is US$25,000 and for services is US$50,000. In the case of Recovery Act procurements, the lower of these two thresholds (US$25,000) will apply. Also, the NAFTA threshold for construction projects is US$8,817,449. The construction threshold for the GPA is US$7,456,000. This threshold is for the total cost of the project and not just for a specific element.
4. The Environmental Protection Agency (EPA) has exercised its discretion and granted several waivers. For example, the EPA granted a nationwide waiver of §1605 for de minimis incidental components of eligible water infrastructure projects funded under the Recovery Act thereby allowing the use of non-domestic iron, steel, and manufactured goods. Similarly, the EPA granted a nationwide waiver for eligible projects for which debt was incurred on or after October 1, 2008, and prior to February 17, 2009.