'Buy American' policy looms large over NAFTA talks

Prime Minister Justin Trudeau and U.S. President Donald Trump take part in a joint press conference at the White House in Washington, D.C. on Feb. 13, 2017. (Sean Kilpatrick / THE CANADIAN PRESS)

OTTAWA -- The United States wants to maintain -- and even expand -- the Buy America provisions that restrict government procurement to companies using materials from within its borders, while making it easier for U.S. firms to get those contracts in Canada and Mexico.

The contradictory goal was among the objectives for the revamped North American Trade Agreement that U.S. Trade Representative Robert Lighthizer released earlier this month, suggesting the Americans want to have their cake and eat it too.

"I think it's rather outrageous," said Lawrence Herman, an international trade lawyer who has represented Canada at the World Trade Organization.

Step aside, dairy cows. Government procurement -- meaning the process of who gets to bid to build bridges, highways and all sorts of public infrastructure projects -- is likely to become one of the toughest issues the Liberal government will have to deal with during the NAFTA talks that start next month.

There are two main kinds of protectionist policies when it comes to government procurement below the border and confusingly, they have similar names: the Buy American Act, which has been around since 1933, and various Buy America provisions, which take on different shapes depending on the type of project and level of government involved.

Under the former, the WTO and the current NAFTA exempt Canada from the requirements, as long as the contract is being offered by a U.S. federal department or agency and the amount is above certain thresholds.

Expanding the other kind -- the one without an 'N,' -- is what appears to be the focus of the new NAFTA negotiating objectives for the U.S.

It currently applies to procurement done by state and local governments (also known as the sub-federal level), but also to transportation services and any state and local projects that receive federal funding, which makes up the majority of infrastructure spending.

It comes with no special exemption for Canada.

This became a big problem when the previous administration of former president Barack Obama rolled out a major stimulus program to help the economy recover from the financial collapse in 2009, with the requirement that only iron, steel and manufactured goods produced within the U.S. could be used for its projects.

That strained the relationship between the two countries, but they reached a one-year deal in 2010 that allowed Canadian materials to be used in some of these projects in 37 states, in exchange for Canada opening up most of its own sub-federal infrastructure projects.

Since Trump promised a $1-trillion national infrastructure program on the campaign trail, maintaining or expanding the Buy America provisions could cause Canadian suppliers a lot of grief.

A group of deputy ministers raised this as a concern when they gathered to discuss intergovernmental relations this February, according to a document Infrastructure Canada released to The Canadian Press under the Access to Information Act.

"Buy American provisions may have adverse impacts on the Canadian construction sector -- and opportunities may be lost with respect to the (Trump) administration's trillion dollars infrastructure plan," said the minutes of the meeting.

Canada does have some leverage.

The Liberal government has a major infrastructure program of its own, one that calls for $81.2 billion in spending over the next decade, while the plan Trump promised on the campaign trail does not appear to be rolling out any time soon.

Andrew Leslie, the parliamentary secretary for Canada-U.S. relations, suggested last week that the White House might want to keep this in mind.

"I think our friends and allies would do well to watch what we are about to build in Canada and they may want to take part in that," he said.

John Boscariol, a trade lawyer with McCarthy Tetrault, said this becomes a stronger argument when one considers the Comprehensive Economic and Trade Agreement (CETA) opens up Canadian government procurement to European suppliers at the sub-federal level, including municipalities, which is where most of those projects are taking place.

"Those U.S. suppliers will see this spending going forward and if they feel they're not getting access to it, or more specifically, the Europeans are getting preferential access to it, I think they will be putting pressure on the Trump government to do something about that," Boscariol said.

The Canadian public procurement market is worth over $200 billion and the U.S. public procurement market is valued at $1.7 trillion. So, as Boscariol and his colleagues pointed out in a recent note to clients on the NAFTA objectives, opening up access means large new markets in both countries.

But there is only so much Canada can offer.

"We're a lot smaller and the advantages that we can provide to procurement are certainly not as great as the advantages that having access to the U.S. procurement market entails," said Herman. "That's a problem, but it's an issue we've always faced."

Joseph Galimberti, president of the Canadian Steel Producers Association, said the highly integrated steel market means Canada can argue that opening things up could benefit both economies.

The Trump administration has argued Buy America provisions for steel preserve domestic supply chains, but Galimberti noted Canadian steel producers get some $1.5 billion (U.S.) in raw material from below the border.

"Canadian participation in the North American market does not undermine American value chains," he said.

Galimberti said one way to improve the current situation would be for the new NAFTA to have the U.S. embrace a "Buy North America" policy that would help all three countries better compete in a globalized trade environment.

Herman said the give-and-take aspect of negotiating a trade deal is not as straightforward as tit for tat.

"It's a complex, intertwined package," he said, "and so what we may give on procurement and what the U.S. may do on procurement will be balanced off against a whole range of other things and they aren't necessarily in the same sector."