A Free Trade Win-Win

The Buy American exemption is a much needed victory, for both Canada and the U.S., over the recent resurgence of protectionism.

Canada and U.S. President Barack Obama’s administration have just completed their first negotiated deal on cross-border trade and it is a much-needed success in a relationship that has been very positive in words but short on deeds.

This vitally important agreement will exempt Canadian firms from the “Buy American” restrictions on U.S. government procurement projects and calls for Canadian provinces to sign up to the World Trade Organization’s agreement allowing foreign firms access to provincial public projects.

Most Canadians enthusiastically welcomed Obama as the new U.S. president one year ago. Yet, few knew what it would mean for Canadian-American relations. The Obama campaign of 2008 did make many Canadians worry when it ripped heartily into the NAFTA accord. Obama said that NAFTA should be re-opened for better labour and environmental conditions. Even though insiders in Obama’s team reassured Canadian diplomats that it was just election talk, it was a shaky start. Some Canadians believed that the president would ease up on stringent border controls, but they were quickly disillusioned by the new Homeland Security secretary, Janet Napolitano, who, if anything, seemed to single out the Canadian-American border for more security measures.

Obama visited Canada in early 2009 in a very popular, though short, visit. But again the substance of the meeting was a bit thin. The two governments agreed to set up a dialogue on clean energy with three working groups for the collaboration on energy research in the areas of clean engine technologies, advanced biofuels, and energy efficiency.

Obama and the Democratic majorities in Congress swept into power in the wake of a financial crisis followed by a recession that started in the fall of 2008. Washington’s first response to the economic challenge included some protectionist elements that as usual, were not meant for Canada but ended up having the most severe impact on Canada. The $787 billion stimulus program passed in early 2009 included a “Buy American” provision that excluded Canadian steel, iron, and manufactured products in as much as $260 billion worth of projects at state and municipal levels.

Wisely, the Canadian government immediately responded with an offer to negotiate new terms on government procurement. In return for obtaining a Canadian exemption for “Buy American,” Canada offered to have the provinces ratify the World Trade Organization (WTO) provisions. Months passed and rumour had it that the talks were in limbo. Meanwhile, other trade troubles showed up. The Obama administration took a strong stand on the Country-of-Origin-Labeling of food products. Canadian beef and pork sales to the United States suffered as a result. The president kept saying he was pro-free trade but often, his actions spoke otherwise.

Of course by now, much of the U.S. stimulus money has been spent or signed into contract. The “Buy American” provision also threatens to become a precedent for future American programs. The same restrictions are already planned by Congress to go into the next U.S. stimulus bill called the Jobs for Main Street Act.

This deal is a win-win for free trade as Canadian companies get to bid on U.S. projects and vice versa with some exceptions. Both countries get the benefit of greater economies of scale and more cost-effective public works. In addition, this mutual procurement policy recognizes that in many industries, Canada and the United States form an integrated chain of supplies. With contracts now no longer barred from crossing the border, this mode of joint production gets a boost in the arm. Canadian businesses stand to gain significantly and taxpayers on both sides of the line should see more efficient work for each dollar.

But more still needs to be done and Canada and the United States should not stop at this point. The next steps should be to seek a comprehensive bilateral accord on government procurement to avoid this problem in the future, and to remove exemptions such as those in place for green energy projects and education.