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The Progressive Economics Forum

Buy American Deal: Did We Get Hosed?

I was going to comment on Jim’s post, but ended up writing enough to warrant a new post.

Jim correctly argues that Buy American provisions are tiny in the grand scheme of Canada-US trade. Similarly, whatever potential procurement preferences Canada bargained away would also have been tiny by this standard. The overall economic effect of last week’s deal will be small, but that does not necessarily mean negative for Canada.

Canadian Gains

While American Recovery and Reinvestment Act funding must be committed by February 17 or risk reallocation, there will be contracting opportunities as projects proceed after that date. Nevertheless, it is true that Canadian manufacturers will gain access to only a small fraction of this procurement.

But Canada gained more than “one-time access to the Recovery Act’s crumbs.” Going forward, the 37 American states that have signed onto the WTO’s Agreement on Government Procurement (abbreviated GPA) are to provide national treatment to Canadian suppliers. Although states have excluded some important areas from their WTO commitments, these commitments still encompass many billions of dollars of ongoing procurement.

Canadian Losses

Jim writes:

Through the WTO system, Canada opens up access to public purchasing in all provinces, and all cities with more than 50,000 inhabitants. . . . we’re doing this right when many struggling Canadian manufacturers – from public transit to pharmaceuticals to windmills – could benefit mightily from the strategic leveraging of a home-field advantage.

The temporary agreement does include Canadian cities (until September 2011) in exchange for access to some Recovery Act procurement by American cities. But as far as anyone knows, the permanent WTO commitments exempt both American and Canadian municipalities.

From page 9 of Scott Sinclair’s primer on the deal:

– Reportedly, Canadian municipal government will not be covered under the GPA offer.

– Canadian provincial governments have also excluded a range of procurement programs, entities (such as crown corporations) and sectors (such as renewable power and mass transit) from Canada’s proposed GPA offer.

So, Canada appears not to have given up actual or potential procurement preferences for municipalities, mass transit, windmills or other renewable power. The Made-in-Canada Matters campaign, which focussed on enacting “Buy Canadian” policies in these areas, can and should continue.

Assessment

We will know more when we see the deal. However, both countries seem to have exempted major types of procurement – cities, utilities and transit – that include (almost) all existing procurement preferences.

In the remaining areas of provincial procurement, Canada has committed not to discriminate against American products. In the remaining areas of state procurement, the 37 states have committed not to discriminate against Canadian products. Since the two countries sell very similar amounts of manufactured goods to each other, these commitments are unlikely to materially affect the Canada-US trade balance.

However, they could be modestly helpful in industries that are integrated across the border. Canadians working at facilities that sell goods to American state governments, and Americans working at facilities that sell goods to Canadian provincial governments, may be slightly more secure going forward.

We should ensure that the Harper government does not extend Canada’s GPA commitments to countries with which we run severe manufacturing trade deficits. The proposed Canada-EU free trade deal, for example, threatens a net loss of procurement contracts and hence of Canadian jobs.

UPDATE (February 12): Quoted in The Globe and Mail on why Canada should not extend its new GPA commitments to the European Union.

Enjoy and share:

Comments

Comment from Scott Sinclair
Time: February 11, 2010, 9:08 am

The deal is, by any standard, extremely unbalanced.
Under the temporary arrangements the US has covered 7 programs, worth no more than US$4-5 billion. In return, Canada has covered procurement worth upwards of $C25 billion. I elaborate on this and other issues in Buy American Basics which is available on the CCPA web site.

As for the permanent commitments under the WTO GPA, Canadian provincial governments have now lost the flexibility to use procurement as a policy tool for procurements worth tens of billions annually. Sure, it could have been worse. There are remaining areas of flexibility under the GPA (e.g. crown corporations and municipalities). Progressives should defend them. But with the Harper government in charge of negotiations with the US, the EU and all the other GPA members, we are now on a very slippery slope.

The U.S, for its part, has excluded a wide range of entities and preferential policies, including its Buy America policies from its permanent commitments under the GPA. As a Canadian, who believes that government purchasing should be an important tool for local development, I find no fault with this. But it should be clear that the deal does not provide Canadian suppliers any meaningful exemptions from Buy American preferences at the state and local level.

In fact, if the day after this deal was signed, a U.S. municipality (acting on its own volition and not at Washington’s direction) tore Canadian pipes out of the ground, neither the Canadian supplier nor the Canadian government would have any legal recourse under this deal or the GPA. On the other hand, if a Canadian municipality thumbed its nose at a U.S. construction company, that U.S. supplier would have access to a Canadian administrative tribunal with the authority to recover damages and even overturn the contract. I know that sounds incredible, but sadly it’s true.

I also want to clarify what it means to make a commitment under the GPA, or other international trade treaties covering procurement. It entails more than a pledge “not to discriminate.” The GPA prohibits “offsets” defined as “any condition or undertaking that encourages local development such as the use of domestic content, the licensing of technology, investment, counter trade and similar action or requirement.”

Basically, governments are prohibited from even considering local development benefits in their purchasing. For example, Ontario or Quebec hospitals (which will now be covered under the GPA) can not negotiate with potential suppliers of medical technology for local benefits (perhaps a commitment to make equipment available to community clinics at subsidised prices). When purchasing software systems, Ontario and Quebec universities (also covered under the GPA) can not now negotiate, or even consider, an offer by a supplier (including U.S. suppliers) to contribute to a local research and development centre of excellence.

Yes, Canada got hosed.

Comment from Jim Stanford
Time: February 11, 2010, 12:47 pm

Here’s an interesting case study in the potential value of domestic procurement levers: the announcement by China’s Zhuzhou Electric Locomotives that if it wins a contract to supply subway equipment to Montreal it will set up a new plant with 1000 jobs in Quebec.
Here FYI is a CAW release on that development:
http://www.caw.ca/en/8499.htm

Comment from Erin Weir
Time: February 11, 2010, 3:00 pm

Thanks for your thoughtful comments.

Perhaps my timing was poor in addressing the deal the day before it was leaked. However, my reading of the documents confirms what I wrote about the significant types of procurement (including subway equipment) that are exempt from the WTO commitments.

To me, the most surprising revelation was that these commitments do cover procurement by the Ontario and Quebec governments (but not other provincial governments) on behalf of universities, schools and hospitals.

Comment from Erin Weir
Time: February 15, 2010, 10:33 am

Scott estimates that, through the short-term agreement, Canada covered $25 billion to gain access to only $4-5 billion. However, my sense is that (almost) all of the $25 billion was open to American suppliers anyway.

Conversely, the $4-5 billion was subject to Buy American, which limited access for Canadian suppliers. So, it is not apparent that Canada gave up more than it got.

It would be interesting to see dollar amounts on the long-term WTO commitments. I suspect that the state procurement, to which Canada will obtain more secure access, is worth substantially more than the provincial procurement, to which the United States will obtain more secure access.

Comment from Travis
Time: February 15, 2010, 7:56 pm

Erin you are asking the wrong question(s). First what is the job intensity of local procurement; second, which Canadian capitalists (firms is a more palatable word?) have the capacity to benefit from reduced restrictions on foreign (Canadian) participation in domestic procurement schemes?

At some point we need to identify specific winners and loosers. It strikes me that the leading fraction of the Canadian capitalist class has (is) doing the maths. Canada is a small country. Conceding domestic procurement to get access to foreign domestic procurement is a no brainer. Especially if your domestic profit centres are already sewn-up. This is not a question of what is good for Canada and Canadian workers. It is a question of what is good for Canadian firms that have the capacity to profit in the global procurement market.

Why have an industrial policy when you can simply bid on the industrial policy projects of other countries? Myopic you bet. But that is the game being played. Thus your dollar for dollar comparison misses the mark. Of course access to potential global procurement will be greater than the value of access to potential domestic procurement. But so what?

Comment from Erin Weir
Time: February 16, 2010, 7:59 am

A dollar-for-dollar comparison may well be the wrong framework for assessing the deal. I was just addressing Scott’s dollar-for-dollar comparison on its own terms.

Comment from Paul Pugh
Time: March 8, 2010, 1:28 pm

I fear that yet another aspect in which we lose through this deal, is the ability to put political pressure on governments to take responsibility for industrial and regional development – they will take the easy way out and claim the agreement ties their hands.

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