Resisting American Protectionism

Murdoch Martyn and Chuck Gastle for The Lawyers Weekly

April 2, 2010

Bilateral agreement gives Canadian businesses access to U.S. procurement

Canada and the United States signed a bilateral agreement in February on government procurement, by which Canadian iron, steel and manufactured products were exempted from the "buy American" restrictions in the American Reinvestment and Recovery Act of 2009.

The agreement provides an exemption to Canadian producers until Sept. 30, 2011 and obligates the two countries to expand commitments on government procurement over the next year. It gives Canadian businesses access to the procurement of forty states - but does not assure Canadian producers access to procurement at the municipal level.

The agreement has been subject to significant criticism that it is "too little, too late," since most of the American stimulus spending has already been allocated. The failure to secure access to American municipalities is certainly a weakness. Further, Canadian provinces and municipalities have given up the ability to stimulate local industry through preferential government procurement programs.

Notwithstanding these criticisms, the agreement is important. It provides access to forty American states, including California and New York. It also builds a closer relationship with the U.S. at a time when protectionism there is growing and there is a risk of spill-over into other protectionist measures. Homeland Security Secretary Janet Napolitano has commented that an open border between Canada and the U.S. is a thing of the past, that it is a real border, and Canadians will have to get used to it.

There are a number of other U.S. measures that thicken and heighten the border to Canadian goods. For example, the Country of Origin Labeling Regulations require each stage in the food processing chain to be disclosed in labeling on American food. This is supposed to provide information to consumers, but many in Canada believe it will result in protectionism and as such, Canada has challenged the labeling requirements to the World Trade Organization. However, the more that Canada can engage the U.S. in bilateral negotiations, the better the chance to resist these kinds of protectionist measures.

The importance of the bilateral agreement is underscored by the fact that the pressure to enter it did not start with the government of Canada, but with Canadian companies that sold to American state and municipal governments who found that they were losing sales. These Canadian companies warned that they may have to shut production facilities in Canada and relocate into the U.S. This outcry culminated in a vote by the Federation of Canadian Municipalities on June 7, 2009 to retaliate against American companies if Canadian companies were not exempted from the 'buy American" provisions.

The importance of obtaining access to American state procurement as a result of the "buy American" provisions is evident in the fact that the provincial governments had resisted opening up their procurement over a lengthy period of time. A government procurement agreement was negotiated as part of the World Trade Organization Agreements in 1995, but the Canadian provinces refused to sign on, preferring to maintain discriminatory procurement policies in favour of local industry, even at the expense of sister provinces. Canada's provinces also refused to participate in negotiations on government procurement under NAFTA Chapter 10. This strategy worked well for the provinces until the recession occurred and the "buy American" provisions were imposed.

The agreement resulted in the Canadian provinces finally signing on to the WTO government procurement agreement. If they had done so in 1995, they would have had a greater degree of insulation from the effects of the "buy American" provisions when they were first introduced.

Nevertheless, the true measure of this agreement cannot yet be determined. It depends on whether Canadian corporations are able to achieve the level of sales that they had prior to the introduction of the "buy American" provisions. It will also depend on the degree to which Canada can resist the imposition of new protectionist measures.

Murdoch Martyn is a trade lawyer in Toronto and an adjunct professor at Osgoode Hall Law School. Chuck Gastle is a principal of Bennett Gastle, a Toronto litigation and international trade law boutique.
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