President Obama’s recently proposed American Jobs Act sent to Congress includes the same “Buy American” provisions that were included in his 2009 American Recovery and Reinvestment Act (ARRA). This has again caused a sharp reaction from the Canadian government.

 

 The Buy American section 1605 of the ARRA is included in the legislative text of the American Jobs Act that provides funds to state and local governments for Community College Modernization, Immediate Transportation Infrastructure Investment and Project Rebuild for abandoned and foreclosed properties. The ARRA was President Obama’s stimulus plan that stated that none of the funds in the bill "may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all the iron, steel and manufactured goods used in the project are produced in the United States." A waiver was provided if the Buy American provision increased the cost of the entire project by 25 percent or more.

The language is similar to that in the 1933 Buy American Act and the 1982 Buy American Act, but only applies to ARRA projects. The 1933 Act applies to all construction services contracts of less than $9.1 million under NAFTA Chapter 10 and less than $7.8 million under the WTO Government Procurement Agreement (WTO-GPA). The federal government is restricted from Buy American language beyond the 1933 Act limits in its contracts, but there is no similar prohibition for state and local government projects unless state governments of both the U.S. and the other national government have agreed to be bound by the WTO-GPA. The legislative language from 2009 clearly states that the U.S. federal government will comply with NAFTA and WTO rules.

Canada is the country most affected by the Buy American language and has vigorously protested against the recent language as it did in 2009. The Canadian government was unaware of the Obama Administration’s plans to again include the requirement. Efficient, integrated supply chains across the U.S., Canada and Mexico have been encourage by NAFTA and are disrupted by the Buy American requirement. Prior to the ARRA in 2009, most U.S. state and local government procurement agencies did not impose local preference requirements.

Canada and the U.S. agreed in February 2010 to exclude some ARRA projects from Buy American, but that agreement expired on September 30. Under the agreement, Canadian companies received permanent access to U.S. state government contracts for the 37 states that have agreed to WTO-GPA rules and U.S. companies were granted permanent access to Canadian provincial and territorial (except Nunavut) projects under the WTO-GPA rules. Canadian companies also received access to seven groups of projects under ARRA, two from USDA, two from the Department of Energy, two from Housing and Urban Development and one from EPA until September 30 of this year and the U.S. received access to some programs not covered by the WTO-GPA rules. The two countries also agreed to explore procurement agreements beyond the WTO-GPA and NAFTA.

While both countries claimed victory from the 2010 agreement, critics in Canada were not mollified and the language in the American Jobs Act has given them another opportunity to criticize both governments’ handling of trade issues. They pointed out that most of the contracts under the ARRA had already been finalized or closed to additional bidding before the Canadian companies gained access, and nothing in the agreement prevented the U.S. from making further Buy American requirements. Protectionists in Canada have also used the two actions by the Obama Administration to push for a Buy Canada requirement in Canadian infrastructure programs. Bad trade policy usually leads to more bad trade policy. The Canadian Construction Association has already voiced opposition to such a policy because of the difficulty of finding replacement supplies.

The immediate problems of the provisions of the American Jobs Act will likely not develop further because Republicans in the House of Representatives have no plans to pass the complete bill. The sections with the Buy American provisions may be dropped entirely or undergo extensive revision in the House and Senate.

But the damage to trade policy has already been done. Businesses will be rightly skeptical that free trade in government procurement within NAFTA and under the WTO-GPA for state and local governments will operate as it generally did before the ARRA was passed in 2009. Some suppliers will exit those markets or create separate supply chains for two separate markets. Economic efficiencies will be lost and governments will have higher costs for construction supplies as producer costs increase and fewer firms bid on contracts. Higher costs mean fewer projects can be financed with a fixed supply of government funds. Taxpayers and users of government infrastructure will be worse-off because of the trade policy.

Failed trade policy applied to government projects can also be applied to private industry projects. Integrated supply chains in all industries have been built across the three NAFTA countries. Special interest groups in any one of the three countries can pursue political force to create a protected market for their goods or services at the expense of other lower cost producers and all consumers.

At their core, the Buy American provisions in government contracts are built on the assumption that trade is bad for the country – that buying a more expensive products somehow makes the country as a whole better off. While a steel manufacturer may be better off, taxpayers, facilities users and producers of products that would have been purchased with the money saved will be worse off.

These issues come at a time when the Obama Administration is negotiating a Trans-Pacific Partnership Free Trade Agreement with eight other Pacific Rim countries. It will be hard for others to take U.S. trade expansion policies seriously with the President promoting protectionist policies.

Ross Korves is the Economic Policy Analyst for Truth About Trade & Technology.