'Buy American' Limits Threaten Trade War

Congress and the states are bent on keeping jobs in the U.S., but their actions may have unintended consequences.

By Andrew C. Schneider, Associate Editor, The Kiplinger Letter

June 16, 2009

Fears of a U.S.-Canadian trade war may be grossly understated. The stimulus plan's "Buy American" provision is already pushing the two nations in that direction. But far from trying to solve the problem, Congress seems determined to make it worse. House members have attached similar language to bills authorizing funds for school construction, repair of public buildings, purchases of health care technology and hybrid cars and, less surprisingly, procurement of a new plane for use as Air Force One.

The Obama administration is feverishly seeking a solution before tensions rise any higher. U.S. and Canadian businesses, along with the Canadian government, are lobbying Congress heavily to back off, pointing out the number of jobs that depend on cross-border trade. But it's far from clear such efforts will have any effect.

The Buy American language in the stimulus was meant to exempt trade with countries that had ratified the World Trade Organization's Government Procurement Agreement or NAFTA. NAFTA members are the U.S., Canada and Mexico. But those treaties fully bind the U.S. and Canada only at the federal level. No Canadian provinces participate. While 40 states observe the pacts, most have exceptions for sensitive goods. Few U.S. cities are covered by the deals.

Such distinctions made little difference before the stimulus bill became law. But now, fearing a loss of aid money, many U.S. state and local governments are going further than they need to and are rejecting contract bids from firms that use Canadian components.

Canada's local governments are already threatening retaliation. On June 5, the Federation of Canadian Municipalities passed a resolution requiring that members limit government procurement from abroad to countries that themselves do not bar Canadian companies from such competition. This would give European, Japanese, Chinese and Korean firms a leg up over U.S. competitors. The federation gave the U.S. 120 days to fix the problem before the decision takes effect.

There's a risk of long-term damage to North American supply chains. Much of U.S.-Canadian trade involves goods crossing the border multiple times before the products in which they're used are finally completed. Indeed, supply chain integration has long been one of the main benefits of NAFTA, given its role in increasing trade and lowering production costs. Makers of water and wastewater equipment, the manufacturers hit hardest by the stimulus bill's Buy American rules, accounted for $10 billion in cross-border trade last year. Other industries with North American supply chains will get dragged down, too, if they're unable to buy from Canada and Mexico.

Consider the case of IPEX, a Canadian-based manufacturer of thermoplastic pipe systems for the construction sector, to see how the problem is playing out on both sides of the U.S.-Canadian border. Before it can participate in a U.S. construction project, IPEX is now asked to sign a certificate affirming that all its products are made in the U.S. Since IPEX's supply chain is integrated across the border, its product load is invariably a mix of Canadian and U.S. parts. The result is that it is either unable to bid on the project or the parts are turned away if they have already been shipped to a construction site.

"Before Feb. 17, we had access to the U.S. market," says Veso Sobot, an IPEX engineer, referring to the date the stimulus bill became law. "Since Feb. 17, we have not." That's bad news for companies such as Westlake Chemicals. Westlake, based in Houston, manufactures the raw materials IPEX uses to make its pipes. IPEX's troubles in the U.S. market will force it to cut back production.

"America ships way more product into Canada than Canada ships into America," says Sobot. "If we injure either one of us, we're injuring ourselves collectively, and we won't be able to compete effectively on the world stage."

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