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Economic Forecasts

Tougher 'Buy American' Rules Likely

But the rules are taking a big toll on trade with Canada, and the threat of retaliation is growing.

Congress is poised to tighten Buy American rules in a jobs bill this year. The Buy American provision in last year’s stimulus package requires that infrastructure projects paid for with federal stimulus dollars must use only U.S.-made iron, steel or manufactured goods, unless doing so would boost the price of a project by 25% or more. Current rules allow companies to apply for waivers to use foreign-made parts when submitting their project bids. The new rules will require any agency granting a waiver to use greater transparency and more documentation in justifying a waiver. Getting such an exemption is difficult enough under last year’s rules. The new strictures will make it all but impossible.

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The change will benefit U.S. producers of steel and concrete, who will be able to charge more for road construction projects in the absence of foreign competition. But manufacturers of high-end electronics and other machinery will find themselves at a severe disadvantage. They have largely integrated their supply chains across North America since the North American Free Trade Agreement (NAFTA) went into effect. Many will be either unwilling or unable to find domestically made alternatives for components they now buy abroad.

The problem is even more acute for contractors, who have to sort out the provenance of each component of each piece of equipment or unit of material when bidding on a stimulus-funded project. Faced with such uncertainty, many firms will decide such contracts are more trouble than they are worth and will decline to submit bids.

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Ironically, this will reduce the number of jobs that Washington hopes the 2010 bill will create. Drinking water and wastewater infrastructure, airport and mass transit projects and school construction stand to face the biggest problems. Matthew Nolan, a partner at the law firm of Arent Fox, notes that the 2009 provision is already delaying work on many such projects. “They are shovel ready but not moving forward,” says Nolan.

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A coalition of more than two dozen U.S. trade groups, helmed by the Emergency Committee for American Trade, is lobbying congressional leaders to make the case that Buy American legislation will do more harm than good to the U.S. economy. Apart from the jobs American contractors and manufacturers stand to lose by being locked out of federally funded infrastructure projects, coalition members fear that other countries will retaliate with “buy national” government procurement policies of their own.

Canada presents a particularly worrisome case. It’s the U.S.’ most important trading partner, and it’s suffering the most from the 2009 Buy American rules. As a result, the Federation of Canadian Municipalities is threatening what amounts to “buy non-U.S.” procurement policies. Ottawa is trying to negotiate a way out of the impasse with Washington, but little progress is being made.

“The bottom line is that it has to do with political interests, not what’s best for economy or what’s best for companies in terms of sourcing the lowest-cost products,” says Tina Kremmidas, an economist at the Canadian Chamber of Commerce. “When it comes down to that, it’s very difficult to convince the U.S. Congress that Canada should have special status.” That, however, makes it all the more likely that Canada’s municipal governments will run out of patience and start imposing protectionist measures of their own.

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