Exporting: Buy American

New rules make it harder, but not impossible, for Canadian exporters to fight to the end and win.

Just before his trip to Canada, United States President Barack Obama signed the US$787-billion American Recovery and Reinvestment Act into law. The act represents billions of dollars in government spending, but it also carries a Buy American rider stating that funds spent on iron, steel and manufactured goods will go to U.S. suppliers only.

Buy American won’t stop trucks at the border or apply new tariffs, but it will restrict Canadian access to business opportunities opened up by new stimulus funding. Judy Bradt, a U.S. trade consultant based in Washington, D.C., believes that Buy American will apply to the approximately US$35 billion slated for projects that could be considered construction and public works.

“If the prime contract is worth more than $8.8 million,” says Bradt, “then Canadian firms may supply products as prime or subcontractors without any special permissions or waivers,” as protected under NAFTA. If the value of the contract is less, however, Canadian firms will need to negotiate a waiver in advance.

Procurement rules under NAFTA prevent government discrimination in favour of local suppliers, but only when it affects bidding on federal contracts, explains Chris Cochlin, an international-trade lawyer with the Ottawa office of Fraser Milner Casgrain LLP. When it comes to selling to state and local governments, it’s a different story.

At the lower levels, Canadians are not protected by NAFTA and never have been. That, says Cochlin, means Buy American can be enforced by state and local officials in a manner that is entirely consistent with America’s obligations under international treaties.

Unfortunately for Canadian exporters, Buy American rules also have another catch that circumvents such treaties. “If one dollar of federal funding with Buy American provisions is used for a state or local project, all the dollars spent on that project must comply with the Buy American provisions,” Bradt explains.

That means it’ll be up to governors and mayors to decide how to apply Buy American since much of the stimulus will not flow directly from the feds. As has always been the case, Canadian companies can apply for waivers to access those opportunities. “But those waivers will be more difficult to get,” says Bradt.

Difficult — but not impossible. Take Redline Communications Inc., a supplier of WiMax and other broadband wireless infrastructure products, based in Markham, Ont. Its vice-president of marketing, Kevin Suitor, says up to 60% of the company’s annual revenues come from U.S. sales. Suitor expects to increase its U.S. market share relative to last year because Redline’s products are now certified under Buy American. That means, says Suitor, the company can supply companies bidding on the US$2.5 billion in contracts for building out wireless broadband infrastructure down south.

Clearly, opportunities remain, but Buy American complicates the process. State and local governments will, says Bradt, feel pressure to buy close to home. What’s more, a government official may not fully understand the provision’s limits, and attempt to head off legitimate Canadian bids. To protect themselves, Bradt says, Canadian companies should know the rules intimately before bidding.

Companies that find themselves shut out of contracts illegitimately have few legal options, says trade lawyer Cochlin. “They can complain to our federal government,” he says, “and Canada can make a complaint on the company’s behalf.” If Canada prevails, it earns the right to retaliate with protectionist moves of its own. That, of course, raises the spectre of a trade war — which neither Prime Minister Stephen Harper nor Obama say they want.

Harper’s next opportunity to contest Buy American will be at the G20 meeting in April, where, according to Gary Hufbauer of the D.C.-based Peterson Institute for International Economics, Obama is expected to make a strong anti-protectionist statement.

“Saying you are anti-protectionist doesn’t actually mean much at this point,” says Cochlin. “We need to hear that [Obama] is willing to change the rules on procurement,” preferably at all levels of government.

And that, Cochlin says, effectively adds up to renegotiating NAFTA.