Begging thy neighbour: understanding Canada's limited options in resolving 'Buy America'.

• Author: Turi, Philip G.
• Position: North American Dispute Settlement

After subduing concerns over his campaign promise to re-negotiate the North American Free Trade Agreement (NAFTA), (1) few Canadians would have expected President Barack Obama's landmark stimulus bill to open a new chapter in Canada-United States trade relations. Indeed, tucked away in the lengthy American Recovery and Reinvestment Act of 2009 (ARRA) (2) was an emboldened "Buy America" policy that, for many Canadian exporters, typified depression-era protectionism. In particular, Canadian companies took issue with [section] 1605 of the ARRA, which restricted the availability of funding appropriated under the legislation to public projects using "iron, steel and manufactured goods" produced exclusively in the United States. (3) While domestic preference rules regarding government procurement were not necessarily new, (4) the breadth and scope of this current provision is a marked departure from past practice. Specifically, eighty percent of ARRA funding for public infrastructure projects is distributed by state agencies and municipalities, the overwhelming majority of which are not covered by any international trade obligations. (5) Under this legislative mandate, subfederal entities are free, and in fact encouraged, to discriminate against Canadian suppliers bidding on government contracts, notwithstanding the many agreements promoting free trade between Canada and the United States.

The following note will examine three principal questions underlying this most recent episode in Canada-United States trade relations. First, was the "Buy America" clause enacted under the ARRA consistent with United States international legal obligations to Canada given that funding mandated under the legislation emanated from the federal government? Second, what legal options were available to Canada, on behalf of affected companies, in response to "Buy America"? Third, to what extent does the Canada-United States Agreement on Government Procurement (Canada-United States AGP) (6) signed in February 2010 engage the preceding issues and provide a framework for managing future "Buy America" provisions?

This note will begin with a brief overview of the ARRA, itself, and the distinction between [section] 1605 and other "Buy America" statutes and provisions. Thereafter, it will examine the permissibility of a restrictive procurement policy under NAFTA and the World Trade Organization's (WTO) Agreement on Government Procurement (GPA) as well as examine other international accords coveting treaty relations and state responsibility. (7) In addressing question two, the analysis is subdivided into options available to Canada through: (1) the waiver criteria established under [section] 1605 (b) of the ARRA; (2) executive order; (3) arbitration; and (4) countermeasures permissible under international law.

It will be argued below that prior to the signing of the Canada-United States AGP, the main cause of Canada's difficulty was a lack of coverage under both of its major trade agreements with the United States. With sub-federal entities largely excluded from NAFTA Chapter 10 and the GPA, the United States was not prima facie contravening obligations to Canada under either agreement. Less clear, however, was whether [section] 1605 undermined United States obligations to Canada under the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement). (8) While overriding political considerations narrowed the range of legal remedies at Canada's disposal, there was a clear legal basis in the United States for countrywide exemption for Canada under executive order. Other alternatives, such as arbitration on a state-to-state basis, were, although viable, prone to protraction beyond the time-sensitive ARRA's mandate. Furthermore, it is unclear whether enacting countermeasures would have been in the best interest of Canadian companies, especially those with established cross-border supply chains. Finally, while the Canada-United States AGP expands Canada's commitment to liberalizing subfederal procurement markets, it provides only marginal access to remaining ARRA funding and does not prevent the United States from enacting future local content provisions with regards to procurement. Notwithstanding these issues, the Canada-United States AGP sets an important precedent and offers the prospect for further integration of procurement markets in both countries.

1. GENERAL BACKGROUND: [section] 1605 AND EFFECTS ON CANADAUNITED STATES TRADE

   The goals of the ARRA, as established in [section] 3(a), include promoting economic recovery, providing investments needed to increase economic efficiency, and investing in infrastructure that will provide long-term economic benefits. (9) The goal of efficiency is reiterated in [section] 3(b), where it is asserted that expenditures and projects commence "as quickly as possible consistent with prudent management." (10)

   Section 1605 of the ARRA attaches domestic content requirements to the United States' $90 billion (11) in infrastructure funding for projects involving the "construction, alteration, maintenance, or repair of a public work or public building." (12) Subsection Co) provides federal agencies involved in administering funds with the ability to waive such requirements in three circumstances: (1) when applying the provision would be inconsistent with the public interest; (2) when domestically produced iron, steel, or relevant manufactured goods are of insufficient quantity or of unsatisfactory quality; or (3) where the inclusion of domestically produced iron, steel, or manufactured goods would serve to increase the cost of the overall project by more than twenty-five percent. (13) In an attempt to forestall the concerns of United States trading partners, subsection (d) provides that [section] 1605 be applied in a manner consistent with United States international trade obligations.

   Although it is not entirely clear whether the insertion of provision 1605 was a response to the lobbying efforts of the American steel industry (14) or a general protectionist sentiment sweeping Congress, the disruptive effect of the clause on United States trade with Canada was easier to ascertain. In particular, unless a procuring entity interested in using Canadian product received a waiver for such purposes from a Federal agency charged with allotting funding, Canadian companies were practically ineligible from competing on ARRA funded projects. (15) However, nearly one-third of trade between Canada and the United States is "intrafirm," and more than sixty percent of trade occurs within established cross-border supply chains. (16) Accordingly, it is not surprising that by August 2009, with only ten percent of the stimulus funding allocated, the legislation adversely affected approximately 250 Canadian and United States companies supplying state and municipal infrastructure markets. (17) Many of these Canadian companies were asked to sign affidavits verifying where their products were manufactured. Furthermore, United States manufacturers selling directly to local infrastructure markets requested that their Canadian suppliers sign similar affidavits. (18)

   At the grassroots level, the Federation of Canadian Municipalities (FCM) responded to the "Buy America" clause by adopting a trade resolution calling for discrimination against goods and suppliers from countries, such as the United States, that had closed "previously open markets to Canadian goods." (19) While the veracity of this resolution was never fully tested, it served as an impetus for the eventual "Buy America" negotiations that ensued in the fall of 2009. Acting as an artificial deadline, the resolution, although never implemented, attracted the attention of policymakers on both sides of the border. (20)

   Unlike federal agencies administering their own procurements, most state and municipal governments neither issued nor implemented complex "Buy America"-type provisions in the past. Section 1605's application to sub-federal entities thus created significant uncertainty and complications for state and local procurement officers and, as a result, projects funded under the ARRA were stalled or moved forward slowly. With practically no international obligations covering government procurement at the municipal level, and only fractionally at the state level, goods eligible for federal procurement under [section] 1605 that were substantially transformed in a covered-trade-agreement country, were ineligible for subfederal procurements. This differential application meant that subfederal agencies spending monies under the ARRA may have had to pay higher prices for products than those available to federal agencies; these agencies also faced contracting delays and burdens not faced by their federal counterparts. (21) Although the House Committee on Transportation and Infrastructure projected the creation of 110,000 jobs and $20 billion in economic activity, as of May 2009, only six projects worth $15 million had started, creating just seventeen jobs in the United States. (22)

   Also, to avoid the administrative burden associated with applying [section] 1605 and the potential for reprimand if misapplied, some municipalities otherwise eligible to use ARRA funds to update their water and sewage infrastructure, for example, declined stimulus money altogether. (23) The application of [section] 1605 at the subfederal level, with "a limited patchwork of international obligations," (24) also led to contradictory results. American companies sourcing components from Canada were not able to participate in subfederal procurement projects. (25) Thus, although difficult to quantify, documented evidence suggests that [section] 1605 generated immediate adverse effects for both Canadian and American companies.

   Other 'Buy American' Legislation

   Domestic preference requirements appear in other pieces of United States federal legislation. The Buy American Act, (26) originally...