The invisible impact of 'Buy American'

It's a clear case of déjà vu all over again. Back in the '80s, Brian Mulroney raised the spectre of U.S. protectionism, then set out to win guaranteed access for our exports. He didn't succeed: We got a "dispute panel" system, instead, and even that doesn't work. But his government was publicly committed to guaranteed access, so Mr. Mulroney put a brave face on his 1988 deal --spinning it as essential insurance and worth the steep price (control over our energy).

The rest, of course, is history. From softwood to beef to steel, U.S. trade policy (driven by the nitty-gritty of U.S. politics) has been as active and arbitrary as ever. "Guaranteed access" was always a fiction. Now, instead of learning from that experience, we're seeing a near-exact reprise with last week's "agreement in principle" on government procurement.

The Harper government has been playing catch-up since the Buy American controversy blew up a year ago. Stephen Harper's stated goal, as it was for Mr. Mulroney in 1988, was to negotiate Canadian exemption from U.S. trade laws.

The talks dragged on, and now most of the Recovery Act money has been spent. But, as in 1988, the optics of coming home empty-handed were abhorrent. So negotiators unveiled a "breakthrough" last week: Canadian companies get a temporary right to bid on whatever contracts have not yet been finalized, but only for seven of the specific programs funded by the Recovery Act.

Based on U.S. Trade Representative data, those remaining contracts might total $4-billion to $5-billion worth of business, or half of 1 per cent of the total $800-billion Recovery Act budget. And there's no guarantee Canadian companies will win a dime of that business -- especially since they're so late to the game.

What's the cost of this one-time access to the Recovery Act's crumbs? Far too high. Through the World Trade Organization system, Canada opens up access to public purchasing in all provinces, and all cities with more than 50,000 inhabitants. Where the Buy American exemption is time-limited, Canada's offer is mostly permanent. Our provincial and municipal procurement is worth tens of billions of dollars every year -- and this is the first time these immense purchases will be subject to the provisions of international trade law. Worse yet, we're doing this right when many struggling Canadian manufacturers - from public transit to pharmaceuticals to windmills -- could benefit mightily from the strategic leveraging of a home-field advantage.

Perhaps the greatest irony is that the real macroeconomic impact of President Barack Obama's Buy American preferences on our actual exports has never been demonstrated. Canada's sales to Americans have been hammered, but by the recession, not by protectionism. Most recent statistics (covering the first 11 months of 2009) indicate that total Canadian exports to the United States declined by 30 per cent from the same period in 2008.

Consumer industries (such as auto, where exports fell 32 per cent) led the decline, as Americans endured their worst downturn since the 1930s. Curiously, many industries that depend on public works spending (and hence should have been most vulnerable to Buy American) actually experienced stronger performance than industries where government purchasing is irrelevant. For example, Canada's exports of cement and concrete, ventilation equipment, turbine and power machinery, and even plastic pipe (the stuff rabid U.S. protectionists were ripping out of the ground) all held up better last year than our overall U.S. exports.

Our best hope, therefore, is to quickly get America back to work. Mr. Obama is trying to do exactly that, with government-spending injections seven times larger (proportionately) than Ottawa's. That's why the U.S. GDP grew three times faster than ours over the last half of 2009. Only that gathering U.S. recovery can resuscitate our exports, not another optics-driven trade deal.

Video clips of U.S. contractors ripping up Canadian pipe sparked righteous indignation in Canada. But the impact of Buy American on our aggregate exports has been statistically invisible; for individual companies genuinely harmed, this deal won't make any difference. Yet, our politicians want to permanently tie our hands governing a major additional chunk of our economy - just so they can prove (like in 1988) they did something.

Doctors take an oath to "do no harm." But, in this case, the "cure" is definitely worse than the disease.

Jim Stanford is an economist with the CAW

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