A Terrible Trade Deal

Harper’s Buy American “cure” worse than the disease
March 1, 2010

It’s a clear case of déja vu, all over again. Back in the 1980s, 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 Mulroney put a brave face on his 1988 deal – spinning it as essential insurance, worth the steep price (i.e., control over our energy) we paid for it.

The rest, of course, is history. From softwood lumber to beef to steel, American trade policy (driven by the nitty-gritty of American 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 month’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. Harper’s stated goal, as for Mulroney in 1988, was to negotiate Canadian exemption from U.S. trade laws.

The talks dragged on, and now the U.S. Recovery Act money has almost all been spent. But, as in 1988, the optics of coming home empty-handed were abhorrent. So last month negotiators unveiled their “breakthrough”: 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 or 5 billion worth of business (or one-half of one percent 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 coming 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. 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 Obama’s Buy American preferences on our actual exports has never been demonstrated. Canada’s sales to America have been hammered, all right – but by the recession, not by protectionism. Most recent statistics (covering the first 11 months of 2009) indicate that total Canadian exports to the U.S. declined by a painful 30% from the same period in 2008.

Consumer industries (like auto, where exports fell 32%) led the decline, as Americans endured their worst economic downturn since the 1930s. Curiously, many industries which 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. President Obama is trying to do that, with government spending injections seven times larger (proportionately) than Ottawa’s. That’s why 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 abundant righteous indignation in Canada. But the impact of Buy American on our aggregate exports has been statistically invisible; for individual companies which were genuinely harmed, this deal won’t make any difference. Yet now our politicians want to permanently tie our own hands governing a major additional chunk of our economy – just so they can prove (like in 1988) that 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 Canadian Auto Workers and a CCPA research associate.)