Commentary | Economic Growth

Canada needn’t worry about Buy American rules in the stimulus

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Journalists and government officials in the U.S. and Canada have no reason for alarm over Buy American rules in the recently passed stimulus bill.  Stewart and Drake  report that the bill contains explicit language which permits governments to waive these requirements when they conflict with our international commitments.   The U.S. and Canada are both parties to the World Trade Organization (WTO) Agreement on Government Procurement (GPA), which was signed by 37 other governments including the European community, Hong Kong, Japan and Korea, but not mainland China, Brazil or Russia.  In addition, the North American Free Trade Agreement (NAFTA) also contains further, bilateral commitments on government procurement requirements. 

The GPA and NAFTA specify which government agencies are subject to the agreement, the types of goods and services that are covered, and monetary thresholds that determine when the agreements come into force.  So the governments of both countries have already conducted very detailed negotiations that have specified exactly which purchases are covered by Buy American provisions and which are exempt.  For example, under NAFTA, state procurements, including those paid for with federal funds (including highway and mass transit projects) are not covered by the procurement codes. Thus the states are free to apply Buy American restrictions to such projects under NAFTA. 

Provincial governments in Canada are also exempt under NAFTA procurement codes, and according to the U.S. Trade Representative’s annual National Trade Estimate Report “a number of Canadian provinces maintain ‘Buy Canada’ and other policies that put U.S. suppliers at a disadvantage.”  So, fears of Canadian retaliation against Buy American policies in the stimulus bill are an empty threat. 

Finally, as Paul Krugman pointed out, there is a good economic case for Buy American provisions when the economy is in a deep slump, which is clearly the case today.  And government procurement spending in the stimulus bill represents a tiny share of overall U.S. trade.  The stimulus includes about $100 billion of spending on construction and manufactured goods (a small fraction of $800 billion dollar stimulus and an even tinier share of total national spending in these two industries).  That represents about 0.3% of U.S. GDP, and a substantial share of that spending will be exempt from Buy American provisions under NAFTA and the GPA agreements.  To put that number in perspective, U.S. spending on all imported goods in 2008 was$2.1 trillion dollars, or 15% of GDP.  So, in terms of its effect on our most significant trading partner, Canada, the flap over Buy American restrictions is, overall, a tempest in a teapot. 


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