November 25, 2017

by on December 24, 2009

Buy America: The Return of the Third Option

On Wednesday last week, the U.S. Congress introduced its latest version of the Buy American Improvement Act. Buy America provisions essentially require U.S. manufacturers, builders, and contractors to utilize only U.S.-made materials in government funded projects. According to its sponsors, Senator Russ Feingold (D-WI) and Representative Dan Lipinski (D-IL), the new legislation is designed to tighten up the existing Buy America rules by closing loopholes and otherwise making it more difficult for U.S. firms to waive the Buy America requirement. Debate on the new legislation will likely begin in January.

The debate between Canada and the U.S., however, has been raging all year. In its current guise, Buy America first reared its ugly head in February when President Obama included it as part of his $700 Billion stimulus plan. Since then, several versions of Buy America provisions have been attached to various other stimulus and spending bills. By all accounts, those bills, along with the legislation introduced last week, loom as a serious threat to Canada’s valuable export stream of manufacturing goods and materials to the U.S

Nixon Shock

Canada has been here before. In August 1971, President Nixon instituted the New Economic Program (NEP), the so-called “Nixon Shock.”  Nixon’s Secretary of the Treasury, John Connally, drafted the NEP. It was a response not just to the severe recession that had begun that year, but also to the U.S.’s severe decline as a leading contender in the global economy.  Connally believed that economic competition from Japan and Europe was the “most important non-military threat to U.S. National Security.”

The NEP contained numerous protectionist measures including a ten percent surcharge on imports, a ten percent tax credit for investment in American produced machinery and a job development tax credit. Like Canada’s response to Buy America today, the Canadian government of 1971 considered the NEP to be downright disastrous for the Canadian economy.

So Canada fought back against Nixon Shock. Much of that fight was famously caught on Nixon’s White House taping system during a meeting in the Oval Office between President Nixon, Henry Kissinger and Prime Minister Pierre Trudeau.  Trudeau came to Washington seeking nothing less than Canadian exemptions from the NEP. On the tapes, and in between profanities, Nixon can be heard reassuring Trudeau that the U.S. considers Canada a close friend and neighbor. Nixon used additional platitudes: “The long-term goal is to move toward freer trade rather than more protection.” However, the tapes show that Nixon was clearly standoffish about making any commitments.

Trudeau, perhaps already leaning toward seeking alternative export markets, told Nixon “if you were going to take a very protectionist trend … we’d have to make some very fundamental decisions.” This threat was interpreted to mean that Canada would enter into trade agreements with other countries that would be detrimental to U.S. exports to Canada.

Ultimately Trudeau came away from the meeting with reassurances from Kissinger that the protectionist measures would be temporary. While Canada never received an exemption from the NEP, the ten percent import duty was soon abandoned.

Obama’s Turn

President Obama has spent much of 2009 sounding a lot like President Nixon in 1971. Since the day Obama visited Canada in February, Canada has repeatedly badgered the new President about Buy America. Canada wants an outright exemption from any Buy America provision enacted by Congress. The basis for Canada’s argument for an exemption has primarily focused on the close and unique trading relationship between the two countries.

In response, Obama has repeatedly assured Canada that the U.S. considers Canada not just an important trading partner but a close friend and neighbor. The President has also stated that the future of the U.S. lies in more open trade, not less. Yet, commitments to Canada with respect to Buy America have not been forthcoming.

The trade negotiations culminated this August with Canadian Trade Minister Stockwell Day offering American firms guaranteed access to Canadian procurement deals and other concessions. This proposal angered many in Canada, as they thought it was giving away the keys to the castle. Nevertheless, Day’s offer expired in October and the parties have been at an impasse ever since.

Despite Canada’s generous offer, the simple fact is that Buy America is immensely popular with U.S. voters. The President is faced with high unemployment, a fragile economy and a Congress with little concern for the well being of Canadian workers. With the new proposed legislation seeking to tighten up Buy America rules even further, an outright Canadian exemption from Buy America is all but dead in the water.

The Third Option

While negotiations and diplomacy continue, other options are necessary. One option is to litigate the Buy America provisions as being violations of U.S. Obligations under NAFTA and the WTO’s Agreement on Government Procurement (GPA). Both NAFTA and the GPA essentially require the U.S. to treat Canada’s goods the same as their own.

Canada’s arguments likely have some merit. Unfortunately, many of the plum procurement projects in question are administered at the local or state level and as a result may not be covered by NAFTA and the GPA. Also to the extent that some Buy America provisions are covered under the treaties, resolution of the dispute would take years and the remedies are limited. So while Canada litigates, the billions of dollars in stimulus contracts go out to the exclusion of Canadian bidders.

The other option is for Canada to leverage its considerable power with respect to its exports to the U.S., including Canada’s significant energy resources. This retaliatory response has recently gained traction. In September, British Columbia MP, Peter Julian, introduced the “Made in Canada Procurement Act” in Parliament.  This of course is a tricky situation as such tactics likely run afoul of NAFTA and the GPA themselves and ultimately do not solve the problem.

A third option is to seek other export markets to either replace the U.S. or to render Canada less dependent on exports to the U.S. Again, Canada has been here before.

Trudeau’s meeting with Nixon in 1971, and Canada’s failure to gain exemption from Nixon Shock, prompted Trudeau’s Economic Diversification Program, or “Third Option” policy. This was Trudeau’s effort to seek other export markets to replace the U.S. The Third Option ultimately failed in its primary objective. By 1985, 80% of Canada’s exports were going to the U.S. That statistic essentially holds true today.

The Third Option policy did succeed in another way however. From it, Canada established strong and lasting ties with China. Canada assumed greater responsibility with respect to global peacekeeping. Canada also raised its stature within the Commonwealth and it became a respected and leading provider of humanitarian aid overseas.

Because of these successes and due to the world’s dramatic shift away from a U.S. dominated global economy in this new century, Canada finds itself well positioned on the world stage such that a revival of Canada’s Third Option policy is warranted. It appears to be working this time.

Canada has made no secret of the fact that it seeks to secure trade agreements with up and coming world powers. It has done just that with most of the emerging giants. This includes the European Union, India, China, and South America. The world’s new economic powerhouses have been lining up to negotiate trade deals with Canada.

Furthermore, the Canadian people support the move. A Canadian Press Harris-Decima survey of Canadians, conducted in April, suggests that 70 per cent of respondents want Canada to pursue more international free trade agreements. 75 per cent favored the far-reaching Canada-EU agreement.

Prime Minister Harper explains that the aim of these trade talks is to counteract the global recession by boosting trade in new areas. However, Canada should not couch its conduct in such sheepish terms. Rather, Canada should forcefully and clearly state to the U.S. that it is seeking out these new trading partners as a full- fledged player on the new world stage.

Canada should make it clear in no uncertain terms that, like the rest of the world, it considers the 21st Century world a new marketplace. One dictated by an emphasis on free and open trade agreements across regions and across oceans. The new global, interconnected market is one where protectionist measures only hurt the country enacting them. U.S. protectionism should be seen as being akin to the U.S. using its military power unilaterally. As the U.S. found out, in the 21st Century, such conduct does not work. The country employing such a tactic will see its international reputation and global status irreparably damaged.

The U.S. currently remains Canada’s largest trading partner. Accordingly, Canada must continue to negotiate with the U.S. to protect its interests from the Buy America provisions. When the U.S. sees that Canada has the 21st Century on its side, the U.S. will realize that its protectionist policies must become a relic of the 20th Century. If not, the U.S. will.

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Comments: 2

  1. by wi11son on December 25, 2009

    I want to quote your post in my blog. It can?
    And you et an account on Twitter?

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