The Difference Between “Buy America” and “Buy American”
The U.S. is known for its “domestic content restrictions,” which
require certain public funds to be spent on goods made in the United
States. The Buy American Act and Buy America requirements are the
most common ones. As they have similar names, the terms “Buy American”
and “Buy America” are often used interchangeably. However, they do not
apply to the same goods, public entities, or circumstances. For the
upcoming negotiation, the focus should be on exempting Canadian
businesses from Buy America requirements.
The Buy American Act of 1933 technically prevents U.S.
federal agencies from purchasing “foreign” goods. However, in
practice, the domestic content restrictions under this act rarely
applies to Canada. As such, under the Trade Agreements Ac t
of 1979 , the Buy American Act can be waived to ensure the
U.S. complies with its international trade agreements’ commitments,
including those found in NAFTA and the WTO GPA.11Manuel and
others, Domestic Content Restrictions . The Buy American
Act therefore does not apply to the U.S. entities listed in the WTO
GPA, allowing Canadian firms to compete with U.S. firms for these public
contracts, unless specified otherwise.
Buy America refers to a group of domestic content restrictions
that apply to states, municipalities, and other government organizations
as a condition to obtain funds from the Department of Transportation’s
various agencies.22Ibid. The name “Buy America” goes back to
the Surface Transportation Assistance Act of 1978, in which these
requirements were first introduced.33Platzer and Mallett,
Effects of Buy America on Transportation Infrastructure and U.S.
Manufacturing . Buy America restrictions vary depending on the source
of federal funds being used. Key examples of Buy America domestic
content restrictions preventing Canadian firms from bidding on
transportation contracts include44The Canadian Trade
Commissioner Service, Buy America(n) Acts .:
-
requirements that all iron and steel materials for state and local
highway projects be produced in the U.S.;
-
requirements that 60 per cent of the total cost of rolling stock
(e.g., subways, buses, railways) come from U.S.-made components and
that final assembly takes pace in the United States.55In 2016,
the U.S. Department of Transportation announced that the minimum
domestic content requirement for rolling stock would be increased to
70 per cent by 2020. For more information, see U.S. Department of
Transportation, FTA Issues Final Buy America Policy .
In contrast with the Buy American Act , Buy America requirements
do not have to be waived by the Trade Agreements Ac t for the U.S.
to comply with its international obligations. As such, these
restrictions are specifically excluded from the United States’
commitments under the Revised GPA. In the Revised GPA, the United States
specifies that “the Agreement shall not apply to restrictions attached
to federal funds for mass transit and highway projects.”66Platzer
and Mallett, Effects of Buy America on Transportation
Infrastructure and U.S. Manufacturing, 3 (footnote #17). However,
waivers can still be granted to foreign bidders when specific criteria
are met.77For more information, see U.S. Department of
Transportation, Buy America ; The Canadian Trade Commissioner
Service, Exceptions and Waivers .
Softwood Lumber: More Stability and Predictability for
Canadian Producers and Exporters
Failure to renegotiate a new softwood agreement—even a less favourable
agreement with new quotas and higher tariff rates—would hurt the
growth potential of Canada’s softwood producers. Around 60 per cent of
Canada’s softwood lumber production is exported,88Calculations
based on data from Natural Resources Canada. Source: Natural Resources
Canada, Forest Resources—Statistical Data . and
three-quarters of those exports went to the United States in
2016.99Calculations based on data from ISEDC. Source: Government
of Canada, Trade Data Online . The goal in a NAFTA 2.0
negotiation should be to ensure stable and predictable access for
Canada’s softwood lumber exporters to the U.S. market.
With the expiration of the one-year grace period1010While signing
the previous Softwood Lumber Agreement in 2006, it was decided that a
one-year grace period would apply upon its expiration, preventing any
trade action from taking place for that given year. last October, and
no renewed softwood lumber agreement (SLA) in sight, the long-standing
trade dispute between the U.S. and Canada is set to continue. At the
heart of this 35-year-old dispute lies the U.S. claim that the Canadian
lumber industry continues to be unfairly subsidized. In Canada, stumpage
fees are set administratively, as most forests are provincially owned.
By contrast, these fees are established through private sales in the
U.S., as most forests there are privately owned.1111Hoover and
Fergusson, Softwood Lumber Imports From Canada .
Despite Canada’s positive track record in winning cases brought before
the World Trade Organization and NAFTA tribunals, the U.S. Department of
Commerce (DOC) is once again investigating softwood lumber trade with
Canada. Recently, the DOC announced a preliminary determination in its
countervailing duty (CVD) investigation of imports of softwood lumber
from Canada. These duties will range from a low of 3 per cent to a high
of 24 per cent for the investigated respondents, with all other Canadian
lumber exporters facing a CVD of 20 per cent. A separate verdict on
anti-dumping duties, is expected in late June.
Since the end of the recession, improving U.S. demand has boosted
Canadian softwood lumber exports, which recovered to their highest
levels since the U.S. housing market downturn in 2006. With limited
growth potential expected in Canada’s housing market going forward,
softwood lumber producers will remain dependent on stable and
predictable access to the U.S. market to take advantage of growth
opportunities.
U.S. consumers are likely to bear the brunt of the decision to impose
duties on imports of Canadian lumber. According to a study on the
welfare impacts of the 2006 SLA by U.S. researchers Rajan Parajuli and
Daowei Zhang, the largest net losers were U.S. consumers themselves due
to higher U.S. lumber prices resulting from the constraints on imports
from Canada.1212Parajuli and Zhang, ”Welfare Impacts of the 2006
United States–Canada Softwood Lumber Agreement.” Based on their
findings, the Montréal Economic Institute calculated that U.S. consumers
spent an additional $6.4 billion as a result of the higher prices. That
is more than three times the $2.0-billion-dollar loss suffered by
Canadian producers due to reduced exports.1313The amounts
calculated by the Montréal Economic Institute are based on the
estimates found in Parajuli and Zhang, ”Welfare Impacts of the 2006
United States–Canada Softwood Lumber Agreement”.
A renegotiation of a bilateral softwood lumber agreement, whether
incorporated into NAFTA 2.0 or separate from it, could address the issue
of the share of the U.S. market accessible to Canadian producers. Under
the previous SLA, Canada’s share of the U.S. softwood lumber market
declined from around 33 per cent to around 28 per cent.1414Hoover
and Fergusson, Softwood Lumber Imports From Canada. However,
the drop was due largely to the collapse of the U.S. housing market; and
with the recovery of the market in recent years, demand for Canadian
lumber imports increased.
A potential approach to solving this dispute would be to allocate
guaranteed (or “free trade”) shares of U.S. consumption for every
province. These levels, which would be based on historic levels, would
also include provisions, such as export taxes or quotas (as in the
previous SLA), to prevent these shares from being exceeded. In addition,
an exchange rate mechanism could be included that would offset
competitiveness advantages resulting from currency fluctuations.
Overall, such a settlement would enhance predictability in trade
conditions on both sides of the border, while sharing the risk of
fluctuations in U.S. consumption.
A favourable trade outcome between Canada and the U.S. also needs to
consider the differences among provinces. Since the last SLA, Quebec has
adapted its stumpage regime to further mimic market-based structures,
and the Maritime provinces continue to have a greater share of their
forests on private lands.1515Miller, From Log Export
Restrictions to a Market-Based Future . Given that producers in these
provinces could be disproportionately hurt by import tariffs due to
generally lower margins, it will be preferable for provinces to maintain
flexibility with regards to the trade restrictions they would face, as
in the previous SLA. There should be no “one size fits all” solution.
Auto Sector: Finding Opportunity in Change
A highly competitive environment for attracting new investments, the
lingering effects of the 2008–09 financial crisis on the industry, and
the integration of Mexico into the sector’s supply chain have resulted
in Canadian auto sector revenues being little different today than they
were at the turn of the century. Still, despite the Canadian industry’s
recent struggles, the sector accounted for 16.5 per cent of Canada’s
merchandise exports in 2016 and directly employed 140,000 people.
In this environment, Canada has an interest in ensuring that any changes
to NAFTA with regards to autos creates new opportunities for growth in
this key sector. In particular, should changes to the sector’s rules of
origin be necessary under NAFTA 2.0, the best course of action would be
an increase in the North American content requirements.
Free trade in the auto industry between Canada and the U.S. has a long
history. The 1965 U.S.–Canada Automotive Products Agreement (commonly
referred to as the “auto pact”) was a groundbreaking agreement that
liberalized auto sector trade between the two countries. A key component
of the auto pact were provisions about rules of origin, which set a
minimum threshold of how much domestic content must be present in a
product for it to receive preferential tariff access to the domestic
market.
The rules of origin for autos and parts were gradually changed—first,
under the U.S.–Canada Free Trade Agreement, and then under NAFTA.
Today, we have North American content rules, rather than domestic
content rules. Light autos, engines, and transmissions must have 62.5
per cent North American content before they can be imported duty-free
into Canada.1616Government of Canada–Justice Laws Website,
NAFTA Rules of Origin Regulations . This share falls to 60 per
cent for other types of auto products.
The implementation of NAFTA brought about significant changes in
Canada’s auto industry. As Mexico became integrated into the sector’s
supply chain, a new production cluster in the U.S. Southeast and Mexico
developed. The shift in investment toward this region contributed to a
prolonged stagnation in Canadian auto production and trade. After
growing throughout the 1990s, the value of Canada–U.S. trade in autos
and parts reached a peak in 2002, and that peak was not surpassed until
2016.1717Based on data for HS code 87 from Innovation Science and
Economic Development Canada, Trade Data Online .
Since the turn of the century, Mexico has experienced exceptional growth
in auto-related trade with its NAFTA partners. The U.S. and Canada have
seen their auto imports from Mexico nearly triple, reaching
US$74.8 billion1818Based on data for HS code 87 from U.S.
Department of Commerce, TradeStats Express . in the U.S. and
C$10.2 billion in Canada in 2016.1919Based on data for HS code 87
from Innovation Science and Economic Development Canada, Trade
Data Online . And while Mexico’s imports of autos and parts from
Canada and the U.S. have also risen, they have not kept pace. As a
result, Mexico has developed a large trade surplus in autos and parts
with both countries. Given the large number of planned auto investments
in Mexico, this situation is unlikely to reverse itself.2020Swiecki
and Menk, The Growing Role of Mexico .
The rapid growth in U.S. auto imports from Mexico, combined with the
auto sector’s size (it employs nearly 1 million people directly in the
U.S.2121U.S. Bureau of Labor Statistics, BLS Data Viewer .
and accounts for 8.5 per cent of all merchandise exports), means that
autos and parts are a prime target for renegotiation in NAFTA.
Preliminary indications are that the U.S. will seek to adjust the
current rules of origin for autos and parts.2222Keenan, ”Auto
Sector Gears Up.” These changes are likely to take one of two
forms—an increase in the current levels of required North American
content, or the imposition of U.S.-specific content requirements.
An increase in the North American content requirements would be the less
intrusive of these options. It would require supply chain adjustments,
as firms would need to source fewer inputs from Europe and Asia, and
that would likely raise costs. It could also mean increased compliance
costs for firms, as they may need to better track the source of their
inputs. While these costs would likely lead to higher prices for
consumers, the increased focus on North American suppliers would also
create new opportunities for Canadian parts suppliers.
A shift to country-specific content requirements would be far more
disruptive. This could effectively lead to a trifurcation of the highly
integrated North American industry and require significant changes in
supply chains. In this situation, Canada’s negotiation strategy would
likely centre on maximizing its share of the North American content
requirements. This may include trade-offs, with lower Canadian content
required in areas where Canada currently has a limited market presence,
such as heavy trucks.
If too restrictive, changes in the rules of origin embedded in NAFTA
could also have another unintended consequence—they could reduce the
attractiveness of the region for auto-related investment. For example,
if compliance costs associated with new rules of origin are too high
relative to the tariffs imposed on vehicles that don’t meet them, auto
assemblers could choose to not comply. In short, unrealistic changes in
the rules of origin could end up leading to less investment in North
America.
Beyond changes in the rules of origin, Canada might also want to table
another issue in the negotiations— the heavy use of subsidies to
attract auto investments. In recent years, financial incentives have
accounted for, on average, more than 20 per cent of the value of new
auto-related investments; in some extreme situations, they have
accounted for the majority.2323Swiecki and Menk, The Growing
Role of Mexico in the North American Automotive Industry . The
competition for new investments and the heavy use of financial
incentives could lead to undesirable outcomes, such as rent seeking (the
practice of manipulating public policy or the economy to boost profits)
or sub-optimal location decisions by auto firms. Establishing a limit to
the size of incentives on offer would help to level the playing field
for investment decisions.
Supply-Management: An Opportunity for Fundamental Reform
Canada’s supply management system is expected to be a contentious and
high-profile issue in the NAFTA negotiations, and it is one sector where
Canada should embrace greater openness in its own market. The Conference
Board’s view is that supply management has served Canada poorly for
decades, and the NAFTA renegotiation could be the first step toward a
gradual transition away from this long-standing system altogether.
Canada uses supply management to manage its dairy, eggs, and poultry
industries. The policy provides a stable price for producers through a
three-pronged approach that controls supply through allocation of
production quotas, a price-setting mechanism to ensure that production
costs are covered, and high tariffs on imports.2424An explanation
of Canada’s dairy supply management system can be found in Goldfarb,
Making Milk . In a 2014 report, The Conference Board of Canada
described supply management as “Canada’s most contentious public
policy.” The report said supply management contributes to higher prices
for consumers and reduces growth opportunities for producers, both at
home and abroad.2525Grant and others, Reforming Dairy Supply
Management .
Canada was able to maintain its supply managed systems during the
negotiations for the Canada–U.S. Free Trade Agreement and NAFTA. While
Canada has defended its supply management policy in more recent deals,
it ultimately agreed to increase the share of dairy products it allows
in from other countries. For example, the Comprehensive Economic and
Trade Agreement (CETA) with the European Union will double the amount of
EU-produced cheese allowed into Canada.2626European Commission,
CETA—Summary of the Final Negotiating Results . The Liberal
government of Justin Trudeau also announced a $350 million investment
over five years in November 2016 to “support the competitiveness of the
dairy sector” specific to CETA.2727Agriculture and Agri-Food
Canada, Government of Canada Invests in Dairy Sector .
During the TPP negotiations, Canada agreed to provide TPP countries with
duty-free access to 3.25 per cent of Canada’s dairy market and 2.1 per
cent of its poultry market.2828Curry, ”The ABCs of TPP.” In
relation to this trade deal, the previous Conservative government had
announced a $4.3-billion, 15-year compensation package to Canadian
dairy farmers affected by the TPP, although the current government has
not committed to it.2929McGregor, ”Liberals Waver on Trade Deal
Compensation.”
The U.S. dairy industry calls Canada’s supply management system
“protectionist” and is putting pressure on U.S. officials to gain
better access for U.S. dairy products.3030U.S. Dairy Export
Council, U.S. Dairy Companies Push Back . U.S. industry leaders
are particularly unhappy with the National Ingredients Strategy for
ultra-filtered milk, a type of dairy ingredient not subject to tariffs.
U.S. producers were increasingly supplying Canadian dairy processors
with ultra-filtered milk until Canada enacted regulations that reduced
the price paid by processors for Canadian ultra-filtered milk.
Canada’s traditional trade negotiating position has been not to make
supply management a part of the discussions. The dairy concessions made
in CETA and TPP were offset in part by the opportunities for greater
access to new, large, and growing markets. In contrast, there is not as
much room for growth in a mature U.S. market. Nevertheless, Canada
should be prepared to offer increased market access for U.S. dairy
products (as well as other supply-managed commodities). First, Canadian
consumers would benefit from greater product choice and more price
competition. Second, a willingness to compromise on an issue such as
supply management could help achieve Canada’s interests in other areas
of the negotiations, including government procurement, softwood lumber,
and the auto sector.
The NAFTA renegotiation could be the springboard from which Canada
undertakes fundamental reform of the supply management system. Canada’s
negotiating priority should be a multi-year, phase-in period for NAFTA
provisions governing supply-managed industries, giving Canada the time
to transition out of the policy altogether. The Conference Board has
called for reform of dairy supply management for almost a decade,
arguing that the policy has imposed costs on domestic
consumers3131The Organisation for Economic Co-operation and
Development estimates that the market price support cost Canadian
dairy consumers an average of $2.6 billion per year in the decade to
2011. That adds up to roughly $200,000 per dairy farm per annum and
around $276 per family every year. See Grant and others,
Reforming Dairy Supply Management . and limited the ability of
supply-managed producers to export their own products to growing
markets, primarily in Asia. In 2014, the Conference Board proposed a
multi-faceted reform plan for the dairy industry, which included buying
out farmers’ production quota at the value at which it was purchased
(“book value”) and an aggressive push to gain access to international
markets for Canadian dairy products.
Canadian dairy operators would be negatively affected in the short term,
and the burden would likely fall hardest on smaller, less-efficient
operators. The Conference Board estimates that about half of Canada’s
milk comes from just 25 per cent of its producers.3232In
Reforming Dairy Supply Management: The Case for Growth , the
Conference Board examined data from the Ontario Dairy Farm Accounting
Project Report (ODFAPR) for 2011, dividing the operations into three
groups—most efficient, medium efficiency, and least efficient. The
most efficient farms had more than 160 head of cattle, approximately
twice the average herd, and earned about $1.4 million in revenue.
Extrapolating the Ontario data to the national industry, we estimate
that the farms in this group would hold almost half of the dairy
production. These operators would have the resources to expand their
herds and invest in their operations to compete internationally. The
outcome would likely be a dairy industry with fewer farms but higher
production and greater export potential, as well as an expectation of
price declines for Canadian consumers and processors over the medium and
long terms.