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 .:
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.