Buy American Deal: Deja Vu All Over Again

I’ve found the politics of the Buy American controversy very odd.  President Obama, to help sell his massive stimulus package to the American public, added measures to maximize domestic content in stimulus-funded projects.  From his perspective, that was sensible both economically (reduces the import leakage from the stimulus) and politically.

If anything, it should have reinforced our nascent efforts in Canada to make better use of our own procurement opportunities as a strategic policy lever to support our (desperate) manufacturing industry.  Despite our past successes with procurement as an industrial policy tool (aerospace, telecom, pharmaceuticals, shipbuilding), Canada has been very passive in recent years — failing to take maximum advantage of home market opportunities in key high-tech sectors.  This passivity has reinforced our recent deindustrialization.  The CAW and others have been campaigning hard in recent years with a Made in Canada Matters slogan to reverse this passivity, and make the most of our procurement levers.

It seemed like we were making some progress on that front.  But then Obama’s efforts sparked an enormously over-exaggerated chorus of outrage up here about “protectionism.”  Never mind the hard economics of it (on net Obama’s overall stimulus program is enormously beneficial to Canadian exports, and we have been for the most part free-riders on his shoulders; at the same time, despite lots of anecdotes about Canadians being frozen out of U.S. public works, there’s no evidence in the export data that Buy American has measurably hurt us).  The righteous indignation of being treated like second-class citizens in what is supposed to be our guaranteed market gave free-traders the excuse to ramp up the rhetoric about the spectre of protectionism.

The end result is this very strange, optics-driven trade agreement unveiled last week.  It cannot possibly make any difference to the Buy American effects (all the more so since the Recovery Act money is pretty well all spent … the last contracts have to be let within the next few weeks).  The real goal here is using the Buy American fear-mongering to justify a significant expansion of trade liberalization.  Free traders who don’t believe in industrial policy are actually GLAD to lose our procurement powers.  And they see in this deal an opportunity to eliminate whatever procurement freedom still exists: interprovincially, with the U.S., and most of all with the Europeans.

That’s the real game here: use the Buy American controversy (which is economically meaningless) to justify full-fledged liberalization of procurement (which will have lasting economic effects).  What risks slipping through our fingers is yet another rare lever with which we can support our own value-added industries.  For the laissez faire crowd, who don’t believe that manufacturing fits into our “comparative advantage,” that’s actually a good thing.

Here’s my Globe and Mail column on the subject.  I am shocked to see that so far the comments are near-unanimous in favour of my argument.  (I especially liked one guy, “Another Opinion,” who wrote: “Does anyone appreciate how incredibly revolting it is that Harper’s economic exploits have forced me into the position of actually AGREEING with a representative of the neanderthals at the CAW?”  I guess that’s what you call a backhanded compliment!

Buy American Cure Worse than the Disease

            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 (namely, control over our energy) we paid for it.

            The rest, of course, is history.  From softwood 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 week’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 most of the Recovery Act money has been spent (whatever’s left must be committed within the next few weeks).  But as in 1988, the optics of coming home empty-handed were abhorrent.  So last week 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, and all cities with over 50,000 inhabitants.  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 percent, from the same period in 2008.

            Consumer industries (like auto, where exports fell 32 percent) led the decline, as Americans endured their worst 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 exactly 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.