Strategy

Trade protectionism: We don’t buy it

If you’re mad about Buy American, here’s the good news: so are Americans.

Of all the sectors due to receive stimulus money under the 2009 American Recovery and Reinvestment Act, waste-water management was supposedly one of the most “shovel-ready.” So for Port Washington, Wisc.–based Aquarius Technologies, which makes waste-water treatment equipment, business in freshly stimulated America should be booming. Yet Tom Pokorsky, Aquarius’s president, says that’s not the case. “Almost no new projects have gone forward yet,” he says. “There have been six projects, worth US$15.6 million in contracts, that have been awarded” — generating a grand total of 17 jobs. “But we have nearly US$7 billion to go, and we’ve only got about two years in which it can be spent.”

What’s the holdup? “Buy American,” Pokorsky replies. “No one can figure out how the heck to comply with it.”

A set of riders Congress added to stimulus project funding back in January, Buy American is supposed to ensure that iron, steel and manufactured goods purchased by funds released under the Recovery Act are made in America — thus promoting the fortunes of U.S. companies such as Pokorsky’s. That’s the theory, anyway. In reality, while the government claims about 25% of stimulus funding has been spent, other estimates put the figure as low as 7%. Some U.S. businesses are scrambling. And many foreign suppliers are shut out of the process.

To date, Pokorsky’s response has been to hedge his bets. “Ironically, I have been getting a lot of work in Canada — a significant percentage, say 20% to 25% — and that will help me survive this year,” he says. “I’ve got work in the Toronto area, in Leamington, [Ont.], and in that province north of here — whatchacallit, Alberta. But if municipalities in Canada block that, I will be in real trouble.”

On June 5, Canadian municipalities voted to do just that. Their new Fair Trade resolution gave the U.S. government 120 days to exempt state and local governments from enforcing Buy American. If that doesn’t happen, Canadian municipalities can cut companies from countries with discriminatory procurement policies out of bidding on their contracts.

The Canadian mayors aren’t alone. Other countries are slipping retaliatory Buy Local language into laws governing their own stimulus funding. Of particular concern are so-called Buy Chinese requirements added to that country’s stimulus in mid-June. They favour domestic suppliers “unless products or services cannot be obtained in reasonable commercial conditions in China.” The net effect could be to freeze out foreign competitors from home markets, in a game of beggar-thy-neighbour that hasn’t been seen on this scale since the 1930s.

MORE: The price of protectionism »

The policy-makers who drafted Buy American did so to help ensure U.S. stimulus funds went toward creating jobs. Unfortunately, their timing couldn’t have been worse. In tough economic times, politicians everywhere try to help struggling constituents by enacting protectionist legislation designed to keep jobs at home. By letting Buy American pass, the Obama administration effectively invited other countries to do the same. According to the World Bank, global trade is projected to decline by 9% in 2009. Reciprocal protectionism will slow down trade flows even more. And that bodes ill for the global economic recovery.

When news of Buy American broke in January, Canadians thought membership in NAFTA meant they were safe from its impact. With the endorsement of President Barack Obama, a group of senators had inserted a clause into the American Recovery and Reinvestment Act requiring that Buy American be implemented in a manner consistent with international trade obligations. Unfortunately for Canada, NAFTA doesn’t cover state and municipal contracts on either side of the border. That’s because at the time NAFTA was signed, the provinces decided against signing on, too. The premiers also refused to sign World Trade Organization general procurement principles that would have opened up state — though not U.S. municipal — levels of government to Canadian bids. Hence, many Canadian businesses attempting to bid on U.S. stimulus contracts through the winter have been frozen out.

To date, the official Canadian response has been mixed. Prime Minister Stephen Harper has been lobbying Obama steadily for an exemption. In late June, Trade Minister Stockwell Day was widely reported to have asked for a declaration from premiers that their provinces won’t discriminate against American suppliers, as a way to convince the U.S. to drop protectionist measures. The Canadian federal government, provinces and municipalities have indicated their support for open procurement policies with the United States at all levels of government — for the first time in history. But given the protectionist mood in Congress right now, that’s unlikely to happen.

Instead, the mayors’ more aggressive action got most of the attention down south. Birgit Matthiesen, the Washington, D.C., rep for the Canadian Manufacturers and Exporters Association, says that “when news of the mayors’ decision broke, I got three calls a day about it, and when China took similar measures later that week, the calls intensified.”

Trouble is, how Buy American plays internationally is only one part of America’s problem. There’s also that minor issue of mass confusion over how it should be implemented. “The OMB [the Office of Management and Budget, which oversees the stimulus disbursement] didn’t really define Buy American until late April,” explains Pokorsky. At that point, the agency decided compliance meant a company had to assemble its final products on a U.S. site — prompting some Canadian firms to look into sourcing factory sites down south.

That said, simply running a U.S. factory isn’t enough. At Duferco Farrell, a Pennsylvania steel company, one component in its supply chain comes from elsewhere. That spooked former partners who, according to news reports, have left Duferco out of planned bids on Buy American projects — which, in turn, prompted Duferco to threaten to lay off 600 steelworkers.

The bloc of professed trade skeptics in Congress has been busy slipping Buy American language into laws covering everything from new investments in schools to climate policy. The Waxman-Markey bill on climate change, which passed the House of Representatives on June 26, contains protectionist language, and two new bills that also recently passed the House — the Water Quality Investment Act of 2009, and the 21st Century Green High-Performing Public School Facilities Act — feature Buy American language identical to that in the Recovery Act. Unlike that act, which authorizes short-term spending, these bills authorize billions of dollars in spending for an indefinite period.

It’s not exactly surprising that Canadian mayors decided to retaliate. Their counterstrike started in February, when John Hayward, the president of Hayward Gordon, a company based in Halton Hills, Ont., that manufactures waste-water pumps and mixers, realized he was being shut out of the estimated US$5-billion market in stimulus-related state and local government procurement in waste water. “We were looking at the language on the requests for proposals coming out of the U.S.,” he says, “and it quickly became apparent that we weren’t protected by our trade agreements.”

In April, Hayward told Halton Hills town councillor Clark Somerville that he might have to scale back the brand new multimillion-dollar facility he’d just built, and move production to Pennsylvania. Somerville decided it was time to do something — though in Canadian fashion, the resolution he and other town councillors drafted didn’t take the form of Buy Canadian. Instead, it calls on municipalities to exclude bids on contracts from companies whose countries themselves discriminate against foreign suppliers. Europeans, South Americans and whoever else are welcome to bid on municipal business; Americans are not.

Whether U.S. policy-makers will react the way Canada’s mayors would like is unclear. Secretary of State Hillary Clinton came to Niagara Falls the weekend the mayors’ resolution passed, and insisted that somehow it was, in fact, entirely consistent with America’s international obligations for the federal government to require states and municipalities to apply Buy American.

Yet many U.S. businesses are stymied, and retaliatory action won’t help. In fact, it’s looking more as though Buy American is as untenable in practice as the legal sleight-of-hand the Obama administration has been using to justify it is in principle. Among the cognoscenti and business groups, the issue is not playing well politically for the Obama administration. The Washington Post ran an article in mid-May highlighting problems with Buy American, and The New York Times and Wall Street Journal have both run editorials against the policy, joining the D.C.-based National Association of Manufacturers and several other groups.

MORE: Canada’s high prices have to stop »

On June 11, the U.S. Chamber of Commerce held a news conference in Washington, in partnership with the Canadian Manufacturers and Exporters (CME), to voice its concern. Chamber president Tom Donohue later pointed out in a letter to Obama that if all Canadian municipalities were to adopt a similar provision, U.S. companies would be shut out of a US$3-billion market in Canadian municipal spending on waste-water projects alone. Soon afterward, the U.S. Chamber submitted new guidance to the OMB on how stimulus funds should be managed. In that document, the Chamber uses a form of states’ rights argument against the federal government’s decision to stipulate how other levels of government spend stimulus dollars. “Our one main ask is for the federal government to exempt state and local governments from this requirement,” says Chris Braddock, the Chamber’s senior director of procurement policy. Doing that won’t get Buy American rolled back — nothing short of a repeal would achieve that. But it would give governors and mayors more latitude.

The chamber is also suggesting the OMB redefine the minimum foreign material a company’s supply chain is allowed under Buy American. Right now, it’s negligible. Braddock says that means a company that manufactures pipes and uses a small foreign-sourced gasket to join them together might not be in compliance. He would like to see the minimum moved to 10%.

With this feedback, the OMB will make a decision on how companies should comply with Buy American. Timeline? Unknown, says Braddock.

Yet all may not be doom and gloom. The U.S National Telecommunications and Information Administration recently exempted broadband infrastructure from Buy American compliance on certain contracts. And though the EPA has issued stiff requirements for compliance, Braddock suggests it may issue a broad waiver, if it receives a large number of requests from water companies.

Pushing for exemptions on a piecemeal basis is not an ideal option for smaller Canadian companies. Jayson Myers, the president of the CME, has been working closely with the U.S. chamber on the issue, and thinks the short-term solution is simple: get the president to issue an executive order that says the federal government will not issue restrictive conditions on how state and local governments should spend their money. Unfortunately, Obama has not indicated that’s something he’s prepared to do. The CME’s other goal is to ensure Buy American language disappears from new appropriation bills going through Congress. In some cases, this is happening. As Matthiesen points out, Buy American is absent from two new appropriation bills going through the House — one for post-stimulus spending in 2010, the other a new agriculture bill.

Matthiesen cautions that Buy American can be inserted into bills at any time, but she is heartened by Obama’s decision to speak out against the protectionist provision in Waxman-Markey, the cap-and-trade climate bill. It would require the president to impose a “border adjustment” or tariff on certain goods from countries that do not act to limit global warming emissions. “At a time when the worldwide economy is still deep in recession and we’ve seen a significant drop in global trade,” Obama said, “I think we have to be very careful about sending any protectionist signals out there.”

Unfortunately for the global economy, the President’s decision to talk about, but not act on, curbing Congress’s taste for protectionism might be too little, too late — particularly given the gap between what Obama says and what the administration and Congress do on the issue. Case in point: on June 24, two days before the House passed Waxman-Markey, a bloc of 108 congressional representatives put their names to a new bill entitled TRADE 2009, or the Trade Reform, Accountability, Development and Employment Act of 2009. It requires Obama to make good on campaign rhetoric and renegotiate NAFTA.

The language in the bill has prompted extreme reactions in the U.S.; some say it may represent the high-water mark of the trade-skeptic bloc’s efforts. Two days after it was launched, the D.C.-based National Association of Manufacturers issued a strongly worded statement, saying the bill would subvert America’s historical commitment to international commerce and wreak havoc in major parts of the economy at a critical time. Charged NAM vice-president Frank Vargo: “The architects of this extremely unwise proposal would do well to remember that the U.S. exports about $80 billion in manufactured goods each month and that millions of American jobs depend on those exports.” Asked why the NAM reacted so strongly, spokesman Hank Cox explained that it was looking to stamp out protectionist sentiment in Congress as soon as it reared its head. And he says there’s no chance TRADE 2009 will pass. “It’s too out there,” he adds. “A bill like that will die in committee.”

Pokorsky certainly hopes so. “The only thing that can be done to convince the mental midgets of Washington to change their minds on why Buy American is a bad idea, is when they see that this legislation is actually having a real impact on American jobs,” he says. Unfortunately, by that time, it might be too late.