GOVERNMENT PROCUREMENT: POLITICAL JUNK FOOD WITH HEARTBURN
As one of a growing collection of ticking time bombs the US has thrown into the NAFTA renewal conversation, US negotiators have included a demand for strict reciprocity in access to government contracts — that is, Canadian and Mexican access to US public works contracts would be restricted on a one-for-one ratio.
That translates into a cap on Canadian and Mexican access to US government contracts at the value of domestic contracts Canada and Mexico awarded to US firms.
Broader Canadian public procurement is estimated to be worth over $200 billion annually, with eleven per cent ($22 billion) of federal contracts going to foreign firms. This is dwarfed by a US public procurement market of $1.7 trillion, with three per cent (or $187 billion) in federal contracts awarded to foreign suppliers. As is often the case, the stakes are heavily weighted in favour of the US.
The recently tabled negotiating direction is consistent with an earlier “Buy American Hire American” executive order issued by the White House, reflecting a policy imperative to focus US government spending — whether in defence hardware, telecommunications, transportation infrastructure, or any of the other countless government pursuits — to more squarely benefit American firms.
“We’re sending a powerful signal to the world. We’re going to protect our workers, defend our jobs, and finally put America first,” US President Donald Trump announced in April 2017.
To be fair, ’buy local’ is not an especially new notion to the US political dialogue.
President Herbert Hoover advocated “Buy American” policies in 1933 during the Great Depression. More recently, President Barack Obama embraced “Buy American” approaches in the 2009 US stimulus legislation, The American Recovery and Reinvestment Act (ARRA). The ARRA required that all public projects use domestically produced iron, steel, and manufactured goods.
That legislation prompted Canada to successfully negotiate specific waivers to the ARRA to deflect potential discriminatory impacts on Canuck firms.
And to be even fairer, ‘buy local’ is not a notion exclusive to the US.
Closer to home, Ontario’s 2009 Green Energy and Green Economy Act comes to mind. For those that may not recall, it included domestic content requirements for wind and solar infrastructure projects, stipulating that participating electricity generators needed to source up to 60 per cent of equipment from Ontario to be eligible.
International trade rules regulate procurement policy and the protectionist tendencies of governments. Those Ontario Green Energy provisions, for example, were successfully challenged at the World Trade Organization (WTO) by Japan and the EU, forcing the province to amend its legislation in 2014. That bought the Ontario government five years of non-compliant favouritism using taxpayer dollars to benefit local goods.
It is without question that government procurement inherently involves a political calculation.
In her testimony before the House Standing Committee on International Trade in early August, Canadian International Trade Minister Chrystia Freeland referred to local content requirements in government procurement contracts as “political junk food — superficially appetizing but unhealthy in the long run”. Pass the Miss Vicky’s Salt & Vinegar, please.
Economists will argue that protectionism in government procurement reduces competition and raises the contract price. So, instead of a broad global set of suppliers competing for a government contract, only local suppliers apply…and depending on the specific expertise required, this may involve a very few. Without extensive competition, there is less incentive to innovate…the winning supplier only needs to edge out local expertise, not the full expanse of foreign-based rivals and know-how.
Governments grappling with budget austerity therefore ironically end up with less to apply towards procurement through “buy local’ approaches. Paying more for less than the best means ending up with less for economic stimulus, less for roads or bridges or hydro infrastructure, less for military hardware.
But political calculation and pure economic theory do not mix well. The natural default for politicians is to apply local taxpayer dollars to local goods and services, to spend voter dollars on local suppliers and reward local expertise. Awarding government contracts to a foreign name or brand, no matter how superior, comes with its own set of negative headlines. Guaranteed.
Elected officials therefore naturally seek to advance the interests of local industry, both in successfully securing domestic contracts and having equal access to foreign procurement contracts. For instance, Premier Wynne has aggressively and ambitiously (and to date successfully) deflected Buy American policy approaches proposed in US state congresses such as New York and Texas. But Ontario has also threatened to implement its own Buy Local legislation in retaliation to protectionist US efforts.
Back to the US NAFTA proposal for reciprocity in government procurement. The existing NAFTA prohibits preferential treatment in government procurement.
In February, a US General Accountability Office (GAO) review found that the US makes available twice as much government procurement to foreign firms, measured in contract value, as the EU, Japan, South Korea, Norway and Canada combined. The fact that much of this procurement imbalance is a result of defence spending — an area where the US remains unmatched worldwide — is lost in translation.
The prevailing view amongst US protectionists, therefore, is that the US is giving away more access than it receives. Nine US senators wrote the US Trade Representative in June in support of Buy American policies in NAFTA 2.0 to establish preferential access for US businesses competing for government contracts. The senators urged the elimination of the NAFTA procurement chapter, characterizing it as a “loophole” preventing taxpayer dollars from being used to create jobs in the United States.
Any objections, Canada or Mexico? Oh, you betchya.
And there are US business interests with a constant eye on the lucrative Canadian procurement market, made richer when the Canadian federal government signalled $81.2 billion in future infrastructure spending.
Finding a “win-win-win” on government procurement in these trade negotiations is not easy, unless parties veered in the unlikely direction of a “Buy North America” procurement policy. That’s a little less catchy than “America First” in any stump speech.
What is it they say about junk food? Appeasing at the moment, but unhealthy in the long run. And then there’s the awful heartburn to contend with.