Economic Relationship between Canada and the United States Committee on April 15th, 2021

[The Chair, Liberal, Raj Saini]

Welcome, members, to the 10th meeting of the Special Committee on the Economic Relationship between Canada and the United States. Pursuant to the motion adopted by the House on February 16, the special committee is meeting to discuss the economic relationship between Canada and the United States. Today, we are continuing our examination of buy American procurement policies.

I would now like to welcome our witnesses.

We now welcome Geneviève Dufour, a full professor at Université de Sherbrooke.

From Loyola Marymount University, we have Justin Hughes, distinguished professor of law. Finally, from the Trade Justice Network, we have Ms. Angella MacEwen, co-chair.

Professor Dufour, you have the floor for five minutes.

[Geneviève Dufour, Full Professor, Université de Sherbrooke, As an Individual]

Mr. Chair, members of the committee, thank you for the opportunity to appear before you to discuss the United States' Buy America jobs plan and the U.S. president's recent executive order.

You have heard from several government officials, including some ministers, that they would not let the Biden administration further restrict our companies' access to the U.S. market and would seek a blanket waiver. One speaker also talked about coming to a sectoral agreement with the United States. Obviously, I can't cover everything in this presentation, but I want you to know that, under international economic law, we have very little room to manoeuvre in response to the measures in the Buy America plan. I will unfortunately be going against the grain of what you have been told.

In my analysis, the United States cannot legally negotiate an agreement with Canada at this time. Nor would it be possible to reach a sectoral agreement. I will explain why.

The United States and Canada are among 48 states in the world that are parties to the World Trade Organization's Agreement on Government Procurement, or WTO GPA. This means that Canada and the United States have agreed to subject their government procurement to international competition.

However, when it comes to government procurement, each state has the ability to restrict its commitment. In other words, each state determines the entities subject to open procurement, the products or services covered, and the amounts above which the agreement applies. In its schedules of commitments, the United States has inserted significant limitations to allow it to continue to favour its suppliers in government procurement. Because of these limitations, therefore, the United States can have measures such as those in the Buy America plan.

Now, can the United States grant a waiver in favour of Canadian suppliers? Unfortunately, the answer is no.

In fact, the WTO GPA provides for compliance by states that are party to the most-favoured nation, or MFN, clause. In law, this clause is simple to apply. If a state gives an advantage to another state, it must extend that advantage to all states that are party to the agreement. In other words, if the United States gives Canadian companies preferential access to government procurement that is subject to the Buy America plan, it must extend that preference to the other 46 states that are party to the WTO GPA.

You may say that the United States had nevertheless agreed in 2010 to a general waiver in favour of Canada following the Obama administration's massive investment plan. But the context has changed.

In fact, there is one exception to the MFN clause I just mentioned: free trade agreements. That is, if states enter into a free trade agreement, they can give each other mutual preferences—that's even the objective—and they can do so without having to extend those preferences to other states. But beware, because, for this exception to come into play, there has to be a proper free trade agreement, which excludes sectoral agreements. I can come back to that during the question period, if you want.

In 2010, Canada persuaded the Obama administration to allow Canadian suppliers to participate in U.S.-only tenders. At that time, we had a free trade agreement, NAFTA, the North American Free Trade Agreement, that covered government procurement. In other words, NAFTA allowed us to have a preferential agreement with the United States on government procurement.

Today, the Canada-United States-Mexico Agreement, or CUSMA, has replaced NAFTA, and this new agreement now applies. It contains no rules on government procurement pertaining to relations between Canada and the United States. So we can no longer avail ourselves of that exception.

In this context, we have a few scenarios available to us. I will not be able to present them all to you, but here are some of them.

First, we unfortunately accept this as a fact of life; we don't have a waiver and our suppliers of goods and services cannot bid on most large infrastructure projects in the United States. In fact, they will be able to bid on some projects within the scope of the GPA, but that's extremely technical. For contracts not covered by the GPA, Canadian and U.S. companies will be able to apply for ad hoc waivers, but it's a very complex mechanism, that, most importantly, provides no predictability for our Canadian companies.

Second, we don't accept that solution and we reopen CUSMA negotiations. Let's be clear: after years of painful negotiations, and given the fact that the U.S. government is quite protectionist at the moment, I don't think that's a good idea.

Third, another solution would be to negotiate a blanket waiver with the United States. However, as I have already said, it would be risky for the Americans because it would go against free trade rules, against their commitments. So that remains to be seen.

Fourth—and I feel we should opt for this scenario when we know more about the specific measures taken by the Biden administration—Canada absolutely must begin a comprehensive analysis of how compliant the measures under the Buy America plan are with the GPA and with U.S. commitments.

This is because it is a good bet that some measures are questionable from a legal perspective. That could provide an opportunity to engage in a fact-based dialogue with a view to limiting the measures arising from the Buy America plan. If no agreement is reached, a dispute settlement procedure could be initiated at the WTO. Obviously, it would not satisfy our desire to move swiftly, but it could put pressure on the United States, especially if other major trading partners like China or the European Union were to join Canada.

This situation is yet another indication of our vulnerability when it comes to trade, and that vulnerability is a direct result of our dependence on the U.S. market. The answer seems simple enough: Canada needs to diversify its export markets. However, that's been slow to happen. We do have free trade agreements with many other countries and with major trading blocs, but, at the level of our businesses, diversification has been slow to materialize. That can likely be attributed to a number of factors. I don't have time to go into them in detail, especially since it goes beyond the scope of the trade relationship with the United States. But I would be happy to address them if you have any questions along those lines.

Thank you for your attention, and I remain available to you.

[The Chair, Liberal, Raj Saini]

Thank you, Ms. Dufour.

[Justin Hughes, Distinguished Professor of Law, Loyola Marymount University, As an Individual]

Thank you very much, ladies and gentlemen.

Thank you for inviting me to participate in today's session focused on President Biden's buy American executive order.

I was surprised to receive the invitation.

I think everyone knows that since the inauguration of the Biden administration, the administration has been focused intently on the COVID-19 pandemic and domestic economic issues. It has concomitantly been moving more cautiously on trade issues. In a sense, President Biden's January buy American executive order falls between the two.

I'm happy to talk about the executive order this evening, but I have to emphasize that I'm not part of the administration. I last served in the Obama-Biden administration in September, 2013. I'm speaking to you as a law professor who teaches international trade and pays a reasonable amount of attention to policy developments in Washington.

As you know, the executive order does not change any of the statutory laws that are commonly called “buy American”, or “buy America provisions”. The executive order calls for a general tightening of department and agency implementation of the statutory provisions.

It does this by doing the following. It establishes a centralized process for granting waivers to buy American requirements, such that “a description of its proposed waiver and a detailed justification” of the waiver must be submitted to the White House's Office of Management and Budget. It makes descriptions of these proposed waivers and justifications available on a publicly accessible website. That is clearly intended to be a resource for American manufacturers who might want to bid on contracts that have not yet received a waiver. It allows the Office of Management and Budget to review each waiver, or to decline to review the waiver. The OMB may reject a waiver, in which case it goes back to the agency for further consideration and further analysis of the determination.

All of that is supposed to happen through a new made in America director in the Office of Management and Budget.

The president's executive order also requires the Federal Acquisition Regulatory Council to study and consider changing the very elaborate and detailed federal acquisition regulations in various ways that could increase the amount of federal purchases that have U.S. value added in it. Then—and this should be important to Canada—the executive order also calls for a longer term assessment, agency by agency, of “waivers issued pursuant to the Trade Agreements Act of 1979, as amended, 19 U.S.C. 2511, separated by country of origin”.

We are still in the earliest days of the implementation of the executive order. No made in America director has yet been appointed by the White House. My understanding is that so far the Office of Management and Budget has been gathering information from agencies and departments on waivers that had been granted in the recent past, analyzing those waivers and determining to what extent things can be tightened up.

My purely personal impression is that they have not yet identified as much abuse or looseness in the waiver system as some expected. I also think that—

[The Chair, Liberal, Raj Saini]

Mr. Hughes, I'm sorry. I am getting the French interpretation on the English channel.

That's okay now. Go ahead.

[Justin Hughes]

I was also getting the French, but I was listening to myself in two languages.

I also think the administration is looking at those waivers, not in terms of the total number of American jobs, which might have been how the prior administration looked at that, but, in my understanding, especially in terms of critical supply chains and strategic production.

As everyone knows, and as Professor Dufour discussed, the U.S. commitment to the WTO government procurement agreement, which benefits Canada at this time, effectively means that buy American rules function as buy from America and friends' rules. Separate from the executive order, I have to be honest with you that in the public statements accompanying the executive order, there is language that was exactly the same as we saw in an August 2020 policy paper from candidate Joe Biden that the new administration would “work with allies to modernize international trade rules and associated domestic regulations regarding government procurement to make sure that the U.S. and allies can use their own taxpayer dollars to spur investment in their own countries.”

As I said in the op-ed piece I wrote a few months ago, anytime a government says they want to modernize international treaty obligations, that's a nice way of saying they want to revise them, which is a nice way of saying they'd like to break them. I think that means that long-term U.S. participation in the WTO's Agreement on Government Procurement is not a foregone conclusion. If you follow Professor Dufour's logic—I agree 98% with everything she said—that is not necessarily a bad scenario for Canada. It could mean revision of the GPA in a way that permitted more regional collaboration, more localization of production, and more acceptance of the desirability of local special rules for procurement.

I know that members of this committee are very concerned about Canadian access to the U.S. market. I look forward to a discussion of these issues, with everyone hopefully keeping in mind that I can only give a close observer's perspective, not any official perspective on what is happening inside the Beltway.

Thank you, Mr. Chairman.

[The Chair, Liberal, Raj Saini]

Thank you, Professor Hughes.

Now we'll go to Ms. MacEwan for five minutes.

[Angella MacEwen, Co-Chair, Trade Justice Network]

Thank you for inviting me to appear on behalf of the Trade Justice Network. We are a coalition of environmental, civil society, student, indigenous, cultural, farming, labour and social justice organizations. We came together in 2010 to call for a new global trade regime focused on social justice, human rights and environmental sustainability.

The Canadian and U.S. economies are very tightly interconnected, with many goods, services and even workers crossing the border every day. The planned stimulus from the United States is good news for Canada's economy, and especially Ontario's, because a stronger U.S. economy generally has positive spillover effects on this side of the border too. I know that we're concerned about buy U.S. and buy American agreements excluding us from some of this money, but I think we need to keep in mind that any stimulus the the U.S. federal government is offering within the U.S. will have spillover effects in Canada, and we will likely benefit from it in the long run, even if we don't directly benefit from some of this spending.

Even so, Canadians are rightfully concerned about buy American clauses hurting Canadian businesses and the workers who had hoped to be able to bid on some of these large U.S. contracts. There's also often a lot of confusion in the Canadian public, because we've been told we can't attach buy local requirements to our public procurement, so how is it that the United States gets away with doing this so openly?

As the two previous speakers explained, the answer is quite simple. Canada is one of the very few nations that has given away our right to attach buy local provisions for subnational governments. The United States has never done so and does not intend to bind subnational government procurement to any of the international trade agreements they are a party to at the federal level.

As Professor Dufour said, the trade agreement that applies in this case is the World Trade Organization's Agreement on Government Procurement, or GPA, because there is no chapter covering government procurement in the updated CUSMA. The U.S. federal government must allow Canadian companies to bid on federal infrastructure projects that fall under the GPA. Despite the rhetoric from the government right now, there likely will be projects that Canadian companies can bid on because they fall under this trade agreement. The problem, as I'm sure others have already told the committee, comes when the federal government transfers infrastructure dollars to U.S. state or local governments, which are not covered by this agreement on procurement.

Since Canada has given away our access to subnational procurement under the GPA and also under the CPTPP and the CETA, we essentially have no bargaining chips left to play in offering the United States special access to any Canadian projects in return for special access there. In all of those deals, construction projects over $9.1 million cannot have buy local provisions, and the bar for goods and services is lower: $366,000 under the CETA and $650,000 under the GPA and the CPTPP.

Despite this, I think there is still a way for the federal government to follow Biden's lead, and that would be through setting sustainability criteria on inputs such as cement, steel, iron and aluminum. These criteria in Canada's own infrastructure projects would favour Canada and U.S. producers because our higher domestic environmental standards result in goods that have a much smaller carbon footprint. This would help level the playing field for high-quality Canadian and U.S. producers, while also helping Canada and the U.S. meet their climate targets, something that has been recommended before by Blue Green Canada.

Social criteria, which could also be allowed, could direct money to businesses, workers and populations that are currently underserved by the economy, such as first nations businesses and women-owned businesses and those types of things, allowing these firms to grow in line with Canada's inclusive trade agenda.

The Green Economy Network, which I'm also a part of, has called for $80 billion in green investments over five years in Canada. These investments would help us build national transit, both within cities and between cities. They would help us retrofit buildings across Canada and grow our renewable energy sector. This investment would directly create 200,000 jobs each year and would allow us to meet our climate targets. That would put us in line with the U.S.

Today, in her first speech as the U.S. trade representative, Ambassador Katherine Tai said that, on the environment, “the multilateral trading system has no rules to address the corporate incentive to participate in the race to the bottom.” She continued:

The view that environmental issues are not an inherent part of trade ignores the reality that the existing rules of globalization incentivize downward pressure on environmental protection. This puts countries with higher environmental standards at a competitive disadvantage.

She says that environmental rules are not a social issue. This is actually an economic issue.

If we put Canadian versions of buy American and buy American conditions, such as sustainability and social criteria, on federal transfers to the provinces and territories, that would bring our policy into line with the Biden administration. It would allow us to work together on a North American green jobs and procurement strategy.

The Biden administration has signalled interest in reforming the WTO and the GPA at the WTO to allow nations to get serious about their commitments to the climate, particularly the Paris Agreement. It would be very good for Canada's economy, job creation and environment if we joined the United States as global leaders on this front.

Finally, I want to point out that, as the committee knows, Canada has failed to support a motion at the World Trade Organization that would waive restrictions to ensure that vaccines and other medical supplies for the pandemic are affordable for developing nations. U.S. President Biden is under significant pressure right now to change his position on this issue to ensure that, globally, we can vaccinate as many people as quickly and as affordably as possible.

Canada should work with our U.S. allies at the WTO council to reverse course on this and allow a temporary waiver of IP rights for life-saving technologies and medicines.

Thank you very much.

[The Chair, Liberal, Raj Saini]

Thank you, Ms. MacEwen.

We will now go directly to questions.

We have Ms. Alleslev, please, for six minutes.

[Leona Alleslev, Conservative, Aurora—Oak Ridges—Richmond Hill, ON]

Thank you very much.

Thank you to our witnesses. You've given us a lot of information on a very complex issue.

I need to make sure we've understood all of the things you've tried to present to us. If I understand correctly, the landscape since NAFTA, and now CUSMA, has significantly changed. That has, in part, put Canada in a bit of a sticky position.

Professor Dufour, you stated that not having provisions in CUSMA around federal government procurement puts us in a difficult position in getting an exemption to buy America because we can no longer have a preferential, most favoured nation type of approach.

Do I have that right?

[Geneviève Dufour]

Basically, you've got it right.

I will summarize what I said. No, we can't have a preferential agreement with the States. That's the rule. When we enter into a free trade agreement, however, we can include an exception. In NAFTA, there was a chapter on government procurement that governed our bilateral relations. CUSMA doesn't have one. Canada could not have a preferential relationship with the United States unless we added a chapter to CUSMA on government procurement or reached a side agreement that would be included in CUSMA.

Right now, we can't invoke any preferential relationship with the United States on government procurement that would justify their granting us a waiver. If they grant us a waiver, they must grant it to all other members of the Public Procurement Authority.

[Leona Alleslev, Conservative, Aurora—Oak Ridges—Richmond Hill, ON]

Exactly. I'm sorry I'm not speaking French, but the technical vocabulary is more complex. So it's easier for me to speak in English.

When we negotiated CUSMA, the federal government would have known that an executive order for buy American was a possibility once we took out those provisions around federal procurement in CUSMA.

[Geneviève Dufour]

I wasn't in the room during the negotiations. So I can't know if the government was aware of it. I would hope that it was a consequence they had not considered.

U.S. demands were exorbitant on government procurement and would have truly put Canada at a disadvantage. I suspect that's why we decided to scrap the government procurement chapter. You will recall that these were not easy negotiations.

Perhaps one of the negotiating team members could better answer your question. That said, I would hope that the government did not see it coming.

[Leona Alleslev, Conservative, Aurora—Oak Ridges—Richmond Hill, ON]

Exactly. Thank you.

Professor Hughes, Canada and others were given a strong indication of the United States' intent in Biden's proclamation in 2020 that they wanted to look at how they were going to do things, modifying the rules and looking at critical supply chains and national security. The United States put us on notice, telling us the direction it might take in terms of having more home procurement.

Is that a fair statement?

[Justin Hughes]

I was looking at your April 8 statement where you said that the Americans were looking to protect and repatriate to the U.S. a significant number of jobs in steel and iron and manufacturing. I think your words were very apt. The signal is very clear, but I would say to everyone on the committee that the target of all of this is a more distant trading partner—not Canada.

[Leona Alleslev, Conservative, Aurora—Oak Ridges—Richmond Hill, ON]

Absolutely.

[Justin Hughes]

As to something Professor Dufour said, I'm more optimistic that it would be possible to renegotiate and reopen chapter 12.

Professor Dufour, is chapter 12 the government procurement chapter of NAFTA 2?

[Rachel Bendayan, Liberal, Outremont, QC]

I believe it's chapter 13.

[Justin Hughes]

Chapter 13. Okay.

To take something that Ms. MacEwen said, why not propose to the Americans that we reopen that chapter but with an environmental focus?

Now, it is true, as Professor Dufour would say, that someone looking out might say, “Well, you can't do that. You have to renegotiate the whole thing.” This was certainly a criticism thrown at the United States' limited renegotiation of KORUS, its free trade agreement with South Korea, but that's pretty esoteric.

This is the last thing I want to say. It would be great if there were a genuine effort to make environmental standards as meaningful as labour standards in the agreement such that Canada, the United States and Mexico should be proud—maybe not enough, but proud.

[The Chair, Liberal, Raj Saini]

Ms. Alleslev, you have 15 seconds. Sorry, we're a bit tight for time today. I apologize.

[Leona Alleslev, Conservative, Aurora—Oak Ridges—Richmond Hill, ON]

All right.

I had hoped I might get another opportunity, but thank you very much to the witnesses.

[The Chair, Liberal, Raj Saini]

Thank you very much, Ms. Alleslev.

We will now go to Mr. Housefather, for six minutes, please.

[Anthony Housefather, Liberal, Mount Royal, QC]

Thank you very much, Mr. Chair, and the witnesses.

I have to admit that I am always fascinated by the legal jargon that goes with international trade. As such, I'm going to go to each of you.

Professor Hughes, I read your article in The Hill. I wanted to hear from you on this subject. I'm going to ask you a couple of technical legal questions.

Previous witnesses have talked about how this would need to go through Congress. I understand that Congress would need to appropriate funds for the projects under buy American, but what you're essentially saying I think is that through the executive order, the law with respect to procurement—meaning how the United States would deal with local and state procurement—would not actually need to change. Congress would need to appropriate funds, but would not necessarily be changing, the rules. It would simply be a different application under the executive order of the existing rules that would apply more stringent safeguards, thereby allowing the central budget office to police what states and local governments are doing.

Is that essentially correct?

[Justin Hughes]

Yes. It's not a matter of Congress appropriating additional money. All federal expenditures are subject to these buy American acts, including money that goes out to state expenditures. You are correct: it is just an executive tightening.

[Anthony Housefather, Liberal, Mount Royal, QC]

The law would actually not be changing. Whatever law exists today, there are more stringent measures under the executive order. It doesn't require Congress to pass new laws related to procurement. As such, what is essentially happening is a tightening. It's not that we're waiting for legislation from Congress on this issue.

Is that essentially correct?