Economic Relationship between Canada and the United States Committee on April 8th, 2021

[William Reinsch, Scholl Chair and Senior Adviser, Center for Strategic and International Studies, As an Individual]

Thank you very much, Mr. Chair.

Thank you for the opportunity to testify. It's an honour to appear before this committee. I'm testifying in my personal capacity and expressing my own views.

The United States is currently entering a stage when buy American is likely to play a greater role in federal government policy, and for three reasons, I do not see immediate relief for those who oppose that.

The first is politics. “Buy American” has always been a popular slogan, and in last year's election, both our parties supported strong domestic procurement provisions. The voters the two parties are competing for, largely white, blue-collar workers in traditional manufacturing sectors, believe that buy American is an important policy that will create jobs for them, and President Biden seems determined to recapture as many of those voters as he can. Pursuing a more aggressive policy than President Trump did will be part of that effort.

The second reason is the COVID-19 pandemic, which has brought to light gaps in our supply chains that led to shortages of critical personal protective equipment, among other things. Many of them were short-term, and ultimately resolved through market adjustments, but U.S. citizens were left with the realization that we did not have everything we wanted at the moment we needed it, and the government wants to make sure that does not happen again. My understanding is that Canada is experiencing similar problems right now.

In starting that process, the administration, to its credit, has not proposed autarky and has acknowledged that working with our allies and partners is the best way forward. The extent to which that is lip service remains to be seen.

The result of the pandemic has been to refocus supply chain management on resiliency and redundancy. Managers need not only plan A, but plan B and plan C as well, and all those alternatives will involve more domestic sourcing or nearshoring. They will also involve some movement away from just-in-time manufacturing to rebuilding inventories.

The third reason is related to national security and grows out of our deteriorating relationship with China. In the last 10 years, there has been a significant change in public opinion in the United States about China. In 2011, 51% of those polled had a favourable view of China, and 36% had a negative view. In 2020, those numbers were more than reversed: 22% favourable and 73% unfavourable. This change has been echoed in the U.S. Congress, where elected officials of both parties have pronounced China a security threat and vie to see who can take the hardest line against it.

The debate has moved in two directions: running faster, improving our innovation capabilities in critical technologies to better compete with China, and slowing China down by restricting its access to U.S. technology. Both strategies have involved efforts to reorient supply chains away from China, sometimes by banning the use of Chinese equipment in the United States, as in the case of Huawei, and sometimes by encouraging companies to decouple from China and return manufacturing onshore.

At the same time, U.S. companies have been shortening their supply chains for reasons unrelated to U.S. government policy, in response to political uncertainties in some countries, rising wages or a desire to reduce transportation times and to be closer to their customers. The sharp economic downturn in the spring of 2020 due to COVID accelerated that trend.

All these factors have combined to push companies to restructure their supply chains in ways that favour domestic production. In addition, it appears the government will attempt to change its procurement rules further to favour domestic production. That will be a complicated undertaking, in part because 96% of federal procurement is already domestic. That number is a bit misleading, because we treat some parts and components incorporated into a product as domestic even if they are imported. Changing that methodology will force some manufacturers to adjust their supply chains to include more U.S. content.

Federal procurement contracts for goods in fiscal year 2019 amounted to $231.4 billion U.S. in spending, a relatively small amount compared to the size of the U.S. economy. The larger economic impact is likely to occur with respect to supply chain adjustments that U.S. companies make, either on their own or as a result of government pressure.

There, the key issue will be how we define national security. There were officials in the Trump administration who defined it very broadly, and a glance at President Biden's supply chain executive order shows similar breadth. He has ordered urgent studies on four critical sectors: semiconductor manufacturing and packaging, batteries, critical minerals and pharmaceuticals, but he has also ordered year-long studies of major sectors of the economy: the defence industrial base, public health, information and communications technology, energy, transportation and agriculture. Taken together, these sectors amount to nearly 60% of U.S. GDP. If all the studies recommend actions to reorient supply chains to the domestic economy, the administration's policy will have a significant impact.

Finally, as an American, it is not my place to suggest what your government might do with respect to U.S. policy, but nevertheless, I'll make some suggestions.

First, the premise of NAFTA was to further integrate the three North American economies, and I believe it succeeded. Economic integration on our continent, particularly between Canada and the United States, is inevitable and it would be useful for your government to continue to remind ours of that imperative from time to time. Instead of buy American, we should be buying North American.

Second, since our security interests are closely aligned and we both benefit from close defence co-operation, Canada could also work with the United States in developing a definition of national security that does not overreach and sweep into the domestic procurement pot a lot of things that shouldn't be there.

Third, the Canadian government could remind the United States of its obligations under the WTO government procurement agreement and of its obligation to provide compensation if it limits other nations' benefits.

Mr. Chair, thank you for the opportunity, and I'd be happy to take questions later on.

[The Chair, Liberal, Raj Saini]

Thank you very much, Mr. Reinsch.

Now, Mr. Trew, you have the floor for five minutes. Go ahead, please.

[Stuart Trew, Senior Researcher, Canadian Centre for Policy Alternatives]

Thanks very much to the chair and to the committee for this chance to speak to you about the Biden administration's plan to tighten up the buy American and buy America rules.

First, I'll tell you a bit about me. I currently direct the trade and investment research project at the CCPA, which has been doing public interest research into Canadian trade and investment policy since the late 1990s.

I've split this presentation today into three parts. The first gives some context on the buy American policies themselves; the second is on the way in which I think we shouldn't respond, and the third is on the way in which I think we should respond to this moment.

The first point is that buy America is here to stay. As committee members know and have heard from other witnesses, buy America, buy American and other domestic preferences on U.S. procurement have existed for some time, and they enjoy broad bipartisan support. Buy American policies require federal agencies to favour domestic end products or domestic construction materials when procuring goods, except in situations where it would be impractical or overly expensive to do so. For example, if buying locally would be more than 25% more expensive than the lowest qualifying foreign bid, or where there is no domestic supplier, the agency can waive the buy American requirement at the federal level.

The buy America policy at the state level refers to a slate of domestic content statutes and regulations in which federal funding for state and local governments, mainly for transit and highway projects but also for water infrastructure, comes with domestic content quotas. These quotas generally relate to the use of American iron and steel and certain other manufactured goods, or they could apply again to the value of components in things like buses and railcars for public transit projects.

As the committee has heard, while many buy American measures at the federal level in the U.S. are generally waived—by regulation, not by statute—for Canada and other member countries to the WTO agreement on government procurement, buy America transfers to the lower levels of government are completely excluded from the U.S. GPA coverage even for the 37 states that have made other procurement commitments in that agreement.

The long-standing measures are standard operating procedure in the U.S. no matter who's in office, and the U.S. is well within its legal rights to continue them. We have very little leverage, in other words, to change these policies. I think the main unknowns, as this committee has already heard, are what exactly the buy America conditions that will apply in this specific new stimulus plan are and how he plans on changing or tightening up this waiver application process in response to criticism that the buy America contracts have been going to foreign firms. I think we have to put in there that the main focus seems to be on China with respect to this specific aspect of the buy America contracts.

So how should we not respond? Looking back at the Obama administration days, when they passed their own recovery act a decade ago with strings attached—buy America strings—we tried to negotiate a bilateral procurement agreement that would be balanced, and it didn't go well. The end deal announced in 2010 was hugely lopsided in favour of the U.S. Canada largely opened up provincial and local government procurement to unconditional U.S. bids, in return for a tiny sliver of opportunity to bid on stimulus money in a handful of federal projects. This wasn't guaranteed access, obviously; it was an opportunity to bid on what was left of the money that hadn't already been spent. It amounted to about four or five billion dollars' worth of what was initially a $275-billion U.S. procurement fund, so not a great deal at the end of the day.

Canada has since made permanent commitments in the WTO GPA to restrict provincial procurement flexibility and bilateral commitments with the EU to permanently cover municipal procurement. U.S. firms with a presence in Canada benefit from both of these agreements already, and as a result we have very little to offer the Americans in a new procurement deal. You could offer them a CETA-plus arrangement with municipal coverage, but that's exactly what we did in the CUSMA negotiations and they weren't interested, and I suspect the Biden administration wouldn't be interested now.

So instead of making a new deal or fretting over what Canadian products or components may or may not be excluded from Biden's new buy America plans, I think we should recognize, as this committee has already heard from other witnesses, that these same products and components—steel pipes, concrete, railcars, buses, transit, renewable power, broadband access, infrastructure, and water in particular—are needed here in Canada as well for the same purposes. The AFB at the CCPA recommends that we spend $36 billion over the next eight years on new water infrastructure because we have a huge deficit in that area.

If we're going to spend the money, which I think we should, why not take a page out of the Biden playbook and find ways to channel some of that money to domestic manufacturing, local small and medium-sized enterprises, women-owned businesses, indigenous-owned businesses, etc., with all the spillover benefits that doing that would produce in Canada and the U.S.?

In summary, I would say that sustainability criteria on federal transfers to the provinces and territories that prioritize high–quality sustainable Canadian goods and services may even bring the Biden administration to the table to discuss, as we just heard from the previous witness, a potentially beneficial and mutually beneficial North American green jobs and procurement strategy.

I'm also happy to answer questions. Thanks very much for your time.

[The Chair, Liberal, Raj Saini]

Thank you very much, Mr. Trew.

We're still trying to get Mr. Robertson hooked online, so what we may do is start with questions. If he does get a chance to come online, we'll just revert back to him.

For the first six minutes, we will go to Mr. Strahl, please.

[Mark Strahl, Conservative, Chilliwack—Hope, BC]

Thank you, Mr. Chair. I'm having some connection issues myself here in Chilliwack today, so bear with me, please.

My questions are for Mr. Reinsch.

I think that certainly at the Government of Canada level there was an almost celebratory mood when there was a change in administration. We figured that there would be a return to certainly a more predictable diplomacy, etc. I think a lot of Canadians perhaps thought that a lot of the protectionist types of tendencies of the Trump administration would be immediately rolled back and we would get back to being the good old friends singing together and cranking out deals to the benefit of both countries.

You alluded to it. It has been my observation that so far we actually have made very few gains, if any, in terms of our relationship with the new administration in terms of policy initiatives that would benefit Canada. We have seen the cancellation of the Keystone XL pipeline. We have another pipeline under threat with Line 5 in Michigan. We have no movement on the softwood lumber agreement, which has not been signed, and now we have this buy America issue.

Other than perhaps a friendlier and more predictable president, do you see any change from the Trump administration's protectionist measures with the Biden administration vis-à-vis its relationship with Canada? Or are we just in for more of the same for the next four years?

[William Reinsch]

I think the answer would be “not yet”, but I wouldn't lose hope. I think it's too soon to say where they'll come out on a number of these issues. Most of these things are under review.

I can't speak to Keystone. That was not an issue we have done any work on. I'm a trade person.

With respect to the other issues, the equivalent of your trade minister, Ambassador Tai only took office three weeks ago. Issues like lumber are things that are under review. I can't tell you that they are going to be the same as they were before.

As you've noted, there is obviously a difference in tone and a difference in rhetoric. There is a philosophical difference as well, which I think will come out. President Biden is a multilateralist in every sense of the word. He believes in co-operation. He believes in teamwork. President Trump was a unilateralist who believed in American sovereignty and was not interested in institutions' co-operation.

That leads also to the view that Biden looks at relationships holistically. Canada is not just about trade. It's about a whole range of issues, some of which you have discussed today. I think that works to the benefit of the relationship and the benefit of the things we're talking about in the long term.

I cannot, however, say that in the first almost three months of tenure they've taken a bunch of actions that should make you happy. They have not, and I think with respect to domestic procurement in particular they're unlikely to do so. When they produced their policy, someone asked them, “What's the difference between you and Trump?” The answer was essentially, “Well, his didn't work and ours will”, so I'm not sure that's a good sign.

[Mark Strahl, Conservative, Chilliwack—Hope, BC]

You mentioned a number of issues. We've talked about the political reasons already. I think the two-year election cycle the U.S. has makes it very difficult to do difficult things and have some time pass before someone.... Someone is always in a mid-term or a congressional race or something. It is all very short-term in terms of negotiating or proposing things on international trade. But I think there is some common ground here in what you're proposing. I think Canadians have recognized gaps in our own supply chains, our own manufacturing capability, etc.

I want to go to the China relationship. Is there an opportunity for Canada to be a part of a new international alliance perhaps that is no longer reliant...? I know President Biden has gone down that road, but are we really all going to have to go down this road separately, or can we find a way to do this in a unified way, where nations with common cause and common values can perhaps create their own integrated supply chains and not all be looking out for just national interests? Why do we need to create all of this separately? Can we not do it in an integrated way, especially between Canada and the U.S.?

[William Reinsch]

His intention is clearly to develop a coalition and a common approach towards China, and Canada would be an integral part of that.

My understanding of their views on China is that they intend to take the next year, essentially, building the kind of coalition you're talking about. We are not, at least at CSIS, looking for major changes in our China trade policy in the interim. I don't think the things that are in place will go away, but I don't think new things will be arriving. I think they intend to work with our allies first to see if we can get everybody on the same page, and then try to tackle the problem collectively.

[Mark Strahl, Conservative, Chilliwack—Hope, BC]

My final question is about the tax that has been proposed by the Biden administration on worldwide U.S. corporate income as part of his infrastructure plan. Will that have the same impact as buy American? It's a separate tool, obviously. Could you speak briefly about what you feel the impact will be on maybe reshoring U.S. manufacturing using the tax system?

[William Reinsch]

You're not referring to the proposal he just made to the OECD; you're referring to the proposal in his legislation. Is that fair?

[Mark Strahl, Conservative, Chilliwack—Hope, BC]

Yes, that was part of his multi-trillion dollar infrastructure announcement.

[William Reinsch]

That's a good question.

It's still a little too soon to say, partly because, as those of you who work with tax legislation know, the devil is in the details. There's no legislation yet; there's only a concept, so it's a little hard to say.

I think the effect would fall largely on American multinational companies that have already offshored their production. I think in the end there might be incentives for them to reshore, to come back here. I don't see a large impact on non-American multinationals.

One of the criticisms of his proposal, which I have not analyzed myself, is that it may have the effect of encouraging corporate inversions, which is what President Trump's tax bill attempted to stop, and actually did stop fairly effectively. It had other negative effects, but it stopped inversions. There's some feeling the Biden proposal may be a step backwards in that respect.

I don't see a major impact on non-U.S. multinational companies, though.

[Mark Strahl, Conservative, Chilliwack—Hope, BC]

Thank you.

[The Chair, Liberal, Raj Saini]

Thank you, Mr. Strahl.

Welcome, Mr. Robertson.

Are you able to hear us? We can give you some time, if you want.

[Colin Robertson, Vice-President and Fellow, Canadian Global Affairs Institute]

Is that better?

[The Chair, Liberal, Raj Saini]

It's better.

Do you have a headset, by any chance?

[Colin Robertson]

Unfortunately, we had to switch.... I spent the last hour trying to get in. I'm on my iPad and the connection for the headset doesn't work.

[The Chair, Liberal, Raj Saini]

It just makes it easier for the interpretation.

[Colin Robertson]

Yes. I'm just going to see if this will work.

[The Chair, Liberal, Raj Saini]

Why don't we suspend for a few moments, just to give Mr. Robertson the chance to do that?

[The Chair, Liberal, Raj Saini]

We're resuming the meeting.

Mr. Robertson, I understand you have opening comments. We'll give you five minutes to make your comments, please.

[Colin Robertson]

Thank you.

My experience with buy America began in Albany in 1981, when my then boss consul general Ken Taylor and I travelled from New York City to Albany to see then governor Hugh Carey to push back on buy New York policies on steel and cement, an experience that over the years I would repeat in different states and on Capitol Hill.

Protectionism through preferential procurement policies for goods and services is not particular to the United States. It is practised by all nations, including Canada, and at every level of government.

If all politics is local, so is trade. Voters prefer that their tax dollars be spent locally, even though buying local generally costs more and provides less choice. But these are economists’ arguments, and they don’t matter much to the public. Neither does the bleat that Canada deserves an exemption from buy America because we are America’s friend and neighbour. While polls consistently show that Americans like Canada more than any other nation—in fact, more than we like them—the business of America is business.

We've learned to deal with buy America policies on four levels.

First is by negotiating a procurement agreement within our trade agreements, as with defence production sharing. At the Trump administration’s insistence, there is no procurement chapter in the current Canada-U.S.-Mexico Agreement. Yet, much of what was included in the NAFTA is included in the WTO's plurilateral agreement on government procurement. There are more likely to be deletions from the entities listed in this agreement, given the current protectionist mood on both sides of the aisle in Congress and the “Made in America” approach of the Biden administration.

Second is to offer reciprocity in procurement at the state and province level, because that is where the money is spent. This is how we dealt with President Obama's Recovery Act program in the wake of the 2008-09 recession. Prime Minister Harper turned to the premiers' Council of the Federation. Premier Jean Charest and his successor as chair, Premier Brad Wall, reached out to their governor counterparts, including through a trip by seven premiers to the National Governors Association in February 2010, to make the case for reciprocity.

The arguments that the premiers made then still apply. By opening to outside vendors, local cartels' ability to game the market was curtailed. Competition means better value. Most states are constitutionally prevented from running deficits. Governors need to make their dollars count, especially as they face huge costs in public services because of the pandemic. The 2010 Canada-U.S. Agreement on Government Procurement did not include every state nor cover every sector, but it did open procurement opportunities for Canada.

Third, working with labour is vital. When our unions are part of the negotiations, as we saw during the CUSMA negotiations, we make progress. United Steelworkers leads the charge for buy America, but their membership is both Canadian and American. In the early 1990s, we gained respite from buy America on steel because then trade minister Michael Wilson went to Washington with then Canadian Steelworkers national director, later Steelworkers president, Leo Gerard. After talks with then Steelworkers president Lynn Williams, the administration agreed that buy America would not apply.

Fourth, with those Americans we buy from and sell to, we need to make permanent our campaign that making things together is mutually profitable for jobs and prosperity. Look at our mutually profitable integrated auto trade. Before a car is assembled, its parts have criss-crossed the border at least six times. A car assembled in Canada contains 60% American-made parts, often from Canadian manufacturers with U.S. operations, like Magna, Martinrea or Linamar.

We need to underline that our regulatory standards, especially labour and environmental, are commensurate with those of the United States. We also need to avoid the “tyranny of small differences” that keeps us out of the U.S. market.

Given America's growing national security concerns about reliable supply and resiliency, we need to point out that we are their closest ally and the source of their energy independence, including for the critical minerals required for next-generation manufacturing. When it becomes an American issue with Americans who want to preserve their supply chains, we increase our success rate, as we witnessed with the dismissal of the Trump tariffs on steel and aluminum.

To conclude, there is no magic bullet for buy America. Hoping for an exemption because we are Canadian won’t work. We need to make our case around reciprocity and better value, while underlining the security of our mutually beneficial supply chains. Buy America is not going away, so making our case must be a permanent campaign, a team Canada effort involving the Prime Minister, premiers, cabinets and legislators working with business and labour.

Thank you, Chair.

[The Chair, Liberal, Raj Saini]

Thank you, Mr. Robertson.

We'll now go to Mr. Oliphant, please, for six minutes.

[Rob Oliphant, Liberal, Don Valley West, ON]

Thank you to all the witnesses.

I want to begin with respect to the last panel. Mr. Hoback mentioned the important role of parliamentarians in the negotiation of the new NAFTA deal, and I want to echo that. Even as the chair of the public safety committee, I led a delegation, and I very much chose the Conservative vice-chair, Tony Clement at the time, to co-chair every meeting that we were in as we met legislators in the United States. He had much more experience than I did. The two of us were able to do that.

Also, I think, as Mr. Hoback was mentioning, Matthew.... What was Matthew's last name, Brian? It was not Dubois....

[Brian Masse, NDP, Windsor West, ON]

We had a couple of Matthews.