Thank you very much, Mr. Chair.
I want to thank the committee for the opportunity to appear today and give my opinion on the Buy American agreement, which came into force on February 16. My personal interest in government procurement goes back to the 1970s, when I was on the Canadian delegation for GATT trade negotiations, during the Tokyo Round. As a delegation member, I took part in the negotiations of the first international agreement to liberalize government procurement. Then, as a senior official in the Quebec government, I took part in the free-trade negotiations with the United States. The issue of government procurement was also on the agenda during those negotiations. It was the same during the Uruguay Round negotiations in the late 1980s and early 1990s, when the initial agreement I just mentioned was renegotiated to assume its current form.
I will limit my remarks to the permanent part of the current agreement, the part that is directly related to the WTO Agreement on Government Procurement, since the part on special access to seven American programs is entirely temporary and impossible to assess at this time, and since the third part on opening talks to expand the agreement is likely of little consequence, at least I hope so. We can come back to these points during the question period.
In my opinion, it is impossible to understand the actual scope of this agreement without first putting it into its historical context. That is what I will attempt to do now. In actuality, the agreement that was just negotiated is a rather pathetic conclusion to some 10 years of negotiations, which Canada put an end to in the mid 1990s, in the face of the U.S.'s unwillingness to compromise. Last month, Canada accepted what it had been refusing for 25 years. You see how things can change.
In the spring of 1979, the Tokyo Round of the WTO trade negotiations had, for all intents and purposes, come to an end. After years of work, a balance of compromises had finally been reached, but a new problem arose, an American problem. In fact, the U.S. delegation raised the issue again and informed the 20 or so countries that had negotiated the first international agreement on government procurement that the U.S. congress was not likely to ratify the agreement without a major exemption. The U.S. administration had concluded that the government procurement agreement was not acceptable to a large number of elected officials in congress. The agreement was an integral part of a huge package. It dealt with tariff reductions, and that included the Agreement on Subsidies and Countervailing Measures, the Agreement on Safeguards and the Customs Valuation Agreement. There was a whole slew of them, and all of these results were potentially thrown into question because congress had decided, by giving permission to the executive branch to negotiate the Tokyo Round, that there would be just one vote on everything. It was the famous fast-track approval procedure.
The stumbling block that brought U.S. negotiators back to the table was a 1953 law guaranteeing a fair distribution of federal government contracts between the country's small and medium-sized businesses. That preference was added to the Buy American Act of 1933, which already gives American suppliers a 6% to 12% advantage over foreign companies that tender a bid for federal procurement contracts.
At the time, there was no question of congress repealing the popular act, especially since this preferential treatment had just been extended to businesses owned by minority groups, on the heels of the civil rights movement of the 1960s. There was even less question of extending that national treatment to foreign SMEs, in other words, treating them the same as American SMEs. So the U.S. requested a permanent exemption from the clauses that would require it to do away with these preferences, which did not adhere to the letter and spirit of the agreement. Time was of the essence, and none of the future signatory countries wanted to reopen the agreement to make adjustments in the face of this new demand by the U.S. The exemption was therefore granted rather grudgingly, but granted none the less. Canada was the country that lost the most as a result. With the possibility of serving the market by land, which compensated for the generally smaller size of its businesses, Canada hoped to carve out a large share of central government contracts for itself with its neighbour to the south.
So it involved federal government contracts; that needs to be pointed out. The government procurement agreement that came into force in early 1981 affected only the procurement of goods by central government entities above a certain value, a threshold, with major sectoral exceptions, such as defence, telecommunications, public transit and heavy electrical equipment. Put off until next time was the liberalization of procurement by federal states, in other words, provinces in Canada, länders in Germany, states in the U.S. and autonomous regions in other countries, whose value exceeds central government procurement contracts in nearly all industrialized nations.
So the expansion of the government procurement agreement was on the agenda for the next round of negotiations, the very ambitious Uruguay Round, which began in 1986 and lasted until 1994. With respect to government procurement, the U.S. subjected the purchases made by 37 of its 50 states to a better agreement, but these new contracts were not open to Canadian businesses, as the two countries were not able to come to an agreement at the time. That part of the agreement will go nowhere until the effective date of the agreement announced on February 5.
The main reason for the failure of the Canada-U.S. negotiations on government procurement during the Uruguay Round was the U.S.'s continued refusal to exempt Canadian businesses from the exemption that it had snatched at the end of the Tokyo Round. Without a similar concession, the majority of Canadian and Quebec SMEs had little hope of landing contracts with the U.S. federal government or state governments, some of which had their own Buy State provisions based on the Buy American measure.
Furthermore, in certain major industries such as public transit, states and cities were subject to specific preferences through federal subsidies, especially public transit. President Obama's recovery plan did not include anything new in this regard.
It should be noted, by the way, that the large Canadian suppliers that had already been forced to set up in the U.S. as a result of American protectionism regarding government procurement, did not have the same appetite as SMEs for the liberalization of government procurement in the U.S. They had already built plants across the border in order to be able to sell their buses and subway cars to American cities. They had solved their problem by investing in the U.S.
The failure of the negotiations to expand government procurement liberalization to the provinces and states under GATT—NAFTA, for that matter, did not change anything because it was largely based on the GATT agreement—did not mean that Canadian businesses were unable to tap into certain U.S. state government contracts. In the absence of restrictive subsidy policies from the federal government, a number of states bought Canadian equipment, and some ten Canadian businesses were able to benefit from that, especially in the public works sector, without any statistics on exactly how much that represented.
Obviously, everything turned upside down on February 17, 2009, when President Obama approved the American Recovery and Reinvestment Act of 2009, a massive two-year economic recovery plan estimated at $787 billion, and around $275 billion of that targeted infrastructure and equipment projects. A large portion of these projects were contracted out to the states, and the use of federal funding was subject to a Buy American clause, in full compliance with the U.S.'s international obligations. That meant that the businesses of the 27 member nations of the European Union, for example, Japan, Korea and some 10 other countries had the right to tender bids for these contracts with the states, but Canadian businesses could not, because the Uruguay Round of negotiations on the issue were not successful, as I mentioned.
This sudden windfall of billions of dollars did not come without strings attached and put an abrupt end to many business relationships that Canadian businesses had managed to build with U.S. states, cities and counties, despite the failure in 1994. You will recall, the Canadian media was highly critical of the American protectionism. At the urging of manufacturers and the Federation of Canadian Municipalities, the Canadian government entered into negotiations with the U.S. in July 2009. It is important to note that no serious estimate of the damage caused by the Buy American measure in the recovery plan was ever released. We do not know just what the damage was. Negotiating head to head with the U.S. to solve a trade issue is always a brave and daring move.
In terms of negotiations, the Canadian government has clearly put itself in a position of weakness with a timeline it had no control over. On October 21, Stockwell Day, the Minister of International Trade for Canada, publicly complained about how slow the negotiations were. With each passing day, potential gains for Canadian companies disappeared as funds were being allocated.
On February 16, 2010, when the agreement reached by his successor, Peter Van Loan, came into force, at least $198.5 billion of the initial $275 billion had been already allocated. But the American requirements remained firm. In hindsight, we can even say that they have increased. What price did Canada have to pay to access a temporary program? The federal government provided the WTO with a list of entities from 10 provinces, and an additional list of 75 cities, including the 15 largest municipalities in Quebec. As part of the Agreement on Government Procurement, American companies will have permanent access when those entities purchase goods and services.
I will close by pointing out that Canada's infamous stumbling block over 10 years of negotiations has remained intact. This obstacle is the exemption clause that allows American authorities to reserve a major part, about 23%, of their federal government procurement for American SMEs. According to a recent estimate, that actually adds up to $130 billion out of $530 billion per year. But no American city is on the list of 37 American states whose procurement is subject to the agreement.
Finally, it is a little strange that the Canadian embassy in Washington had to take it upon itself to let American states know that Canadian companies now have the right to bid on the few contracts that have not been awarded yet. Is that a great victory for Canada? Certainly not. Is it a significant gain for the United States? Yes, it clearly is.
A previous witness noted that this was the first trade agreement signed by the Obama administration. For Mr. Harper's government, of course, it is the second agreement with the United States. We can only hope that it will not be as much of a disaster for the Canadian economy as the first one.