Iron

By Melissa Pistilli-Exclusive to Iron Investing News

President Barack Obama’s US$819-billion stimulus package apparently carries a “Buy American” provision that has seriously ruffled the feathers of the Canadian government.

There are fears that the proposed protectionist measures could essentially create a trade barrier against Canada’s iron and steel exports to the U.S.

On Thursday, the House passed the stimulus plan with an attached provision that requires the iron and steel used in the plan-funded construction projects be produced in the U.S. unless the material proves to be unavailable or prohibitively expensive.

Canada’s International Trade Minister Stockwell Day, whose country’s CD11 billion in iron and steel products exported in 2007 went mainly to the U.S., said his office was “in daily contact with a variety of individuals in the United States.” On Monday, he told the House of Commons, “We are warning them of the dangers of protectionist movements. They say that they are concerned about this. They are looking at what they can do to mitigate it.”

Prime Minister Stephen Harper said the “Buy American” bill could violate the North American Free Trade agreement and contradict the U.S.’ “international obligations” to prevent impediments to global trade. “I spoke to our ambassador about it yesterday and I know that countries around the world are expressing grave concern about some of these measures that go against not just the obligations of the United States, but frankly the spirit of our G20 discussions,” Harper told Parliament on Thursday. “We will be having these discussions with our friends in the United States and we expect the United States to respect its international obligations.”

Several international trade lawyers, including Simon Potter of McCarhty Tetrault in Montreal, are in agreement that the “Buy American” provision is in violation of trade agreements made under NAFTA. Canada can file a complaint under either NAFTA or with the WTO. “The question is whether the United States’ trading partners are going to be understanding of the problem for a temporary period during this stimulus package,” said Potter.

Another version of the bill is now before the Senate and reports say it pushes protectionist policies even further by ordering that only American-made goods and equipment (not just iron and steel) may be used in any of the federally funded stimulus projects.

The newly-elected President Obama is scheduled for his first visit to Ottawa on February 19, and is evident that free trade between the two countries will be high on the list of topics for discussion.  ”I don’t think there’s any doubt that trade is going to be on an agenda for a bilateral meeting between the United States and Canada,” said White House spokesman Robert Gibbs.

While President Obama, who just last June warned that protectionist policies could “make us worse off,” has acknowledged that the bill has sparked some contention and has said he will examine the provisions, Vice President Joe Biden‘s comments show that “Buy American” support in Washington is still strong. “I don’t view that as some of the pure free traders view it, as a harbinger of protectionism. I don’t buy that at all,” said Biden. “So I think it’s legitimate to have some portions of ‘Buy American’ in it.”

Gibbs assured that the President would do everything he can to insure the stimulus plan is not in violation of NAFTA.  “The administration is reviewing that provision,” he said. “It understands all of the concerns that have been heard not only in this room, but in newspapers produced both up north and down south.”

Although some “review” may be in order, it’s unlikely that the protectionist clauses will be entirely erased from the stimulus plan as there is a lot of political support for “Buy American” in the States.  However, given that Canada and the U.S. together comprise the world’s largest bilateral trading relationship, it’s even more unlikely that the U.S. would not seek to compromise with its northern neighbour. 

While some in the Canadian iron and steel industry are concerned about what the provisions may mean for business, others are confident the issue will be resolved once the complexity of the market is understood. “We need to get across the idea that we are an integrated market,” said Jayson Myers, President of the Canadian Manufacturers and Exporters Association.

As mentioned earlier, Canada exported roughly CD11 billion in iron and steel to the U.S. in 2007. A recent Globe and Mail report pointed out that almost the same amount crossed the border into Canada. What many do not realize is that there exists a “highly integrated North American steel industry” where iron and steel products “in various stages of manufacturing often go back and forth across the border multiple times before reaching customers.”

Given the nature of the North American steel industry and the deep economic and trade relationship between the U.S. and Canada, the “Buy American” provisions will no doubt end up hurting Americans and the U.S. steel industry in the long run.