In our last international trade brief, we talked about the Canadian Free Trade Agreement (CFTA), the U.S.-China 100-day plan and how provisions in the now defunct TPP could find their way into NAFTA. In this brief, we discuss U.S. President Donald Trump’s “Buy American, Hire American” Executive Order, the transition towards Canada’s new internal free trade agreement, and the CFTA’s forward-looking initiatives.

Trump signs “Buy American, Hire American” Executive Order

On April 18, 2017, U.S. President Donald Trump signed an Executive Order (the Order) directing federal agencies to review laws and “loopholes” that allow foreign companies to bid on federal government projects covered by “Buy American” provisions. The Order also seeks to tighten rules that award visas to skilled foreign workers. The Order, dubbed “Buy American, Hire American,” aligns with the promises President Trump made during the election to bring jobs back to America and increase American manufacturing.

The “Buy American” component of the Order is comprised of four main parts. The results of investigation of these four parts are to be compiled into a report from Commerce Secretary Wilbur Ross to President Trump, which is due in 220 days, or November of this year.

The first part of the “Buy American” component of the Order involves the examination by federal agencies of possible “loopholes” in, and poor enforcement of, the existing rules. The results of this examination will be used to improve the existing “Buy American” provisions so as to promote domestic purchasing.

The second part will require an examination of the bidding process for government procurement contracts, by ensuring that injuriously dumped and subsidized goods, including those made from unfairly traded steel, are taken into account in the procurement process and making of decisions.

The third part will require an examination of free trade agreements, including the WTO’s Government Procurement Agreement, with respect to their impact on the operations of “Buy America” provisions. On this point, the Trump administration has signalled the possibility of renegotiating or rescinding free trade waivers, and the need for reciprocal access to the government procurement of trading partners.

The fourth and final part of the “Buy American” component of the Order singles out the steel industry, directing a review of procurement rules favouring U.S. companies to see if they are actually benefiting from the existing “Buy American” provisions.

The “Hire American” part of the Order refers to changes to H-1B visas for highly skilled workers. The H-1B visa program allows companies to bring skilled foreign workers to work in the U.S. for a few years. The visas are currently awarded under a lottery system. While the Order doesn’t change the H-1B policy itself, it does call for a multi-agency review for changes to the program. Under the program, the U.S. government currently admits 85,000 foreign workers annually, particularly in the fields of medicine, science, and technology. The U.S. administration singled out outsourcing firms as using up the lion’s share of H-1B visas.

Of the four parts of the “Buy American” portion of the Order, the possibility of rescinding free trade waivers and forcing reciprocal access will likely be the greatest source of concern for Canada. Government procurement has long been a contentious issue between Canada and the United States, but the threat of rescinding free trade waivers and renegotiating the WTO Government Procurement Agreement is new ground.[1] It is clear that Canada will have to continue lobbying U.S. officials to highlight the benefits of the trading relationship and protect the interests of Canadian businesses working south of the border [PDF].

The transition towards Canada’s new internal free trade agreement

With the election of President Trump and his promises to dramatically shift U.S. trade policy from a free trade orientation towards protectionism, Canadian businesses have been largely focused on Canada-U.S. trade relations to assess the impact of various initiative of the new administration. However, in recent days there has been some good news with the release of the text of the Canadian Free Trade Agreement (CFTA) on April 7, 2017. Currently, internal trade within Canada represents approximately one-fifth of our annual GDP and also accounts for nearly 40% of provincial and territorial exports. The CFTA seeks to expand internal trade by certain liberalizing measures and increased transparency.

According to the Government of Canada, the top five benefits that Canadians can expect from CFTA’s trade liberalization measures are: (i) increase in employment, business opportunities, and choices for Canadians; (ii) aligned interprovincial rules and regulations; (iii) improved competitiveness for local business; (iv) support for Canadian innovation and emerging sectors; and, (v) expanded business opportunities for Canadian suppliers to federal and sub-federal governments.

Background

Various non-tariff barriers and protectionist measures have stifled interprovincial trade, as provinces have pursued parochial policies seeking to protect local industries and maintain local monopolies particularly in regulated sectors such as agriculture, liquor and beer. In December 2014, the federal, provincial and territorial governments launched negotiations aimed at a replacing the 1995 Agreement on Internal Trade (AIT) with a more ambitious agreement in time for Canada’s 150th anniversary. CFTA is the product of these negotiations and will come into force on July 1, 2017.

Modernized trade rules under CFTA

Whereas the AIT was expressly limited in its scope to certain industries, CFTA seeks to cover almost every sector of the Canadian economy, including most of the services economy and the energy sector (which account for approximately 70% and 9% of Canada’s GDP [PDF] respectively). Compared to the AIT, CFTA better aligns with Canada’s obligations under international trade agreements, such as the Canadian-European Union Comprehensive Economic and Trade Agreement (CETA), which will help to reduce compliance costs for Canadian businesses engaging in international transactions. However, the CFTA does not fundamentally address the impediments to trade created by the provinces in regulated sectors such as agriculture, liquor and beer.

CFTA will introduce a more open procurement system aimed at creating a level playing field for companies operating across Canada, regulatory reconciliation processes designed to address regulatory differences across jurisdictions, restrictions on the ability of government entities to discriminate between suppliers based on their place of business, and prohibitions on administrative requirements to discriminate.

CFTA’s forward-looking initiatives

While the purpose and intention behind CFTA can be seen as a positive step towards modernizing Canada’s internal trade practices and removing interprovincial trade barriers, CFTA contains many forward-looking initiatives that leave matters for further negotiations between the parties to the CFTA. As a result, the CFTA does not deliver, in the short term, on the promise to reduce trade barriers in some of the most difficult and contentious areas, and its ultimate success is entirely dependent on further goodwill of the federal, provincial and territorial governments to expand on the CFTA’s trade liberalization goals.

For example, within six months of CFTA coming into force, federal, provincial, and territorial governments have committed to engaging in exploratory discussions to assess the incorporation of rules on financial services into CFTA. Under CFTA, these discussions may continue for up to two years. There is no timeline for the implementation of any rules or processes that arise from such discussions. Similarly, while trade in both alcohol and fish have been identified under CFTA as areas requiring new trade protocols, CFTA only obligates its signatories to enter into discussions within one and five years respectively.

In contrast, some industries, such as electricity, will become more open in the short term. It is clear that the introduction of CFTA will be yet another step in a long process of trade liberalization which started 150 years ago with Confederation.