Obama's Buy American Rule Breaches NAFTA

There is no question that Obama’s “Buy American” Rule breaches Chapter 10 of the NAFTA regarding government procurement. This allows Canada to argue that Canada and Mexico should be exempt from this new legislative requirement.

If no exemption is given, Canada might have to suck it up as a cost of doing business with the United States – just like Canada did on the Softwood Lumber settlement. There is no effective dispute settlement mechanism. If the United States persists, the only recourse for Canada would be to cancel the NAFTA and that would not be a remedy at all given our dependence on the American market and the current Congressional wave of protectionism.

NAFTA Article 1003 requires the U.S. Federal Government to allow Canadian companies to bid on a non-discriminatory and national treatment basis. This means that the United States must treat Canadian bidders the same as American bidders.

NAFTA Article 1001 requires the U.S. government to allow Canadians to bid on U.S. Federal contracts in excess of $50,000.00 for goods and services, and $6.5 million for construction contracts (in 1994 dollars subject to inflation). The United States’ Schedule lists more than 50 government entities including such departments as Agriculture, Commerce, Education, Housing, Justice, Labour State, USAID, Treasury Transportation, EPA, and even the Executive Office of the President.  There are other forms of procurement made available to Canadian bidders but this is the largest category.

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A very effective mechanism would exist if disputes relating to government procurement were subject to investor-state arbitration under NAFTA Chapter 11. This Chapter allows for binding commercial arbitration to be undertaken when national treatment has been denied, amongst other provisions. NAFTA Article 1108(7) excludes claims regarding national treatment based on a failure to provide national treatment.  A Canadian bidder would have to argue that the “Buy American” provision amounts to a denial of the minimum standard of treatment at customary international law (1105), or constitutes conduct tantamount to expropriation (1110).  This would be difficult.

The only dispute mechanism left is NAFTA Chapter 20.  This mechanism is a poor cousin to the WTO dispute settlement mechanism, and is rarely used with only three decisions issued by NAFTA Chapter 20 panels in fifteen years (one against Canada and two against the United States). The only remedy is one of retaliation which generally means applying a tariff at the border on certain American exports. The dispute panel lacks the authority to order the United States to immediately withdraw the “Buy America” Rule or to provide Canada an exemption.

In the end, the only recourse is provided by NAFTA Article 2205 which allows a Party to withdraw from NAFTA six months after it provides written notice. This is really no remedy at all because Canada cannot risk losing market access to the United States when it is so dependent on the American marketplace. As a result, Canada may just have to grin and bear it and continue to work quietly to preserve as much market access as possible in the circumstances.