Mar 10, 2022

Why Buy American narratives fail to see the forest for the trees

By Candace Sider, Vice-President of Regulatory and Government Affairs, North America, at Livingston International

There’s a peculiar kind of politicking coming out of Washington, particularly on matters related to trade.

It appears that as the Biden administration moves to mend fences across the Atlantic with allies in Europe, it is taking for granted long-time allies right next door.

Rather than diffuse emerging and ongoing disputes with its neighbour to the north, the Biden administration seems intent on exacerbating them through protectionist measures. These were on full display in November with the decision to increase the rate of countervailing duties on Canadian softwood lumber that have been in place since 2017. In addition, the now-beleaguered $1.7 trillion Build Back Better bill included a tax credit on electric vehicles that incentivized the purchase of EVs made with American union labour. Most recently, the issue of how regional value content for vehicles is to be calculated to qualify for tariff exemption under the new USMCA became a point of contention as Washington demands an unnecessarily more complicated calculation than outlined in the trade deal. These are all part of an ongoing policy of trade protectionism euphemistically coined as “Buy American.” Individually, each appears relatively innocuous, but collectively they create a sentiment that normalizes free-market and free-trade barriers and creates an air of uncertainty that discourages cross-border investment.

To be sure, trade across the 49th parallel remains robust. In fact, in 2021, Canada saw its trade surplus with the U.S. nearly triple from the previous year and grow 70% over the pre-pandemic period. It was the largest annual surplus since 2008. And therein lies the rub. Supporters of Buy American policies point to such figures as a threat, interpreting a trade deficit with Canada to be a form economic invasion from the north. But such views are out of touch with a world in which global trade is highly integrated and designed to allow economies to enhance productivity and cost efficiency through international commerce.

Proponents of Buy American policies tend to view deficits as a binary contrast of finished-goods imports over finished-goods exports. That is far from the case. In fact, prior to the pandemic, two-thirds of Canadian exports to the U.S. were cost-saving and productivity-enhancing intermediate goods integral to U.S. production of finished products, many of which were eventually exported from the U.S. to international markets, including Canada. Research from the U.S. Department of Labor shows imported intermediate inputs contributed eight per cent to the annual average growth rate of labour productivity in the private sector between 1997 and 2015.

Equally misleading is the narrative that trade adversely affects U.S. employment. A study by the Business Roundtable conducted in 2019 revealed an estimated 39 million American jobs are supported by trade, and that 7.2 million of these are sustained by trade with Canada alone.

As U.S. producers look to diversify their pool of suppliers away from Asia, they are increasingly investigating near-shore options with Canada being high on the list. U.S. private investment in Canada grew 8.8% between 2018 and 2020, even as the pandemic discouraged such activity.

If trade diversification in the U.S. is to take hold in earnest in the coming years, Canada will inevitably play a critical role. U.S. policymakers would be wise to reduce points of tension across our shared border and incentivize investment, rather than create the conditions that make reliance on overseas production a mainstay of the U.S. supply chain.

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