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‘Buy America’-type rules at odds with vitality of cross-border supply chains

by Ilene Grossman ~ October 2016 ~ Stateline Midwest »
Buy America requirements, provisions added to federal legislation to require domestic content when purchasing materials for government-supported projects, are showing up more regularly in major bills passed by the U.S. Congress.
The most recent example of this trend came in September, when the U.S. Senate approved its version of the comprehensive Water Resources Development Act. The legislation would mandate that only American-made iron and steel products be used in drinking water infrastructure projects that receive funding from a federal revolving-loan program.
For supporters such as U.S. Sen. Tammy Baldwin of Wisconsin, the rationale for these domestic content requirements is this: If taxpayer dollars are going to the projects, why not make sure that the money goes to American workers, foundries and mills?
But in seeking ways to protect and expand domestic job opportunities, Buy America (or “Buy American”) can complicate another part of the U.S. economy — the integrated supply chains that have developed across the U.S. and Canadian borders. In this type of market, a product or piece of equipment may be ready for sale only after crisscrossing the border multiple times. Domestic content requirements, then, can disrupt the way some products are made.
The Associated General Contractors of America points to other concerns as well — for example, requiring companies to replace long-standing, reliable suppliers (in order to be eligible for a federal infrastructure project), or encouraging other countries to respond with domestic content provisions of their own.
Though it has become more common in U.S. legislation in recent years, the inclusion of “Buy American” language dates back to 1933. That year, the U.S. Congress began requiring federal agencies to purchase American-made materials such as iron, steel and manufactured products. In practice, the law established a price preference for American-made products and materials.
A newer Buy America standard, which first appeared in 1982, related to procurement for transportation projects. Construction projects for roads, bridges, rail and transit required all parts and materials to originate in the U.S. These standards have been attached to U.S. Department of Transportation funding bills ever since. The original Buy American Act language referred to federal procurement, while transportation projects are often run by states and localities (but federal dollars are used).
The American Recovery and Reinvestment Act of 2009 provided over $150 billion in stimulus funding for infrastructure, transportation and water (such as drinking water and wastewater) projects. Section 1605, which contains the Buy America provisions, applies to projects funded by ARRA, including those funds going to states and localities. The act requires that 100 percent of the iron, steel and other manufactured products used in ARRA-funded projects be American-made.
Value of cross-border supply chains
Two recent studies underscore just how important U.S-Canadian cross-border supply chains have become in the world’s largest binational trading relationship. Vehicles, for example, generally have more than 40,000 individual parts, and even the manufacturers of smaller components often have many suppliers of their own.
In a recent study of the operations of a single southern Ontario firm that makes car seats, researchers at the Automotive Parts Manufacturers’ Association found that the company had 95 suppliers alone — most of them based in the United States. And this interdependent relationship extends well beyond making cars and vehicle parts; the manufacturers of industrial machinery and equipment, chemicals, plastics and construction materials rely on cross-border supply chains as well.
As a result, goods officially counted as “Canadian made” often include components made in the United States, and vice versa. In 2014, U.S. content accounted for nearly $70 billion of the value of Canadian manufacturing output (8.5 percent of the total value), according to a report commissioned and released this year by the Embassy of Canada; likewise, Canadian content in U.S. manufacturing totaled roughly $44 billion (2.5 percent of the value of U.S. exports).
Because Canadian companies rely on U.S. suppliers, and vice versa, provincial, state or federal policies that require the use of domestically made products can be problematic. As one example, the Embassy-commissioned report cites how domestic-content requirements (for example, “Buy America” language in the American Recovery and Reinvestment Act of 2009 and other federal legislation) impacted the cross-border supply chain that makes pipes for U.S. municipal water systems.
An end manufacturer of these pipes was based in Ontario, but 95 percent of the raw materials was coming from the United States. The partly finished pipe then crossed between facilities in the two countries for further processing. But because the manufacturer was based in Ontario, the finished product didn’t meet domestic-content provisions.
Cross-border supply chains rely not only on the free flow of goods between countries, but also on the efficient movement of those goods across the border. States and provinces can make this movement smoother by ensuring that their roads and bridges support the truck traffic that delivers manufacturing components. Though good roads benefit all shippers, they are most important for industries that rely on just-in-time deliveries, such as the auto industry.

 

Article written by Ilene Grossman, CSG Midwest staff liaison for the Midwestern Legislative Conference Midwest-Canada Relations Committee.