Canada Considers Procurement Restrictions

Canada is exploring options for responding to the expansion of “Buy America” policies in the United States. It is considering measures that would allow it to restrict access to its federal procurement and federally funded infrastructure projects when the U.S. and other trading partners do not provide reciprocal access to their procurement. It may also create a set-aside program for Canadian small businesses. Canada’s aim is to ensure that countries that restrict Canadian access to their procurement markets do not unfairly benefit from its procurement system. This post looks at the restrictions that Canada is considering and the scope for adoption of such measures under its international procurement obligations.

Canada has opened a two-month consultation process (Mar. 31, 2022 to May 30, 2022) to solicit views from Canadian stakeholders on approaches that it could take to implement reciprocal procurement policies. The basis of the consultations is Canada’s 2021 budget commitment to pursue such policies “in order to demonstrate to Canada’s trading partners the importance of balanced procurement opportunities”. It seeks to ensure that Canada purchases goods and services only from countries that grant Canadian businesses a similar level of market access.

To explain its need for the proposed change in its procurement policies, Canada singles out U.S. restrictions on foreign suppliers’ access to U.S. procurement markets and its introduction of new restrictions that limit Canadian access to U.S. procurement. It cites the U.S.’s recent introduction of new “Buy America” domestic content requirements on infrastructure projects, which it expects will negatively affect Canadian suppliers’ access to such projects. The  Infrastructure Investment and Jobs Act, enacted in November 2021, imposes a permanent “Buy America” requirement on iron, steel, manufactured products, and construction materials used in any infrastructure project undertaken with federal funds. In addition, the Biden administration in March revised “Buy American” rules to increase American-made content required in domestic products and construction material, with implementation set for October 2022.

Canada, like most parties to the WTO Government Procurement Agreement (GPA), generally allows foreign suppliers, goods, and services to compete for its federal procurement whether or not the GPA or another trade agreement applies. They provide greater access to their federal procurement than they are required to under the GPA and free trade agreements (FTAs). [In contrast, the U.S. federal government is generally prohibited by the Trade Agreements Act of 1979 from purchasing goods or services from countries that are not covered by the GPA or an FTA, unless they are not available in the U.S.] 

In its consultation document, the Canadian government has outlined three potential approaches to implement reciprocal procurement policies that would be consistent with its international trade obligations. It has invited its stakeholders to offer other approaches.

One Canadian approach would be to limit access to its federal procurement (except defense purchases) “to what is strictly required by Canada’s government procurement obligations” in the GPA and FTAs. Such an approach could provide preferential access, such as awarding “extra points in the bid evaluation process for bidders who meet prescribed content requirements,” prevent certain foreign suppliers, goods, and services from competing in Canadian federal procurement, or limit access based on the origin of the supplier, good, or service. Currently, Canada does not place any restrictions on U.S. access to the federal procurement that Canada covers under the GPA. [The U.S. waives the application of the Buy American Act of 1933 for Canada and the other GPA parties. As a consequence, the Biden administration’s recent expansion of the “Buy American” requirements would only affect Canada’s participation in procurement below the GPA threshold ($183,000).]

A second approach could be for Canada to place conditions on financial assistance provided by its federal government to provinces and territories for infrastructure projects that are excluded from Canada’s international trade obligations. Its exclusions include urban rail, urban transportation equipment, and highway projects. Canada suggests that it could impose domestic content requirements, “whereby foreign content would only be considered alongside Canadian content if that foreign content originates from a country that provides reciprocal access to infrastructure projects for Canadian suppliers, goods, and services”. This proposal seems particularly linked to the new U.S. infrastructure restrictions.

Canada proposes as a third approach the establishment of a set-aside program for its small businesses. It could allow Canada to exclude foreign suppliers (except those from the EU and Britain under their respective FTAs with Canada) from the federal procurement that it set asides for Canadian small businesses. Under the GPA, Canada has taken a broad reservation for a such a program, which would provide it with considerable latitude in determining the value and scope of contracts subject to set-asides. 

Canada’s broad small business exclusion reflects that of the U.S. Under the U.S. exclusion of set-asides, it its able to reserve nearly a quarter of federal procurement for its small and minority businesses. As Canada noted in its consultations request, the U.S. reserves any procurement with a value of $250,000 or less for U.S. small and minority-owned businesses if a “rule of two” is met. It requires at least two U.S. small businesses that are competitive in terms of market prices, quality, and delivery. Procurement above $250,000 may also be set aside for U.S. small businesses if it is expected that the rule of two will be met.

The “Buy America” requirements that the U.S. attaches to federal funding of state and local infrastructure projects and its small business set-asides have long been thorns in the U.S.-Canada procurement relationship. For 15 years after the GPA first covered sub-central procurement, Canada had refused to open its provincial procurement because the U.S. would not exclude its suppliers from “Buy America” restrictions or its small business set-asides. Canada only agreed to open its provincial procurement in 2010 in exchange for exemptions from several programs funded by the 2009 stimulus package that imposed a “Buy America” restriction on infrastructure projects.  

In 2021, the Canadian Parliament and Chamber of Commerce sought to counter current and future “Buy America” policies. For example, a special committee of the Canadian Parliament called on the Canadian government to seek “a full exemption” from these policies.

Canada’s efforts to obtain reciprocal access to the procurement markets of its trading partners is similar to the EU’s proposed International Procurement Instrument. That EU regulation is nearing implementation after the Council of the EU and the European Parliament reached agreement on it in mid-March. Such measures could provide incentives to non-GPA parties to consider accession to the WTO plurilateral agreement.

Jean Heilman Grier

April 7, 2022

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    Book: The International Procurement System Government procurement required 40 years and substantial efforts to become part of the international trade regime, even though it comprises a significant part of the global economy. The international system requires governments to balance protectionist forces favoring local suppliers against the pressures of liberalization, which expand procurement markets and lower prices.