Billion-dollar government procurement market in NAFTA crosshairs

November 22, 2017 Paul Murphy Sarah Babbage  & Gail Ballantyne

This analysis was first available to Bloomberg Government subscribers

The fifth round of North American Free Trade Agreement renegotiations wrapped up today in Mexico City without resolving any of the most contentious issues, including access to a government contracting market in the U.S., Mexico, and Canada that benefits U.S. aerospace and defense companies, such as Lockheed Martin Corp. and Harris Corp.

Little progress was made made on issues such as dairy, automotive content, dispute panels, and a sunset clause. Negotiators plan to meet next month in the U.S. before convening in Canada in January, Bloomberg News reported. President Donald Trump has said he’ll withdraw from the pact if he can’t get a deal that he considers more favorable to the U.S.

U.S. negotiators are seeking a cap on access to America’s procurement market at a dollar-for-dollar level with the combined Canada-Mexico market. That means the combined value of contracts that Canadian and Mexican companies could access in the government procurement market couldn’t exceed the total value that U.S. firms could win in those two countries.

Canadian Foreign Affairs Minister Chrystia Freeland said the proposal would put Canada and Mexico’s market access in the U.S. behind that of Bahrain.
In the latest round, Mexican negotiators responded with their own proposal that would limit the value of procurement-tenders awarded to American companies to the same amount that Mexican firms get in the U.S. Since American firms do more procurement business in Mexico than vice versa, it would mean less business for U.S. companies, Bloomberg News reported.
Companies incorporated in Canada won $850.2 million in U.S. government contracts in fiscal 2016, while U.S.-based companies received $503.4 million from the Canadian government. Mexican vendors won just $1.1 million in U.S. awards, according to data compiled by Bloomberg Government.

The top U.S. supplier to Canada in fiscal 2016 was Lockheed Martin. with $77.6 million in contract receipts. The majority was from a $65.9 million contract won by its Sikorsky International Operations Inc. subsidiary.

U.S. and Canadian government agencies are among the top suppliers between the countries. The Canadian Commercial Corporation acts as a prime contractor for defense contracts worth more than $150,000 with the U.S. government, while the Defense Department’s military branches have programs to facilitate sales of defense-related goods and services by U.S. companies.

The CCC received $519 million from the U.S. government in fiscal 2016, more than 60 percent of U.S. spending that went to companies incorporated in Canada. Many other top contractors from Canada are subsidiaries of companies headquartered in the U.S. or elsewhere.

Canadian vendors that could be affected by changes to Nafta include the Bank of Nova Scotia and the Toronto-Dominion Bank.

There’s currently no cap on how many U.S. contracts can be awarded to Canadian or Mexican vendors, and under Nafta’s chapter 10, Canadian and Mexican vendors can bid for any contract valued above a certain threshold, which the U.S. must consider without regard for the vendor’s country.

Changes to, or a U.S. withdrawal from, Nafta wouldn’t necessarily mean immediate changes for Canadian contractors. The U.S. and Canada are both party to the World Trade Organization’s agreement on government procurement, which also provides nondiscriminatory market access for most contracts exceeding certain cost thresholds. Contractors in Canada and the U.S. would probably maintain access to each other’s markets under those terms. Mexico isn’t among the 47 WTO members covered by the agreement.

Canada’s access under the GPA might not last though. An April executive order from Trump directed the U.S. Department of Commerce to study the GPA and other agreements with procurement provisions.

“If the analysis mandated by this report indicates any agreement is failing to meet the Trump standard of fairness and reciprocity so that the U.S. is a net loser, these findings will inform the president’s decision to rescind or renegotiate these deals,” according to the order.

Canada and the U.S. also have policies and agreements outside Nafta and the WTO that establish their right to collaborate on defense contracts, free of tariffs or other trade barriers. It’s unclear how those arrangements could be affected by the administration’s proposed changes.

Nafta sets formal procedures and value thresholds for governments to follow in soliciting and selecting contracts, and above which firms in the three countries can bid on each other’s construction and goods and services contracts. A provision carried over from the Canada-U.S. Free Trade Agreement, which preceded Nafta, also allows nondiscriminatory bids between Canada and the U.S. on certain federal goods contracts greater than $25,000. Manufactured goods have to include at least 50 percent Canadian or U.S. components.

The parties are trying to reach an agreement by the end of March 2018.

Implementing a renegotiated deal or withdrawing from the pact will be a lengthy process, which will require action by Congress.

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