Buy American or What? 


Spring 2009 - (International Trade Brief Spring 2009)

International Trade Brief Spring 2009

The American Recovery and Reinvestment Act , commonly referred to as the "stimulus package", became law in the United States on February 17, 2009. This legislation included the much discussed "Buy American" policy for funds disbursed under the stimulus package. The "Buy-American" clause will require all public works projects funded by the stimulus package to use only U.S.-made steel, iron and manufactured goods. The question now is how does the "Buy-American" clause affect you as foreign suppliers to, or foreign investors in, the U.S.? The answer may be surprising to many. The "Buy-American" clause is not, as originally feared, an impenetrable door being shut on foreign goods and services.

To the extent that a "Buy American" policy causes damage to foreign entities with investments in the United States, these investors may bring claims against the U.S. Government pursuant to the investment provisions in (1) NAFTA (with respect to Canadian and Mexican investors), (2) other free trade agreements to which the home country of the investor and the U.S. are parties (with the exception of the U.S. - Australia FTA, which does not have an investor-to-state dispute settlement mechanism or even an investment chapter), or (3) a bilateral investment treaty to which the home country of the investor and the U.S. are parties. The rules and requirements differ slightly among the various agreements, but the following three principles generally apply to all.

First, investors may have the right to file a claim in order to start an investment arbitration against the United States through the United Nations Commission on International Trade Law ("UNCITRAL"), or through the International Centre for Settlement of Investment Disputes ("ICSID"), depending upon the specific terms of the treaty, including NAFTA Chapter 11. Who satisfies the definition of the term "investor" will depend on the definition in the applicable international treaty. If you are a Canadian investor, you would look to the definition of the term "investor" in NAFTA .

Second, assuming that there is an investor, there must be an "investment". Some provisions in the treaties establish a requirement that the investment be in the territory of the United States, but others, such as the one in NAFTA , are not clear on this location requirement.

Finally, there must be a breach of a substantive provision of the international treaty. For example, there must be a taking or expropriation of a right — such as the right to participate in government contracts without discrimination. The "Buy American" provisions may indeed breach such substantive rights, such as the "national treatment" obligation found in international trade and investment agreements. Under NAFTA and other trade and investment agreements, countries are not permitted to discriminate against goods and services from other countries, in accordance with the principle referred to as "national treatment". By requiring preference to be accorded to local suppliers and manufacturers, the "Buy-American" provisions may lead to challenges against the U.S. Government regarding the direct or indirect denial of the substantive rights (i.e. national treatment) of foreign suppliers/investors.

Foreign companies that have incorporated in the United States as importers of steel, machinery and other products, and foreign companies who have established subsidiaries in the United States in order to bid on U.S. Government contracts, may be able to argue that the U.S. Government has changed the rules of the trade game if the "Buy American" provisions negatively affect their business. Many of these companies have spent hundreds of thousands (if not millions) of dollars on security measures and compliance with U.S. laws. The "Buy-American" clause may prevent foreign investors from benefiting from their efforts if domestic goods and services are being favoured.

As stated above, NAFTA and other trade and investment agreements may provide individual rights to investors to sue the U.S. Government for actions taken which are harmful to those investors. However, the rules relating to government procurement are rather complex and may impact the potential for an investor to bring forward a claim against the U.S. Government. For example, there are monetary thresholds with respect to the value of contracts for goods and services, and higher thresholds relating to the provision of construction services. In addition, using NAFTA as an example, there are a number of market sectors excluded from the government procurement provisions of the agreement, such as U.S. defence procurement. Similar complications may be present within the text of other treaties. Investors must be aware of these potential complications and should seek legal advice before making a decision as to whether or not to pursue an arbitral remedy.

In addition to the individual investor-oriented remedies, NAFTA and other trade and investment treaties provide for government-to-government consultations and dispute resolution mechanisms. For example, NAFTA provides for a panel system to rule on disputes in a manner that allows the withdrawal of commensurate concessions (i.e. permitting reasonable retaliation). As a result, in addition to pursuing some of the investor-State remedies outlined above, a Canadian investor affected by the "Buy American" provision may wish to consider joining the lobbying efforts already under way to have the Canadian government engage in these government-to-government mechanisms.

The U.S. Government will likely have to defend numerous claims against it by foreign governments and investors as a result of the "Buy-American" clause. These may result in the U.S. Government having to pay significant compensation should arbitral panels make awards in favour of foreign investors. The re-direction of "stimulus package" funds from the hands of U.S. manufacturers to the hands of foreign investors in the form of arbitral awards could make the "Buy American" clause of the stimulus package less than stimulating for the U.S. economy.

Should you have any questions about the rights of your company in the face of the "Buy American" provisions, please contact a member of the International Trade Group at 613-232-7171.

By C.J. Michael Flavell and Martin Masse

This article appeared in the Lang Michener LLP International Trade Brief Spring 2009.