Countering the Aggressive Reach of US Law

By | December 19, 2014

The broad and aggressive out-reach of US law has again reared up in Canada.

This time it’s Buy America and the requirement that the Prince Rupert ferry upgrade must use US steel. It shows how Canada can be sideswiped by the American approach in legislating with intended global effect.

In this case, a rapid Canadian response is called for. The December 16 editorial in the Globe and Mail is right on point.

The US Buy America requirement is a carve-out from that country’s obligations under the WTO Government Procurement Agreement. Because that is a “bottom-up” agreement, it means that governments are allowed to list only those procurements that are covered by the GPA’s obligations– and as well those that are not.

So the US excluded all government procurements subject to its Buy America requirements, including all transportation infrastructure projects that get US government funding. Recipients of that funding must only use US goods in their projects, meaning any port terminal projects benefitting from these subsidies.

And since the Prince Rupert terminal, leased to an American operator, wants access to these funds, the condition is that all steel used in the project has to be of US origin.

It wasn’t really intended that Buy America would apply outside the geographical limits of the United States. But it happens that these foreign projects actually do qualify – as apparently would a US operated port facility in Asia, the Middle East or elsewhere.

Unintended or not, the effect is unacceptable when it comes to Canadian projects and the government must take appropriate counter-measures. You may have seen my comments in a piece by Barrie McKenna in the December 14 edition of the Globe and Mail on this very point.

Canada has a law called the Foreign Extraterritorial Measures Act, a more-or-less dormant piece of legislation that was passed by Parliament in the 1985, mostly to counteract the effect of US laws that required American subsidiaries in Canada to comply with the US trade embargo of Cuba.

Canada has no prohibition on trading with Cuba and it was – and is – considered unacceptable for American laws to try to prevent someone in Canada from doing something that is perfectly legal here.

To prevent that, FEMA prevents any Canadian-based company and any person in Canada from complying, directly or indirectly, with the American trade embargo of Cuba.

In more technical terms, statute says that where Canada’s justice minister determines that a foreign state has taken any trade-related measure that (1) “has adversely affected or is likely to affect significant Canadian interests . . . involving business carried on in whole or in part in Canada” or (2) “otherwise has infringed or is likely to infringe Canadian sovereignty”, the justice minister, with the concurrence of Canada’s foreign minister, can issue an order preventing the application of that foreign measure in Canada.

Under those provisions, the government enacted the Cuban blocking order in 1992, making it an offence for any one in Canada to comply, directly or indirectly with the American trade embargo of that country.

No criminal prosecutions have been taken under the blocking order since its enactment. But it continues on the books and it happens that from time to time Canadian companies get caught up in the prohibition against following the US embargo.

While the issue is not the same in the Prince Rupert affair, it would be perfectly in line with the objectives and the statutory language of FEMA for the government to pass an order similar to the Cuban blocking order, preventing Buy America rules having any direct or indirect effect here. It would require Mr. McKay, as justice minister, to make a determination that these Buy America rules infringe Canadian sovereignty and, with Mr. Baird’s concurrence, to issue the necessary blocking order.

Of course, there’s more than technical points at stake here. The issue has broader Canada-US dimensions. Action under FEMA will also affect the redevelopment of the Prince Rupert facility – although the $15 million sacrifice can conceivably be made up with Canadian infrastructure money. This will clearly require the Prime Minister’s sign off before any such action can be taken.

But as the Globe editorial has got it right. Canada must respond and FEMA offers the road map for that response.