OTTAWA - Buy America restrictions in the massive U.S. stimulus package could be sufficiently punitive to keep Canada's economy from a more robust recovery next year, a new economic outlook says.
The CIBC report argues that Canada will largely miss out on the benefits of the U.S. recovery next year because most of the activity is being generated by government stimulus.
"Much of the U.S. growth in 2010 will be generated from government stimulus on projects where Buy America provisions shut the door on Canadian suppliers, or in sectors like education that don't benefit Canadian industry," said chief economist Avery Shenfeld.
The CIBC has upgraded its forecast for the Canadian economy next year by half-a-point to two per cent growth, but that is still a full percentage point less than the Bank of Canada estimate.
The key difference in the forecasts, says Shenfeld, is that the central bank has built in a substantially bigger bounce for Canada's export sector, a pop he maintains won't happen because of Buy America and other provisions of the stimulus program.
"In a normal year Buy America provisions might not bite that much because the U.S. economy would be growing on several channels, but in the case of 2010, with a lot of the growth coming out of that stimulus, that will be one reason why we may underperform," he explained.
The restrictive provisions have been a bone of contention between the two countries since they first appeared last fall.
But with the lion's share of the US$290-billion infrastructure portion of the U.S. stimulus set to roll out in 2010, the issue has come to a critical juncture for Canadian suppliers who hope to bid on thousands of lucrative contracts.
In late August, Canada named Foreign Affairs assistant deputy minister Don Stephenson as Canada's chief negotiator with the marching orders of obtaining a Canadian exemption from the laws.
Canada has obtained provincial consent to offer the U.S. unfettered access to sub-federal government procurement markets on a temporary basis, and a "commitment to explore the scope for a permanent, reciprocal government procurement agreement." The North American Free Trade Agreement only covers federal procurement practices, not sub-national governments.
Officials said talks have commenced with the aim of achieving progress in time for Prime Minister Stephen Harper's visit to Washington next week.
But Canada-U.S. relations analyst Chris Sands of the Washington-based Hudson Institute believes Obama is in no position to offer substantial concessions, given the president's plummeting approval ratings and the economy shedding seven million jobs in the past 20 months.
"He will obviously make a gesture on this at Harper's insistence, (but) the Obama administration will not want the news of the day to be his efforts to ensure that Canadians get jobs out of U.S. taxpayer-financed stimulus funds," he said.
Even if the White House were to give Ottawa everything it wants, that would not eliminate all the barriers to Canadian suppliers, Sands added.
"The more serious concern is 'Buy Local' sentiments, particularly in areas with high unemployment," he said.
"Regardless of the outcome of an Obama-Harper meeting next week, a county road commissioner is likely to want to spend federal stimulus money on local contractors. There is not much that a Canadian government can do to counter this attitude, especially since most Canadian cities and provinces have taken similar positions over time."
Despite the expected ongoing weakness in Canadian exports, particularly autos and forestry, Shenfeld believes Canada's economy will still manage to outperform the U.S. in each of the next two years by a half-point, with two per cent and 3.8 per cent growth for 2010 and 2011.
Nor does he fear a so-called double-dip recession hitting the economy in 2011 as some economists, including George Vasic of UBS Securities Canada and Scotiabank's Derek Holt, say remains a risk.
Shenfeld said government and central bank stimulus should buttress the economy from a sudden reversal, until the private sector is ready to do its part. He predicts both the Bank of Canada and the U.S. Federal Reserve will keep their policy interest rate at the practical low of 0.25 per cent all of next year.
"As long as policy makers don't overdo the return to higher interest rates and tighter fiscal policy, they should be able to avoid the double dip horror," he predicted.