Renegotiating the North American Free Trade Agreement: Government Procurement Impact

October 2017

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It’s true that President Trump’s Buy American-America First agenda is the reason Canada, the U.S. and Mexico are engaged in negotiations to modernize NAFTA. It is also true that technology has made modernization of NAFTA necessary as certain aspects of the original agreement are out of date.

What are the issues?

Among the top-of-mind concerns when it comes to government procurement in the digital age is privacy of information, how and where information resides, and who has the right to access it. NAFTA predates the ubiquity of big data centres and cloud computing. Since October 2001, when the USA Patriot Act passed into law, the U.S. government has had access to any data stored on U.S. soil. This means, for example, if the Canada Revenue Agency were to decide to store Canadians’ tax information through a cloud-based service with data centers in U.S., the U.S. government has access to Canadian financial records. Current NAFTA rules allows the Canadian government to ‘protect’ privacy by instituting rules that force companies to store data on Canadian soil.

Our current regulations around the storage of personal data are reasonably strong and the Canadian government has made it clear it is an area that it plans to continue to protect this. The U.S. would like to see fewer regulations and more open cross-border data flows in the financial services sector.

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What does the U.S. want?

When it comes to bidding on government contracts, United States Trade Representative Robert Lighthizer has been consistent in his push to improve access to government contracts in Canada and Mexico for U.S.-based companies while limiting opportunities for Canadian and Mexican-based companies to bid on U.S. government contracts.

Specifically, the U.S. has stated it wants to: “Establish transparent, predictable and non-discriminatory rules to govern government procurement practices – including publication of opportunities, timelines for submissions, fair review processes, awarding based on specified criteria, administrative process to review challenges.”

That’s because while currently U.S. businesses can bid on Canadian government contracts, to do so they must follow Canadian privacy laws and have Canadian security clearance for the company and their people. Even then, preference is given to Canadian companies located in the province where the project originates. The U.S. wants that preferential treatment and some of the security rules eliminated in a new NAFTA. Such a change would go beyond NAFTA and enter the realms of governance and policy.

For example, the U.S. wants reciprocity in certain government industries the Canadian government has “protected” as a matter of public policy, such as aerospace, banking and finance and cultural industries. If you are in aerospace you should be watching this. Bombardier has been heavily subsidized by both federal and provincial governments for public policy reasons. The U.S. has stated its recently announced 219 percent tariff on Bombardier C-Series jets imported into the U.S. is a direct response of these subsidies.

Of course, the U.S. has industries it protects, too, most notably defense and construction. It is very difficult if not impossible for non-U.S. firms to bid on any projects in these industries because of security regulations and Buy American rules.

Chapter 19 & Procurement

Government procurement is a thorny issue because it goes to the heart of a government’s sovereignty.

Under the current NAFTA, companies in North America can use an arbitration system to have their say when a country has put in measures that violate NAFTA, using Chapter 19. The system has given Canadian and Mexican firms a voice against the giant U.S. government. Most of the arbitrations have gone their way, which is why the U.S. wants to overhaul it.

Chapter 11 & Procurement

Another area of NAFTA up for debate: Chapter 11. This section of NAFTA involves companies suing governments. The Canadian government wants changes to Chapter 11 to ensure that "governments have an unassailable right to regulate in the public interest." To date, Chapter 11 has been a preferred tool for U.S. companies, which tend to be much more litigious than their counterparts in Canada and Mexico.

To better understand the potential impact of NAFTA renegotiations on your business, please speak to your BDO advisor.

What’s next?

NAFTA negotiations continue on. In the mean-time BDO are updating business owners and decision makers as and when updates are announced.

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BDO would also like to get your take on how negotiations are going. Have your say by taking part in our survey: NAFTA – What are Canadian Businesses Thinking About?