Buy American: Establishing Artificial Boundaries or Removing Unwanted Barriers?

Posted on September 6, 2009


“This idea of international free trade is a fallacy. We don’t need free trade. We need smart trade . . . Even Canada is not truly a free trade partner. Their regulations require broadcasters use a specified percentage of Canadian-produced programming. That’s protectionism, and to deny it is to be the patsy to foreign governments who think they can take advantage of the naivete of the American voter.”

Stephen Cottle, Hartford, CT (LinkedIn Q&A Response)

The growing number of responses I have received to both the recent “Buy American” post and the announcement that Minister Stockwell Day, who will be joining us on the September 28th Guest Panel discussion on the PI Window on Business Show, have been as interesting as they are diverse.

While the common theme has been one of disapproval for the policy of the Obama Administration, this unified consensus has been reached through a variety of intersecting interests.

The comments by Stephen Cottle stood out for a number of reasons, including the fact that I had watched earlier in the week a two-part series on the Canadian music industry.  In particular, and what is relevant to both Mr. Cottle’s comment and the Buy American debate, was the introduction of the CanCon legislation which required that at least 25% of all music played on AM radio stations had to be dedicated to Canadian Content.  Coming into force on January 18th, 1971, the CanCon regulation stipulated that at least part of the required content be “written, produced, presented, or otherwise contributed to by persons from Canada.”

This was important legislation in that prior to its introduction, the Canadian music industry “was regarded with indifference” by Canadian stations.  Without going into the MAPL system itself, it is safe to say that CanCon paved the way for an industry that has and continues to flourish both domestically and on the world stage.

While the quota system implemented through the Canadian content rule is not unique to Canada (France, Ireland, Israel and the United Kingdom are just a few examples of countries who have instituted similar regulations), the “Listen Canada” legislation has been criticized by some as “cultural protectionism.”

Even though one might argue that it is indeed a form of the protectionism for which the Buy American policy is being criticized, it would be hard to argue the point that without CanCon, the Canadian music industry would likely be languishing in relative obscurity with our indigenous talent heading south of the border to hone their craft and success.

This of course leads to a number of interesting questions.  For example, is a protectionist or self-serving domestic policy more conducive (re justifiable) for talent or knowledge-based industries than a more traditional sector such as manufacturing?

From a broader perspective, and taking into account the fact that knowledge-based industries are becoming a critical cornerstone of a sound domestic economy, does the potential threat of a Buy American policy provide countries such as Canada with incentive to accelerate their focus on developing Quaternary sectors while simultaneously (and gradually) ceding at least in part, manufacturing (which is considered a Secondary sector) to low cost countries?

The Automotive Industry

Even though manufacturing has always been second to our Primary sectors of logging and oil, it has historically been an important cog in the engine that drives our economy.

In no other sector is this importance better illustrated than in Central Canada, which is home to “branch plants” for major American and Japanese automobile  manufacturers.  This region of the country has produced more vehicles each year than the neighboring U.S. state of Michigan, which is considered to be the heart of the American automobile industry.

That said and even though Canada has in the past attracted manufacturers as a result of its highly educated population, lower labor costs and funded health care system, competing with shifting global manufacturing capabilities and lower cost models may be an impossible task.  A task made more daunting if you take into account the sentiments expressed by some senior auto manufacturing executives.

I am of course referring to GM’s former VP of Procurement and Supply Chain Bo Andersson’s speech at the 1st China International Auto Parts Expo in 2007 in which he stated that the “best market to sell cars and trucks in is North America, assuming you don’t produce them there.”  He also lamented the fact that GM is paying a “big number, a large number” for health care coverage for 1.1 million North American-based retirees.  (Note: here is the link to the August 11th broadcast “Intersecting Ideals: Why GM’s Supply Chain is in a State of Ruin,” in which I interview author and supply chain expert Bill Michels.)

Coupled with the current economic climate, this means that we are unlikely to avoid the negative impact of deindustrialization in 2009, as we were able to (at least in part) in the 1970s and 1980s.

Particularly hard hit will be Ontario, a Province which is very much dependent on the automotive industry.  This undoubtedly weighs heavy on the shoulders of the current government as Ontario has the most electoral seats of any province in Canada.  What this means is that earning support from Ontario voters is considered a “crucial matter for any party hoping to win a Canadian federal election.”

With the potential for another election being held in the near future, ceding this or any manufacturing capacity even if it means fighting for what amounts to being a lost battle may be the only viable option for the current government to stay in power.  An effort that is made more acceptable given the very real impact on families in which factory closures will result in massive layoffs.

This leads to another important question.  Has the government past and present done enough to stimulate development and growth (including re-training) in Quaternary sectors to counteract or counterbalance unemployment?

Quaternary Sector: A Natural Progression for a Wealthy Nation?

For those of you who may be unfamiliar with this reference, the Quaternary sector is considered to be an extension of what is referred to as the “three-sector hypothesis of industry.”  Developed by Colin Clark and Jean Fourastie, the hypothesis includes the extraction of raw materials (Primary), manufacturing (Secondary), and services (Tertiary).

Under a “general pattern of development,” a wealthy nation progresses through each phase.  Effectively managing this progression is critical to what Fourastie referenced in his 1949 publication “The Great Hope of the Twentieth Century” as “the increase in quality of life, social security, blossoming of education and culture, higher level of qualifications, humanization of work, and avoidance of unemployment.”

Because this transitional process spans many years, the groundwork for where we are today was laid a long time ago, through different times and involving many different governments.  Therefore from a political perspective, and in relation to my earlier question “has the government done enough to stimulate development and growth (including re-training) through each sector,” this is truly a bipartisan issue that should not solely rest at the feet of the current administration.

This said the present government still has responsibilities relative to at least pointing our country in the right direction, beginning with assessing where Canada is in terms of the progression from Primary to Secondary to Tertiary and of course Quaternary sectors.  The next logical step would be to develop a strategy in which the cost of making the necessary progressive series of transitions is calculated both in the short-term as well as the mid to long-term, keeping in mind that Canada’s rich, indigenous resources means that we will always be somewhat reliant on a model in which the Primary sector will play an important role.

Properly leveraging these indigenous resources to their maximum potential will however serve as a catalyst for the economic progression of the country into and through the other sectors.  The Quaternary sectors come into play as part of a natural and necessary progression.

The Quaternary sector is generally viewed as being the engine driving both innovation and expansion.  It consists of those industries providing information services such as “computing, information & communication technologies, consultancy, research and development.”  Ironically, and referring back to the CanCon example, Quaternary definitions have even included the entertainment industry.

While similarities with the tertiary sector are often made as they are either service-based or oriented, knowledge-based industries are incredibly important.  Look at the United Kingdom.  The Tertiary and Quaternary sectors represents the largest part of their economy, employing 76% of their entire workforce.  Another interesting area to be researched would be the parallel breakdown for Canada and the United States in this same area?

Let’s consider India.  Indian software engineering talent has made that country the off shoring destination of American high-tech firms, each of which have committed to investing $1 billion into its economy.  The result of this boom is that India has seen double-digit wage growth for much of the 2000s.

Again, where are Canada and the United States in relation to India’s evolution?

This leads us back to the questions I had raised in Friday’s post The Buy American Policy: A Clear and Present Danger?. Specifically . . . are the companies (and the industry sectors within which they operate) that will benefit the most from the trade promises being made by the Canadian Government significant contributors to the overall health of our domestic economy?  Are these industry sectors part of the mid to long-term economic picture?  Upon which domestic sectors is guaranteed access to “the provinces’ public purchases” likely to have the greatest negative impact?  Are these sectors part of the mid to long-term Canadian economic picture?

I of course do not have the answers.  This is why I am so looking forward to our September 28th broadcast in which Minister Day will undoubtedly provide some much needed insight into what is a complex situation.

I am then looking forward to the follow-up discussion with our esteemed guest panel, which I hope will enable us to move from the realms of sound bite reactions to a more tangible and holistic understanding of the Buy American issues.