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UNCLAS SECTION 01 OF 03 OTTAWA 000364 
 
SENSITIVE 
SIPDIS 
 
WHITE HOUSE/NEC FOR FURMAN 
 
STATE FOR E, EB/DCT, WHA/EX, WHA/CAN 
 
STATE PASS USTR (SULLIVAN) 
 
COMMERCE FOR ITA/MAC (WORD) 
 
TREASURY FOR IA (WEYER) 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV EIND PREL KPAO CA
SUBJECT: CANADA'S LIST OF TRADE IRRITANTS CEMENTING IDEA OF GROWING 
U.S. PROTECTIONISM 
 
Refs: (A) Toronto 85  (B) Toronto 98 
      (C) Ottawa 160 
 
SENSITIVE BUT UNCLASSIFIED.  PLEASE PROTECT ACCORDINGLY 
 
¶1. (SBU) Summary:  Several recent U.S.-Canada trade irritants have 
led Canadian business associations and the media to accuse the USG 
of economic protectionism.  The major problem areas are the Country 
of Origin Labeling (COOL) voluntary requirements on meat products 
and "Buy American" provisions in federal stimulus legislation. 
Other events, such as recent U.S. duties on softwood lumber, the USG 
elevation of Canada to the Special 301 Priority Watch List, "Black 
Liquor" tax breaks for U.S. pulp paper producers, and the looming 
June 1 implementation of the Western Hemisphere Travel Initiative, 
have reinforced the negative perception here of the United States on 
economic matters.  End summary. 
 
Canadians Doubting Top-Level Assurances 
--------------------------------------- 
 
¶2. (SBU) During his visit to Canada in February 2009, President 
Obama stated, "My administration is committed to making sure that 
even as we take steps to strengthen the U.S. economy, that we are 
doing so in a way that actually over time will enhance the ability 
of trading partners, like Canada, to work within our boundaries." 
Prime Minister Harper similarly opined: "If we start thinking simply 
nationally and start having policies that try and restrict the 
benefits only within our borders and try and implement protectionist 
measures, this will not have the effect we need to have on the 
global economy, and it's the global economy that's pulling most of 
us down."  Despite the top-level commitments to keep markets open, 
Canadian business associations and media charge that the United 
States has instituted protectionist measures against Canada. 
 
Buy American 
------------ 
 
¶3. (SBU) The Buy America provisions of the American Recovery and 
Reinvestment Act (ARRA) exclude Canada and other U.S. trading 
partners from supplying iron, steel, manufactured goods, and many 
other products for state and municipal projects financed by ARRA 
funds.  Although the NAFTA provides reciprocal market access by a 
number of federal agencies, no market access commitments exist at 
the sub-federal level.  The Association of Canadian Manufacturers 
and Exporters states that as a result of the ARRA, Canadian firms 
are having their orders cancelled by U.S. purchasers - including 
Federal entities such as Department of Defense elements that are 
covered by the language on international trade commitments - or are 
being asked to sign affidavits to verify that they are supplying 
only U.S.-made products to government purchasing agents at the 
sub-state level.  Even Canadian goods destined for projects not 
funded by the ARRA (or non-manufactured goods permitted under the 
ARRA) are being refused by sub-federal procurement officers not 
wanting to potentially run afoul of the ARRA's Buy America 
restrictions, according to Embassy contacts.  One case that has 
received extensive Canadian press coverage involved the removal of 
newly-installed, Canadian-made sewage pipe at the Camp Pendleton 
Marine Base, reportedly for fear of violating the Buy America 
provisions.  The pipe came from a Canadian subsidiary of the Belgian 
Qprovisions.  The pipe came from a Canadian subsidiary of the Belgian 
IPEX company.  In several other cases that we have heard of, the 
affected exporter is actually a Canadian subsidiary of an American 
firm. 
 
 
¶4. (SBU) Comment:  It is true that Canadian provinces were offered 
the opportunity during the original NAFTA negotiations seventeen 
years ago to agree on reciprocal "most-favored-entity" treatment 
from 37 U.S. states.  The Canadian provinces missed that boat.  That 
being said, however, the sectors on offer from these 37 states in 
many cases were very limited and would not have covered many of the 
sectors that today are being affected by the ARRA.  The remaining 13 
U.S. states, including some of Canada's largest trading partners, 
were not willing to come to the table.  End comment. 
 
OTTAWA 00000364  002 OF 003 
 
 
 
¶5.  (U) The extension of Buy America provisions to other U.S. 
legislation (such as the Water Quality Investment Act) has provoked 
fears in the Canadian business community that Buy America provisions 
will become a standard component of U.S. appropriation and 
authorization legislation.  One Canadian community, Halton Hills, 
Ontario (refs A, B) has responded by declaring that it will only 
make municipal purchases from suppliers in countries that do not 
impose local trade restrictions.  While this small suburb of Toronto 
lacks market power on its own, it has asked the other 1774 members 
of the Canadian Federation of Municipalities to follow suit.  The 
Federation will decide on the resolution in June. 
 
¶6. (SBU) Beyond possible retaliation by Canadian municipalities 
against U.S. goods, Buy America has had effects on U.S. enterprises 
that are upstream suppliers for Canadian firms.  For example, the 
multi-billion dollar U.S.-Canada market for water and wastewater 
equipment is highly integrated with suppliers servicing contracts on 
both sides of the border.  U.S. and Canadian governments have 
allocated billions of dollars in new spending for municipal water 
and sewer upgrades.  Given the highly interlinked nature of the 
U.S.-Canadian economic relationship, by closing off cross-border 
supply chains, Buy America will likely negatively affect U.S. firms. 
 IPEX (whose products were removed from Camp Pendleton) buys about 
90 percent of its chemical inputs, valued at more that $170 million 
per year, from American suppliers, particularly in Texas and New 
Jersey.  Hayward Gordon, a pump and mixer manufacturer from Halton 
Hills, expects to lose 30 percent of its sales this year as a result 
of Buy America.  This will have direct effects on its 
Wisconsin-based supplier of gearboxes and its Georgia-based supplier 
of electric motors. 
 
COOL 
---- 
 
¶7. (U) The voluntary components of U.S. Country of Origin Labeling 
rules has raised concerns among Canadian meat producers - especially 
the requirement to provide disaggregated information about an 
animal's place of birth, feeding and slaughter (see ref C for 
details).  The regulations (including the voluntary measures) went 
into effect on March 19, 2009.  They preempt an earlier agreement 
reached with Canada and Mexico that would have permitted Made in 
North America labeling. 
 
 
¶8. (U) Similar to the industrial sectors affected by Buy America, 
COOL is also having a negative impact on U.S. agri-business because 
of the highly integrated status of the North American beef and pork 
industries.  For example, hogs that are born in one country are 
frequently raised and slaughtered in the other.  COOL voluntary 
measures ask meat processors, retailers, etc. to process and label 
this mixed origin product separately.  As a result, U.S. feeding 
operations and processing plants are losing business.  Nearly ten 
percent of hogs slaughtered in the United States are of Canadian 
origin.  Most imported Canadian hogs are processed at U.S. Midwest 
pork plants.  Ron Plain, an agriculture economist at the University 
of Missouri estimates that at least one U.S. Midwest pork plant will 
have to close because, without the Canadian stock, U.S. pork plants 
Qhave to close because, without the Canadian stock, U.S. pork plants 
will not have enough hogs to operate efficiently. 
 
¶9. (U) To avoid penalties for country of origin labeling mistakes, 
U.S. beef and pork companies are either refusing or segregating 
cattle and hogs born outside of the United States.  Cargill, JBS SA, 
Hormel Foods Corp, Seaboard Corp and Smithfield Foods, which 
together sell more than 50 percent of U.S. pork, have either stopped 
buying Canadian hogs or have announced plans to phase out such 
purchases.  According to the USDA FAS there has been a 42 percent 
reduction in Canadian hog exports to United States and 1000 fewer 
hog farms (down from 8300) compared to a year ago. 
 
¶10. (SBU) In early May, Canada and Mexico announced plans to jointly 
launch a WTO complaint against the United States over COOL. 
(Comment: Ironically, this action coincided with joint efforts by 
 
OTTAWA 00000364  003 OF 003 
 
 
Agriculture Secretary Vilsack and Canadian Agriculture Minister Ritz 
to keep Asian and European pork markets open to North American 
products in the wake of the H1N1 flu outbreak. End Comment)  Canada 
exports roughly $3 billion in hogs and cattle to the United States 
yearly, part of more than $10 billion in agricultural sales Canada 
buys about $14 billion in US-made food products. 
 
Other Concerns 
-------------- 
 
¶11. (U) The USG tax credit for pulp and paper operations using 
so-called "black liquor" as a power fuel source has also provoked 
Canadian allegations of unfair industry subsidies.  A byproduct of 
the wood pulp manufacturing process, black liquor has long been used 
as an energy source for the pulp and paper industry.  When mixed 
with a small amount of diesel fuel, companies burning black liquor 
for power generation can qualify for a U.S. tax credit designed to 
encourage the substitution of hybrid sources for fossil fuels.  With 
black liquor tax credits estimated by some Canadian industry 
analysts to run as high as $4 billion in 2009, there is talk in 
Canada and the European Union about launching a subsidies challenge 
against the United States in the WTO 
 
¶12. (SBU) Comment:  Both Buy America and COOL are having direct 
effects on cross-border trade as well as indirect effects that are 
the result of companies who simply stop dealing with traditional 
NAFTA suppliers to avoid the hassle of new regulatory regimes. 
These measures are causing severe disruptions to established and 
profitable NAFTA supply chains.  Many of these disruptions are 
affecting American businesses and American economic interests. 
Meanwhile, softwood and black liquor complaints represent some of 
the more predictable bumps in the cross border trading relationship. 
 However, when combined with the more profound effects of COOL and 
Buy America, within the highly-charged environment of a global 
economic crisis, the sum of these problems is greater than the parts 
and may foster public discontent over the future and utility of 
NAFTA trading relations. End Comment 
 
HOPPER