Of all the sectors due to receive stimulus money under the 2009 American Recovery and Reinvestment Act, waste-water management was supposedly one of the most "shovel-ready." So for Port Washington, Wisc.–based Aquarius Technologies, which makes waste-water treatment equipment, business in freshly stimulated America should be booming. Yet Tom Pokorsky, Aquarius’s president, says that’s not the case. "Almost no new projects have gone forward yet," he says. "There have been six projects, worth US$15.6 million in contracts, that have been awarded" — generating a grand total of 17 jobs. "But we have nearly US$7 billion to go, and we've only got about two years in which it can be spent."

What's the holdup? "Buy American," Pokorsky replies. "No one can figure out how the heck to comply with it."

A set of riders Congress added to stimulus project funding back in January, Buy American is supposed to ensure that iron, steel and manufactured goods purchased by funds released under the Recovery Act are made in America — thus promoting the fortunes of U.S. companies such as Pokorsky’s. That's the theory, anyway. In reality, while the government claims about 25% of stimulus funding has been spent, other estimates put the figure as low as 7%. Some U.S. businesses are scrambling. And many foreign suppliers are shut out of the process.

To date, Pokorsky’s response has been to hedge his bets. "Ironically, I have been getting a lot of work in Canada — a significant percentage, say 20% to 25% — and that will help me survive this year," he says. "I've got work in the Toronto area, in Leamington, [Ont.], and in that province north of here — whatchacallit, Alberta. But if municipalities in Canada block that, I will be in real trouble."

On June 5, Canadian municipalities voted to do just that. Their new Fair Trade resolution gave the U.S. government 120 days to exempt state and local governments from enforcing Buy American. If that doesn’t happen, Canadian municipalities can cut companies from countries with discriminatory procurement policies out of bidding on their contracts.

The Canadian mayors aren't alone. Other countries are slipping retaliatory Buy Local language into laws governing their own stimulus funding. Of particular concern are so-called Buy Chinese requirements added to that country’s stimulus in mid-June. They favour domestic suppliers "unless products or services cannot be obtained in reasonable commercial conditions in China." The net effect could be to freeze out foreign competitors from home markets, in a game of beggar-thy-neighbour that hasn’t been seen on this scale since the 1930s.

The policy-makers who drafted Buy American did so to help ensure U.S. stimulus funds went toward creating jobs. Unfortunately, their timing couldn’t have been worse. In tough economic times, politicians everywhere try to help struggling constituents by enacting protectionist legislation designed to keep jobs at home. By letting Buy American pass, the Obama administration effectively invited other countries to do the same. According to the World Bank, global trade is projected to decline by 9% in 2009. Reciprocal protectionism will slow down trade flows even more. And that bodes ill for the global economic recovery.

When news of Buy American broke in January, Canadians thought membership in NAFTA meant they were safe from its impact. With the endorsement of President Barack Obama, a group of senators had inserted a clause into the American Recovery and Reinvestment Act requiring that Buy American be implemented in a manner consistent with international trade obligations. Unfortunately for Canada, NAFTA doesn't cover state and municipal contracts on either side of the border. That’s because at the time NAFTA was signed, the provinces decided against signing on, too. The premiers also refused to sign World Trade Organization general procurement principles that would have opened up state — though not U.S. municipal — levels of government to Canadian bids. Hence, many Canadian businesses attempting to bid on U.S. stimulus contracts through the winter have been frozen out.

To date, the official Canadian response has been mixed. Prime Minister Stephen Harper has been lobbying Obama steadily for an exemption. In late June, Trade Minister Stockwell Day was widely reported to have asked for a declaration from premiers that their provinces won’t discriminate against American suppliers, as a way to convince the U.S. to drop protectionist measures. The Canadian federal government, provinces and municipalities have indicated their support for open procurement policies with the United States at all levels of government — for the first time in history. But given the protectionist mood in Congress right now, that’s unlikely to happen.

Instead, the mayors’ more aggressive action got most of the attention down south. Birgit Matthiesen, the Washington, D.C., rep for the Canadian Manufacturers and Exporters Association, says that "when news of the mayors’ decision broke, I got three calls a day about it, and when China took similar measures later that week, the calls intensified."

Trouble is, how Buy American plays internationally is only one part of America’s problem. There’s also that minor issue of mass confusion over how it should be implemented. "The OMB [the Office of Management and Budget, which oversees the stimulus disbursement] didn’t really define Buy American until late April," explains Pokorsky. At that point, the agency decided compliance meant a company had to assemble its final products on a U.S. site — prompting some Canadian firms to look into sourcing factory sites down south.

That said, simply running a U.S. factory isn’t enough. At Duferco Farrell, a Pennsylvania steel company, one component in its supply chain comes from elsewhere. That spooked former partners who, according to news reports, have left Duferco out of planned bids on Buy American projects — which, in turn, prompted Duferco to threaten to lay off 600 steelworkers.

The bloc of professed trade skeptics in Congress has been busy slipping Buy American language into laws covering everything from new investments in schools to climate policy. The Waxman-Markey bill on climate change, which passed the House of Representatives on June 26, contains protectionist language, and two new bills that also recently passed the House — the Water Quality Investment Act of 2009, and the 21st Century Green High-Performing Public School Facilities Act — feature Buy American language identical to that in the Recovery Act. Unlike that act, which authorizes short-term spending, these bills authorize billions of dollars in spending for an indefinite period.