A new analysis from the Montreal Economic Institute, a free-market think tank, has issued a stark warning about the financial implications of Canada's federal procurement rules that prioritize domestic companies. The study projects that these regulations could increase the cost of major infrastructure projects by more than $12 billion each year, with taxpayers ultimately shouldering this substantial financial burden.
Expanding Protectionist Measures
The federal government's Buy Canadian policy, which took effect in December, currently applies to contracts valued at $25 million or more. Under these rules, domestic suppliers receive additional points during bid evaluations, and all proposals are assessed based on their use of Canadian inputs and employment of Canadian workers. Later this year, these regulations will be extended to cover contracts worth between $5 million and $24 million, significantly broadening their scope and potential impact.
Diminished Competition and Innovation
Vincent Geloso, the study's author and an economics professor at George Mason University, argues that while these policies are marketed as strengthening Canadian industry, they actually harm domestic firms in the long run. "The reduced competition faced by Canadian businesses makes them lazier, as their need to innovate is reduced," Geloso explained. "By making less of an effort to reduce costs and improve quality in a context of protection, our firms end up becoming less competitive on global markets."
Geloso points to concrete examples demonstrating how procurement protectionism leads to governments paying more while receiving inferior results. A California state program that offered local businesses a five percent bid preference increased costs by between 1.4 and 3.6 percent. When applied to the Canadian context, this translates to an annual cost increase ranging from $4.8 billion to $12.2 billion.
Questionable Job Creation Claims
The study also challenges the employment benefits often cited to justify such protectionist policies. Geloso references research showing that "Buy American" provisions in the United States cost the economy up to US$237,000 for every domestic job created—far exceeding the average wage. "What you're doing is protecting a narrow group of workers, with the trade-off being more expensive government services and a worse allocation of taxpayer dollars," Geloso stated. "It's wishful thinking to pretend that this won't affect other Canadian jobs."
Political Realities Versus Economic Optimality
Geloso acknowledges that while research clearly indicates the superiority of open, transparent government bidding processes that maintain a level playing field between foreign and domestic firms, this approach may not align with current political trends. With economic nationalism gaining momentum, policymakers face pressure to implement protectionist measures despite their economic drawbacks.
The recent controversy surrounding BC Ferries illustrates this tension. The ferry service faced criticism from both major federal parties after awarding a substantial shipbuilding contract to a Chinese state-owned shipyard. Geloso suggests that legitimate national security concerns, such as data encryption and storage issues raised by critics of the BC Ferries-China deal, can be adequately addressed through proper vendor vetting processes without resorting to broad protectionist policies.
The Broader Economic Impact
The Montreal Economic Institute study concludes that the Buy Canadian policy will likely result in costlier projects, inferior infrastructure quality, and ultimately make Canadians worse off financially. As the rules expand to cover smaller contracts later this year, the economic consequences could become even more pronounced, affecting a wider range of government projects and services.
Geloso emphasizes that protectionist procurement policies create a false sense of security for domestic industries while undermining their long-term competitiveness and innovation capacity. The study serves as a cautionary analysis of how well-intentioned policies designed to support Canadian businesses may ultimately impose significant costs on taxpayers and weaken the very industries they aim to protect.
