The High Price of Protectionism: Why 'Buy Canadian' Policies Burden Taxpayers
Each year, Canadian governments allocate tens of billions of dollars to public procurement, a sector representing over 13% of the national economy. Even a modest percentage increase in these expenditures could translate into billions more shouldered by taxpayers, highlighting the critical need for fiscal prudence.
The Role of Competition in Cost Control
In an era marked by rising American protectionism, governments are increasingly embedding preferential purchase clauses in public contracts. However, this approach is ill-advised when scrutinized against available economic data. Empirical research consistently demonstrates that competition is a key driver in controlling costs.
For instance, a study from the National Bureau of Economic Research found that in U.S. transport contracts, each additional bidder correlates with an average cost reduction of 8.3%. Similarly, an analysis of over 1.3 billion calls for tender in Brazil between 2015 and 2018 concluded that greater participation leads to a better balance between costs and social benefits.
The Costly Consequences of Preferential Policies
Conversely, preferential purchase policies are linked to measurable cost escalations. In California, a 5% preference granted to local firms for specific public projects resulted in total estimated cost increases ranging from 1.4% to 3.6%, as documented in studies published in the Journal of Public Economics and the American Economic Review.
Applied to the Canadian context, a comparable measure would have increased infrastructure spending by $4.8 billion to $12.2 billion in 2021 alone, based on available data. This translates to an estimated additional cost of $124 to $320 per Canadian for that single year, underscoring the tangible financial impact on households.
Real-World Implications for Public Funds
These figures are not merely abstract statistics; they represent real public funds that could otherwise be invested in essential areas such as:
- Healthcare services and facilities
- Education programs and infrastructure
- Debt reduction initiatives
Proper management of public funds is paramount, yet protectionist policies often undermine this principle. Some advocates argue that extra costs are offset by the creation of quality jobs, but studies refute this claim.
For example, research from the National Bureau of Economic Research estimates that 'Buy American' clauses incurred a net cost exceeding $111,500 per job. Even when factoring in potential benefits like job creation and tax revenues, the cost per subsidized worker remains in the six figures, imposing a steep tax burden that hampers job growth elsewhere in the economy.
Long-Term Effects on Competitiveness
The reduction in bidders associated with public procurement protectionism also yields indirect negative effects. A less competitive business environment diminishes entrepreneurial incentives to innovate, reduce costs, and enhance quality. Over time, this erosion of competitiveness weakens Canadian firms on the international stage, potentially stifling economic growth and innovation.
Decisions regarding public procurement carry significant budgetary consequences. The available data clearly indicate that reduced competition tends to inflate costs and diminish efficiency, whereas increased competition fosters lower costs and superior outcomes.
An open and transparent procurement process serves taxpayers effectively, while protectionism in public procurement produces the opposite effect. With billions of dollars at stake, the only prudent course is to maximize the efficiency of every government dollar spent.
Vincent Geloso is a senior economist at the Montreal Economic Institute, specializing in economic policy analysis.
