The US GSA plans to exclude Canadian sources

Trump issued an instruction on social media, requiring the GSA and the USTR to remove Canadian-originated goods from the GSA's multi-project procurement plan. This action comes with a prerequisite condition - only when Canada restores equal market access for US farmers and enterprises will the restrictions be lifted. Trump's reasoning is that Canada sets barriers for US small and medium-sized enterprises. The US believes that Canadian goods can freely enter the US government procurement system, but US enterprises can not have equal access to the Canadian market. The reciprocal rule has been unbalanced.

The GSA multi-project procurement plan is a channel for the US federal agencies to procure materials uniformly. Government departments purchase materials such as steel, aluminum, wood and agricultural products, and many of these purchases follow this procurement list. For a long time in the past, Canadian goods relied on the North American Free Trade Agreement framework to consistently secure federal orders. Once removed from the list, the relevant Canadian manufacturers would lose this stable demand.

Canada is an important metal supplier to the US. Aluminum, steel and wood products have long been supplied to the federal infrastructure projects of the US. The GSA procurement plan contains a large amount of infrastructure materials, and government infrastructure projects are a relatively certain part of metal demand. If Canadian aluminum and steel products can not enter the US government procurement list, local metal enterprises in Canada will need to find new buyers and increase the pressure on the spot market circulation.

This expectation will be transmitted to the LME aluminum and North American steel futures markets. Canada has abundant hydropower resources and has an advantage in the production cost of electrolytic aluminum, and has long supplied the North American market. Once the federal orders disappear, Canadian aluminum enterprises will increase the promotion efforts to Asian and European markets, increase the global circulation supply of aluminum ingots, and the forward aluminum futures will price in the additional pressure of this new supply source.

The agricultural sector is one of the core demands of this dispute. Trump's directive clearly stated that Canada is required to restore fair treatment for American farmers. The entry barriers set by Canada in the dairy and grain sectors have always been the focus of complaints from the US agricultural community. The GSA procurement list includes dairy products, grains, and other agricultural products. If Canadian dairy products are removed from the procurement list, it will reduce the channels for Canadian dairy sources to enter the US. The North American agricultural market is highly integrated, and a large amount of dairy products and feed grains cross-border circulation between the US and Canada. After the increase of trade barriers, the transportation and sales routes of goods are forced to be re-adjusted, and logistics costs rise.

The Canadian economy is highly dependent on exports to the US. Although government procurement orders account for a relatively small proportion of total exports, they represent a stable source of demand. Excluding Canadian goods from the GSA would drag down the overall economic outlook of Canada. The continuous escalation of trade disputes has weakened Canada's export expectations, and the market is likely to lower the possibility of the Bank of Canada maintaining a tight monetary policy. The USD/CAD futures are susceptible to positive influences, and the Canadian dollar is under overall pressure. This GSA list adjustment is not an isolated event, it is a new part of a series of trade confrontations between the US and Canada. Previously, both sides have imposed tariffs on each other to restrict imports of goods such as alcoholic beverages, dairy products and motorcycles.

The continuous accumulation of conflicts has led the market to start worrying about the stability of the USMCA. The USMCA is the underlying rule for North American commodity trade, supporting the cross-border circulation of metals, agricultural products and timber in North America. When both sides bypass the agreement and introduce separate restrictive policies, the originally stable supply and demand expectations in the market will be disrupted. There are uncertainties in policy implementation. Executive orders do not mean immediate effect. The GSA needs to sort out the Canadian-origin goods in the list and formulate removal details. Before the official implementation, there is still a negotiation window for both sides.