Cross-Border Markets: Evaluating the Effect of U.S. Domestic Content Requirements on the U.S.-Canada Economic Partnership

WSHDC-RFP-004

September 15, 2017

Submitted by

The Trade Partnership 1701 K Street, NW Suite 575 Washington, DC 20006 1

EXECUTIVE SUMMARY

This study examines the effect of U.S. domestic content requirements on the U.S.-Canada economic partnership. We examine the impacts by conducting in-depth interviews with officials at companies with significant cross-border trade where domestic content requirements do (e.g., Buy America or Buy American rules) or could (e.g., proposed rule requiring U.S. steel in pipelines) shape supply chains. We also spoke to U.S. government agencies whose procurement is subject to such rules. We found:

U.S. domestic content requirements can impact U.S. companies by limiting sourcing options and increasing product costs, both of which negatively impact U.S. jobs and competitiveness. • Buy America requirements can prevent companies from purchasing some inputs from preferred suppliers, even if few alternative U.S. suppliers exist. • Many U.S. manufacturing jobs exist in spite, not because, of domestic content requirements. • Domestic content requirements can create additional compliance costs for companies selling similar products to both commercial and federally funded projects. • Taking additional steps to comply with domestic content requirements can increase the price of goods significantly without leading to a similar increase in U.S. jobs.

Proposed domestic content changes that could prevent companies from sourcing from Canada would disrupt existing supply chains and harm many U.S. businesses, particularly in the short term. • The current inability of U.S. producers to supply key materials (e.g., aluminum) makes whole industries reliant upon imports from Canada. • Extensive co-production occurs between U.S. and Canadian facilities, meaning that some products cross the border multiple times before final sale. • Imposing new or more restrictive domestic content requirements between the United States and Canada could interrupt longstanding manufacturing processes and threaten jobs and investments in both countries.

Government agencies impacted by U.S. domestic content requirements typically procure goods and services from companies that are longstanding suppliers and know what is expected of them, so the compliance burden falls on contractors while the extra cost burden falls on (unknowing) taxpayers. • Contracting authorities view compliance with Buy America requirements as a “standard operating procedure” because an industry has grown up specifically to meet them. • Requests for domestic content waivers are rare since engineers and contractors design projects with the rules in mind. • Following the “well worn” path of using the same designs, materials, and suppliers can slow projects and increase their costs, but in ways that are impossible to quantify. • Failure to obtain a Buy America waiver in instances when it is necessary can cost local agencies significant amounts of time and money. • New programs in several states now allow local projects to avoid rules such as Buy America, but there is minimal evidence that such opportunities are being utilized.

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I. INTRODUCTION

For nearly 85 years, the United States has maintained “Buy America” and “Buy American” programs requiring that certain Federal and/or state or local government funded products or purchases meet domestic content requirements.1 In certain limited cases, local content requirements can be waived.2 These requirements have been amended and adapted over time. 2017 has seen a number of new proposals that would extend domestic content preferences, either de jure (e.g., proposal to require U.S. “melted and poured” steel for domestic pipeline projects) or de facto (e.g., Section 232 national security investigations that could prevent imports altogether).

Given the popularity of domestic content proposals and their growing prominence in political rhetoric in 2017, one might assume that ample evidence existed substantiating the benefits of such provisions, or at least the limited costs. Yet few studies solidly quantify the benefits or costs of domestic content policies. When asked about the impacts on them, companies and government procurement agencies alike generally can provide anecdotal – or at least hypothetical – examples of why such programs may increase costs, but few can provide any data that could be used to quantify overall impacts. The reason is quite simple: neither companies nor agencies have an incentive to collect or analyze the information.

For contracting agencies, the Buy America rules are always back-of-mind: engineers design projects using only readily sourced materials that comply; contractors submit bids using only those compliant materials, and agencies only select winning bids from the pool of proposals that meet the domestic content requirements. As a result, agencies do not consider if a project could be designed more efficiently; built more cost-effectively with other materials, or finished sooner.

Companies similarly are not incentivized to “think outside the box” about ways to deliver low-cost, high-value results for projects subject to federal funding restraints. Companies compete in one market for projects subject to content requirement rules, and in a different market for commercial projects. Even when companies could use imported materials to complete projects faster or in a more cost-effective manner, they do not bother to submit a bid that would include those inputs.

In each case, reviewing or submitting non-compliant bids would be a waste of time and resources. So while many can give examples of why rules likely raise costs, actual quantification is rare. This research confirmed past research, by The Trade Partnership and others, of the difficulties associated with quantifying the impacts of U.S. domestic content requirements. As far back as 2001, respondents to surveys about Buy America’s impact yielded the conclusion “Since this regulation has been around so long and all vendors are familiar with the requirements, it’s really not a problem or an issue.”3 A 2008 U.S. Government Accountability Office (GAO) report on federal highway funding found that no reviewed studies attempted to quantify the costs of Buy America program requirements. A Federal Highway Administration (FWHA) report identified major potential costs, such as “higher iron and steel prices, higher overall project costs, reduced bidding competition, and project delays,” but did not attempt to quantify them. In a survey of state Departments of Transportation (DOTs), five of 51 respondents said “the Buy America program factored into their decision to use nonfederal funds” for specific projects.4

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More recently, the FHWA requested comments on two proposed nationwide Buy America waivers in late 2016.4 The request included the following question: “Does your agency or company track costs associated with the administrative or compliance efforts associated with the Buy America requirements?” DOTs from 15 states answered the question directly, but not one reported tracking specific costs. Among the 14 agencies that directly answered the question, none responded yes.5

Several reports released in 2017 attempted to quantify overall costs (as opposed to company- specific costs). One study found that returning potential savings from higher government purchases of imports in the form of a tax cut could generate $22 billion in economic activity and support over 300,000 net jobs, but job losses in many manufacturing sectors.6 Another study showing U.S. metro cars cost 34 percent more than foreign metro cars on average concluded “Buy America policies almost certainly contribute to higher infrastructure costs in the U.S., but it is hard to gauge just how much.”7 Finally, a 2017 Congressional Research Service report on Buy America’s effects found: “Empirical evidence on the economic benefits or costs of domestic content laws is largely lacking.”8

Given the constraints to quantifying the costs of U.S. domestic content requirements, this report focuses on agency and company case studies affected by local content restrictions in four ways:

• Companies impacted by existing U.S. domestic content requirements; • Companies potentially impacted by proposed U.S. domestic content requirements; • Companies with extensive U.S.-Canada co-production at risk of supply chain disruptions, and • Agencies impacted by existing U.S. domestic content requirements.

Each case study is based on interviews with individuals at the contracting agency or company. Interviewees held a number of roles related to supply chains, procurement, operations, engineering, sales, compliance, communications, and public affairs. For most company case studies, multiple employees across functions played a role in collecting the information presented. The conclusions reflect information obtained from available literature, the profiled companies and contracting agencies, as well as others that agreed to interviews only on background.

1 “Buy American” laws and provisions typically regulate direct federal government spending (e.g., The Buy American Act of 1933, Trade Agreements Act, Berry Amendment). “Buy America” laws and provisions typically regulate indirect federal government spending, such as grant funds to state and local governments (e.g., many relating to transportation spending). They often define what it means to be produced or manufactured in the United States in different ways. 2 For example, Buy America requirements can be waived if it is determined that the purchase meeting the restrictions would be inconsistent with the public interest, that the materials are not produced in the United States in sufficient quantities or of a satisfactory quality, or that the inclusion of domestic materials will raise the cost of the overall project by more than 25 percent. 3 Transit Cooperative Research Program, Legal Research Digest, “Guide to Federal Buy America Requirements,” September 2001, http://onlinepubs.trb.org/onlinepubs/tcrp/tcrp_lrd_17.pdf 4 See for example U.S. Government Accountability Office, “Federal-Aid Highways: Federal Requirements for Highways May Influence Funding Decisions and Create Challenges, but Benefits and Costs Are Not Tracked,” GAO-09-06, December 2008, http://www.gao.gov/assets/290/284235.pdf 5 “Buy America Nationwide Waiver Notification for Commercially Available Off-the-Shelf (“COTS”) Products with Steel or Iron Components and for Steel Tie Wire Permanently Incorporated in Precast Concrete Product,” https://www.regulations.gov/docket?D=FHWA-2016-0028 6 Peter B. Dixon, Maureen T. Rimmer, and Robert G. Waschik, “Macro, Industry and Regional Effects of Buy America(n) Programs: USAGE Simulations,” April 2017, http://www.copsmodels.com/ftp/workpapr/g-271.pdf 7 Philip Rossetti, Jacqueline Varas, and Brianna Fernandez, “Buy America Regulations May Raise Cost of Subsidized Infrastructure,” July 2017, https://www.americanactionforum.org/research/buy-america-regulations-may-raise-cost-subsidized-infrastructure 8 Congressional Research Services, “Effects of Buy America on Transportation Infrastructure and U.S. Manufacturing: Policy Options,” July 2017, https://fas.org/sgp/crs/misc/R44266.pdf

4 III. LIST OF CASE STUDIES (SEQUENTIAL)

Companies impacted by existing U.S. domestic content requirements

Evraz North America Heico Wire Group Ontario Trap Rock

Companies potentially impacted by proposed U.S. domestic content requirements

Molson Coors Dana Incorporated Welded Tube

Companies with extensive U.S.-Canada co-production at risk of any supply chain disruptions

Fiat Automotive General Electric

Agencies impacted by existing U.S. domestic content requirements

Ohio Department of Transportation Multnomah County (Oregon) Bridge Section Secondary Research: States Introduce Programs to Increase Local Procurement Flexibility (Slowly)

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Rolling mill at Evraz Oregon Steel in Portland; Photo credit: Evraz North America

Company: Evraz North America Evraz North America is a leading producer of engineered steel Headquarters: Chicago, Illinois products for rail, energy and industrial end markets. Headquartered in Chicago, Illinois, Evraz has six production Key points sites in the United States (Portland, Oregon; Pueblo, Colorado) and Canada (Regina, Saskatchewan; Calgary, Camrose, and Red • Evraz Oregon Steel’s jobs exist Deer, Alberta). Evraz employs about 1,500 people in the United in spite, not because, of Buy States and 1,800 in Canada, with jobs at one facility depending America rules and it estimates greatly on the success of others. that 60 more workers could be hired if steel products using Take Evraz Oregon Steel in Portland, which employs about 400 Canadian slab qualified for people and is one of the only plate mills in the western United federally funded projects. States. The facility produces steel plate and coil that are sold for a wide variety of uses, including for military and defense • Extending Buy America-type purposes, U.S. shipbuilding, and railcar manufacturing. In some rules for “melted and poured” cases it is exported back to Canada. Evraz Oregon Steel can steel to private pipelines would produce steel plate up to 11-feet wide and 5-inches thick and have negative impacts on coil up to 10-feet wide and 5/8-inches thick. Evraz, both in the United States and Canada, and on There are no steel mills west of the Rocky Mountains that Evraz’s U.S. customers. produce the steel “slabs,” and transportation costs from slab producers in the eastern United States can be prohibitively • Since there are no U.S. steel high for shipping 25-ton steel slabs. As such, nearly all of Evraz slab makers west of the Rocky Oregon Steel’s products – and the corresponding jobs – rely Mountains, Evraz Oregon upon slab imported from Evraz’s facility in Regina, Steel’s products rely upon steel Saskatchewan or from overseas. slabs imported from Canada.

6 U.S. domestic content requirements such as the American Iron and Steel (AIS) provisions in Buy America hurt Evraz Oregon Steel’s ability to compete for projects and grow its Oregon workforce. Because the slabs are “melted and poured” in Canada, Evraz Oregon Steel’s derivative products are ineligible for use in many federally funded projects, including local projects such as recent roadwork on Interstate 5 near Portland. Evraz’s jobs in Portland exist in spite, not because, of Buy America rules. Evraz believes it could hire 60 more workers in Portland if “Buy America” steel products using Canadian slab qualified for federally funded projects.

Evraz is the largest producer of large diameter pipeline pipes and the only company in North America making both steel and such pipes. As such, Evraz would be uniquely impacted by extending the AIS provisions for federally funded projects to private pipeline projects, as proposed by the Trump administration. Evraz believes any effort to restrict Canadian pipe from private projects would harm investments in both Canada and the United States.

This holds true for Evraz’s mill in Colorado, which manufactures oil drilling pipe and other downstream products from 100 percent U.S.-produced steel. The negative impacts on Canadian operations would more than offset any potential gains at Evraz Rocky Mountain Steel. Since investment decisions are made on a North America-wide basis, rules meant to promote U.S. pipe manufacturing instead could force the cancellation of planned investments in the United States.

For the oil and gas industry in particular, the border between the United States and Canada is increasingly “thin.” For example, Evraz produces pipeline pipes in both countries; its customers lay pipe in both countries, and their customers transport oil from western Canada to refineries in Indiana and Illinois.

National Fuel Gas Company – an Evraz pipeline customer based in Williamsport, New York – reported that access to Canadian pipeline pipe was critical for increasing the number of capable sourcing options. Only a quarter of its steel pipe comes from Canada, but an inability to purchase such pipe likely would lead to higher prices and less availability, particularly in the short term. It could take 18 months or more to qualify a new supplier and order pipe for a planned project start, so cutting off supply from Canadian producers like Evraz could require the company to delay project starts and buy from lower-tier suppliers without a proven track record of high-quality, on-time deliveries.

Policies that minimize impediments to trade between the United States and Canada support jobs up and down the supply chain in both countries. However, the opposite is also true: policies that create additional barriers to bilateral trade hinder job growth at Evraz in both the United States and Canada.

“We know that Buy America policies already reduce the number of steel manufacturing jobs we have in Portland. Extending them to private pipelines could have a similar impact in Pueblo.” - Brian Kristofic, Director – Trade and Government Affairs at Evraz North America

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EVRAZ NORTH AMERICA’S INTEGRATED U.S. AND CANADIAN PRODUCTION

Headquarters Electric arc furnaces (and other operations) Recycling centers Steel product manufacturing facilities

Recycling Scrap from Minnesota and nearby U.S. states makes its way to a recycling facility North Dakota, one of 16 Evraz recycling facilities in the western United States and Canada. Two out of every three pounds of steel in the United States is manufactured from recycled ferrous scrap.

Steelmaking Scrap metal is converted to liquid steel in two electric arc furnaces (EAFs) in Regina, Saskatchewan, and then cast into slabs. Some slabs are rolled into coil. Making steel with EAFs emit up to 79% less CO2, and it is infinitely recyclable. Evraz’s steel contains 95 percent recycled-metal content.

Slab Rolling Line Pipe Manufacturing Steel slabs are rolled into plate in Portland, Steel coil is turned into line pipe for oil and Oregon. About half of the plate’s value-added natural gas in Camrose and Red Deer, comes from the conversion process. Alberta.

Customers Customers Evraz Oregon Steel supplies local employers Evraz Camrose and Red Deer supply line pipe like railcar manufacturer Greerbrier for oil and gas transmission lines laid in both Companies and shipbuilder Vigor Marine. the U.S. (e.g., Illinois, Wisconsin) and Canada.

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Company: Heico Wire Group The Heico Wire Group, based in Irwindale, California, includes Headquarters: Irwindale, both Davis Wire and National Standard. It is the largest California consumer of wire rod in western North America and employs 650 people in plants in California, Washington, Oklahoma, and Key points Michigan. It is a subsidiary of The Heico Companies LLC, a holding company based in Chicago, Illinois with a diversified • Buy American and similar rules portfolio of over 35 businesses involved in manufacturing, can limit sourcing options, construction and industrial services. raise costs, and create compliance challenges related Heico purchases the vast majority of its raw materials – wire to inventory. rod – from domestic U.S. producers, but generally purchases 25 to 30 percent from international sources. In Canada, it • From a quality and ease-of- sources rod from Ivaco Rolling Mills, another Heico Companies business standpoint, sourcing subsidiary, and has purchased rod from non-affiliated Canadian from Canada is “basically the companies as well. same” as sourcing from American mills. According to Bob Moffitt, Vice President of Purchasing for Heico Wire Group, the company considers a range of • 25 to 30 percent of Heico’s raw advantages and disadvantages when deciding whether to buy materials – wire rod – come domestic or imported wire rod. In these considerations, Heico from foreign sources, including views sourcing from Canada as the same as sourcing from a sister company in Canada. domestic mills: prices are similar, small shipments are available by rail, there is minimal damage from overseas transport, and the company does not need to deal with distance issues such as time zones, languages, and travel times. Sourcing from Canada increases Heico’s supplier choices, but Buy America rules take that choice away.

9 Lower prices are the biggest advantage of sourcing wire rod from outside of North America, despite the fact that imports from overseas require larger purchase orders, which increase inventory costs, and are more likely to be damaged, meaning Heico needs to write off a lot more product as unusable. Savings often result from “blending” material costs, or using a mix of imported and domestic materials to bring down the average cost. For example, if a given amount of imported wire rod costs $100 and the same amount of domestic rod costs $200, the average cost can be lowered to $150 – making the products manufactured from the steel much more competitive. Once again, Buy America rules can eliminate those potential savings

The benefits of blended costs are particularly acute for products made from low- grade steel. Heico manufactures aluminum conductor steel-reinforced cable (ACSR), the structural component of a type of high-capacity, high-strength stranded conductor used in overhead power lines. Materials for the highly technical product tend to be the same price regardless of the source, so potential benefits from cost blending are minimal. However, Heico also manufactures wire mesh for reinforcing concrete. On a technical level, mesh can be made from the lowest-cost (i.e., imported) wire rod, but Buy America rules result in using some of the more expensive materials instead.

Finally, Heico faces challenges associated with storing, tagging, and marking products based on the various U.S. regulations, including Buy America. Certain Heico products may be manufactured from:

1) U.S. steel that is drawn, galvanized, and woven in the United States; 2) imported steel that is drawn, galvanized, and woven in the United States, or 3) imported galvanized wire that is woven in the United States.

Additionally, since multiple coils are welded together during the drawing process, it is possible for a domestic coil to be welded to an imported coil – producing a continuous wire from both U.S. and foreign steel. Heico can ensure Buy America compliance for customers that request in advance without any issues. It is able to trace the steel source and manufacturing through its quality assurance system to prove compliance, as well as provide mill test reports. Yet it is only now beginning to address the costs associated with compliance for its general inventory.

In short, rules such as Buy America limit Heico’s potential sources for high-quality, highly technical materials from Canada and low-cost, commodity-grade materials from other countries, while also driving up compliance costs. All of these contribute to higher costs for commercial and taxpayer- funded projects alike.

“We prefer to buy U.S. steel for multiple reasons, but made a strategic decision years ago to import 25 to 30 percent of our materials. Buy America rules can raise material costs, compliance costs, or both, with the end result being higher prices and less competitive products.” - Bob Moffitt, Vice President of Purchasing for Heico Wire Group

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Ontario Trap Rock quarry in Sault Ste. Marie, Ontario; Photo credit: Ontario Trap Rock Company: Ontario Trap Rock Ontario Trap Rock (OTR) is a specialty aggregate quarry located Headquarters: Sault Ste. Marie, near Sault Ste. Marie, Ontario. Its 1,000-acre site contains more Ontario, Canada than 80 million tons of diabase, a hard and durable rock used for rail ballast, rock wool insulation, high-quality asphalt, Key points concrete and industrial mineral applications.

• Chicago Transit Authority paid Given its location and high transportation costs for heavy up to $3 million extra for rail materials such as aggregates, OTR is a competitive supplier to ballast on a single project the Great Lakes region. Its serves customers – typically Class I, because of Buy America rules. Regional, and Shortline Railroads in Illinois, Indiana, Michigan, and Ohio – through 11 U.S. ports (see map). OTR is a • Crushing Canadian rock in the particularly important supplier for those states, none of which United States to meet Buy has quarries able to provide similar diabase aggregates. America rules adds costs, but not jobs. The Federal Railroad Administration (FRA) and the Federal Transit Authority (FTA) consider OTR rail ballast (i.e., the stone • Buy America rules make rail under and between rail ties) “manufactured products” for Buy projects in the Great Lakes America purposes. So freight and transit customers such as region more expensive, though Amtrak and Norfolk Southern cannot use imported rail ballast no local quarries can provide on federally funded projects without a Buy America waiver. As the materials. a supplier to either general contractors or sub-contractors, OTR does not have the ability to request a Buy America waiver itself. At the same time, customers that might request a waiver on its behalf have said the project would be complete before a waiver decision could be made.

To comply with Buy America rules, OTR has shipped larger rock to the United States for processing into the final product, but this has major cost impacts. After accounting for additional transportation costs, crushing and screening costs, and extra waste, the price increases by as much as 50 to 60 percent. A large portion of this increase is due to the fact that about 25 percent of crushed rock is unusable.

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GREAT LAKES SHIPPING ADVANTAGES DELIVER LOW-COST MATERIALS NOT OTHERWISE AVAILABLE

Ontario Trap Rock Mine U.S. Ports Served

For example, OTR provided 100,000 tons diabase for projects in Detroit in 2015 and 2016. Crushing the rock in Detroit instead of in Canada added about $1.5 million in cost for the same amount of finished product from the same quarry. Importantly, the extra spending does not create additional U.S. jobs; it just changes the tasks. The same workers that normally would handle the finished product from Canada also would be responsible for operating the crushing equipment used to make Buy America compliant product.

Despite the increased cost of U.S. processing, OTR’s prices in areas like Detroit remain competitive because materials otherwise would need to be shipped from quarries in central Wisconsin or Missouri. Water transportation across the Great Lakes has both financial and environment advantages over transportation by rail or truck. Shipping costs via rail from Wisconsin can be up to quadruple the price of vessel transportation from Bruce Mines, Ontario to Detroit.

Similarly, the Chicago Transit Authority (CTA) required about 200,000 tons of materials for its Red Line South Reconstruction Project several years ago. It ultimately shipped in material from Georgia and South Carolina that could have been purchased from Canada for as much as $15 per ton less. In other words, CTA paid an up to $3 million extra for the rocks between and under the rail ties because of Buy America provisions.

Both the Detroit and CTA examples show that Buy America rules can have a significant impact on the cost of publicly funded projects without any corresponding jobs benefits. Paying more than necessary for some projects limits agencies’ ability to move ahead with other projects that could boost the local economy.

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The MillerCoors brewery in Colorado; Photo credit: Molson Coors

Company: Molson Coors Molson Coors, headquartered in Denver, Colorado, has a Headquarters: Denver, Colorado brewing heritage that goes back over 140 years in the United States. The company recently became the sole owner of Key points MillerCoors and solidified its position as the only U.S.-based global brewer. Molson Coors has nearly 8,400 employees in the • An ongoing “Section 232” United States and 18,000 worldwide, and is responsible for aluminum investigation could iconic American brands such as Coors Light and Miller Lite as lead to increased costs for well as national craft brands such as Blue Moon and Molson Coors – and ultimately Leinenkugel’s. Like many American brewers, Molson Coors its customers – despite no packages and sells a large share of its beer in aluminum cans. national security applications for cansheet-grade aluminum. Because the United States does not produce enough primary aluminum to meet the large and growing demand to make • Workers at plants throughout cansheet, many brewers rely on global supply chains for key the United States play a role in raw materials. When it comes to primary aluminum, Canada is turning primary aluminum far and away the top source, accounting for approximately 66% from Canada into beer cans for of U.S. primary aluminum imports each year since 2008. Molson Coors. Just how much canned beer is sold in the United States? • Because the United States does According to the Beer Institute, American brewers sold 107.7 not produce enough primary million barrels of beer in cans in 2016, which accounted for aluminum to meet growing 51.9 percent of total U.S. beer sales by volume. That works out demand for cansheet, many to about 35.6 billion 12-ounce cans – or nearly 150 cans of brewers rely on imports of key beer for every U.S. adult over 21 years old! And the importance raw materials from Canada. of beer cans has grown significantly since 2008, when domestic brands sold the equivalent of 34.0 billion cans of beer and accounted for 48.2 percent of total U.S. sales.

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Source: Beer Institute, National Packing Mix Report

For Molson Coors brands such as Coors Light and Miller Lite, can volume (as a percent of annual sales) is higher than the national average. Considering that aluminum represents the largest single cost in a can of beer, the price and supply of aluminum are very important to Molson Coors.

Molson Coors illustrates both the importance of Canadian aluminum for American brewers and the complexities of the supply chain. Canadian aluminum is key but the company is frequently several steps removed from any direct importing. Instead, imported primary aluminum ingots are combined with ingots made from recycled used beverage cans (UBCs) before further processing at U.S. facilities for companies such as Novelis Corporation and Ball Corporation (see graphic).

Aluminum cansheet tends to be highly recycled: more than 75 percent of the input material of cansheet comes from recycled UBCs, though some of those also come from Canada. Amazingly, a recycled UBC may be back on the shelves as a new product in as little as 60 days. The primary aluminum plays a key role in ensuring the technical integrity of new cans, with some cans components requiring a greater share of primary aluminum than others.

The U.S. government recently launched a “Section 232” investigation into the aluminum industry that could impact U.S. beverage producers and other aluminum users, supplier countries like Canada, and ultimately consumers. The Section gives broad discretion to levy tariffs and other trade restrictions if imports are found to undermine domestic aluminum production in a way that hurts national security. Cansheet and the primary aluminum used to make it have no national security applications, but the wide scope of the investigation means remedies (i.e., tariffs or quotas) designed to force companies to buy American aluminum could increase the cost of can sheet.

So what would happen if the Administration imposes trade actions on imported primary aluminum? On a technical level, it is not yet possible to produce cansheet from 100% recycled UBCs. New smelters might emerge, but high-volume, low-value producers such as cansheet manufacturers

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FROM BAUXITE TO BEER CAN: COMPANIES AND PLANTS THAT PLAY A ROLE IN THE SUPPLY CHAIN

Rio Tinto Aluminum transforms bauxite into alumina, then alumina into primary aluminum ingots in facilities in Saguenay, Quebec. Novelis recycles used beverage cans (UBCs) and casts ingots for cansheet in Berea, Kentucky and Greensboro, Georgia. Novelis manufactures cansheet from a mixture of recycled UBCs and primary aluminum in Russellville, Kentucky and applies coatings to rolled aluminum sheets for can lids in Warren, Ohio. Ball Corporation manufactures and labels cans in Golden, Colorado. Molson Coors brews beer and fills the cans in Golden, Colorado for distribution throughout the United States and beyond.

would be competing with high value-added producers for limited quantities of domestic primary aluminum. The cost of cans for end users like Molson Coors would likely increase, requiring tough decisions related to pricing, packaging, and other operational issues.

Though an outright ban on Canadian aluminum seems unlikely, less draconian steps could still result in higher prices and leave tens of millions of people crying in their (now more expensive) beer.

“When looking at the cost of a can of beer, the aluminum is the largest percentage of that total cost. Combined with the fact that cans represent the majority of beer sales, any impact to the cost or supply of aluminum is tremendously significant to the company.” - Global Senior Category Manager, Metals at Molson Coors

15 Dana manufactures oil coolers (pictured above) in the United States with specialized materials from Canada.

Company: Dana Incorporated Dana Incorporated is a global provider of high technology Headquarters: Maumee, Ohio driveline, sealing, and thermal-management products. Founded in 1904, today the Maumee, Ohio-based company Key points employs about 29,000 workers in 34 countries, including about 7,500 in the United States and 780 in Canada. Its customers • Cutting off access to Canadian include virtually every major vehicle manufacturer as well as materials would negatively industrial equipment producers. impact Dana’s manufacturing workers in Michigan and Canada plays an important role in Dana’s global manufacturing Tennessee. capabilities: it produces automotive thermal acoustical protective shields in Chatham, Ontario and heat exchangers • U.S. manufacturing jobs at such as oil coolers, as well as materials used to make such Dana rely on materials created products, in Cambridge, Mount Forest, and Oakville, Ontario. in, and imported from, its The heat exchanger facilities were part of Long Manufacturing, Canadian facilities. which was acquired by Dana in 1998, and are now part of Dana’s Power Technologies Products Group. • Canada plays an important role in Dana’s global R&D and Dana imports certain aluminum materials and components manufacturing capabilities. from Canada. One such product, plated clad aluminum brazing sheet that was developed internally at Dana’s Oakville technology center, is very specialized and not available from domestic U.S. manufacturers. The proprietary “fluxless” process is considered a competitive advantage in the design and manufacturing of many of the heat exchanger products that Dana supplies allowing Dana to provide exceptional value to its end customers.

16 While this research breakthrough occurred in Canada, there are significant benefits for Dana’s U.S. operations as well as other U.S. suppliers. For Dana, these specialized materials are used to manufacture automotive components at its facilities in St. Clair, Michigan and Paris, Tennessee, as well as a Dana facility in Mexico. Products from these facilities are sold to OEMs in the United States, Canada, and Mexico as well as exported throughout the world.

If Dana could not import these materials from the Canadian producer it might be required to discontinue the business entirely or shift production of the downstream product to another country – and import the finished product. This would have negative impacts on Dana’s U.S. workers using the material to manufacture heat exchanger products in Michigan and Tennessee.

It is not just Dana’s downstream production that benefits from the imports from Canada. Dana purchases a significant volume of the raw aluminum from U.S. producers and exports it to Canada for the explicit purpose of making the brazing sheet for re-import. Those American aluminum suppliers also could be harmed if Dana either discontinued – or was forced to shift production – of this specialized product line.

Finally, these imports from Canada benefit Dana’s customers, which include virtually all major automotive OEMs in North America, and car owners themselves. The Canadian brazing sheet helps extend the life and improve performance of products responsible for cooling transmission oil, engine oil, and batteries. Everyone wins when auto parts last longer and operate more efficiently.

The brazing sheet is just one of Dana’s advanced technology projects with Canadian ties. Dana’s global research and development center for heat exchangers is located in Oakville, Ontario. Dana has a large group of dedicated and experienced researchers and development engineers which support development of new heat exchanger products that are manufactured in plants throughout Dana’s global network including the heat exchanger plants in Michigan and Tennessee. Many of the new products developed in Oakville are manufactured in the US plants.

Throughout its 100-plus year history, Dana’s focus on innovation has helped differentiate it from competitors through performance, materials, and processes. Some of these recent breakthroughs have occurred not just at Dana’s Canadian facilities, but also in collaboration with other Canadian companies, to the benefit of American workers up and down the supply chain.

“Essentially we operate in North America as part of a regionally integrated supply chain and so do our customers. We regularly move material and components between the United States, Canada, and Mexico. These products often cross the border several times before ultimately being sold to customer plants located in all three countries.” - Joseph Heckendorn, Director of International Trade at Dana

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Oil country tubular goods casing pipe; Photo credit: Welded Tube

Company: Welded Tube USA Welded Tube is an Ontario-based producer of steel pipe and Headquarters: Lackawanna, New tube that supplies both the Energy Tubular and Industrial York products market. It owns and operates five manufacturing and finishing facilities in Canada and the United States, including a Key points 109,000 square foot production facility on 45-acres in Lackawanna, New York that opened in 2013. The Lackawanna • Any new domestic content plant, just south of Buffalo, employs 150 workers and is requirements on pipes would capable of producing up to 350,000 tons of oil country tubular disrupt Welded Tube’s supply goods (OCTG) casing pipe tube annually. chain and negatively impact continued growth in New York. Currently, all the OCTG casing pipe rolled in New York is shipped back to sister plants owned by Welded Tube in Ontario • The jobs at Welded Tube’s for further processing and/or finishing. Only then can it be sold Lackawanna plant are wholly to customers in the United States and Canada who use this dependent on cross-border OCTG pipe for onshore drilling for oil and gas, making the jobs trade between the United at Welded Tube’s New York facility wholly dependent on cross- States and Canada. border trade between the United States and Canada.

• U.S.-Canada linkages extend The linkages between Welded Tube’s U.S. and Canadian throughout the company’s facilities extend throughout the supply chain, from materials material procurement, procurement to production to sales. production, and sales. Procurement – Welded Tube purchases steel coil from U.S. and Canadian based steel mills based on grade, size, price and availability. It generally sources coils from approved mills in Ohio, Michigan and Ontario, though it occasionally purchases from other U.S. sources as well. Essential to final processing,

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U.S. made pipe from Lackawanna is threaded with collars, protectors, and lubricants. Welded Tube’s Canadian facilities import these directly from U.S. suppliers.

Production – In addition to the Lackawanna plant, Welded Tube has four other pipe mills in its Concord, Ontario facility capable of producing 300,000 tons of pipes per year. The plants in Concord make Hollow Structural Sections (HSS), Mechanical, and Roll-Over Protective Structure (ROPS) structural pipes for both the U.S. and Canadian markets. Additionally, one mill is capable of supplying OCTG casing or green tubes as required when Lackawanna is unable to support the business needs.

The Lackawanna mill and the one mill in Concord manufacture OCTG pipe with the same diameter – 4.500 to 9.625 inches – but with a few differences. Most importantly, the New York plant can produce slightly thicker pipe for more demanding applications. Since its inception in September 2013, Lackawanna has already produced 1,000,000 pipes and recently added more crews to keep up with the growing demand of its products. Through recent investments at Lackawanna, casing pipe is now also sent to another Welded Tube facility in Port Colborne, Ontario for threading, augmenting the finishing capacity already in place at Welland. Welded Tube plans to continue expanding the Lackawanna property so it can finish and ultimately thread products there without sending them back to Canada.

Sales – Welded Tube sells its products to customers in both the United States and Canada, either directly or through distributors as in the case of OCTG. In the United States, OCTG pipe is generally sold for oil and gas drilling in Colorado, Wyoming, North Dakota, Ohio, Oklahoma, Pennsylvania, and West Virginia. In Canada drilling activity is confined to Alberta, Saskatchewan, and British Columbia. The company ships about 600 truckloads a month into the northeast United States and 100 railcars per month for destinations greater than 500 miles from its finishing facility in Welland, Ontario. Each truck load carries anywhere from 1,500 to 2,500 feet of pipe, depending on the diameter, whereas railcars hold four times this amount.

OCTG casing is not subject to any U.S. domestic content requirements. Should OCTG casing or other pipe products made by Welded Tube be subject to domestic content requirements, it would disrupt Welded Tube’s current supply chain and negatively impact Welded Tube’s continued growth in Lackawanna.

“There is already a commercial and historical preference for “domestically made pipe”; just no formal or legal provisions. Our customers consider both Canadian- and U.S.-made pipe to fit this description. Creating new barriers to trade between the United States and Canada would hurt our supply chain and be detrimental to our expansion plans at our Lackawanna facility.” - Jeff Hanley, Welded Tube's Vice President Sales, Energy Tubulars

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A Charger in production at the Plant in Ontario, Canada; Photo credit: FCA US

Company: FCA US LLC Chrysler Automobiles (FCA) is one of the largest Headquarters: Auburn Hills, automakers in the world based on total annual vehicle sales. Michigan The FCA North American operations (FCA US) are headquartered in Auburn Hills, Michigan. There the company Key points designs, engineers, manufactures and sells or distributes vehicles under the Chrysler, Dodge, ®, Ram, FIAT, and Alfa • Annually, Canadian plants Romeo brands, as well as the SRT performance designation. purchase $3.5 billion from the The company also distributes and parts and United States, while U.S. plants accessories. purchase $3 billion in parts from Canadian suppliers. FCA employs nearly 68,700 workers in the United States and Canada, including more than 49,000 hourly employees at 29 • The Toledo, Ohio-built Jeep manufacturing plants. Production in the two countries Wrangler and the Brampton, complements each other. The U.S. assembly plants are Ontario-built Dodge Charger dedicated to producing SUVs and trucks, while the Canadian demonstrate the importance of assembly plants exclusively produce minivans and large cars. U.S.-Canada trade for For example, the Jeep Wrangler, Jeep Grand Cherokee, and automotive supply chains. Dodge Durango are only produced in the United States, while the Chrysler Pacifica, Dodge Charger, and Dodge Grand • FCA’s production in the United Caravan are solely produced in Canada. States and Canada complements each other, with Extensive manufacturing operations in both the United States each country dedicated to and Canada result in large flows of intra-company, cross- producing certain models. border trade. Annually, the FCA plants in the United States purchase almost $3 billion in parts from Canada and the Canadian plants purchase almost $3.5 billion in parts from the United States. The company’s U.S.-Canadian trade is even higher when its Tier 1-4 suppliers in both countries are included.

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U.S.-CANADIAN CO-PRODUCTION IN ACTION

The U.S.-built Jeep Wrangler includes Cosma The Canadian-built Dodge Charger includes 3.6-liter stampings from Ontario; Goodyear tires from Pentastar engines from the FCA US Trenton Engine Ontario, and U.S.-built engines with content from Plant in Michigan and 8-speed transmissions from Canadian suppliers. the FCA US Plant in Indiana.

FCA US sourced over $250 million from Canadian FCA US exported over $700 million in engines and suppliers for the Toledo, Ohio-built 2- and 4-door transmissions from the United States to its Jeep Wranglers. Brampton, Ontario plant in 2016. Much of the cross-border trade is in parts and components, since assembly in one country often depends on parts manufactured in the other. Two examples of this cross-border manufacturing relationship would be the Jeep Wrangler and the Dodge Charger.

Jeep Wranglers have been produced in Toledo, Ohio, for more than 70 years. Among the Canadian parts and components incorporated into the Wrangler are Cosma (Magna) stampings and Goodyear tires, all sourced from plants in Ontario. In total, FCA US sources over $250 million in components from Canadian suppliers for the 2- and 4-door Wrangler. Additionally, U.S.-built engines installed in the Wrangler contain content from Canadian suppliers including Magna, Stackpole and Schaeffler.

Conversely, the Dodge Charger is built in Canada with a significant number of parts from the United States. The Charger is produced in Brampton, Ontario, alongside the Chrysler 300 and Dodge Challenger. The Brampton facility employs almost 3,800 workers and since 2005, it has produced more than 1.2 million Chargers, sold throughout the United States, Canada, and the world.

Chargers assembled in Ontario use numerous parts from U.S. plants, including 3.6-liter Pentastar engines from the FCA US in Trenton, Michigan, and eight-speed transmissions from the Company’s Kokomo Transmission Plant in Kokomo, Indiana. In 2016, FCA US exported over $700 million in engines and transmissions from the U.S. to Brampton for production of the three large sedans.

The inter-country flow of parts between the United States and Canada, as well as Mexico, has contributed to FCA’s success. Because of the U.S.-Canada Auto Pact, the U.S.-Canada Free Trade Agreement and finally, the North American Free Trade Agreement (NAFTA), FCA’s supply chain has become increasingly integrated across all three markets, making its vehicles more competitive in North America and globally. Any changes to the NAFTA that impede the free flow of vehicles and parts between the United States, Canada, and Mexico could adversely affect FCA, its suppliers, and the thousands of workers they employ across North America.

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A GE engine jet prepares for testing in Winnipeg, Manitoba, Canada; Photo credit: General Electric

Company: General Electric General Electric is an iconic American company with over Headquarters: Boston, 100,000 employees, 180 manufacturing sites, and 15,000 Massachusetts suppliers in the United States. GE exports about $20 billion annually, making it one of the largest U.S. exporters. Canada is Key points not just a top export market; it is a key part of GE’s integrated supply chain in North America. Overall, GE employs about • GE’s U.S.-Canada trade is 6,500 workers at its operations in Canada ranging from R&D significant, with intra-company and testing to manufacturing to sales to servicing. trade accounting for the majority of the $3 billion total. GE’s U.S.-Canada trade is significant: GE’s internal trade between the United States and Canada is about $3 billion. The • GE Aviation helps illustrate the majority of this trade was intra-company between GE benefits of integrated supply operations on different sides of the border. Yet these figures chains, with U.S. and Canadian barely scratch the surface of the importance of co-production facilities collaborating every taking place between the United States and Canada step from R&D to sales. GE Aviation helps illustrate the benefits of integrated U.S.- • Growing demand for GE Canada supply chains. Based in Cincinnati, Ohio, GE Aviation engines has meant significant has more than 80 locations in 12 countries that develop, investments at home and manufacture, assemble, repair, and overhaul jet engines for abroad, to the benefit of U.S. commercial and military applications. About 25,000 of GE and Canadian workers alike. Aviation’s 45,000 employees are in the United States, several thousand work at GE Aviation’s facilities in Canada.

All GE jet engines undergo final assembly in the United States. Much of this works takes place at manufacturing and final testing facilities in Evandale and Peebles, Ohio. Yet before they can go through final tests and be installed into aircraft, GE Aviation facilities in Bromont, Quebec and Winnipeg, Manitoba play a key role.

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GE AVIATION: U.S-CANADIAN COLLABORATION EVERY STEP FROM R&D TO SALES

Research & Development – GE engineers throughout the United States, along with colleagues in Bromont and other countries, participate in the R&D process for new models. Bromont in particular has a team working to advance the use of robotics in aviation manufacturing.

Testing – GE’s facility in Peebles tests for qualities such as thrust, fuel efficiency, and emissions, as well as an engine’s ability to ingest objects such as hail, dust, and even birds. The Winnipeg facility takes advantage of cold Canadian winters to test new models’ ability to endure the harshest weather conditions.

Analytics – GE’s Winnipeg testing center collects massive amounts of data that are analyzed in Milwaukee, Wisconsin. The insights into how engines withstand ice build-up – which rely on cross-border data flows – help guide future R&D.

Production – GE assembles engines in the United States from components manufactured domestically, from Canadian facilities like Bromont, as well as other countries.

Sales – GE engines may be exported to Canada directly or indirectly. GE “Passport” engines will be exported directly to Bombadier’s Canadian production facilities to power its forthcoming Global 7000 and Global 8000 business jets. Air Canada’s decision to purchase Boeing jets with GE engines represent indirect exports to Canada.

Support – GE also provides engine support services, both in the United States and abroad. For example, Air Canada signed a 20-year agreement for maintenance and repairs of the 122 LEAP-1B engines powering the Boeing 737 MAX

The Bromont facility specializes in manufacturing compressor components and other engine parts. In particular, it produces engines blades that are shipped to Ohio for final assembly. The Bromont facility also is home to a Global Robotics, Automation and Instrumentation R&D Centre, launched in 2013, that develops advanced robotic processes, software applications and intellectual property for export to GE Aviation facilities around the world.

The Winnipeg facility is home to GE’s Aircraft Engine Testing, Research and Development Centre, where all new engine models must undergo cold-weather testing. The six-year old facility’s specialty is ice certification testing, and throughout the process GE engineers capture high-speed photography to determine exactly how ice builds up on an engine's fan blades and spinner.

The collaboration between GE Aviation’s U.S. and Canadian operations exist throughout an engines’ product cycle. According to Karan Bhatia, VP of Government Affairs and Policy, GE “Integrated supply chains combine the relative strengths of each country to make the overall products more competitive, thus winning sales globally and growing jobs in both countries.”

That has been true of late: growing demand for GE engines has meant significant investments at home and abroad. In early 2017, GE Aviation announced $4.3 billion in U.S. investments, including building or upgrading plants in Alabama, Indiana, Mississippi, New Hampshire, and North Carolina. At the same time, it announced $1.1 billion in non-U.S. investments, including $238 million to modernize the Bromont facility. The Winnipeg facility received a $26 million upgrade in late 2015.

Yet competition to produce next-generation engines will only grow. Competitors in China and the European Union have both large internal markets and supply chains from which they can draw a varied range of skill levels and resources. Collaboration with Canada, as well as Mexico, is important for GE Aviation’s continued ability to compete globally.

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Interstate 90/Innerbelt Bridge in Cleveland; Photo credit: Chuck Crow, The Plain Dealer

Agency: Ohio Department of District 12 of the Ohio Department of Transportation (ODOT) is Transportation responsible for maintaining the Interstate transportation Projects: Repairs to Willow system in the Cleveland area. Oversight for roads and bridges Avenue Bridge; I-90 bridge means that ODOT works on many federally funded projects replacement subject to Buy America provisions. Outcome: No waiver granted; no waiver requested According to Randall Over, who recently retired after 18 years as the District Construction Engineer for ODOT District 12 (and Key points 23 years at ODOT overall), contracting agencies such as ODOT rarely have trouble meeting Buy America requirements – or • Buy America rules can slow even have a need to request Buy America waivers. There are down and/or increase project still potential costs, but longstanding project design and costs, but in ways that are construction processes make them impossible to quantify. impossible to quantify. From the contracting agency perspective, Buy America • Contracting agencies rarely ask compliance is not difficult because transportation projects for Buy America waivers have standard components that are sourced over and over. An because projects are designed industry exists to supply Buy America-compliant components to use readily sourced, and “the path is well worn.” Thus, if certain components are compliant materials. readily sourced from two or three companies, projects are designed to use those components. In other words, engineers • When truly necessary, the design projects around the Buy America-compliant materials waiver process can move instead of seeking the best-possible design. quickly. After the design stage, the burden of compliance falls on contractors. State DOTs must resolve any waiver issues before accepting a bid, so when Buy America waivers are sought, they tend to be for smaller components from Mexico and Asia, or for specifically engineered products such as lift bridges.

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The waiver process can move quickly. Recently ODOT requested a Buy America waiver for emergency repairs to the Willow Avenue Lift Bridge. Waivers cannot be approved by the Ohio DOT – they need sign-off from the Federal Highway Administration (FHWA) after publication in the Federal Register and the opportunity for public comment. Nevertheless, the process for the Willow Avenue waiver took only a few months and occurred in parallel with design and construction. As such, it did not impact the ability to deliver the emergency project.

The Willow Avenue repair was a special case: the bearings used in the bridge were popular in the 1950s and 1960s but are no longer used in new bridges. The chosen supplier (Timken) had the distinct advantage of owning the original bearing designs, which included housings manufactured in Canada and bearings made in the United States from U.S. and German materials. An engineering firm determined that other suppliers would need to reverse engineer the bearings and conservatively estimated it could take a Buy America-compliant supplier “up to 1 year to procure.” Given the emergency repair situation, Timken’s ability to deliver the product in 26 weeks outweighed the fact that it could not meet Buy America rules, and it received the waiver.

Even though the Willow Avenue project waiver happened quickly, Buy America rules can slow and/or increase the cost of projects, but in ways that are impossible to quantity. Buy America provisions prevent agencies and contractors from “thinking outside the box” when trying to deliver quick, cost-effective projects. For example, ODOT recently completed the largest bridge projects in its history: replacing a 1959 truss arch bridge with two nearly identical spans over the Cuyahoga River on Interstate 90 into downtown Cleveland. The five-year effort cost more than $500 million.

Part way through building the second span, ODOT decided to assess the viability of finishing the project before its scheduled October 2016 completion date. ODOT hoped to shorten the project by about six months so the bridge would be open for the Republican National Convention that July. It requested cost estimates from the contract team for that purpose, but ran into issues with accelerating the steel fabrication, which must occur domestically from steel “melted and poured” in the United States because of Buy America rules.

However, all regional steel fabricators were fully committed and could not deliver components sooner. Project managers looked into shipping the steel as far as Florida for fabrication but transportation costs to ship materials south and back were prohibitively high, so ODOT opted against early completion. It is impossible to know whether steel fabricators in nearby Ontario could have completed the work faster or cheaper – Buy America rules meant that no one could consider regional fabricators in Canada.

The limiting nature of domestic procurement requirements impacts everything from design to bidding to mid-construction adjustments, while the standard operating procedures followed by companies and agencies to ensure compliance prevent quantification of compliance costs.

A DOT representative from another state echoed many of these comments, reiterating: 1) waivers rarely are requested because an industry exists to meet the current standards; 2) changing domestic content rules likely would have minimal impacts on contracting agencies since contractors are expected to meet whatever rules may apply, and 3) opening up procurement policies could result in lower product costs and faster delivery, but it is unclear how to quantify the potential savings.

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The Burnside Bridge over the Willamette River; Photo credit: Multnomah Country, Burnside Bridge Photo Gallery

Agency: Multnomah County Multnomah County, Oregon, which includes Portland, has the (Oregon) Bridge Section distinction of being the Oregon’s largest county by population Projects: Repairs to Burnside, and smallest by territory. Its Bridge Section maintains six main Broadway, and Morrison Bridges bridges – four movable and two fixed – crossing the Willamette Outcome: No waiver granted River. Since bridge upgrades and repairs are eligible for federal highway funding, the Bridge Section often must comply with Key points Buy America rules.

• The inability to identify the Multnomah County is in the middle of three major bridge origin for small amounts of projects. The Burnside Bridge requires the most work: the steel components will cost concrete is cracked and crumbling; the electrical system and Multnomah County millions of the parts that raise the bridge need upgrades, and the steel dollars and delay necessary framework on the bridge is rusting. The County also must upgrades. replace the eight-foot diameter steel wheels that help the Broadway Bridge open and close (after more than 100 years of • Multnomah County was unable use) as well as a failing deck on Morrison Bridge lift span. to obtain Buy America waivers for three ongoing bridge However, each of these projects ran into problems related to repairs. Buy America requirements and the inability to obtain waivers in a timely manner. Many of the Buy America issues result • The County had to redesign the from the fact that these are “movable” bridges with big projects and then start a new motors, programmable logic controllers (PLCs), and motor project for the repairs not drives that control things such as speed for when the bridges eligible for federal funding. lift to allow boats to pass.

For example, the motor drives cost tens of thousands of dollars each. Maybe $50 of that is the cost of steel, but global manufacturers such as Allen-Bradley generally either cannot (or will not) determine the source of such small quantities of steel, so Buy America waivers were necessary.

26 Multnomah County started working with the Oregon Department of Transportation (ODOT) and a local Federal Highway Administration (FHWA) representative on a waiver in January 2016. Technically, each bridge project was separate – and involved different design consultants – but the county worked with the consultants to combine the waiver requests.

If the waiver had been approved, costs would have been minimal. However, that waiver was never approved. It was not denied either; the FWHA simply did not move ahead on steps required for approval. In fact, the FWHA has not approved a single waiver since October 2016.

As a result, Multnomah County must take a number of additional steps, and expend additional resources, to move ahead with necessary repairs:

1. Prevent Immediate Fallout – The County had to work with consultants to scrub all references to non-compliant components for the three projects. It did not want all three projects held up over the waiver issue, so it set aside the “problem” repairs and moved ahead only with the Buy America-compliant aspects. Much of this work will be completed in fall 2017.

2. Minimize Delays – The systems for which domestic components could not be sourced were installed between 2001 and 2005 and some device lines are no longer eligible for support. While they are becoming less reliable with age, they also are harder to repair when things go wrong. So the County is combining the three separate projects into one new project that it hopes to complete in 2018, a year later than expected. This requires staff to work with consultants on a new design, after which the county will need to re-start the bidding and contracting process.

3. Prioritize Funding – On federally funded projects, localities generally pay only 10 percent of project costs. Without either domestically available products or a Buy America waiver, the county must pay for 100 percent of the project. The cost is expected to be several million dollars – all because a few hundred dollars of steel components are from an unknown origin. Other projects deemed “non-emergency,” such as brake repairs that also were included in the initial Buy America waiver request, may need to be delayed until the County has more available funds.

How could the process be made better? According to Jon Henrichsen, Multnomah County’s Bridge Services Manager, excluding whole categories of products with small components, such as computers, would solve many of the issues faced. Additionally, excluding specialty products not manufactured in the United States, such as certain brakes or bearings, would also help smooth the process.

“We must move ahead with these repairs, even if it costs the county more money. Our goal is to minimize the potential negative impacts that not receiving the Buy America waiver could have on the ability to do other programs in the future.” - Jon Henrichsen, Multnomah County Bridge Services Manager

27 STATES INTRODUCE PROGRAMS TO INCREASE LOCAL PROCUREMENT FLEXIBILITY (SLOWLY)

In recent years, a number of states have introduced new programs that provide local agencies with greater flexibility for funding local transportation projects. The programs – called federal fund exchanges (FFEs), federal fund purchases (FFPs), or simply federal fund “swaps” – allow counties to trade federal transportation dollars for state transportation dollars, usually at a discounted rate (e.g., counties get 90 cents of state funds for every $1 of forgone federal funds).

Kansas was the first state to create its FFE in 2010. Kansas Department of Transportation (KDOT) cites eliminating “costly and time-consuming requirements of federal-aid projects” like Buy America among the potential benefits. In a sample cost comparison with potential savings (reproduced on next page), KDOT estimated a locally funded bridge project could cost 20 percent less than a federally funded one, including a 7.5 percent savings on construction, including materials.1

Other states that followed primarily are in the Midwest, including Indiana, Minnesota, Nebraska, Ohio, Oregon, and South Dakota. Iowa passed similar legislation in February 2017. Iowa Senate Transportation Committee Chairman Tim Kapucian said the goal was to reduce costs associated with paperwork and federal rules: "I want more dollars for projects and to get more work done."2

Yet neither Kansas state nor county transportation officials nor contractors could not provide data on, or examples of, counties that used FFE moneys to buy foreign steel. Procedural, educational, and commercial issues all contribute to the lack of potential case studies quantifying costs.

Procedural Issues: At the state level, KDOT promotes the ability to avoid federal mandates, but its refund process for counties does not involve questions about material origins or cost savings; just whether they met the terms of agreement (e.g., spent money on intended use).

Educational Issues: The Public Works Director/County Engineer for a large county that has used FFEs for multiple bridge products was not aware of the ability to use foreign steel. In fact, they said it had never crossed their mind. FFEs helped lower design costs and eliminate red tape related to inspection and oversight processes.

Commercial Issues: The Public Works Director/County Engineer for another county said despite bid specifications exempting projects from Buy American requirements for steel, contractors still used U.S. steel and products fabricated from it in every locally funded project. A contractor that works on both KDOT and FFE projects elaborated: since most local contractors tend to buy the same grade of steel from the same 1 or 2 local steel suppliers – and most big projects will require Buy American compliance – purchasing foreign steel introduces the risk of having leftover, non-compliant steel.

1 Kansas Department of Transportation, Bureau of Local Projects, Federal Fund Exchange (FFE), Training and Cost Comparison Documents, https://www.ksdot.org/bureaus/burLocalProj/default.asp 2 “Iowa Senate OKs controversial DOT road fund swap with cities, counties,” The Des Moines Register, March 13, 2017, http://www.desmoinesregister.com/story/news/politics/2017/03/13/iowa-senate-oks-controversial-dot-road-fund-swap-cities- counties/99122172/ 28 COST COMPARISON FEDERAL-AID PROJECT VS. FEDERAL FUND EXCHANGE PROJECT $400,000 BRIDGE FEDERAL AID LOCAL ACTIVITY PROJECT PROJECT REASONS FOR COST DIFFERENCE (FA) (FFE) Federal-aid projects require plan development that meets KDOT requirements. Estimated cost of meeting these requirements is about 40% more than plans developed for a project that is administered locally with local funds. Some DESIGN $35,000 $25,000 reasons for the higher costs with Federal-aid include, but are not limited to: NEPA environmental review, multiple levels of plan review, strict adherence to the "Federal process", and requirements for greater detail in the plans. Acquisition of R/W on projects using Federal-aid on any portion of the project must be done in accordance with the Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970. This law has specific requirements that have created a time-consuming process that results in administrative costs that R/W ACQUISITION $8,000 $6,000 are unreasonable for many smaller projects. An example of these costs is the requirement for two independent appraisals (initial appraisal and review appraisal) to establish the compensation amount. It is estimated that these costs are about one-third more than acquisitions done under local procedures. Construction under Federal-aid requirements is higher than a locally administered project because of stricter requirements, as well as requirements that apply only to projects utilizing Federal funds. These include, but are not limited to: strict material and construction requirements in KDOT CONSTRUCTION $400,000 $372,000 specifications, which are required for Federal-aid projects; and required Federal specifications that increase costs such as Davis-Bacon Wage Requirements, Buy America for steel and iron products, and Disadvantaged Business Enterprise contract goals. The estimated cost of complying with the additional requirements is about 7.5%. The inspection requirements for a Federal-aid project are much greater than a typical local project. Additional requirements on Federal-aid projects include, but are not limited to: inspector must be present on the job site at all times the contractor could be performing work; KDOT specifications have extensive CONSTR. requirements for taking measurements and confirming all work is in order; ENGINEERING / $60,000 $20,000 greater documentation/reporting is required, particularly with regard to INSPECTION Federal- aid specifications; and KDOT certified inspectors are required, which requires a city/county to invest in training for its own staff or to hire a qualified consulting engineering firm to perform the work. When compared to normal local procedures, this work costs about three times as much on Federal-aid projects. Under current procedures, the project development of a city/county Federal-aid project takes about two years to complete all requirements to allow it to be let to contract. The exact same project developed under local procedures can be INFLATION $22,000 $0 completed in a matter of only a few months. As a result, a Federal-aid project will have a higher cost due to the inflation incurred over the two year period. This cost has been estimated at a 3% annual inflation rate. TOTAL PROJECT $525,000 $423,000 Total cost of local project is approximately 80% of the same FA project. COST COMPARISON OF REQUIRED LOCAL SHARE OF PROJECT UNDER FEDERAL FUND EXCHANGE COST VS. TRADITIONAL FEDERAL AID FEDERAL FUNDS $385,600 80% of Construction and Inspection LOCAL FUNDS $139,400 20% of Construction and Inspection, plus 100% of Design and R/W FFE $347,040 90% of the $385,600 that would have been paid for a FA project LOCAL FUNDS $75,960 Amount local agency would have have to contribute to project. TOTAL COST $525,000 $423,000 RATIO OF LOCAL The cost to the city/county using Federal Fund Exchange for the same project FUNDS FOR FFE VS 54% would be 54% of their cost for a Federal-aid project. FA PROJECT

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