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US President Donald Trump smiles to the crowd of supporters as he steps off Air Force One in West Palm Beach, Florida, April 13, 2017.

JIM WATSON/AFP/Getty Images

Canadian officials are breathing a sigh of relief that New York has backed off putting Buy American restrictions on most state purchases.

But this isn't the end of the story for Canadian companies that sell to federal, state and local governments in the United States. Not by a long shot.

Emboldened by Donald Trump's America First rhetoric and widespread anti-trade sentiment, protectionist purchasing rules are spreading rapidly in the United States – the main market for Canadian exports. New and more expansive purchasing restrictions are likely inevitable.

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A clutch of U.S. Senators are pushing the Trump administration to remove the procurement provisions from the North American free-trade agreement. Likewise, some members of the Congressional steel caucus are sponsoring a bill that would extend Buy American restrictions to various departments and agencies now untouched by these rules. Meanwhile, the Commerce department is working on a plan to ensure that all energy pipelines are built with U.S. materials, even if financed by the private sector.

This raises a vital policy question for federal and provincial governments: Is "Buy Canadian" the answer to the Buy American problem?

Some industry leaders say yes. The Canadian Manufacturers & Exporters, for example, want Ottawa to provide "a level playing field" by embracing "reciprocity" in the doling out of federal infrastructure cash, president and chief executive Dennis Darby said in a recent letter to Infrastructure and Communities Minister Amarjeet Sohi.

"Certain goods originating from the U.S. should be disqualified from use in federally funded infrastructure projects, in a manner that is consistent with the unfavorable treatment that Canadian goods . . . are receiving in infrastructure projects funded by the U.S. government," Mr. Darby argued.

Ontario Premier Kathleen Wynne acknowledged last month that the province was weighing "all reasonable options to protect Ontario jobs" in the event that New York State went ahead with its plan to block foreign companies from bidding on all contracts worth more than $100,000 (U.S.). The state eventually removed the provision in its budget, defusing the confrontation for now.

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Retaliation might be satisfying – like standing up to a bully. In the short term, it could even save a few Canadian jobs.

But it's like a fight with your next-door neighbour. Neither side really comes out ahead. Retaliation can quickly escalate, with devastating consequences for both parties.

Your neighbour puts up a fence. You put up a bigger one, casting a shadow over their prized vegetable garden. So they redirect the downspout from their eavestroughs into your flower bed. And so on.

Retaliation is a dangerous economic proposition for Canada, the smaller and more vulnerable player in this showdown. As a small, relatively open economy, Canada needs the United States more than the other way around.

Say, for example, the City of Toronto builds a new subway line. Strict Buy Canadian rules would inflate the cost of the project. By limiting the range of potential suppliers for steel, electronics and lighting, the price tag of the project would inevitably rise. Taxpayers would pay more and get less.

The same logic applies to the United States. But it has the benefit of a much larger domestic market and a much wider spectrum of local suppliers to choose from.

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Though not directly analogous, a recent C.D. Howe Institute paper analyzed the impact of tit-for-tat border taxes by Canada and the United States. Both sides would suffer an economic hit, concluded authors Dan Ciuriak and Jingliang Xiao, but retaliation would be far more painful for Canada than the U.S. And it would not make the U.S. any more likely to back down.

"Retaliation would double the damage domestically with little deterrent effect on U.S. real GDP or production," according to the report, Protection and Retaliation.

Retaliation could prove to be a costly dead-end.

But Canada is not completely powerless.

Canadian officials can, and are, making their U.S. counterparts aware of all the benefits American companies currently enjoy in Canada through economic integration. They should also make it clear they are willing to invoke trade agreements and other legal means to defend Canadian interests.

The best hope for Canada is to push for clear and reciprocal rules in a renegotiated NAFTA.

Engaging in a wall-building contest with your richer neighbour never ends well.

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