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Alaska's decision to scrap the controversial rebuilding of a remote B.C. ferry terminal is the inevitable postscript to a sad episode in Canada-U.S. relations.

Any contractor willing to take on the work would have faced the impossible choice of running afoul of either U.S. or Canadian law.

Federal Trade Minister Ed Fast insisted he would not let protectionist Buy America purchasing rules apply on Canadian soil. And he invoked a seldom-used anti-sanctions law to ensure they wouldn't.

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Alaska Governor Bill Walker and the U.S. government were equally steadfast, refusing to waive rules that mandated the use of American iron and steel on their project.

It would be easy to dismiss this story as a meaningless sideshow. Reconstruction of the Prince Rupert, B.C., ferry terminal would have cost $10-million to $20-million (U.S.), of which the steel component might have been less than $2-million. That's roughly equal to the goods and services traded between Canada and the United States every minute.

And it's hard to imagine this setting any sort of precedent. The ferry terminal is unusual – a U.S.-funded project on land leased from a federal port authority in Canada.

But make no mistake: There is cause for concern here. If Canada and the United States can't work out the easy stuff, how are they ever going to overcome the larger challenges confounding a vast, complex and increasingly strained relationship?

The Prince Rupert ferry terminal demonstrates that even minor disputes have now become hard to fix. Domestic politics trumps common sense at every turn, making compromise virtually impossible.

What hope is there, then, for the tough stuff, such as the Keystone XL pipeline, energy policy more broadly, agricultural trade or a litany of persistent border problems?

Both sides had easy and relatively painless options open to them.

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Alaska Governor Bill Walker could have quietly sought a waiver from the U.S. Department of Transportation, which was putting up 90 per cent of the money. There is a precedent: By agreement, Canadian and U.S. steel is being used in the construction of the new Windsor-Detroit bridge.

There was no obvious domestic constituency pushing Mr. Walker to play hardball on the ferry terminal, other than nationalist chest-thumping. Not a single job in his state would be created or saved. Alaska does not produce any steel of its own, and no major corporate interests are in play.

And yet Mr. Walker stood his ground, insisting that Buy America was good for Alaskans and good for Americans, oblivious to its noxious effect on a neighbour.

Likewise, the U.S. Department of Transportation could have suspended its own rules, in light of the delicate circumstances. But U.S. officials apparently judged they had little to gain by doing Canada any favours, and plenty to lose if they failed to strictly enforce Buy America rules mandated by Congress.

On the Canadian side, Ottawa failed to use its own leverage to head off controversy. The Prince Rupert Port Authority, a federal agency, signed a 50-year lease on the ferry terminal with the Alaska Marine Highway System in 2013. At the time, Alaskan authorities made it clear to their Canadian counterparts that Buy America rules would apply to any work done owing to the U.S. government picking up most of the tab.

The port authority could have demanded an exemption from Buy America as a condition of the lease – a perfectly reasonable request in light of the recent controversy. Facing no apparent objections from the port, Alaska sailed on, oblivious to the storm that lay ahead.

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Mr. Fast is getting kudos in Canada for standing up to the United States over Prince Rupert.

But it's not clear that the Canadian government is doing everything it can to fight the worrying proliferation of Buy America-style local-content laws across the United States, which risks costing Canadian businesses billions of dollars in lost opportunities. Ottawa should be pushing much more aggressively for a bilateral procurement deal.

Mr. Fast can't do a victory lap, because everyone loses.

An aging ferry terminal, vital to business and the lucrative summer tourist trade on the B.C. and Alaska coast, doesn't get the overhaul it badly needs. Not a dollar of economic value, nor a single job, is created in either country.

And Canada and the United States squander another opportunity to find common ground.

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