Free Riding the Rails
In Canada, domestic rail manufacturing firms play by free-market rules while foreign competitors are shielded, supported, and subsidized.
By Cyrus Nagra
The shortlisted companies eligible to bid for the contract to build the new Alto high-speed rail line included the consortia of Cadence, Intercity Rail Developers, and QconnexiON Rail Partners. With its progressive public-private partnership (PPP) structure, the Alto offers a long overdue high speed rail track which should improve mobility for the densest and most developed region in Canada; the Quebec City-Windsor Corridor. The list of bidders mentioned, however, omits a major rolling stock player: CRRC, China’s state-owned rolling stock conglomerate.
CRRC has won many recent major rail contracts in North America and the EU through competitive underbidding, often usurping national champions in the process. The CRRC’s State-owned enterprise funding model grants it the leverage to undercut major rolling stock competitors like Bombardier-Alstom, Siemens, Hyundai Rotem or Kawasaki and secure contracts because of its dominant value proposition. While government procurement involves striking a balance between lowest bids and best value, CRRC’s omission from the Alto shortlist was not a matter of cost, but more likely due to a fear of cybersecurity risks. CRRC’s success in the rail sector and more recent examples of Canada outsourcing procurement to China offer a departure point for a discussion of industrial policy tensions between international trade agreements and domestic content requirements. More specifically, that foreign entities like CRRC benefit from “free-riding” the Rules of Origin (ROO’s) commitments set out by the government procurement regulations of many major international trade agreements.
With the U.S having withdrawn from many multi- and bilateral trade agreements — repeatedly threatening departure from the WTO — and pursuing an increasingly aggressive tariff policy, the staying power of many major trade agreements has been brought into question. Whether America’s deviation from the rules-based order is indicative of an empire in its death throes or part of a broader geopolitical shift toward a multipolar protectionist agenda, confidence remains that multinational trade agreements will persist. In the rail sector, Canada is bound by various trade agreements including the Comprehensive Economic Trade agreement (CETA) with the EU, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the World Trade Organization’s Government Procurement Agreement (WTO-GPA). The purpose of these agreements is to level the playing field for foreign entities; to ensure an open and just procurement environment which can restrict domestic content requirements.
For Canada, the main agreement that imposes restrictions on domestic content requirements is CETA, which mostly bans such requirements, but allows Ontario and Quebec to impose a 25% local content requirement for public transit projects. Yet even this 25 per cent includes after-sales services, which do not need to be delivered locally. This means that foreign firms can still import most components and qualify for procurement bidding with minimal domestic engagement. CRRC’s use of this formula in North America won them contracts in Boston, L.A, and Chicago by building nominal final assembly plants while importing the majority of property parts, equipment and labor from China. In 2017, Montreal’s AMT contract for 24 railcars followed this pattern, with CRRC underbidding Bombardier by 30 per cent, thanks in part to CRRC’s government subsidies.
Implementation of the CETA requirements in Canada effectively extended the benefits of CETA to foreign entities like the CRRC, whose country of incorporation falls outside the EU, and so is beyond the scope of the trade agreement. This allows foreign entities like the CRRC to free ride into easy market access while circumventing domestic production requirements.
Meanwhile, prior to their acquisition and merger with Alstom, Bombardier struggled to compete in this increasingly uneven market. Their domestic operations — such as in La Pocatière, Thunder Bay, and Kingston — offer fully integrated manufacturing with high local content, but face tight constraints under Canadian procurement policy. Ironically, even as India (the production point for the Montreal REM line) mandates 75 per cent local content under its “Make in India” rail strategy, Canada’s commitments under CETA have become a de facto ceiling of 25 per cent, applied even to non-EU suppliers like China, Japan, and Korea.
The failures of Canada’s industrial policy to protect strategic markets like rail is made even more apparent when compared to other western nations. In 2016, France awarded Alstom a $3 billion high-speed rail contract with support from SNCF and the French Treasury. In the U.S, “Buy America” rules mandate at least 65% local content. Even China’s rail sector is fortified as foreign entities cannot win rail contracts without partnering with local manufacturers. Canada, by contrast, has embraced the formal rules while ignoring how others bend them. Domestic firms play by free-market rules while foreign competitors are shielded, supported, and subsidized.
The progressive public partnership model structure of the Alto line, with its explicit engagement with Indigenous groups and commitment to domestic capacity-building, while a step in the direction, is itself not enough. To truly level the playing field, Canada must increase the Canadian-Content threshold for Final Assembly of Non-EU suppliers, and offer a “Rated Criteria” for all suppliers, in which bids which go above and beyond the 25 per cent minimum are rewarded accordingly. At a time when nation-building is at the forefront of the Canadian imaginary, revising trade agreement rules of origin is one route by which Canada may prevent free riding and better serve its own interest.
Cyrus Nagra is a recent graduate receiving a Bachelor of Arts in Political Science and Philosophy from the University of Ottawa. He has gained some work experience in both the financial services and legal sectors. He has also held contract work in the legal department of the fin-tech startup HelloBrigit. Cyrus has undertaken social justice and education reform work in Maharashtra, India with the YUG Foundation, by working to amend municipal school curricula for Pune's institute for the blind. These experiences have influenced his interest in understanding the policy process and the public good.