‘Michigan First’ in state contracts: A good deal for Michigan?

LANSING — Should the Legislature give companies in Michigan an economic edge over out-of-state businesses when they bid on government contracts?

Yes, says the Michigan Senate, which overwhelmingly passed such a measure last week to protect a salt mining company operating in Detroit, whose executives say they aren’t able to keep pace with Canadian mines on price.

The business, Detroit Salt Co. LLC, claims the legislation will prevent it from being undercut by Canadian competitors, which the company claims are able to offer a lower price on rock salt to the state, in part because of currency differences between the two nations.

But such “Michigan First” legislation has drawn concern from economists, legal experts and even some government officials, who worry that the bill could drive up costs to state taxpayers, and raise the possibility of an international trade dispute.

“By not opposing the bill, we’re advocating picking winners and losers to an extreme degree that isn’t consistent with the fairness in our bidding process for all suppliers, new and current, and most importantly to us, ensuring the best value for tax dollars spent,” Jim Colangelo, chief procurement officer with the Michigan Department of Technology, Management and Budget, testified before the Senate commerce committee two weeks ago.

“By not opposing the bill, we’re advocating picking winners and losers to an extreme that isn’t consistent with the fairness in our bidding process for all suppliers.” – Jim Colangelo, chief procurement officer with the Michigan Department of Technology, Management and Budget.

The bill that created a preference for Detroit Salt sailed through the Michigan Senate last week with all but two senators on board. It’s now in a House committee.

The advantage would come in the form of an 8 percent premium tacked onto bids from companies outside the state for products mined in Michigan when the state weighs bid prices in awarding the contract. The only Michigan company that sells a mined product to the state is Detroit Salt, which employs about 60 people on Sanders Street in southwest Detroit.

As it happens, Detroit Salt is now owned by a Canadian company.

The company contends it is being hurt by Canadian competition resulting from mines that are larger and the currency weaker than the U.S. dollar, making it cheaper to buy Canadian salt.

Sen. Rick Jones, a Republican from Grand Ledge who sponsored the bill, says the state should do what it can to protect Michigan workers’ jobs. He said he’s not concerned that the state might grant an incentive to a company with Canadian ownership, in part to offset competition by other Canadian suppliers.

“You call it a Canadian company,” Jones said. “I call it Americans, Michiganders, working here in the state of Michigan, and we need to support them and not workers somewhere else. If it is based here and providing 60 to 80 jobs to people here in Michigan, I consider it a Michigan company.”

“You call it a Canadian company. I call it Americans, Michiganders, working here in the state of Michigan, and we need to support them and not workers somewhere else.” – State Sen. Rick Jones, R-Grand Ledge, on protecting Michigan jobs, even for local companies with Canadian ownership

That’s a sentiment the salt company can get behind.  

“The field is not level now,” said George Davis, public affairs manager for Detroit Salt.

“The value of (Canada’s) dollar plays a part in their ability to sell at a larger volume, as well as their size,” he said. “Our Legislature should have some way to be a better arbiter of that at market.”

Canada in Michigan

Detroit Salt extracts rock salt from a mine that reaches nearly 1,200 feet below the city. It was purchased in 2010 by Cambridge, Ontario-based The Kissner Group, which has a U.S. office in Overland Park, Kan.

The prevalence of “buy local” or “America First” preferences tracks with President Donald Trump’s yen for protectionist trade policies. He has called for renegotiating the North American Free Trade Agreement and for Washington to more heavily favor U.S. companies when awarding government contracts. And last week, Trump told European Union officials that Germany was “very bad on trade,” citing the volume of automobiles it imports to the United States.  

Giving preference to in-state companies isn’t illegal, particularly when the state’s the one doing the buying, said one expert. Rick Walawender, an attorney at Miller, Canfield, Paddock and Stone PLC in Detroit who specializes in corporate and international law, said an exception to the U.S. Constitution’s commerce clause applies to states if state government is acting as a participant in the market and not a regulator.

“The state can favor its own, even if it’s one company,” he said.

Even so, the Detroit Salt bill, if it becomes law, runs the risk of being challenged if a company outside the U.S. perceives the 8 percent premium as a “non-tariff barrier to trade,” said Bruce Thelen, an attorney with Dickinson Wright PLLC in Detroit, who leads the firm’s international practice team.

Thelen said the Michigan legislation would not be considered a tariff because it would be used to compare bid prices, and would not be imposed on the actual importation of rock salt. The U.S. Constitution gives Congress, not states, the power to regulate trade through tariffs.

Backlash could come if a foreign supplier feels that it has been hurt by the preference, he said. He added that a company could decide whether to take action under World Trade Organization or other trade agreements, and similar issues likely will arise as negotiations about NAFTA continue.

“To the extent that federal law is inconsistent with a state law, the federal law will take pre-emption over that,” Thelen said. “And treaties are part of federal law.”

Question of preferences

Currently, a Michigan-based company is given preference for a state contract if all other factors are equal, including price and project specifications.

Yet the existing language is so light, it has never been invoked, said Colangelo, the Michigan DTMB administrator.

“All things are never equal,” he said. “If we’re going to have Michigan-based preference language, it should be much, much stronger than that, or why bother?”

Ohio, for instance, offers a 5 percent financial preference. Sen. Jones said Ohio’s provision inspired his bill.

But Ohio also includes a reciprocity agreement for border states, meaning a Michigan-based company also would receive a 5 percent preference when bidding on a contract in Ohio, department spokesman Caleb Buhs said. Jones’ bill does not.

Colangelo said he has drafted language modeled after Ohio’s law and those of other states to extend preference to all Michigan-based companies that bid on state contracts, regardless of industry. Jones said he would be open to considering such a bill, but not as part of the current legislation.

Unintended consequences

The bill would likely increase state costs, the nonpartisan Senate Fiscal Agency said.

In its example, a firm based outside of Michigan bids $10 million for a contract, and a Michigan-based firm bids $10.5 million. Ordinarily, the non-Michigan company would win the work for being the lowest bidder.

But the new legislation would add an 8 percent surcharge, or an extra $800,000, to the non-Michigan company’s bid price. That means its $10 million initial bid instead would be considered at $10.8 million. In this scenario, the Michigan-based firm would become the lowest bidder, and the state would pay an additional $500,000 above the true lowest bid.

In an interview with Bridge Magazine and Crain’s Detroit Business after his Senate testimony, Colangelo said: “We would rather see a bill go through that is much more broad and helps a greater number of businesses.”

The narrowness of Jones’ bill opens up Michigan to “a real slippery slope,” said Charles Ballard, an economist at Michigan State University. If adopted, he said, it could raise costs for services like winter road salt that are shared by state and local governments.

Detroit Salt has two state contracts that run through August 2018 after the state exercised extensions, according to state records, worth a combined $20.1 million.

The financial preference being debated wouldn’t amount to billions of dollars, so it’s possible that it wouldn’t elicit a negative response from the Canadians, Ballard said. It’s also possible that it could.

Against the backdrop of talk in Washington about renegotiating NAFTA and imposing border taxes, “we’re in territory where there are policies that are now being considered seriously that would lead to a wrenching adjustment that would take years and years to get past,” he said. “If you whack the other guys’ exports to you, he may want to whack your exports to him, and that’s how trade wars start.”

For his part, Emmanuel Manos, Detroit Salt’s president, told a Senate committee that the larger Canadian mines could run out Detroit Salt, its 60 employees and the truck drivers, mechanics and hydraulics operators that support it, out of business.

“I’m lowering my prices to try to keep winning the salt,” Manos testified, “but there will be a limit to it.”