Two years ago, Ottawa brought down rules limiting investments in Canada by foreign, state-owned companies. The move came in response to a growing concern that companies that take their marching orders from a foreign government – especially the government of China – could end up buying up chunks of this country, distorting free markets, eliminating competition and damaging the economy.

Two years later, a foreign investor owned by a foreign government is, as feared, doing just that. It's even attempting to enforce its home country's laws on Canadian soil. The thing is, the company in question is not run by Communist Party of China apparatchiks. Its owner is the Alaska Department of Transportation and Public Facilities.

The state of Alaska owns the Alaska Marine Highway System, which operates a fleet of 11 ferries running between the Aleutian Islands and Washington. Its ships sail through Canadian waters, and at Prince Rupert, B.C., it recently signed a long-term lease on the local ferry terminal. As the lease-holder, it is planning on rebuilding its ferry terminal, at a cost of around $15-million. So far, so reasonable. Canada welcomes foreign investment.

Story continues below advertisement

But the terminal rebuild is being funded in part by the governments of the United States and Alaska – and they expect public infrastructure spending to be subject to so-called "Buy America" rules. As a result, the Prince Rupert ferry terminal's tender documents say that the project – which is not only in Canada but on Crown land to boot – must be built with American iron and steel.

The U.S. is hardly unique in coming up with novel ways of subverting free trade, upping protectionism and favouring local companies. Canadian governments are also past masters at this game. But the Prince Rupert case takes things to a new and absurd level. It's bad enough to shut Canadian firms out of bidding on an American project, or for Canada to block American firms from bidding in Canada. But in this case, American law is being applied in Canada and preventing Canadian-made goods from being used in Canada. How can Ottawa let this stand? It can't.