The federal government is threatening to invoke a rarely used anti-sanctions law to block the U.S. from imposing Buy America rules in Canada.

Outraged that Washington has banned Canadian steel from a ferry terminal overhaul in Prince Rupert, B.C., Ottawa is considering using the Foreign Extraterritorial Measures Act (FEMA) to prohibit suppliers from bowing to a foreign law on Canadian soil, according to industry sources.

Canada has used the law just once – in 1992 – after the U.S. moved to tighten its trade embargo on Cuba by punishing companies and individuals doing business there, including Canadians.

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Invoking the law again would further strain tensions between the Conservative government and U.S. President Barack Obama, who are already at odds over issues such as the Keystone XL oil pipeline, climate-change policies and U.S. meat labelling laws.

This latest dispute was triggered when the Alaska ferry service announced plans recently to rebuild a terminal it leases from a Canadian government port authority in Prince Rupert, 750 kilometres north of Vancouver. Much of the money for the $10-million to $20-million (U.S.) project is coming from the U.S. Federal Highway Administration, which routinely imposes strict Buy America rules on everything it funds.

Ottawa has asked the Obama administration to waive Buy America rules in this case, pointing out that the work will be done in Canada on Canadian Crown land. So far, those efforts have proved fruitless.

Asked about invoking FEMA, a spokesman for Trade Minister Ed Fast would say only that the government is continuing to look at "all" options.

"The application of these protectionist trade restrictions on projects on Canadian soil by a foreign government is unreasonable," said Max Moncaster, Mr. Fast's press secretary. "We are exploring all options to address this situation."

He added that Canadian officials have raised the matter with U.S. officials, both in Washington and in Alaska.

FEMA would give Justice Minister Peter MacKay, Canada's Attorney-General, the power to issue an order prohibiting suppliers on the terminal project from complying with Buy America. Violators could be fined for non-compliance.

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A spokeswoman for Mr. MacKay declined to comment.

"It is a possible avenue and one that should be explored," said Toronto trade lawyer Lawrence Herman of Herman and Associates.

Mr. Herman pointed out that Buy America rules were never intended to apply outside the U.S. "These are very unusual circumstances," he said.

Complicating matters, the Alaska government has already published detailed tendering documents, making it clear that Buy America rules will be enforced on the project. Under the rules, only U.S. iron and steel can be used for the project, which involves building a new pier and replacing a terminal building.

Officials in Alaska acknowledged ongoing "conversations" between Ottawa and the Alaska and U.S. federal governments to resolve the dispute. But the project is going ahead, insisted Jeremy Woodrow of the Alaska Department of Transportation and Public Facilities.

"I don't know where those conversations are going and whether any revisions can be made to that contract, especially since the proposal is already out," he said. "It's still moving forward as planned."

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A proliferation of protectionist purchasing rules, including Buy America, has become a thorn for Canadian companies doing business in the U.S. The firms regularly sell products that have both Canadian and U.S. content. Raw steel, for example, is often made in one country and fabricated into beams and other final products in the other.

The latest source of concern is New Jersey, where the state legislature is slated to vote Thursday on a bill that would block Canadian and other foreign companies from bidding on state procurement.

Canadian manufacturers have been pushing Ottawa, the provinces and municipalities to retaliate with more stringent "Buy Canadian" rules in this country – a move Ottawa has so far declined to endorse.

"It is time for all levels of governments in Canada to introduce reciprocal policies to level the playing field for Canadian manufacturers and exporters," said Jayson Myers, president and chief executive of the Canadian Manufacturers and Exporters, which speaks for more than 10,000 companies.

The CME has warned that protectionist purchasing rules will cost Canadian jobs and exports unless the two sides reach a comprehensive deal to open up each other's government procurement markets.