The provision is part of the massive economic stimulus bill that has passed the U.S. House and is now working its way through the Senate. The measure would require that U.S.-made iron or steel be used in construction projects paid for by the bill.
President Obama strongly supports the bill, but has voiced concern about the international implications of the so-called "Buy American" provision.
The Senate agreed to specify in the bill that U.S. international trade agreements should not be violated. But a move by Sen. John McCain, a leading Republican, to delete the requirement failed 31-65.
The legislation is still making its way through the Senate. After it is approved, it will have to be reconciled with the House version of the law, so there could still be major changes.
Canada's trade minister, Stockwell Day, said Thursday that country has made great headway in its efforts to win relief from the 'Buy American" provision in the stimulus bill.
"This is not finished yet," Day said. But he said Canadian officials would work with American counterparts "to see this through to what we hope will be a successful conclusion,"
But European Union steel makers were not happy with the changes and threatened to take the issue to the Geneva-based World Trade Organization.
Gordon Moffat, the head of the EUROFER steel makers' association, said the "bill represents a beggar thy neighbor policy and goes directly against the political engagement of the G-20 to refrain from raising new barriers to trade. It is a protectionist measure. It sends the wrong message to the world exactly at the time that everyone should be working to keep markets open."
Earlier this week EUROFER asked the EU executive branch to prepare to take the issue to the WTO if necessary.
White House press secretary Robert Gibbs on Wednesday said Obama wants to make sure that "any legislation that passes is consistent with trade agreements and doesn't signal a change in our overall stance on trade in these economic times."
He added that the president will make sure that any bill he signs would meet trade commitments.
The "Buy American" provisions in the spending bill are favored by lawmakers in Obama's Democratic Party, who want to make sure American businesses receive the maximum benefit from a bill costing more than $800 billion. Labor, a traditional Democratic ally, strongly backs the provisions.
But there have been complaints from major trading partners, including the 27-nation European Union and Canada. Some have threatened retaliation and say the measure could kick off a trade war as the world economy is already reeling. They say it would break a promise made by world leaders in November not to resort to protectionism to prop up their economies.