WASHINGTON – It didn’t last long, the lofty pledge by leaders of 20 top economies last November to refrain from erecting new trade barriers for at least a year.
A “Buy American” clause in the big stimulus bill before Congress is causing howls from major U.S. trading partners and posing a difficult early challenge for President Barack Obama.
The provision has strong support among congressional Democrats and labour unions and clear popular appeal in the midst of economic distress. But it is opposed by many Republicans, business groups and economists who warn it could provoke trade retaliation and thus further deepen the global downturn, much as protectionist legislation did in the 1930s.
“If we refuse to buy foreign-made goods, then our trading partners will refuse to buy from us,” said U.S. Chamber of Commerce president Thomas Donahue, a critic of the provision.
Not only in the U.S., but around the world leaders are facing intense domestic pressure to protect jobs and homegrown industries. Economic woes have worsened since the Group of 20 countries pronounced their opposition to trade barriers at their meeting in Washington.
The stimulus bill that passed the House last week would require the use of American-made iron and steel for public works projects paid for with tax dollars. The Senate is debating even stronger language that also includes “all manufactured goods.”
It puts Obama in a tricky position as he tries to win support for an economic recovery package totalling more than US$900 billion.
Flat-out rejection of the provisions by Obama could alienate Democrats. But his acceptance of strong language would antagonize economic partners and some say it could risk new trade wars. Exports are a vital part of the U.S. economy.
In separate television interviews Tuesday night, the president underscored his plight. Without commenting specifically on the House or Senate language, Obama told Fox News “we can’t send a protectionist message.” He told ABC it was important that “any provisions that are in there are not going to trigger a trade war.”
Supporters of a Buy American provision claim the criticism is much ado about nothing. They argue such provisions are similar to ones that have been on the books for decades in government procurement policies and would not violate international trade obligations.
“We frankly believe this is a lot of bluster,” said Scott Paul, executive director of the Alliance for American Manufacturing, a union coalition that backs the provision.
Paul told a conference call with reporters on Wednesday that Obama’s brief TV-interview remarks should not be interpreted as signalling opposition.
The proposed provision has already generated international protests, especially in Europe, Canada and Australia.
European Union officials have indicated they may file a complaint with the Geneva-based World Trade Organization if the U.S. passes such a provision.
John Bruton, the EU’s top diplomat in Washington, wrote to congressional and administration officials suggesting such provisions are at odds with the vow not to resort to protectionism that the U.S. and other countries made at the Group of 20 meeting of world leaders in November. He warned of “a spiral of protectionist measures around the globe that can only hurt our economies further.”
The G20 countries meets again in early April, in London. The global economic situation has deteriorated considerably since their November meeting. Part of the agenda for the April session will be discussed when Treasury Secretary Timothy Geithner meets in Rome this weekend with his counterparts from Britain, Germany, France, Japan, Canada and Italy.
Some critics of the Buy American provision say it is blatantly protectionist and suggest it contains echoes of the infamous Smoot-Hawley Tariff Act signed by President Herbert Hoover in 1930, which raised U.S. duties on thousands of imported goods. Other countries retaliated by raising their own barriers on U.S. goods, leading to a collapse in international trade that worsened and lengthened the Great Depression.
The U.S. isn’t the only country considering measures to protect home industries and jobs.
British banks receiving government money have been asked by the government to only lend to British-based companies and individuals. The European Union is renewing subsidies on some dairy products to protect its farmers. Indonesia last month raised new trade barriers on various manufactured imports.
And China launched its own multi-billion-dollar stimulus package that envisions using China-made steel in scores of public works projects.
The centrist Peterson Institute for International Economics this week released a study finding that the Buy American provision could end up costing more new jobs than it creates.
Economist Gary Hufbauer, one of the authors of the study, said in an interview that the U.S. action “will be seen as a license to other countries to do their own protectionist measures. The U.S. has always preached open markets and open trade. And now the United States is violating its international commitments.”
“Do I think we’ll go down the ’30s road?” he said. “Certainly, one hopes not. One hopes there’s a lot of good sense and a lot of rules that have to be trampled on and countries won’t follow that path.”
Congressional defenders of the provision dismiss talk that it will spark trade wars, noting it deals just with government spending practices and doesn’t raise a single tariff on foreign goods or services.
Senator Charles Schumer (D-N.Y.) said a Buy American clause “doesn’t bother me much” in that it’s part of “a stimulus package that’s supposed to create American jobs.”
–
EDITOR’S NOTE – Tom Raum has covered Washington for The Associated Press since 1973, frequently reporting on the economy.
