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''Buy American'' provisions in the ''stimulus package'' raise fears among US trade partners

WASHINGTON, DC – 02/16/09 – Despite his proclamation earlier this month that that the US “cannot send a protectionist message to the rest of the world,” President Barack Obama’s $787 billion “stimulus” package is being overshadowed by growing global fears that the “Buy American” provisions it includes are the first wave in a rising tide of protectionism in the US capital.

The provisions effectively bar the use of foreign iron, steel, and manufactured goods in public works projects funded by the massive plan, the largest government spending bill in US history.

The concept of "Buy American" has become particularly sensitive in a time that the world is facing sagging economy and slumping trade, echoing the Smoot-Hawley anti-import legislation that helped usher in the Great Depression in the 1930s when a wave of tit-for-tat protectionism choked global trade and prolonged the economic pain.

While the White House is trying to allay concerns by stating that the implementation of the bill will strictly abide by its international trade obligations with Administration  analysts asserting that an international government procurement agreement “might exempt” Canada, the European Union (EU), Japan and a few other countries from the provisions.

Even so, potential protectionism embedded in the provisions still touched the nerves of these nations and blocs. Canada, with about 40% of its steel export going to the US, is expressing deep concern over the “Buy American” provisions. Canadian Prime Minister Stephen Harper has said the clause could contravene the North American Free Trade Agreement (NAFTA) and backtrack on Washington's "international obligations" to break down global trade barriers.

Harper spoke out again last Friday, after the bill was approved by the Congress, that "there were some improvements as this went through the congressional process but obviously all of us remain concerned, and I think President Obama himself has said that he wants to ensure that the stimulus packages do not lead to protectionist measures in the United States or anywhere else."

On February 4, the US Senate voted to retain the "Buy American" provisions in the bill. At the same time, Washington's major trade partner Japan joined in to lobby against the clause.

Japanese Prime Minister Taro Aso has been quoted as saying the provisions are "ridiculous" and a "breach of WTO [standards] of the current age," and chief cabinet secretary Takeo Kawamura said protectionism might lead the world economy to "atrophy."

The EU joined in criticizing the clause with John Bruton, the European Commissions' ambassador in Washington, saying last Thursday that "the risk…is that we might be experiencing American unilateralism in the economic sphere."

The ambassador said such clause would counteract efforts to avoid protectionism, despite Washington's promise not to violate any international trade agreements. China, one of the US’ largest trading partners, adopted a massive stimulus package to spur its economy within the last several days.

The Chinese package did not include any restrictions on the import of foreign products in its domestic stimulus projects.

"We won't practice 'Buy China'," said Chinese Vice Commerce Minister Jiang Zengwei last Monday, "We'll treat domestic and foreign products equally as long as they are needed."

Despite international doubts, "Buy American" provisions in the stimulus bill managed to strike its way through the Congress. Final approval of the plan coincided with the G7 meeting in Rome last Friday, raising deeper worry from G7 participants about widespread protectionism.

In the meeting, finance ministers and central bank governors of the leading industrialized countries pledged to prevent the snowball from getting rolling by voicing unanimous opposition against trade barriers and advocating open trade and free market. British Financial Minister Alistair Darling said protectionism "is very damaging and will hold up the recovery."

Meanwhile, German Financial Minister Peer Steinbrueck called for full efforts to "ensure history does not repeat itself," referring to the spread of protectionism during the Great Depression.

Amid such collective concern, new US Treasury Secretary Timothy Geithner tried to ease the worry at the G7 meeting by reaffirming Washington's determination to comply with international trade obligations and President Barack Obama's “commitment to open trade.”

Criticism of the “Buy American” provisions of the stimulas package weren’t confined to the international global trade community.

During the heated discussion of the bill in the Congress, Republican Senator John McCain, Obama's rival in the presidential election, had called for the provision to be removed from then package.

“Should we enact such a provision, it will only be a matter of time before we face an array of similar protectionism from other countries – from 'Buy European' to 'Buy Japanese' and more,” he said.

Although his proposal was rejected, the Senate did make amendments by adding languages requiring the implementation of the bill to honor international trade commitments.

A study conducted by Gary Hufbauer and Jeffrey Schott, both economists at the independent Peterson Institute for International Economics, said "the negative job impact of foreign retaliation against 'Buy American' provisions could easily outweigh the positive effect of the measures on jobs in the US iron and steel sector and other industries."

Moreover, one day after the stimulus packaged was passed by the Congress, the Consumer Electronics Association, one of the largest business organizations in the country, issued a statement warning "the 'Buy American' provisions in the stimulus bill will signal to our trading partners around the world that the US is returning to the bad old days of protectionism and economic nationalism."

Rather than stimulate the American economy, "these provisions will lead to retaliation from abroad and cost precious jobs in the United States," said Gary Shapiro, president of the association, who also dismissed the promise of keeping with the letter of WTO commitments as "a meaningless gesture."

Such mounting criticism has put President Obama in a tough position.In addition to the possibility of igniting a catastrophic, domino-effect global trade war, the crafting of the stimulus package was left largely in the hands of Congressional staffers with members of both the House of Representatives and the Senate being given little time to study the 1,000-plus page bill.

The sense of urgency surrounding the passage of the bill and the fact that it’s content was driven largely by House Speaker Nancy Pelosi (D-California) and Senate Majority Leader Harry Reid (R-Nevada) are seen by a growing number of people as examples of the president’s inability to effectively exert his authority as the nation’s chief executive.

His challenge, they say, is to strike a balance between stimulating domestic economic growth without upsetting the balance of global trade that serves as one of the country’s primary economic engines.

The question they're asking is whether he’s up to the challenge.

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