News and Analysis • Volume 13 • Number 1 • March 2009

Building without BRICs: Lessons from the ‘Buy American’ Debate

by Craig VanGrasstek

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What will be the key features of trade policy in the Obama administration? The recent flap over the Buy American provisions in the economic stimulus bill offers some valuable clues. While some see this episode as just another manifestation of a global trend towards economic nationalism, a closer look reveals a more nuanced view of where policy made be headed.

At issue is a provision in the $787 billion stimulus bill that requires, with certain important exceptions, that all of the iron, steel and other manufactured goods used in the stimulus program (including $48 billion for transportation projects) be made in America. After the House of Representatives attached this amendment it set off a heated debate inside and out of the United States. In response to the administration’s concerns over sending a protectionist message, the Senate amended the bill to specify that these provisions “shall be applied in a manner consistent with United States obligations under international agreements.” That language remained in the final bill that President Obama signed into law on 17 February.

The incident may prove to be symptomatic of a policymaking environment in which trade policy is handled in an episodic and marginal manner, but in which the results remain narrowly compliant with existing trade agreements. It also offers a good illustration of the holes that remain in the trading system, and why the United States and its partners should reinvigorate their commitment to fill those holes in the Doha Round.

Trade Policy Proper vs Trade-related Policy

The stimulus package may offer a glimpse of a trend in which much more attention is devoted to trade-related issues than to core questions of trade policy. Look for Washington to undertake more initiatives to regulate business, protect workers’ rights, enforce food and product-safety laws and provide for stricter port security, as well as more loans, guarantees and other subsidies for favoured industries. There is also increased scope for new trade-related taxes and fees, as well as a danger that rising budget deficits will distort interest rates and the value of the dollar.

The principal objectives in each of these areas lie outside the scope of trade policy per se, but they all have the potential to affect the interests of US trading partners. And as shown in this first episode, that potential can be deliberately exploited in Congress. The net result may not be the wholesale collapse of the trading system that some critics fear, but there could be significant erosion along in the edges. In the meantime, we could well see more action in the WTO’s Dispute Settlement Body than in the Doha Round negotiations.

Passive Free-Traders versus Opportunistic Protectionists

President Obama’s approach to trade policy at this very early point in his term might best be characterised as passive free trade. The administration has shown that it will take action to avoid being labeled protectionist, but has yet to demonstrate any eagerness to make trade liberalisation an important part of its economic recovery strategy.

There is no evidence to suggest that the administration has protectionist designs. It did not propose the Buy American provisions in the first place. That being said, there are no signs that the new team sees any urgency in undertaking new market-opening initiatives, nor in dealing with the pending legacy agreements (notably those with Colombia, Korea and Panama) and negotiations (especially the Doha Round) that it has inherited. The same message is conveyed by the very low priority that has been accorded to filling the US Trade Representative and Secretary of Commerce posts.

Many members of Congress are prepared to take advantage of any opportunities that the administration may hand them. The Congressional Steel Caucus is a bipartisan, in-house lobby for its constituency, and its chairman won widespread support when he submitted this amendment. Nor was the support merely partisan: Republicans opposed the overall stimulus bill, but every Republican member of the House Appropriations Committee favoured the amendment. (The Senate’s language on compliance with international agreements likewise received bipartisan support.)

The same pattern could well be repeated on other trade-related initiatives in the coming months. The administration managed this time to ensure that the final bill remained within legal bounds, but that is no guarantee that other favoured initiatives will emerge from Congress in WTO-compliant form.

Retrospective Compliance vs Forward-looking Leadership

One point often missed in this episode is that even the original Buy American amendment could have been implemented without violating any obligations under existing trade agreements. It bluntly stated that all of the iron and steel used in a project had to be produced in the United States, but also provided for three exceptions. One would allow the restriction to be waived when it is in the ‘public interest’.

Although undefined in the bill, Federal Acquisition Regulations specify that ‘public interest’ means that exceptions may be invoked for countries that have agreements that provide exceptions to the Buy American Act. The administration could well have implemented even the original House provision in compliance with US trade agreements; the language inserted by the Senate simply made this more explicit.

It is US law and practice to grant public-interest exceptions to the Buy American rules to four categories of trading partners: signatories to the WTO’s Government Procurement Agreement (GPA), countries that have government-procurement rights under their free trade agreements (FTAs) with the United States, beneficiaries of the Caribbean Basin Initiative (CBI) and the least-developed countries (LDCs).

The Obama administration clearly intends to implement the stimulus bill in compliance with GPA and FTA obligations. Whether CBI and LDC partners will receive the same treatment is less certain, but the point is nearly moot (Trinidad and Tobago may be the only one among them to produce much steel).

The stimulus package is thus more a status quo measure than a protectionist innovation. From the perspective of global cooperation, however, mere compliance with the letter of existing agreements represents a failed opportunity to provide leadership. There still remain a great many holes in the existing trade agreements, and it would be quite possible for the rest of the world to take actions that are highly restrictive yet still WTO-compliant. It would be legal but devastating, for example, if developing countries were to raise their applied tariffs up to their bound rates.

BRICs vs Favoured Partners

Among the countries that may be most tempted to follow suit are the ones whose interests are unprotected under the existing agreements. The so-called BRICs (i.e., Brazil, Russia, India and, especially, China) were the real targets of the amendment as passed by the House. Much as Japan was the main focus of protectionist pressures in the 1980s, restrictive measures in the foreseeable future are likely to be crafted with an eye to their impact on imports from China.

One of the peculiarities of the Government Procurement Agreement is that it falls outside the scope of the ‘single undertaking’ that covers almost all other WTO agreements, being instead a plurilateral agreement. Only those countries that signed it are subject to its disciplines and entitled to its benefits. The current signatories to the GPA consist primarily of industrialised countries in Europe, North America and East Asia. The BRICs are conspicuously absent from that list.

China and the other BRICs account for a large share of the US global trade imbalance, as is especially notable in the case of iron and steel. In 2008 the BRICs were responsible for $12.7 billion of the $28.8 billion US deficit in iron and steel. Consider the contrast between Canada and China. Canada had long been the largest supplier of steel to the United States, but in 2008 it lost that distinction to China. And while US-Canada steel trade is approximately in balance, the deficit with China last year was $6.6 billion. Canada’s rights are doubly protected as an FTA partner and a GPA signatory, but the Buy American provisions will shut China out of this segment of the US market.

Dispute Settlement vs Retaliation in Kind

The fact that the stimulus package discriminates against the BRICs does not mean that these countries can effectively challenge the measure in the Dispute Settlement Body. There are four reasons why their complaints may be ineffective.

First, the United States is likely to implement the restrictions in a GPA-compliant manner. The only challenge that was ever brought to the WTO on US government procurement practices concerned a sanctions law that was only incidentally related to procurement issues (the Massachusetts-Myanmar sanctions). If the new provisions are implemented in the same manner as the existing Buy American laws they will likely find legal safe harbour.

Second, the BRICs have no standing under the GPA. Russia has not even completed its WTO accession, and none of the other three countries are GPA signatories. Unless they can find ways to bring their complaint under the scope of other WTO agreements, such as that on Subsidies and Countervailing Measures, the BRICs have little legal recourse.

Third, the dispute settlement system limits the scope of available remedies. WTO law does not require that a country compensate its partners for any past injury done to them; the goal is instead to achieve compliance with obligations. The economic stimulus package has a limited time horizon, and the WTO dispute-settlement process is not known for its speed. By the time that a case is decided, most or all of the contracts will already have been let. A winning country might thus achieve a victory in principle, but not in practice.

Yet a fourth reason why formal disputes may not be the answer is that trading partners might opt to forego this approach altogether. They may instead be tempted to bypass the dispute-settlement system and go straight to retaliation or, more properly stated, the adoption of copycat rules. For reasons stated above, that may be a more serious matter than the threat to take the United States to the Dispute Settlement Body.

What Is the Way Forward?

This episode offered a first opportunity for the Obama administration to demonstrate how it will balance its domestic political demands against its aspirations for a more cooperative approach to multilateral diplomacy. The results are mixed: compliance with obligations is better than protectionist compromises, but it is not nearly as good as providing leadership.

Mixed results are not good enough in the present crisis, where the United States should aim to bring the Doha Round to a successful conclusion. Nor can this be achieved solely through US efforts. This episode demonstrates why it is in the interests of the BRICs to shoulder their share of the burden and thus produce an ambitious and balanced set of commitments.

As long as we work with a set of trade agreements that are ridden with holes, trade policy is handled at the edges and not at the core and otherwise pro-trade policymakers take a passive approach, their failure to take the initiative will allow US legislators and their foreign counterparts to make mischief. It would be far better to ensure that these lawmakers spend their time dealing with the results of the multilateral trade talks, and to abide by their results, than to give them more opportunities of this sort.

Craig VanGrasstek is Adjunct Lecturer in Public Policy at the JFK School of Government at Harvard University.