Bridges Weekly Trade News Digest • Volume 13 • Number 4 • 4th February 2009
‘Buy American’ Provision in Stimulus Bill Rankles US Trading Partners
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Free trade advocates and US trading partners are up in arms over the ‘Buy American’ provision included in the US$ 819 billion economic stimulus bill that was passed by the US House of Representatives last week. Critics of the provision say the move is a blatant protectionist measure during hard economic times. But proponents argue that the import restriction is in line with international trade rules and will create thousands of vital manufacturing jobs amidst the economic downturn.
But the fate of the provisions was thrown into question on Tuesday, when US President Barack Obama revealed in several interviews that he has reservations about the measures.
“I think it would be a mistake…at a time when worldwide trade is declining for us to start sending a message that somehow we’re just looking after ourselves and not concerned with world trade,” Obama said in an interview with Fox News.
“That is a potential source of trade wars that we can’t afford at a time when trade is sinking all across the globe,” Obama said in a separate interview with ABC News.
The controversial provisions would require, with some exceptions, the purchase of US-made iron and steel in certain public works projects that are funded by the stimulus package, which includes tax cuts and spending provisions aimed at rebuilding the country’s transportation infrastructure and creating millions of manufacturing jobs in the process. Members of the House largely stuck to party lines in their votes on the proposed legislation, with Democrats voting in favour and Republicans opposed. The Senate is expected to vote on its version of the legislation later this week.
The passage of the bill drew immediate scrutiny from overseas.
“We regard this legislation as setting a very dangerous precedent at a time when the world is facing a global economic crisis,” John Bruton, the EU’s ambassador to the US, said earlier this week.
“Measures of this nature, if they breach WTO rules, are likely to be the subject of legal action,” he said.
“There is always the possibility of retaliatory measures to be taken.”
Italian Trade Minister Adolfo Urso also took a hard line: “A dangerous new steel war is looming and we need to counter it with strong and decisive actions,” he warned on Monday.
Major US blue-chip firms General Electric, Caterpillar, Boeing and FedEx also oppose the measure, out of concern that it could provoke other countries into raising their own trade barriers, thus dampening demand for their exports.
But US Vice President Joe Biden defended the provisions in an interview last week.
“I don’t view that as some of the pure free-traders view it, as a harbinger of protectionism,” Biden, a long-time advocate of organised labour, told CNBC. “I don’t buy that at all. So I think it’s legitimate to have some portions of Buy American in [the stimulus bill].”
“I don’t think there’s anything anticompetitive or antitrade in saying when we are stimulating the US economy that the purpose is to create US jobs,” he said.
“The same thing’s happening in Britain, the same thing’s happening in Europe, the same thing’s happening in China, and they’re not worrying about American jobs.”
But some analysts say that domestic purchasing requirements may not actually create any new US manufacturing jobs. A recent study by the DC-based Peterson Institute for International Economics found that, under some scenarios, the import bans could in fact lead to a net loss in jobs across the sector.
“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,” the study concluded. “The difference is that jobs lost would be spread across the entire manufacturing sector, while jobs gained would be concentrated in iron and steel and a few other industries.”
A ban, with three exceptions
The bill, as passed by the House, would force government contractors to purchase US-made materials and equipment for stimulus-funded projects, but with three exceptions. First, the requirement could be waived if US iron and steel makers could not produce the quantity or quality of materials needed. Second, foreign goods could be purchased if the use of domestic products would raise the cost of the project in question by more than 25 percent. Finally, the head of a federal department or agency could waive the requirement if its application “would be inconsistent with the public interest.”
Critics say that the Buy American provision would violate world trade laws. Indeed, several bilateral trade deals that the US has recently enacted forbid such import restrictions, as does the WTO’s Agreement on Government Procurement (GPA), to which the US is a signatory.
But proponents of the Buy American clause argue that the ‘public interest’ exception included in the House bill could be used to allow purchases from countries that have signed on to the WTO procurement agreement or that have negotiated bilateral deals with the US.
If government officials used the public interest waiver in such a way – although the law provides no guarantee that they would – then products from NAFTA members Canada and Mexico would be safe from the restrictions, as would goods from countries like Costa Rica, Jordan, Oman and Peru that have signed bilateral trade deals with the US.
Moreover, products from the EU, Japan, Korea, Switzerland and a handful of other countries that have signed the GPA would be exempted from the ban. But because the GPA is a plurilateral, as opposed to multilateral, agreement, only those countries that have signed it would be protected against discrimination in government spending. Thus, major emerging economies Brazil, China, India, and Russia, none of which have signed the GPA, could potentially see their exports to the US drop as a result of the Buy American provision. No international treaty, at least, would forbid Washington from discriminating against their goods.
The message, not the technicalities
But some observers argue that the question of whether the Buy American provision violates international law is beside the point. The real issue, they say, is the message that such a trade restriction would send to the international community.
Since the onset of the financial crisis in September, world leaders have been struggling to prevent a slide into the kind of tit-for-tat protectionism that in the 1930s transformed what began as a recession into a global economic depression. To that end, in November, the leaders of the world’s 20 largest economies signed a declaration outlining their commitment to keeping their borders open to trade despite the economic turmoil.
“We underscore the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty,” the declaration said. “In this regard, within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organisation (WTO) inconsistent measures to stimulate exports.”
Even if Washington can justify the trade restrictions in terms of international trade law, in principle, some critics argue, the Buy American provision represents a significant departure from the spirit of openness that inspired the declaration.
“I don’t think we ought to use a measure that is supposed to be timely, temporary and targeted to set off trade wars when the entire world is experiencing a downturn in the economy,” Republican Senator Mitch McConnell said Monday. “It’s a bad idea to put it in a bill like this, which is supposed to be about jump-starting the economy.”
But others disagree.
“Domestic sourcing is not protectionism,” Scott Paul, head of the labour group Alliance for American Manufacturing, said in statement. “It is a longstanding policy of the US government that is completely compliant with our international trade obligations.”
Pundits say that if US trading partners begin taking similar measures to prop up domestic industries, the argument against Buy American might be harder to make. So far, though, such measures do not appear to be widespread. The Economist reported last week that the Swedish government has offered Saab and Volvo as much as US$ 3.5 billion in loans and credit guarantees on the condition that the automakers spend that money in Sweden. Similar provisions have cropped up in Britain and France, but not on the scale of the proposed US domestic sourcing plans.
ICTSD reporting; “’Buy American’ rider sparks trade debate,” THE WASHINGTON POST, 29 January 2009; “US House approves ‘Buy America’ steel measure,” REUTERS, 28 January 2009; “For sale,” THE ECONOMIST, 29 January 2009; “Saab and Volvo are on the block, but where are the buyers?” THE ECONOMIST, 29 January 2009; “’Buy American’ stimulus plan riles trade partners,” AFP, 30 January 2009; “EU warns Obama on protectionism in stimulus bill,” AP, 3 February 2009.
3 responses to “‘Buy American’ Provision in Stimulus Bill Rankles US Trading Partners”
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A very good analysis. The best I’ve seen so far. Thank you. Here’s my take from a Canadian’s perspective.
http://excesscopyright.blogspot.com/2009/02/free-trade-fiasco.html
Example: I will buy what I need from my neighbors before I will leave home and buy something 200 miles away. think USA, not USSR.
Localisation is the best answer of globalisation.