19th February 2009

Criticism grows as ‘Buy American’ rules written into law

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‘Buy American’ provisions in the US$ 787 billion stimulus bill that was signed into law yesterday by US President Barack Obama have sparked sharp rebukes and threats of legal challenges from US trading partners. But Washington maintains that the domestic-sourcing requirements are in line with its international trade commitments and that the measures will create vital manufacturing jobs at home.

The Senate and the House of Representatives both approved the final compromise version of the bill late last week, with members of Congress voting largely along party lines, Democrats in favour and Republicans opposed.

(For background on the bill’s passage through Congress, please see Bridges Weekly, 12 February 2009, http://ictsd.net/i/news/bridgesweekly/40503/, and Bridges Weekly, 4 February 2009, http://ictsd.net/i/news/bridgesweekly/39776/.)

The controversial ‘Buy American’ provisions require the purchase of US-made iron, steel and manufactured goods for all building or public works projects that are funded by the massive spending bill. The legislation provides roughly US$ 48 billion for transportation projects and another US$ 30 billion in infrastructure improvements and other spending. It is the dispensing of those funds that would be subject to the ‘Buy American’ requirements.

However, the law allows the purchase of foreign products under three scenarios: if US goods are not available in sufficient quantity or quality; if the use of domestic material would increase the cost of a project by more than 25 percent; or if an agency head deems it “in the public interest” to use foreign materials.

The legislation also states that the domestic-sourcing provisions must be implemented in a way that does not violate Washington’s obligations under international trade rules. Thus, products from NAFTA members Canada and Mexico would in theory be safe from the restrictions, as would goods from countries that have signed bilateral trade deals with the US. Moreover, products from the EU, Japan, Korea, Switzerland and a handful of other countries that, like the US, have signed the WTO’s Agreement on Government Procurement, or GPA, would also be exempted from the ban.

And in a final exemption that was added in the last round of negotiations on the draft legislation, lawmakers added a provision ensuring that the ‘Buy American’ requirements would “not apply to least developed countries to the same extent that it does not apply to the parties of…international agreements.”

Criticism from abroad and at home

But that US pledge not to violate its trade commitments provided little comfort for countries such as China and Brazil, whose exports would not be protected from discrimination under existing world trade laws.

In a swift and forceful reaction to the new US legislation, Brazil indicated earlier this week that it may challenge the ‘Buy American’ rule at the WTO’s Dispute Settlement Body.

“It’s a complex legal analysis, but we’re doing it,” Brazilian foreign minister Celso Amorim told a Brazilian television network on Monday, Reuters reported.

“(Going to the WTO) is a real option,” he added.

“It’s a bad sign…It’s not positive at a moment when the world economy is trying to revive,” Amorim said.

The outcry from China was also strident. A story in the government-run Xinhua news service lambasted the “potential protectionism embedded in the [domestic sourcing] provisions.”

“’Buy American’ has become particularly sensitive in a time that the world is facing sagging economy and slumping trade, echoing the Great Depression in the 1930s when a wave of tit-for-tat protectionism chocked global trade and prolonged the economic pain,” the story said.

For its part, though, the White House has said that it is confident that measures have struck the right tone.

“I think where we ended up with the ‘Buy American’ provision is the right compromise that respects the ‘Buy American’ laws that we have had on our books for many, many years, while also ensuring that the language doesn’t create unnecessary trade disagreements in a time of economic crisis,” Obama spokesman Robert Gibbs told reporters last week.

The new law will no doubt be on the agenda during Obama’s upcoming visit to Canada on 19 February, his first trip outside the US since taking office four weeks ago. The Canadian government has already signalled its unease with the domestic-sourcing provisions in the US stimulus bill.

“Our intent and our resolve is to see that there is no increase of that ‘Buy America’ act … that’s the territory that we’ll be marking out and I’m sure the prime minister will be sharing some of those things with the president,” Canadian Trade Minister Stockwell Day told a Canadian television network on Sunday.

Ottawa has also expressed its unease over promises that Obama made on the campaign trail to re-open some sections of the North American Free Trade Agreement, a subject expected to be broached at the meeting on Thursday.

But Obama signalled in an interview with Canadian television yesterday that Ottawa should not be too concerned about the ‘Buy American’ provisions, stressing that his administration understood the dangers of protectionism.

“Canada is one of our most important trading partners. We rely on them heavily. There’s US$ 1.5 billion worth of trade going back and forth every day between the two countries and it is not in anybody’s interest to see that trade diminish,” he said.

Criticism of the ‘Buy American’ requirements was not limited to foreign governments. US business groups also slammed the proposal on the grounds that it might launch a trade war that could ultimately limit their access to markets overseas.

“The ‘Buy American’ provisions in the stimulus bill will signal to our trading partners around the world that the United States is returning to the bad old days of protectionism and economic nationalism. Rather than stimulate the economy, these provisions will lead to retaliation from abroad and cost precious jobs in the United States,” Gary Shapiro, president of the Consumer Electronics Association, said last week.

“The promise that the ‘Buy American’ provisions keep with the letter of World Trade Organization commitments is a meaningless gesture – it contradicts recent statements by both President Obama and G-20 leaders to avoid protectionism,” he added.

But the provision generated enthusiasm among US labour groups, which welcomed the ‘Buy American’ requirements wholeheartedly. Thomas Gibson, president of the American Iron and Steel Institute said the domestic-sourcing requirements would “lead to thousands of jobs in the manufacturing industry.”

But trade analysts disagree as to whether the domestic purchasing requirements will 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. However, an earlier study by the Alliance for American Manufacturing, a coalition of labour groups, concluded that the ‘Buy American’ requirements will create 77,000 new jobs in the manufacturing sector.

Trade Adjustment Assistance gets a boost

In another win for union interests, the stimulus bill updates and expands the existing Trade Adjustment Assistance, or TAA, programme, which offers training and income support for displaced workers.

The new version of the programme increases funding for training courses and extends coverage to include workers in the services sector, as well as workers who lose their jobs because of plant relocations to countries with which the US does not have a free trade agreement. The new provision also raises the health coverage tax credit and guarantees TAA coverage for workers who lose their jobs because of unfair import surges.

The Emergency Committee for American Trade, which fights for US business interests on Capitol Hill, applauded the expansion, saying that programmes like TAA are “vital to ensure that American workers have the skills, tools, training and resources to re-enter the workforce when adjustment is required.”

ICTSD reporting; “Brazil may challenge ‘Buy American’ at WTO,” REUTERS, 17 February 2009; “Obama’s stimulus clears House, goes to Senate,” 13 February 2009; “FACTBOX – Trade dominates Canada-US issues for Obama visit,” REUTERS, 17 February 2009; “FACTBOX – ‘Buy American’ in US stimulus bill,” REUTERS, 13 February 2009; “Recovery package gets congressional approval,” WALL STREET JOURNAL, 14 February 2009; “’Buy American’ meets formidable challenge,” XINHUA, 16 February 2009.

One response to “Criticism grows as ‘Buy American’ rules written into law”

joko s.usman 22nd February 2009 at 02:23
The G20 signed in Washington late 2008 indicated that we have just to agree to non restriction on trade flows. Why the US as the initiator of the accord and leader of the free world becomes a protectionist. This is an unacceptable trade policy/law.The world will retaliate and an unprecedented severer world economic and political chaos may happen.