“Buy American” clause prompts global trade war fears

It looks like the concerns expressed on Stormont Live by economist Mike Smyth were well founded. The US Stimulus Bill passed by Democratic Party representatives, 11 of them joined Republicans in opposing it, contains a “Buy American” clause for public infrastructure projects. Alex Singleton identifes the old protectionist problem at the Telegraph blog and concerns of a trade war are already being expressed by the Canadian government and by the European Commission – the US Chamber of Commerce are also reported to be concerned. Magical unicorn fairyland, indeed.
From the CBC report

As passed by the House, Section 1110 of the American Recovery and Reinvestment Act of 2009 says, “None of the funds appropriated or otherwise made available by this act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron and steel used in the project is produced in the United States.”

The exceptions to the rule are if “the head of the federal department or agency involved finds that” the rule “would be inconsistent with the public interest,” there is insufficient U.S. iron and steel of satisfactory quality, or including U.S. iron and steel will increase the cost of the project by more than 25 per cent.

This language won’t necessarily be in the bill when it gets to Obama’s desk for signing, but the final version could be even worse from the point of view of U.S. trading partners.

The Washington Post reported Thursday that a Senate version of the bill, yet to be acted upon, goes further, requiring, with few exceptions, that all stimulus-funded projects use only U.S.-made equipment and goods.

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  • Harry Flashman

    One has to be amused by commentators bemoaning the lack of bipartisanship in vote on the massive bail out package when in fact the House displayed admirable bipartisanship when 11 Democrats joined with all of their Republican colleagues in rejecting a massive pork barrel bill which at a fair estimate will see only about 20% of the money going to actual economic stimulus packages.

  • kensei

    The general principle is worrying, but I’m not sure you can equate this with the steel tariffs. That is a general provision, this is specific to a single package. If you are pumping money into your economy you probably don’t want lots of the cash leaking out.

    I’m not 100% sure what impact this will have. It will probably mean steel is more expensive on these projects. So there is either less money for other people (bad for them but not necessarily hugely mattering in aggregate) or the project overruns budget (bad). It might also simply time shift the job losses in steel (probably what you want). But those seem more internal issues for the US than big problems in world trade? Does anyone have abetter understanding?

    HF

    What constitutues “stimulus” is very much in the eye of the beholder.

    I think Warren Buffett put it best as to what they are doing:

    SG: But there is debate about whether there should be fiscal stimulus, whether tax cuts work or not. There is all of this academic debate among economists. What do you think? Is that the right way to go with stimulus and tax cuts?

    WB: The answer is nobody knows. The economists don’t know. All you know is you throw everything at it and whether it’s more effective if you’re fighting a fire to be concentrating the water flow on this part or that part. You’re going to use every weapon you have in fighting it. And people, they do not know exactly what the effects are. Economists like to talk about it, but in the end they’ve been very, very wrong and most of them in recent years on this. We don’t know the perfect answers on it. What we do know is to stand by and do nothing is a terrible mistake or to follow Hoover-like policies would be a mistake and we don’t know how effective in the short run we don’t know how effective this will be and how quickly things will right themselves. We do know over time the American machine works wonderfully and it will work wonderfully again.

  • 6cp

    Bush and his promotion of free trade wasn’t so bad after all, eh?

    Obama and the Dems are going to stick it to the rest of the world. Europeans can’t start whingeing and whining now.

    You reap what you sow!

  • edward

    the only people this will stick it to is the american people as the government has just signalled the steel manufacturers that they can now charge premium prices for inferior product

    Oh well what else is new

  • Earnan

    Read an analysis of the breakdown of whats in the “stimulus” bill.

    Stimulus bill my ass. Just using the economy as an excuse to fund all kinds of things on the lefts wishlist.

    But hey, whats another trillion in debt??

  • I wonder if all the forelock tuggers who will show up in Ottawa on the 19th when the President graciously comes to visit (ZOMG FIRST!1!) will show solidarity with steel workers in Hamilton, Ontario who will be shut out of the so-called “Free Trade Area”, while our federal and provincial government is expected to shove billions into the maws of the car companies headquarters in Mr. Obama’s country.

    Will. They. F**k.

  • NCM

    Maybe the larger problem is corporations, beholden only to the profit of their shareholders, moving all the manufacturing jobs to China where, under the complicit eyes of the so-called “communist” people’s government of China, you can pay the workers 25 cents an hour and can throw them in the street without workers compensation when your dangerous factory machinery lobs off their hands. With this as the backdrop, trying to push a little US manufacturing, rewarding the corporations who still make things in the US despite higher labor costs, is fair play.

  • OC

    Mark Dowling: I’m assuming that you are Canadian.

    I became aware that paper mills in the US Midwest were being closed, and many were Canadian owned.

    But when I looked on the ‘net, it seems that Canadian paper mills were suffering the same closures, but were actually owned by US firms.

    WTF?!?

    In both countries, these closures sometimes devastated the small towns that the mills were located in.

  • Greenflag

    ‘WTF?!? ‘

    I recall a couple of years reading a report which stated that it cheaper to cut down the wood in the USA or Canada export it to Indonesia and have it processed in paper mills there and returned to either the USA or Canada and sell on the local market for 50% of what a locally (USA or Canadian ) plant would have to charge to remain viable .

    ‘But hey, whats another trillion in debt?? ‘

    Small change compared to the drop of 23 trillion in world wide ‘wealth ‘ when all the missing share value and property values and income loses are added in .

  • Lurganite

    Globalisation is something all the attendess at Davros do not wish to speak about, wonder why that is 🙂

  • kensei
  • Pete Baker

    Ken

    And what does Krugman [Nobel prize winner, after all] say in favour of protectionism?

    It’s a second-best argument — coordinated policy is the first-best answer.

    And his fear..

    And if we go all protectionist, that will shatter the hard-won achievements of 70 years of trade negotiations — and it might take decades to put Humpty-Dumpty back together again.

    Which is indeed the fear of a global trade war I pointed to.

    His argument amounts to, it’s for US! And it’s only short-term.. honest.

  • kensei

    Pete

    If you are going to quote him, Pete, best give the man the courtesy of the full context.

    Let’s be clear: this isn’t an argument for beggaring thy neighbor, it’s an argument that protectionism can make the world as a whole better off. It’s a second-best argument — coordinated policy is the first-best answer. But it needs to be taken seriously.

    In any case, is anyone addressing the first-best argument? That might something to consider before going off in a tizzy.

    His argument amounts to, it’s for US! And it’s only short-term.. honest.

    The issues here strike me more political than economic. It is both and understandable and not unreasonable reaction by the US taxpayer to demand that the vast sums they are borrowing remain in their economy. I am unsure why on principle you believe the US should be subsidising the rest of the planet. I additionn to the economic case Krugman presents, if large sums were spent outside the US it could jeopordise the entire stimulus, which might very well mean that things get much worse than they might otherwise have been.

    But we know that the general economic argument is strongly in favour of trade. If the political climate leads to protectionism (and again, we should bear in mind it takes more than the US to get to that point) then in the medium to long run we are worse off. So there is a tension, and a challenge there. The more interesting question to me seems to be how the Obama Adminstration walks the line.