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Could the Stimulus Start a Trade War?

Some commentators and trade experts have expressed concern that the "Buy American" provisions in the stimulus are not only wasteful, but potentially harmful in that they could be a prelude to greater protectionism, both here and abroad. For instance, last Saturday in the NYT, Douglas Irwin wrote:

Steel industry lobbyists seem to have persuaded the House to insert a "Buy American" provision in the stimulus bill it passed last week. This provision requires that preference be given to domestic steel producers in building contracts and other spending. The House bill also requires that the uniforms and other textiles used by the Transportation Security Administration be produced in the United States, and the Senate may broaden such provisions to include many other products.

That might sound reasonable, but history has shown that Buy American provisions can raise the cost and diminish the effect of a spending package. . . . While this is a windfall for a lucky steel company, steel production is capital intensive, and the rule makes less money available for other construction projects that can employ many more workers.

American manufacturers have ample capacity to fill the new orders that will come as a result of the fiscal stimulus. In addition, other countries are watching closely to see if the crisis becomes a general excuse for the United States to block imports and favor domestic firms. General Electric and Caterpillar have opposed the Buy American provision because they fear it will hurt their ability to win contracts abroad.

They're right to be concerned. Once we get through the current economic mess, China, India and other countries are likely to continue their large investments in building projects. If such countries also adopt our preferences for domestic producers, then America will be at a competitive disadvantage in bidding for those contracts.

The Senate's "Buy American" provisions are even worse, and could have significant trade implications while providing minimal offsetting employment benefits, noted trade economists warn. Pascal Lamy, head of the World Trade Organization, has also expressed concern.

Buy local" measures by governments will jeopardise export sector jobs and risk setting the world on a damaging downward spiral of beggar-thy-neighbour protectionism, the head of the World Trade Organisation has warned.

Speaking to the Financial Times, Pascal Lamy, WTO director-general, said pressures for economic nationalism were an inevitable response to the global crisis, but in an integrated world economy such measures were much more dangerous than in the past.

"If you start killing imports, you will kill exports," Mr Lamy said. And since a high proportion of global output depended on international supply chains, shrinking trade flows would have a huge multiplier impact on world production and jobs.

Mr Lamy would not comment directly on the Buy American provisions in the US economic stimulus bill, which potentially could be the subject of WTO litigation, but said that Washington, like other governments, had to abide by its international commitments.

Should we be worried? Daniel Drezner tries to inject a dose of optimism. I hope he's right.

Related Posts (on one page):

  1. Debating the "Buy America" Provisions:
  2. Could the Stimulus Start a Trade War?
Thomas_Holsinger:
It depends on whether the porkalooza bill's trade restrictions are enacted and enforced. If they are, then there will be a trade war. If they aren't, then there won't.
2.6.2009 1:32pm
AG2009:
How can the U.S. be accused of protectionism when we have the largest trade deficit in world history? Clearly the U.S. is interested in products from other countries.
2.6.2009 1:49pm
anonymous98:
"If you start killing imports, you will kill exports," Mr Lamy said. And since a high proportion of global output depended on international supply chains, shrinking trade flows would have a huge multiplier impact on world production and jobs.
--------------------

So not only will the United States eliminate its trade deficit, but all those outsourced jobs will come back here too!
2.6.2009 1:53pm
RPT (mail):
There has been a trade war ongoing for some time. It would be nice if the enthusiastic GWOT supporters had equal interest in this area.
2.6.2009 1:55pm
Sarcastro (www):
World War VII?
2.6.2009 2:03pm
Some Random Bonehead (mail):
Gosh, do you think so?

Every other industrialized nation is drafting a stimulus bill right now. If the US waves a big stick in the air, what are the odds that France, or Germany, or Japan might not take it the wrong way?

What's the American trade balance again?
2.6.2009 2:13pm
Oren:
At the very minimum, we'll seem like huge hypocrites. I hope the the moderate block of the Senate (Nelson seems to be taking the lead, which is interesting since he was a possible veep) mitigates the damage and takes out some of the more wasteful spending. If we are lucky, there will be a provision that forbids spending any stimulus money after Jan 1 2011 (after all, this is short term stimulus, right?).
2.6.2009 2:19pm
Tony Tutins (mail):
Instead of stimulating other countries' economies, couldn't we just offer them tax cuts, instead?

How many infrastructure jobs should we set aside for illegal aliens?
2.6.2009 2:34pm
Steve:
I have not seen much detail on the extent to which the proposed "Buy American" measures even differ from current law. My understanding is that the federal government already operates under certain constraints of this type and they are perfectly consistent with our treaty obligations, so the difference is apparently one of degree.

It seems to me that it is in the interests of free-trade advocates to avoid illuminating these distinctions so that people will believe these "Buy American" provisions are wholly novel innovations that will blow up our trade relations, but I would be very interested in seeing a fact-based analysis of what is actually at issue here.
2.6.2009 2:40pm
Nunzio:
Could the stimulus start a stimulus?
2.6.2009 2:42pm
Clayton E. Cramer (mail) (www):
Are the Democrats TRYING to create another Great Depression? Do they not know about Smoot-Hawley and its role in turning a stock market crash into a worldwide depression? Or do they not care?

World War II was fought with conventional weapons until the very end. The war that repeating the Smoot-Hawley mistake will cause will be a lot worse.
2.6.2009 2:56pm
David Drake:
The world went down this road before. The result was the Great Depression and ultimately a world war.

Those who do not know the past. . .
2.6.2009 2:56pm
David Drake:
Steve--

I think the difference is that the current provisions would be extended into non-federal government purchases in violation of treaty obligations and common sense.

Why should we taxpayers have to pay more for steel, for example, if we could get it cheaper from an off-shore supplier? Because some lobbyists for "Big Steel" persuaded Congress to require it?
2.6.2009 2:59pm
Steve:
David, do you have a link for that information? If something in the stimulus package purports to regulate the purchasing decisions of private individuals, that would certainly be pertinent, but I haven't seen anything like that to date.
2.6.2009 3:02pm
David Drake:
RPT:


There has been a trade war ongoing for some time. It would be nice if the enthusiastic GWOT supporters had equal interest in this area.


The Bush II adminstration tried mightily in the Doha Round of trade talks to address this, did it not?

I'm a proponent both of fighting the Jihadis (What you dismissively call the "GWOT") and free trade; I suspect there are lots and lots of others.
2.6.2009 3:03pm
jpe (mail):
Steve and David: the WTO Government Procurement Agreement (available at the WTO web site) requires national treatment in government procurement. If the feds purchase stuff, they can treat a foreign supplier no worse than an American supplier. eg, they can't discriminate based on the nationality of the supplier.

There is a broad exception for defense contracting, so if our procurement policies have required American goods then those policies have fallen within that exception.
2.6.2009 3:10pm
JoeSixpack (mail):
So we are more than happy to pay for people in other countries to get abortions, but we don't want to trade with them in ordinary products and services. More change we can believe in! This is almost as good as the liberals who don't want to send jobs to other countries but are more than happy to have people from those countries illegally pour across the border and take the jobs that are still here.
2.6.2009 3:12pm
David Drake:
Thanks JPE. I'm somewhat of a technological illiterate and couldn't get my link to an article yesterday to work.

The article said that the "stimulus package" has been amended to stipulate that nothing in it shall be deemed to violate WTO requirements or other treaty obligations, but the "Buy American" provision was left in the bill.
2.6.2009 3:18pm
Sarcastro (www):
Quiet JoeSixpack! Don't give away our plan! We plan to import everybody, and starve or abort all the rest, and then rule the world!! It should only take about a million years.
2.6.2009 3:19pm
Bill McGonigle (www):
This isn't surprising, it's Smoot Hawley II. We'll be rebasing the currency to monetize the debt in a couple years. The work programs will continue to make things worse until the monetary situation gets fixed, eventually.

A former-Soviet escapee told me the other day, when we were talking about this, "most people can't learn from history they haven't experienced," and it saddens me to agree. The TV tells me, "all this has happened before, and all this will happen again."
2.6.2009 3:25pm
wooga:

Are the Democrats TRYING to create another Great Depression? Do they not know about Smoot-Hawley and its role in turning a stock market crash into a worldwide depression? Or do they not care?


I hesitate to declare that people I disagree with "must be either stupid or evil" - a common tactic of the left - but I'm beginning to think that the Democrats in Congress either really don't know about Smoot-Hawley, or are deliberately seeking short term political gain at the expense of expected long term economic disaster for the US.

I mean really, is there any legitimate reason that "this time will be different" from the last time they tried it?

Any takers on how long until the Kos kids start editing the Smoot-Hawley Wikipedia page to claim it was a good thing?
2.6.2009 3:26pm
anonymous87:
The world went down this road before. The result was the Great Depression and ultimately a world war.
-------------------

A common misunderstanding. America's protectionist tariffs were in place until the 1960s.
2.6.2009 3:28pm
Steve:
I find the intersection between the Buy American Act and the WTO Government Procurement Agreement to be rather elusive. Wikipedia suggests the Buy American Act is excluded from the GPA's coverage, but I haven't been able to find a primary source which says so.
2.6.2009 3:34pm
Bruce Hayden (mail):
I am no expert here, but don't we import a lot of our steel, etc.? I think the reality is that we haven't been competitive internationally making basic steel for a long time now, and only are competitive on specialty types. So, in an attempt to gin up high paid American jobs, the solution is to subsidize the making of inefficient American steel, in preference for buying cheaper foreign steel. Of course, the steelworkers union will benefit, but that doesn't make a lot of economic sense.
2.6.2009 3:38pm
Anonymous Engineer:
I find the Buy America provisions egregious, but I'm surprised there's been such an outcry about their inclusion in the stimulus bill, given that existing law already includes similar requirements - at least in the transportation sector.



I have a project scheduled to go out for bids on Monday. This project was ready to build last summer, but because the project includes federal funding, we've had to wait 6 months for a waiver to the Buy America requirements in order to use a foreign steel expansion joint.
2.6.2009 4:42pm
Anonymous Engineer:
Link didn't work; here are the current FHWA Buy America requirements: CFR 635.410
2.6.2009 4:45pm
Michael B (mail):
Krugman chimes in, youTube (in two parts), too narrowly and predictably focused one might suspect, but a contrasting pov.

(As to concerns with groupthink in general but otherwise OT, developments relevant to Unfairness Doctrine initiatives are worth heeding. Groupthink and statism go hand in glove.)
2.6.2009 7:01pm
wyswyg:

"America's protectionist tariffs were in place until the 1960s."


Not only that, this country was built on protectionist tariffs, as was Britain in it's glory days. For the first hundred years of its existence the US federal government was funded by excise taxes and tariffs.
2.6.2009 7:03pm
wyswyg:

"..on an attempt to gin up high paid American jobs, the solution is to subsidize the making of inefficient American steel, in preference for buying cheaper foreign steel. Of course, the steelworkers union will benefit, but that doesn't make a lot of economic sense."




Exporting all of Americas jobs does not make a lot of sense either, but that's the path we're taking at present.
2.6.2009 7:06pm
Elliot123 (mail):
"David, do you have a link for that information? If something in the stimulus package purports to regulate the purchasing decisions of private individuals, that would certainly be pertinent, but I haven't seen anything like that to date."

When a contractor is engaged to build something, he cuts purchase orders to the suppliers under his own name. Then he bills the project owner and adds a fee. So almost all infrastructure repair purchases are done by private contractors. The contracts can be written to restrict the contractors to using only certain suppliers. The contactor takes this into consideration when bidding the job. They are funded by the government, but executed by the private contractor. This is where it can get very messy.
2.6.2009 7:39pm
Elliot123 (mail):
"Exporting all of Americas jobs does not make a lot of sense either, but that's the path we're taking at present."

While we can say some jobs are exported, many more never were here, and others are eliminated by technlogy.

For example, a labor intensive plant may be built in Thailand, and it exports its products all over the world. If the owner is an American company, it cannot compete in the world market if it built the plant in the US. So these are jobs that never were in the US, never could be, and always existed outside the US.

Other plants in the US are old and use outdated technology. A plant may employ 500, but after upgrade it might employ only 50. If it were upgraded in the US 450 jobs would be lost. If it is moved to Thailand, then 500 jobs are lost. Activists then claim 500 jobs are exported when the true figure is 50.

But, an owner looks at all the government regulations he has in the US... OSHA, labor law, equal opportunity, envirnmental impact statements, Sarbanes-Oxley, lawsuits of every type, and decides it's not worth it to stay in the US. And now the Democrats are promising card check. Why bother? The American worker tells himself he is the best in the world, but he's the only one who still believes it.

These other countries try to make it easier for companies to do business. Many people in the US oppose commerce and try to make it more difficult to do business. Remember the 2000 campaign where Al Gore campaigned against corporations? Kerry did a modified version in 2004. Why?
2.6.2009 7:53pm
RPT (mail):
"Michael B:

Groupthink and statism go hand in glove."

They don't call themselves dittoheads for nothing.
2.6.2009 10:54pm
Eli Rabett (www):
There are huge and questionable assumptions built into claims that Free Trade is beneficial, including full employment and capital availability, which, as the guy said looking around, ain't the case. As a matter of fact, the US and the world look increasingly like underdeveloped countries with economies characterized by underemployment and volatile, cyclical capital flows. To top it off, at least one of the major players, China, does not have a flexible exchange rate.

Therefore, the premise, that a "buy American" amendment would restrict free trades is not something to worry much about.
2.7.2009 11:01am
pintler:

I think the reality is that we haven't been competitive internationally making basic steel for a long time now, and only are competitive on specialty types.


I'm no expert either, but I think at least some US companies are competitive - I toured a Nucor steel mill a couple of years ago, and at that time they were exporting rebar to China. It was a very efficient plant. They may be, to borrow from another thread :-), the exception that proves the rule.

BTW: someone asked if they were a union shop (they are), and if they had the 'yup, the line is down but we can't change the fuse and restart until an electrician gets here' type problems. The reply was 'our average worker has a high school diploma and makes $90K a year. Two thirds of that is production bonuses. When rebar is coming off the line, we're making $45/hr; when the line stops, we're making $15/hr. Everyone cooperates to keep the line running'. And it was a plant where everyone seemed upbeat, with an enviable safety and environmental record (heck, it's almost in downtown Seattle).

If we're going to have a 'Car Czar', it's a doggone shame Ken Iverson isn't available.
2.7.2009 11:48am
A. Zarkov (mail):
This article appearing the the Los Angeles Times by Harvard economist Niall Ferguson. Fairly short recommended reading even if you think the stimulus package will work.

There is something desperate about the way economists are clinging to their dogeared copies of Keynes' "General Theory." Uneasily aware that their discipline almost entirely failed to anticipate the current crisis, they seem to be regressing to macroeconomic childhood, clutching the Keynesian "multiplier effect" -- which holds that a dollar spent by the government begets more than a dollar's worth of additional economic output -- like an old teddy bear.
Basically Ferguson says that the Keynesian prescription won't work because the current situation is so fundamentally different from the 1930s. All this seems to escape Krugman and Delong. Time will tell. A lot of people are going to be very embarrassed in a few years and I don't think it will be Ferguson.
2.7.2009 2:25pm
Alexia:

Any takers on how long until the Kos kids start editing the Smoot-Hawley Wikipedia page to claim it was a good thing?


It will be an ironic treat to see the Kos kiddies making a case for Pat Buchanan's position.
2.7.2009 2:45pm
PC:
I'm glad Republicans were all up in arms when the Bush administration was jacking up tariffs for cheese the week before it left office.

Trade wars! Great Depression II!
2.7.2009 3:43pm
Michael B (mail):
A telling sneer, RPT.

So, I link to roughly 15 mintues of Krugman. I additionally link to two comments at Unfair Doctrine, one on Dem. Sen. Stabenow's interest in resurrecting the Orwellian "fairness" doctrine.

And RPT's response, his commentary, his insight? A big, bad, vapid sneer.
2.7.2009 4:28pm
Steve2:


But, an owner looks at all the government regulations he has in the US... OSHA, labor law, equal opportunity, envirnmental impact statements, Sarbanes-Oxley, lawsuits of every type, and decides it's not worth it to stay in the US.


My understanding is that evading those US regulations in the US is only possible under a Free Trade model. Under a Fair Trade model, couldn't (and possibly, shouldn't) the U.S. government impose an import tariff on all goods manufactured under less-costly-than-American regulations to bring the cost up to what it would be had they been made under the U.S. regulations?
2.8.2009 11:18am
RobertT (mail):
Free trade with free countries. Anything else is an unbalanced equation.
2.8.2009 7:20pm

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