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?