Strategy

Global trade: Blame America

Will the U.S. stimulus bill provoke a global trade war?

Not a dime has been spent, but the multi-billion-dollar U.S. economic stimulus bill has already stimulated plenty of cross-border debate.

Under the controversial Buy American provisions, the House version, passed Jan. 28, proposed that projects backed by stimulus funds use only U.S.-sourced iron and steel. The Senate version, as originally worded, attempted to extend such provisions to all manufactured goods used in stimulus projects. The point is to ensure funds are spent domestically. But the proposals shut all foreign suppliers out of new stimulus spending. Canadian politicians went into overdrive, lobbying the Senate and White House furiously for a rethink.

Pressure to pass the bill is at fever pitch. A Bureau of Labor Statistics report out Feb. 6 showed the U.S. lost almost 600,000 jobs in January, bringing to 3.6 million the number of jobs lost since December 2007. In such circumstances, a Congress dominated by trade skeptics is under increasing pressure to pass protectionist measures and keep jobs at home. According to a fact-sheet put out by the Alliance for American Manufacturing, Buy American provisions will create one-third more U.S. manufacturing jobs. (Executive director Scott Paul did not respond to requests for comment.)

Others aren’t so sure. A paper released Feb. 3 by the Peterson Institute of International Economics, a Washington-based think-tank, argues Buy American actually represents only 1,000 new jobs in steel, and 9,000 jobs out of a total of 220,000 stimulus-created jobs in manufacturing. Considering the total labour force of the United States is 140 million people, these seem small numbers over which to spark what some fear could become a global trade war.

The problem, explains the paper’s author, senior strategist Gary Hufbauer, is that Buy American could easily translate into Blame America in countries whose economies are also hurting: China, India, Brazil. “They believe this crisis originated out of the United States,” he says. “They will see headlines about Buy American and will argue, ‘Why not do the same?’”

On Feb. 3, President Barack Obama went on ABC News to tell the nation he was “concerned” about the possibility of a trade war. The following day, an amendment inserted into theSenate version of the bill clarified that Buy American will be applied in a manner consistent with U.S. obligations under international trade agreements. At the Toronto Board of Trade, Minister of International Trade Stockwell Day told reporters that he was “pleased with progress so far,” though he acknowledged Canada is “not out of the woods yet.”

Day is hoping for a total exemption of Canadian goods from Buy American. This is because, as Hufbauer points out, the current wording means “true blue” U.S. products still enjoy a “huge competitive advantage” as state and local governments begin doling out federal stimulus cash. (“True blue” means all of a supplier’s inputs — say, construction steel, roofing material — are purchased from U.S. producers.) When competing for contracts, a supplier could claim “true blue” status, while charging that his competitor buys material from foreign suppliers. What’s more, states and localities could argue they are not covered under NAFTA rules on government procurement, since they didn’t sign the NAFTA chapter.

The Senate and House versions of the bill will likely be reconciled and presented to the president for signing in mid-February. At that point, Hufbauer hopes Obama will invoke a total waiver of the provisions, arguing they are not in the broad public interest. (This has already happened to the iron and steel provisions.)

It’s unclear, however, whether Obama will champion free trade over protectionism in a suffering economy. “The fracas has already done a lot of damage to the U.S. reputation,” says Hufbauer. “The only repair is a very strong statement from President Obama. The chances of that happening? Maybe 1 in 5.”