Buy American, Buy Depression
Trade: The new administration watered down a protectionist "Buy American" provision in the Senate stimulus bill and hoped all sides would go away happy. But they won't, as the European Union envoy to the U.S. explains.
As if the $900 billion stimulus package wasn't controversial enough, provisions requiring purchase of U.S.-made iron and steel for government contracts that were slipped into the House version, and of all manufactured goods in the Senate's, have annoyed more people than expected — across the world.
Last week, leaders from Canada, Brazil, China, the U.K., India, Mexico, Germany and the Czech Republic, among others, spoke out against such "Buy American" provisions as protectionist. Some threatened retaliation.
The most assertive voice came from the European Union, our top overseas market, which last year engaged in two-way trade with the U.S. totaling $709 billion.
EU ambassador to the U.S. John Bruton warned Congress that the "Buy American" provisions will damage the U.S. as well as world trade by building protectionist sentiment around the world.
Even a watered-down provision "Buy American" provision passed "in a manner consistent with U.S. obligations under international agreements" is still bad news, Bruton said. It may not violate treaties, he said, but it's protectionism just the same.
We may have our differences with Europe about its lumbering statism and political correctness, but it's worth remembering the trade wars that presaged World War II and the core premise of the EU itself — a trading bloc of free nations designed to ensure continental peace.
Now, with a global crisis on, "we are all in this together," Bruton told IBD in a recent interview to make the EU's case. Even if the "Buy American" provision breaches no U.S. treaty obligation, as the Senate insists, Bruton said it still breaks a vow the U.S. made at the G-20 summit last November, in the early stages of the economic crisis.
All the large developed and emerging economic powers agreed to introduce no protectionist measures, he said.
But "Buy American" violates that. "To introduce this in a high-profile stimulus bill sends out a message that the U.S. doesn't see this crisis as a global problem but only an American problem that can be solved by American legislation."
"This is a global crisis we are facing," Bruton said. "We need to tackle this globally."
Retaliation would be the first problem, but not the last. "I suppose if the U.S. did breach its international obligations, there would be retaliation," he said. "But that doesn't mean this doesn't do a whole lot of damage."
Bruton said the stimulus bill is being closely watched and will send a global message. U.S. leadership would not be enhanced, he said, noting that another G-20 meeting is set for April, where the U.S. presumably would have to explain itself.
"I think this is a mistake for the signal it sends to the rest of the world," Bruton said.
After all, two can play the protectionist game. Europe was somewhat shielded from the move because it had signed a "Government Procurement Agreement" with the U.S. But in areas of the economy where that didn't hold sway, retaliation could be possible.
That would be terrible for U.S. companies, he said. They could be shut out of contracts they might otherwise win.
"The EU market for government contracts is one of the most open in the world, and many American companies bid successfully for public sector contracts," he said. "The risk is that if America becomes more closed, the only way to persuade it otherwise is to retaliate, which, in the short run, imposes costs."
Meanwhile, emerging countries such as Brazil and India "are not party to agreements," Bruton said, "so the full rigor of (the Buy American rule) would apply to them."
Besides, he said, "We already have had 'Buy American' provisions in effect since the 1930s, so why are they not adequate now? The legislation was signed by Herbert Hoover, and it didn't do much."
Even from the U.S. point of view, protectionism would bring less bang for the buck, Bruton said. If the U.S. wants to build new bridges, or invest more in information technology, or build schools, it will cost more if you limit the potential suppliers through protectionism than if you throw the process open to bidders around the world.
This is in no one's interest, said Bruton. "One would end up with less stimulus per dollar on a global basis."
And it would also mean more bureaucracy, he warned.
"If you have to buy American, you have to verify where products come from," he said. "So a lot of money would be wasted in paperwork to comply with the provisions, and that's not what we want at a time of urgency."
It's true the EU has its own list of protectionist policies. But Bruton's right about one thing: as we found in 1930, after the Smoot-Hawley tariffs were imposed, more protectionism is the last thing the world needs.