Update: the FT reports this afternoon that the buy American provisions have been softened but may still do harm:
Moffat's criticism tracks with Bhagwati's:
The Senate narrowed the Buy American provisions, which require that federal money be spent on goods from US companies, to ensure they would be compatible with US commitments under existing trade treaties. But it rejected an amendment from John McCain, the defeated Republican presidential candidate, to strike Buy American from the bill altogether.
The head of the European steel industry trade group said the Senate had not done enough to head off a potential trade war. “Unfortunately the Senate’s vote does not go further and overturn the Buy American clause,” said Gordon Moffat, director of Eurofer. Countries such as China, India, Russia, the Ukraine and Turkey, which have not signed the World Trade Organisation’s government procurement agreement, would still be excluded, he said.
Yet some do worry about thus undermining the WTO, which has inherited from the General Agreement on Tariffs and Trade the many roadblocks to re-enacting that history of mutually harmful outbreaks of trade barriers. They have argued, therefore, that the US can enact WTO-consistent procurement rules by excluding from US procurement China and India, among other developing countries, which have not signed the optional procurement code. But remember that these nations can also retaliate in WTO-consistent ways. They often have “bound tariffs” – ceilings, which are significantly above the “applied”, that is, actual, tariffs; and it is possible to raise the applied tariffs towards the bound levels without any restraint at all.While I have found Bhagwati's free trade championing a bit imperious at times (and been imperiously slapped back), his warning now is timely and well-informed. Not passing a strong stimulus bill could be disastrous. But so could passing one with this poison pill.
Nothing would prevent India and China from choosing to raise tariffs thus on items of export interest to the US. Besides, they could shift their own purchases of aircraft away from Boeing to Airbus, and of nuclear reactors from American to French companies. The response would, of course, be for the enraged US congressmen to start enacting their own retaliation. The game would become lively.