Poison pill in the stimulus bill

Suppose the Democratic Congress passes and President Obama signs a stimulus bill that triggers a worldwide Depression rather than forestalling one? We may be on the brink.

Like many Obama supporters, I've spent a lot of time lately fretting about what Republican opposition might do to the stimulus. Will they cut out $200 billion? Will they raise the ratio of tax cuts to spending?

But those concerns pale beside the "buy American" provisions in the bill. In the House version, these stipulate that any iron and steel used for projects funded by the bill be produced in the U.S. The current Senate version extends the requirement to all manufacturing products.

Leaders in Europe and Asia are warning that these provisions could trigger a global trade war -- a cascade of "beggar-thy-neighbor" protectionist measures. Economists and financiers across the political spectrum echo that warning (two are noted in the prior post). As the world looks to the Obama Administration for leadership, a protectionist stimulus would cause swift and widespread disillusion -- and equally widespread retaliation.

Most galling, as a new Peterson Institute study makes clear, the provision would trade U.S. global credibility for a pittance -- approximately 1,000 steel industry jobs in a labor force of 140 million people.

The negative effects of the provision may be moderated in various ways. It may be jiggered to remain in nominal compliance with WTO and NAFTA commitments. Specifically, additional cover could be built into its current public interest waiver, stating that the "buy American" provision will be waived where it proves "inconsistent with the public interest." The Peterson brief suggests that negative effects could be mitigated "by stating explicitly...that the public interest waiver is intended to be used to avoid violations of US trade obligations." Another option, according to the Peterson brief, is a presidential statement (signing statement?) that the U.S. will respect its international obligations.

Even with such a caveat, however, as the Peterson brief and Jagdish Bhagwati point out, the provision would cut out major steel suppliers hat have not signed the WTO's Agreement on Government Procurement -- namely China, India and Brazil. Yes, the measure with the appropriately positioned waiver could be used to "encourage" those countries to sign on. But it will more likely prompt them to impose their own import restrictions.

It's distressing that the Peterson brief appears to assume that the political imperative to include this poison bill is too strong to resist. What an opportunity this is for Obama to walk the bipartisan walk and outflank even most Republicans from the "right" -- though part of his broader political message should be that getting a free trade/fair trade balance right does not fall into "the tired categories of left and right." The real issue, framed trenchantly by the Peterson brief, is leadership:

Buy American provisions would particularly damage US reputation abroad since they would come just a few months after the United States pledged to reject protectionism at the G-20 summit on November 15, 2008. The world is carefully watching the first moves of President Obama to gauge the tone of the new administration's trade policy...

Based on our economic and legal analysis, the Buy American provisions would violate US trade obligations and damage the United States' reputation, with very little impact on US jobs. In a country of 140 million workers, with millions of new jobs to be created by the stimulus package, the number of employees affected by the Buy American provision is a rounding error.

In other words, there is little bang for the buck, and on balance the Buy American provisions could well cost jobs if other countries emulate US policies. Most importantly, the Buy American provisions contradict the G-20 commitment not to implement new protectionist measures--a commitment that was designed to forestall a rush of "beggar-thy-neighbor" policies.

Very early in his presidency, George W. Bush's free trade credibility was gutted when he kowtowed to the steel industry and imposed tariffs on steel imports. What a bitter irony if Obama makes the same mistake in his first month in office - selling the U.S.'s global leadership birthright for a mass of protectionist pottage.

UPDATE: Buy American provision has been softened but not dissolved - FT:

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 Ukraineand Turkey, which have not signed the World Trade Organisation’s government procurement agreement, would still be excluded, he said.

The "softening" was prompted by Obama, who had this exchange with Charlie Gibson on Feb. 3:

CHARLES GIBSON: A couple of quick questions. There are "Buy America" provisions in this bill. A lot of people think that could set up a trade war, cost American jobs. You want them out?

PRESIDENT OBAMA: I want provisions that are going to be a violation of World Trade Organization agreements or in other ways signal protectionism. I think that would be a mistake right now. That is a potential source of trade wars that we can't afford at a time when trade is sinking all across the globe.

CHARLES GIBSON: What's in there now? Do you think that does that? Do you want it out?

PRESIDENT OBAMA: I think we need to make sure that any provisions that are in there are not going to trigger a trade war.

But Obama stopped short of calling for the provision to be removed entirely. Clive Crook explains why the "softening" is not enough:

President Obama and his spokesmen said this week that the bill's language will be changed as necessary to prevent a trade war. The revised Senate language is helpful, but does not go far enough. Protectionism that is technically consistent with treaty obligations is still an attack on trading partners. The spirit of co-operation is as important as the letter. In the current climate, legal protectionism could quickly degenerate into a cycle of illegal retaliation and counter-retaliation.