Thursday, February 05, 2009

What Republicans should be good for

Andrew Sullivan has recently written something to the effect that we need Republicans to referee spending and hack fat off the stimulus bill. I seriously doubt the party's ability for constructive input on that front (so does Andrew; today he writes that they should understand that they have no crediblity on fiscal discipline). But Republicans could do the country a real service right now by standing up for one of the party's historic core principles: free trade. Today, Jagdish Bhagwati in the FT and Burton Malkiel in the WSJ sound the alarm about starting a Depression-triggering cascade of protectionist actions worldwide with the "buy American" provisions in the stimulus bill. Those warnings are timely and should be a matter of bipartisan consensus.

Update: the FT reports this afternoon that the buy American provisions have been softened but may still do harm:

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.

Moffat's criticism tracks with Bhagwati's:
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.

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.

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.

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