WASHINGTON — "Buy American" provisions in the economic stimulus legislation moving through Congress have foreign leaders threatening retaliation and academics warning that the globe could soon go through the kind of tit-for-tat protectionism that helped deepen the Great Depression.
The stimulus bill passed by the House of Representatives and the Senate measure being voted on this week contain a provision that directs builders and general contractors to use only U.S.-made steel and iron.
Proponents insist that these provisions already exist in U.S. law and simply echo a 1982 policy that requires federal transportation spending to favor U.S.-made iron, steel and manufactured goods.
Opponents warn that these terms in the stimulus legislation may violate international trade treaties and present an affront to nations already reeling from entanglement in America's financial-market meltdown.
Both are right.
In today's interconnected — and badly bruised — world, the perception of rising protectionism in Washington may be as important as a reality that suggests otherwise.
A number of economic stimulus programs are being forged in capitals around the world — from Beijing and London to Brasilia and Canberra — that could launch a new wave of what some will call protectionism, others self preservation. If they emulate the U.S. "Buy American" national favoritism, not only will U.S. firms miss opportunities to sell to them, but the pattern of closing off commerce to non-nationals could expand.
The Buy America provision "is starting small, but of course our whole financial crisis started small, with subprime (mortgages). You've got the same thing in the trade area — you can start small, but it is a license to every country to protect" its domestic industries, said Gary Hufbauer, a senior fellow for the Peterson Institute for International Economics, a pro-trade research organization.
Indeed, that's the pattern of history in the missteps that helped bring about the Great Depression. Congress passed the Smoot-Hawley Act in 1930, raising to record levels the tariffs on more than 20,000 imported goods.
European nations responded in kind. The tit-for-tat nationalistic trade war brought a plunge in commerce between nations, and rising hardship fed nationalistic tensions that eventually erupted into War World II.
Many U.S. trading partners will be judging the final shape of America's stimulus legislation as a measure of President Barack Obama's worldview.
"If Buy America becomes part of the stimulus legislation, the United States will lose the moral authority to pressure others not to introduce protectionist policies," warned Michael Wilson, Canada's ambassador to the U.S., in a letter this week to Senate leaders.
Complaints from Canada, China and Europe have all hinted at retaliation. However, proponents of the "Buy America" language in the stimulus legislation are correct in saying these provisions are nothing new.
The stimulus language is virtually identical to a number of U.S. laws, most notably the 2005 reauthorization of funding for highway programs. The highway bill language and the terms in the stimulus legislation are identical in restricting funds from use in projects "unless all of the iron, steel, and manufactured goods used in the project are produced in the United States."
The new language is also identical in how waivers to the rules are granted — by presidential decree, if materials are unavailable in the U.S. or if they would raise the cost by 25 percent or more.
The only substantive difference in the stimulus legislation as introduced is a requirement that the reasons for granting a waiver be published in the Federal Register.
So if this language just repeats existing law, what's the problem? Why all this talk of trade wars and a return to the Great Depression?
"They're constructing a scenario that is not going to happen in the real world," said Scott Paul, executive director of the Alliance for American Manufacturing, a lobby group for small U.S. manufacturers and steelworker unions. "What I think is happening here is a lot of bluster on this issue to try to leverage the Obama administration on more pressing issues down the road."
That's because during the presidential campaign, Obama was cool to free trade. A new round of global trade liberalization has been deadlocked for several years, and in this time of crisis, Americans aren't exactly begging for it.
"People need to understand their chances of talking the American public out of this kind of attitude are zero," Rep. Barney Frank, D-Mass., chairman of the influential House Financial Services Committee, told reporters Tuesday. "There is now a deeply rooted anger on the part of the average American at what he or she thinks is a very unfair set of arrangements."
The Obama administration, besieged with problems getting appointees confirmed, is trying to keep a foot in both camps of the Buy American debate.
"We're looking at the specific provisions and the specific language," Larry Summers, the head of Obama's National Economic Council, told reporters Tuesday. "But the president's been very clear that he wants this to be a bill that supports the American economy, but at the same time his bill is not going to be an excuse for America breaking its international commitments or embracing any new kind of protectionism."
(Lisa Zagaroli contributed to this article.)
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