Buying American: A Dangerous Precedent

When U.S. President Barack Obama signed a giant economic stimulus package that included “Buy American” provisions, he was setting a dangerous precedent for the world. International trade will probably be degraded thanks to a sharp rise in trade protectionism. The world economy will face the threat of a worse recession.

Trade protectionism started to rear its head in developed countries when governments of the world were seeking fair measures to save their economies. Quality standards and antidumping laws create trade barriers. Among these restrictions, the “Buy American” policy clearly brings protectionism to the forefront.

The final “Buy American” clause was changed a little from its initial version as “applied in a manner consistent with United States obligations under international agreements” was added, while insistence on the use of American-made iron and steel for public works projects funded by the stimulus plan remained. This change in words shows that the congressmen had some reservations about potential retaliation from America’s trade partners as they planned to protect the American manufacturing sector.

Since the subprime crisis in the real estate market, “deglobalization” has posed a heavy threat to the world economy. To maximize the output from spending to stimulate domestic economies and keep job opportunities at home, many governments are showing that they don’t trust their “neighbors” and just care about their own businesses. The Obama administration’s invocation of the 1933 Buy American Act as an example of home-made products purchased to stimulate the home economy is undoubtedly a “bad lead” that others might follow.

This means that the U.S. government, as the leader of the largest economy and a long-term propeller of free trade, is insincere in its efforts with the rest of the world to deal with this unprecedented financial crisis. The allusion to the Buy American Act also shows that maximizing national interest from international trade is the U.S. government’s most important goal, while it has been actively participating in making the rules of international trade.

When the subprime crisis in Wall Street became corporate and consumer credit crises, unemployment, economic slide, investment shortages and falling confidence became the shared challenges of global economies. Although the U.S. economy was hard-hit in this crisis, it still has a strong influence on the global economy and has a great capacity . Many countries have worse economic situations than the U.S.

Following the U.S.’s announcement last December that it was in recession, many countries including Japan, Germany, the U.K., Italy and Spain, admitted that they are in recession as their economies have been contracting in two consecutive quarters. More are lingering at the brink of bust. Just as the U.S. congressmen were debating the “Buy American” clause, loud calls for “employing locals only, buying home-made products only, prohibiting manufacturers from moving overseas and levying high tariffs upon foreign goods” were heard in the Euro zone.

A communiqué by G-7 finance ministers, including the U.S. Secretary of the Treasury, Timothy Geithner, announced an effort to prevent trade protectionism at the Rome Summit that was concluded on Feb. 14, but we still worry that more governments will follow the U.S. government to improve their political standing at home at the expense of international trade, once they see job creation and economic growth as their overwhelming priorities.

It is unnecessary to repeat the damage done by the Smoot-Hawley Tariff Act adopted in 1930s, when the U.S. congress started a trade war by imposing high tariffs upon over 20,000 import goods. The consequent retaliation by European countries caused stagnation of global trade and sharply reduced production.

Economic globalization today has made international trade an increasingly important contributor to the world economy. Trade protectionism will cause vast and profound damage. Embedding the Buy American clause in the economic stimulus plan is purely a stopgap with “no benefit to the U.S. but harm to others”, because it will certainly curb the innovation and competitive ability of domestic industries, and hurt the interests of American consumers and importers while protecting American companies and job markets. Also, it becomes harder to define a “local company” and “home-made goods” as liberalization of trade and investment causes a global reallocation of production resources, which will somewhat reduce the impact of the economic stimulus plan.

In contrast, China, which is also suffering in the current financial crisis, is open-mindedly joining in remedial global action. China’s 4 trillion Yuan stimulus package has no “Buy Chinese” clause and its policy of “Home Appliances to the Countryside”, supported by government funds, rejects no foreign brand. Household electrical appliances made by Panasonic, Nokia, Siemens and other foreign brands that are sold in China’s rural areas will benefit from fiscal subsidies worth 13 percent of their prices.

No country can evade the crisis. The world economy can pull through the recession only with international cooperation and the development of a multilateral trade system, and this fact is even more important for a great country with global economic influence.