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 Japan 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 here). 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 -- adding or saving perhaps 1,000 steel industry jobs in a labor force of 140 million people.
The Senate did soften the provision this week, adding language stipulating that the provision be "applied in a manner consistent with U. S. obligations under international agreements" -- that is, with WTO and NAFTA commitments.
Even with such a caveat, however, as the Peterson brief and Jagdish Bhagwati point out, the provision would cut out major steel suppliers that 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. And it has not molified critics worldwide.
The "softening" of the Buy American provision 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 reomoved entirely. It seems that the political imperative to make the gesture is too strong, regardless of its negligible effect on job creation and its potentially outsized effect on our ability to help coordinate world response to the economic crisis. What an opportunity could be 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 - undercutting U.S. global leadership for a mass of protectionist pottage.
Update: Clive Crook explains eloquently why Obama's intervention to soften the Buy American provision does not go far 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.