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: There is no denying that the world is sliding towards protectionism. If comparisons have been made with the Great Depression, comparisons with the1930 US Smoot-Hawley Act are also inevitable. Senator Obama’s voting record didn’t establish any free-trade credentials. However, President Obama’s decisions were expected to be less myopic. That was not to be and the $787-billion stimulus package that has just become law incorporates ‘Buy American’ provisions. Recipients of the stimulus must mandatorily purchase domestic iron, steel and manufactured products. This is a bad precedent, bad economics and bad law. It is a bad precedent because the US economic importance implies snowball effects in other countries. Ahead of the G-20 meeting, the US would have been expected to lead the way in ensuring fiscal packages don’t incorporate the beginnings of trade wars. Already, the French stimulus packages in the auto sector build in local content requirements. Indonesia proposes to impose import curbs on garments, electronics, shoes, toys and food. India has restricted imports of Chinese toys and Indian pharmaceutical exports have faced non-tariff barriers (NTBs) in Europe. China hasn’t imposed import curbs yet, but has plans to stimulate exports, other than the long-standing exchange rate issue. It is bad economics because revival of global growth is contingent on trade growth. The post-World War II correlation between the two is patently obvious.
It is also bad economics because such artificial constraints prevent US companies from becoming competitive. They can no longer source from low-cost suppliers. Restrictions on the use of H-1B visas, therefore, contributes to offshoring, good for host countries, but not necessarily good for Americans, who lose jobs, consumption expenditure and social security taxes. Finally, this is bad law because unlike the 1930s, there is a trade body in place, other than the US-driven bilateral free trade agreements that ‘Buy American’ provisions fall foul of. The WTO may be in a doghouse now and WTO agreements don’t cover everything under the sun. Having said this, the stimulus package should have stayed within the confines set by WTO agreements—the gap between actual tariffs and bindings, safeguards, anti-dumping, government procurement codes and even NTBs. It is by no means obvious that this is the case. Canada, Mexico, Japan and the EU will probably be bought over by diluting the ‘Buy American’ clause to grant preferential access. But Bric countries should take the US to the WTO. There is an irony in the...
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