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Brooks Wilson's Economics Blog: A Brief History of the "Buy American" Provision of The Stimulus

Wednesday, June 10, 2009

A Brief History of the "Buy American" Provision of The Stimulus

I have written several posts (here, here, here) about the buy American provision of the stimulus bill (The American Recovery and Reinvestment Act of 2009) that continues to rankle our trading partners.  This post presents a brief history of the provision.  The original bill required that all public projects use iron, steel, and manufactured goods produced in the United States.  Representatives of foreign governments, including Canadian prime minister, Stephan Harper, became concerned about the sections protectionist nature.  As the debate over the stimulus raged in Congress, President Obama was preparing to meet with Harper in Canada.  Roger Runningen and Hans Nichols write for Bloomberg in  "Obama Will Review Buy American Provision in Stimulus (Update1)," (January 30, 2009) that,
The administration “will review that particular provision,” Gibbs [President Obama's press sectretary] said today at his regular briefing. The president’s advisers understand “all of the concerns that have been heard, not only in this room, but in newspapers produced both up north and down south.”

He refused to say whether the administration supported or opposed keeping that part of the legislation intact. Nor did he say what the president would do if the provision remains once the bill clears the House and the Senate.

The issue may cloud Obama’s trip to Canada on Feb. 19, his first journey outside U.S. borders as president. Officials in Canada, the top U.S. trade partner, are criticizing a part of legislation that passed the U.S. House of Representatives Jan. 28 that requires the use of U.S.-made iron and steel in infrastructure projects.
On February 4, 2009, Sheldon Alberts of reports in "U.S. Senate votes to soften 'Buy American' clause," that
American lawmakers on Wednesday voted to soften the controversial "Buy American" provisions in the proposed U.S. economic stimulus package over fears they could spark a trade war.

The change gives Canada, among other major trading partners, some comfort it would be exempted from a strict requirement in the $819-billion bill, which passed the House last week, that only U.S.-produced steel and iron be used in projects launched with funds from the economic stimulus.

The amendment, approved by the Senate, requires the Buy American provisions be "applied in a manner consistent with U.S. obligations under international agreements."

Senate Democrats had earlier in the evening voted down an amendment, proposed by Senator John McCain, that would totally strip the Buy American provisions.
The "Buy American" section  as passed by the Congress and signed by President Obama reads,
    Sec. 1605. Use of American Iron, Steel, and Manufactured Goods. (a) None of the funds appropriated or otherwise made available by this Act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron, steel, and manufactured goods used in the project are produced in the United States.
    (b) Subsection (a) shall not apply in any case or category of cases in which the head of the Federal department or agency involved finds that--
      (1) applying subsection (a) would be inconsistent with the public interest;
      (2) iron, steel, and the relevant manufactured goods are not produced in the United States in sufficient and reasonably available quantities and of a satisfactory quality; or
      (3) inclusion of iron, steel, and manufactured goods produced in the United States will increase the cost of the overall project by more than 25 percent.
    (c) If the head of a Federal department or agency determines that it is necessary to waive the application of subsection (a) based on a finding under subsection (b), the head of the department or agency shall publish in the Federal Register a detailed written justification as to why the provision is being waived.
    (d) This section shall be applied in a manner consistent with United States obligations under international agreements.
While meeting with the Canadian prime minister, President Obama promised U.S. compliance with international trade obligations and related his hope that trade would continue to expand ("PM, Obama talk trade, Afghanistan, pledge 'clean energy dialogue',", February 19, 2009.
On the controversial "Buy American" provision included in the U.S. stimulus package, Obama said he made clear that those measures will be consistent with Washington's obligations under the World Trade Organization and the North American Free Trade Act.

"I provided Prime Minister Harper an assurance that I want to grow trade, not contract it," Obama said.

Harper said those agreements do allow domestic purchasing preferences, but pointed out they are not allowed without limits.

"We have agreed in the G-20 countries to stimulate the global economy, not just benefit ourselves. If we choose to benefit ourselves at the expense of others, we will deepen the global economic crisis," Harper said.
Apparently, there is a lot of wiggle room in international agreements that allows nation to restrict trade when spending on government funded projects.  The provision is being applied and our trading partners are considering retaliation.  President Obama's supporters promised an empirical president.  Protectionism is a knee jerk reaction, that is not based on empirical evidence. 

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