The "Stimulus" Trade War

Drudge highlights two articles concerning the buy American provision in the Stimulus package (The American Recovery and Reinvestment Act of 2009).  President Obama should have vetoed the bill for this provision alone.  Like most economists, I support trade.  Protectionist policies lower a country's standard of living.  During the Great Depression, the Smoot-Hawley Act began the beggar thy neighbor era in which countries responded to protectionism with protectionism.  Allan Dowd writes ("Canadians angered over "Buy American" rule," Reuters, June 6, 2009),

WHISTLER, British Columbia (Reuters) - Canadian municipal leaders threatened to retaliate against the "Buy America" movement in the United States on Saturday, warning trade restrictions will hurt both countries' economies.

The Federation of Canadian Municipalities endorsed a controversial proposal to support communities that refuse to buy products from countries that put trade restrictions on products and services from Canada.

The measure is a response to a provision in the U.S. economic stimulus package passed by Congress in February that says public works projects should use iron, steel and other goods made in the United States...

Trade Minister Stockwell Day told the group on Friday that Ottawa was actively negotiating with Washington to get the "Buy American" restrictions removed.

The measure's supporters agreed to modify it slightly by suspending implementation for 120 days, in order to give Canadian trade officials and U.S. critics of the "Buy America" rules more time to work on the issue.

Breitbart.com reports that Canada is not the only country concerned with the buy American provisions of the stimulus ("'Buy American' plan leads to ire, confusion," June 6, 2009).

The "Buy American" plan in US economic stimulus legislation is drawing increasing fire from US trading partners and also has led to confusion as government agencies try to implement the strategy.

Singapore was the latest among key US allies such as Canada and Japan to express concern over the restriction, warning that it could "beget other actions and then cause the situation to snowball in the wrong direction." ...

Without pointing at the United States, Lim [Singapore's trade minister] said it might be difficult to pin down countries that took steps that bordered on protectionism at the World Trade Organization, the global trade watchdog.

The Buy American clause originally said that infrastructure projects designed to kick-start the US economy out of a languishing recession could only use US-made manufactured materials.

But it was later watered down to show that such procurement could only take place in a manner consistent with Washington's international treaty obligations...

"The Buy American requirements are having a major impact on projects administered by state and local governments, resulting in declining trade and lost jobs for American workers," US Chamber of Commerce vice president Bruce Josten said..."Retaliation by Canadian municipalities could result in three billion dollars in lost business for US water and wastewater equipment manufacturers," he said..."We are sending exactly the wrong signal to our trading partners, and a retaliatory spiral may already be underway."