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Does 'buy American' send the wrong message?

An economic stimulus package clause raises concerns of repercussions by US trading partners.

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Last Tuesday, a spokesman for the European Community called the Buy American provision the "worst possible signal" that President Obama's new administration could send out. Canada's ambassador to Washington similarly warned that passage of the clause could prompt global repercussions. The Canadian economy is highly dependent on trade with the far larger US economy for its prosperity.

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The Buy American provisions would perhaps save 1,000 jobs in a country with 140 million workers, says Jeffrey Schott, an economist at the Peterson Institute for International Economics in Washington. "Why take such big risks [of prompting a trade war] for little or no gain," he wonders.

Mr. Schott wrote most of the trade section in the 12-page Trade Policy Study Group report intended to help Mr. Obama understand world trade issues and proposed solutions. During the election campaign, Obama spoke of a need for renegotiating the North American Free Trade Agreement and talked much of "fair trade." Such statements prompted concerns he might be inclined toward more protectionism.

Yet his appointment of key economic officials with strong free trade credentials, some from the Clinton administration, prompted consternation among some advocates of a tougher American trade policy.

Both Mr. McMillion and Schott reckon the US will have to be sterner with China. The charge is that China manipulates the value of its currency, the yuan, in order to have a price advantage in selling goods to the American market. The trade group report states the yuan is "substantially undervalued."

But Mr. Malmgren maintains that the Chinese economy is no longer growing. Its exports and imports are collapsing in reaction to the world recession. China's top economic policymakers, his high sources tell him, are divided on what to do to revive the nation's economy in addition to a $600 billion stimulus package.

"The China threat is over," he says.

Malmgren's main concern is that China will use a large chunk of its perhaps $2 trillion in US Treasuries to finance another domestic rescue package, putting upward pressure on US interest rates.

Meanwhile, a huge trade deficit continues. From 2001 to 2008, the European Union, Japan, and Canada sold the US $1.9 trillion more than they bought. China's surplus has been about as big.

In order for the US trade deficit to shrink to a more manageable level, its trading partners will have to make concessions in future trade deals, says McMillion.