Buy American, buy a trade war
If the recovery bill bans spending on foreign goods, it will invite retaliation.
American tax dollars directed at America's ailing economy should be spent only on American products. That sounds logical – and compassionate to US workers, who can use all the lovin' they can get. But the "Buy American" provision of the megastimulus package winding through Congress makes little sense. Neither is it kind.
Last week, the House passed an $819 billion economic recovery plan with the stipulation that all public projects funded by the bill (read highways, airports, mass transit, etc.) use only iron and steel produced in the U.S. of A. The Senate version goes further, to include all manufactured products.
The lawmakers' thinking on this is understandable. They're sensitive to the outrage that would come when it's discovered that some federal monies will inevitably go to foreign goods, supporting foreign jobs. With an economy this bad, better take care of our own, they reason.
But the gain in US jobs will not be worth the ultimate cost.
For starters, the number of jobs generated by the House version will be tiny – about 1,000 steel jobs, according to a study this week by the Peterson Institute for International Economics. If the Senate's broader version is adopted, about 9,000 US manufacturing jobs would be gained, according to the institute.
Now look at the loss side of the ledger. A "Buy American" provision is sure to generate retaliation abroad (threats loom already). If trading partners strike back on steel, the US industry could lose exports equal to or greater than the number generated by the stimulus.
If other countries choose to shut out only a small percent of American manufactured goods from their own government-funded projects, the US would lose 6,500 jobs. More extreme measures could cost 65,000 jobs.
Meanwhile, cutting foreign products from the stimulus bill means less price competition, more expensive public-works projects, and thus fewer of them to go around.
Further, the Buy American provisions violate US trade obligations (though one wonders whether auto bailouts and other rescue measures around the world will end up being legally challenged).
Even if lawmakers make changes to accommodate the letter of trade pacts, they'll trample the spirit of a new global gentlemen's agreement: Last November, most of the world's leading industrialized countries decided at a summit that the global economic crisis needed a global solution, and pledged a "standstill" on new protectionist measures.
Such public rhetoric can wither under public pressure, though, and Russia, India, and Indonesia have raised import fees. European countries such as Britain are taking advantage of weak rules governing global finance by encouraging their banks to favor domestic loans.
These steps threaten to blossom into a trade war that will worsen economies and prolong recoveries everywhere. And this is where the biggest cost comes in.
If "Buy American" is not expunged from the recovery package, President Obama will cede his moral authority to lead the world away from mutually destructive trade policies – triggered by a crisis for which the US shares much blame.
To recover, America will have to export more, not less. "Every man for himself" won't accomplish this; only the golden rule will.