‘Buy American’ will translate into a 21st century Smoot-Hawley

Politicians in Washington D.c. have cooked up a nice way to re-create the mistakes of the Great Depression by attaching a ‘Buy American’ provision onto the stimulus bill making its way through Congress.  Apparently the Canadians and Europeans have already voiced their concerns, with the Europeans threatening to retaliate.

The White House has promised to review the protectionist proposals, passed last week by Democratic allies in the House of Representatives, which would ban the use of non-American steel in the $800 billion of construction projects.

Obama officials are under pressure from what European diplomats in Washington describe as a discreet but outspoken campaign of “quiet fury” from America’s closest allies.

They regard the move as a provocative shift away from free trade and towards economic populism at a time of turmoil.

Anyone who has read a cursory history of the Great Depression knows that protectionism and the banking system were at the core of events. As time goes on, I have become increasingly pessimistic about the skill of the political establishment in the U.S. and elsewhere to navigate this economic crisis. Certainly, the response to the banking crisis has been less than stellar. However, increasingly, it is also apparent that countries are turning to export subsidies and protectionism in a bid to favor domestic producers as trade plummets. The auto sector is front and center in this effort. I am certainly not convinced that Obama’s team will brush back the tide of protectionism — his record on the issue is dubious at best. However, America’s neighbors to the north are trying to stop the protectionist train from gathering steam.

Canada and other nations fear “Buy American” barriers could trigger a cycle of retaliation that would strangle world trade and undermine efforts to end the global economic crisis.

The measure would not raise any illegal tariffs but some experts say it may violate public-procurement provisions signed with the World Trade Organization by Canada, the United States, the European Union and other countries.

“There’s some pretty furious legal research that’s going on right now to see where it potentially may cross the line,” Day said.

Let’s see where this leads.  The Telegraph in the U.K. has reported this:

Privately, diplomats are withering about the “excitable” US rhetoric in support of the Buy America proposals. But they are resigned to a solution that leaves Mr Obama with something he can sell as protecting American workers, so long as it does not violate the letter of the trade arrangements.

European Commission representatives and diplomats from the British, French, Canadian and Mexican embassies in Washington have all launched an intensive lobbying operation to convince senators to strike the provisions from the bill they will debate this week.

A Western diplomat in Washington made clear that otherwise a trade war was in prospect. “The EU has said it will not stand idly by and let this happen. I’ve not heard words that strong from Brussels in 20 years,” the official said.

This certainly is not the makings of recovery and prosperity. Stay tuned. Apparently, in uncertain economic times, it’s every nation for itself. Economic nationalism has well and truly arrived.

Barack Obama to dilute ‘Buy American’ plan after Europe threatens US with trade war – Telegraph
Canada may raise “Buy American” issue with Obama – Reuters
Protectionism could destroy us all – Telegraph
Buying American – Economist

  1. John says

    This is a classic game theory problem. If you implement protectionism and no one else does, it produces the best outcome for you. Studies of game theory say the protectionism outcome is most likely. Should we hold out hope or cut our losses early since we stand to lose the least relatively speaking?

  2. Richard says

    If Obama and his team go down this path of cheap populism they will be repeating exactly the same policy mistakes that were made in the 1930’s…..and history will end up judging Obama as a Hoover lookalike.

  3. John Creighton says

    Clearly a trade war would be destructive but why shouldn’t countries be able to insure a reasonable amount of infrastructure money they spend stays in the country. Shouldn’t countries be allowed to pay a premium for local content?

  4. Aristo says

    If the US attempts any type of formal protectionism, then those same countries will stop buying US Treasuries. That’s an even more vicious form of retaliation.

    The US is borrowing from other countries to provide the stimulus. The other countries get a say in the process. If China’s steel is cheaper than US steel, then that is where it should be sourced from to preserve the capital for more productive allocation. That is precisely what the Chinese will insist upon. And they’ll get it.

  5. John Creighton says

    Aristo the steel is used for infrastructure projects and the goal of these project is not solely the construction of the infrastructure. The other goal is also to stimulate the economy. Requiring governments to procure resources from the cheapest source creates a disincentive for stimulus type government spending. If China tries to retaliate by not buying American bonds then it will devalue the American currency helping America regain price competitiveness.

  6. Aristo says

    To: John Creighton

    True what you say, but China is in a damned if I do, damned if I don’t situation. Employment is a worse issue for China, so they will do anything to maintain political/social stability even if it means a dropping greenback.

    A devalued US$ will increase the price of oil and commodities significantly, greatly minimizing the competitiveness of the US position.

    Keynesian theory is well and good, but has never been tested by a nation using foreign borrowing as it main means of stimulus. That horribly complicates things. I am foreign and investors I talk to are becoming extremely wary of US debt loads. The investment limit is a looming wall.

  7. mL says

    1. As a friendly gesture to Obama government, China will continue to buy bonds.

    2. If she doesn’t and the bond market collapses, the value of bonds held by China not only drops but cliff diving. However, China may not buy as much bonds as before. China has already moving from the long term bond to short term.

  8. Aristo says

    China may continue to buy short-term at levels that maintain the current investment exposure. But will they add to their portfolio? Will they supply another 500 billion worth for the “stimulus”? Where China goes, others (BRI + Gulf States + EU) will follow.

    The message from China was “No”. At Davos the responses were circumspect, but experienced China watchers saw a strong signal that China that a Great Wall was forming.

    I think it disingenuous to assume China will be “friendly” with its citizens money towards the US. That’s not realistic. If the US$ drops and the bond market is stressed, the major loser is the US economy. Oil skyrockets, interest rates go into the stratosphere and the Administration has no tools left to pave over the trough save hard structural wealth reallocation on a scale that would make bank nationalization seem trivial. It is estimated that 50% of China’s urban workforce can actually go back to subsistence agriculture and get by. Can US workers do that?

    It’s moot anyway. China was already investing returns from exports in US T-items. Those export derived returns have dried up. To stimulate internal demand China is already selling assets to finance their own stimulus package. There is doubt that US demand can get back to the 70% level of consumer spending to keep the gravy train rolling.A lot of past spending has to paid off first, the banks re-capitalized, etc. China appears to have realized this before the US. China can stimulate without debt. (The real loser in all this would be Japan).

    The move from bonds to notes will mean higher interest rates in the US domestic economy. The Fed is out of room. They cannot have a trade issue work against interest rate policy.

    Obama will increasingly be at odds with his party on this issue. There is no way the Fed and the Obama administration can be nationalist/protectionist about the spending side and internationalist on the financing side. It doesn’t work that way. Foreign investors and governments are being very discrete in saying so. If Americans do not get that message it will be forced on them. The US has very little credibility or leverage now.

  9. Richard says

    The passing of the protectionist Smoot-Hawley Tariff Act in by President Hoover in 1929 was an unmitigated disaster for the US and the rest of the world and both deepened and prolonged the Depression. Restricting world trade during this time of crisis will have exactly the same result that it did in the 1930’s……..and that is MASSIVE unemployment with the US still the hardest hit.

  10. Richard says

    Sorry, got my dates wrong…..it was made into law in 1930 not 1929.

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