‘Buy American’ sends wrong signal
11-2-2009 | Economic news
In response to the severe deterioration of the US economy since the summer of 2008, with monthly losses of almost 600,000 jobs, politicians have responded this month with an economic stimulus package of US$789 billion. US economist Philip Marey from Rabobank’s Financial Markets Research department, discusses the effects of what the ‘Buy American’ provision could mean to the global economy.
In order to maximise the impact on the US economy, Democrats in the House of Representatives have included a ‘Buy American’ provision that would require infrastructure projects financed by the stimulus package to use only US-produced iron and steel, and American-made goods.
At first sight, it appears reasonable that American taxpayers' money is spent on American materials and goods. However, it does give their companies an unfair advantage over foreign firms. Such protectionist measures may lead to retaliatory measures from other countries. Since the various economic stimulus packages in response to the worldwide recession are implemented by national governments, the possibility of a trade war is not purely theoretical.
US economic stimulus bill
The Japanese ambassador to Washington has already sent a letter to key US policy-makers, expressing concern about the protectionist aspects of the economic stimulus bill. Republicans in the Senate have subsequently softened the provision by an amendment that international trade agreements should continue to be honoured.
However, a proposal by the former Republican presidential candidate John McCain, to get rid of the ‘Buy American’ provision altogether, was defeated in the Senate. Consequently, protectionist tendencies may still pop up in the implementation of the economic stimulus package.
Protectionism versus free trade
If the US does not take a clear stand against protectionism, then why should we expect other countries to stick to free trade principles?
In the event of a trade war, everybody would lose, even the US. After all, international trade is not a zero-sum game, where one country’s gain is another country’s loss. On the contrary, international trade allows us to exploit the comparative advantages of countries. Free trade facilitates the efficient allocation of labour and capital, which leads to a higher global output of goods and services than in the absence of trade. As a result, we all benefit from free trade and we all lose from protectionism.
‘Buy American’ and everybody loses
Some are already comparing the ‘Buy American’ provision to the infamous Smoot-Hawley Tariff Act of 1930, often blamed for deepening and prolonging the Great Depression, although economic historians still debate whether Smoot-Hawley single-handedly sparked off a rise in protectionism and a collapse in world trade, or whether it was just one in a series of protectionist measures that popped up all over the world because of economic adversity.
It is clear that ‘Buy American’ would send the wrong signals around the world, which could lead to a rise in protectionist sentiment. And the last thing the crumbling global economy needs right now is a further collapse in world trade.
Financial Markets Research (FMR) is the research department of Rabobank International’s Global Financial Markets division and Philip Marey is the author of this article.
