[Overseas view]A regrettable step to protectionism

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[Overseas view]A regrettable step to protectionism

The “Buy America” provision in the $787 billion American Reconstruction and Recovery Act of 2009 (the “Act”) generally requires that public works projects funded by it use domestically produced iron, steel and manufactured goods. Although Congress tempered this controversial provision by explicitly requiring that it be implemented in a manner consistent with the United States’ international trade commitments, it has cost the U.S. credibility among our trading partners. Now that the legislative process has concluded, it is important to consider the underlying anti-free trade sentiment exposed by the Buy America debate, and whether the United States is leading by example or tilting toward the false sanctuary of protectionism.

In times of economic crisis, it is natural for governments to pursue policies that foster job creation, economic expansion and enhanced social safety nets. However, policies such as the Buy America provision threaten to undermine these legitimate objectives by costing American jobs, threatening the rules-based international trading system and damaging U.S. credibility and leadership abroad.

The touted job gains from the Buy America provision may be illusory. According to a recent study by the Peterson Institute for International Economics, domestic job creation from enforced local sourcing could be offset if American suppliers are precluded from taking advantage of the stimulus-fed growth in government procurement opportunities abroad.

While the requirement that the Buy America provision “be applied in a manner consistent with United States obligations under international agreements” has likely averted a trade war with our most important trading partners, this will be a hollow victory if other countries adopt “Buy National” programs in their economic stimulus packages that could exclude U.S. exports. American businesses stand to have fewer opportunities than they would without these restrictions as our trading partners enact their own economic stimulus plans. This is a particular concern for countries that are not parties to the World Trade Organization Agreement on Government Procurement, including Brazil, China and India that have no international commitments to provide non-discriminatory access to their government procurements.

Countries could also follow the U.S. stimulus bill’s example by taking other types of WTO-consistent, yet protectionist measures, such as raising tariffs from lower “applied” rates to higher “bound” rates. It is not uncommon for countries to increase their applied tariff rates as a means of advantaging domestically produced goods, but it is hardly helpful for the U.S. Congress to have given them moral cover for doing so. They could also adopt new standards, regulations and other non-tariff barriers that, in practice, disadvantage imports, which, while possibly WTO-inconsistent, could take years to litigate. Only time will tell whether Congress has opened a Pandora’s box here.

Less obvious but possibly important is the cost to the states, many of which have previously not seen any reason to prefer domestically produced goods or services in their procurements. The Buy America provision will obligate such states to establish new procurement procedures to comply with the discriminatory requirement, in a legal setting that otherwise bases procurement decisions on common criteria such as the highest quality for the lowest cost. They will do so in order to access the Act’s funds, but the waste associated with developing discrimination mechanisms (and possibly later defending them on appeal) could be substantial.

Most troubling of all about the debate on the Buy America provision is the potential damage to U.S. standing in the international trade community. In times of crisis - including the current unprecedented economic and financial crisis - the world looks to the United States for leadership. Unfortunately, it took an outcry from the export-oriented segments of the U.S. business community, the threat of litigation by our trading partners and a welcome warning from President Barack Obama, for Congress to insert language into the Buy America provision ensuring that it is implemented n a manner that respects our international obligations.

It was indeed a positive sign that President Obama clearly and unequivocally signaled his opposition to a Buy America provision that would be inconsistent with our trade obligations. This bodes well for the President’s future responses to efforts by Congress and our trading partners to limit foreign trade and investment.

However, far from affirming the G?20 commitment to “refrain from raising new barriers to investment or trade in goods and services, imposing new export restrictions or implementing WTO-inconsistent measures to stimulate exports,” Buy America sent the wrong message to our trading partners with whom we need to collaborate on the faltering Doha Round negotiations, on global financial industry reform and international macroeconomic policy in order to resolve the global financial and economic crisis.

The enactment of the Buy America provision will make it all the more difficult for President Obama to take the moral high ground at the April G?20 meeting in London.

The United States cannot emerge from this economic crisis by walling itself off from its trading partners. Providing robust domestic economic stimulus and showing leadership internationally by adhering to the letter and spirit of our international commitments are complementary, not mutually exclusive.

In this unprecedented global crisis, the path to economic heath lies not in the false hope of protectionism -no matter how well disguised - but in policies that open markets, break down barriers to trade in goods, services and investment and respect our international commitments.

*The writer is a former U.S. trade negotiator who participated in the negotiations for the Korea?U.S. FTA and many other negotiations.

by Jay L. Eizenstat
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