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Obama’s 'Buy American' a threat to international trade
By
Kuthula Matshazi
Posted
to the web: 02/02/2009 23:03:15
WHILE the world has been preoccupied dealing with
the fallout of the global financial crisis, another danger looms. That
danger is trade protectionism, which is being practiced by many countries
but is now epitomised by the huge United States US$825 billion stimulus
package.
The Bill that has won the support of the US House of Representatives contains a provision called “Buy American” that mandates all public works projects to procure iron and steel made in the US only. A similar Bill emanating from the Senate is reported to be considering the “Buy American” provision for all manufactured goods bought with stimulus funds.
This is part of the Democratic Party-dominated new US government’s effort to boost business for that country’s steel sector (and business in general) that has faced declining demand both within the US and in the international markets.
For the struggling US companies and their citizens who have been losing jobs, it seems the right way to go because they believe such action can stimulate their businesses and create or save their jobs. Stimulating the economy and creating or saving existing jobs has been President Barack Obama’s priority.
However, this stimulus package has raised charges of trade protectionism against the US. That country’s free trade advocates and other countries argue that restricting procurement of steel to American suppliers only is against the World Trade Organization’s free trade rules. The US is a member of the WTO that uses its (WTO) systems extensively such as in unfair trade practices. It has used the Dispute Settlement Mechanism much more than any other country of the 153 WTO members, since its inception in 1995.
Last week, the WTO Director General Pascal Lamy warned countries to implement stimulus packages in a manner that will not violate WTO trade rules leading to trade disputes.
The “Buy American” initiative highlights the complexity of liberal trade and also provides an opportunity for the Western countries to experience the effects of protectionism.
Liberal trade theorists state that there are gains or benefits derived from engaging in free trade when countries build comparative advantage through specialisation and, through economic growth and development. If the US moves ahead with the “Buy American” initiative, theoretically it will undermine its trade potential, that of its trade partners and the entire world. This is so because the current liberal trade regime was built around US interests and it still continues to play a central role in international trade.
Therefore, if the Obama Administration pushes ahead with the “Buy American” initiative it will destabilise the international trade system. Many countries will officially adopt similar actions as the US. This could not have come at a better time when protectionism appeals. Those countries that have applied protectionism argue that they are protecting their basic national economic and social interests.
But as Lamy warned, countries should not use this global economic crisis to provide stimuli that would distort trade leading to further economic stagnation and trade wars. As of now, the Western countries have been using protectionist measures to restrict trade flow from the developing countries. The high tariffs on agricultural products from developing countries are a good example of protectionism by the Western countries.
So while the West has committed itself to free trade, it is at the same time applying protectionist measures against goods and services from developing countries. In agriculture, while the Africans theoretically enjoy a comparative advantage, practically that is not the case because of the various protectionist practices by the Western countries. The US, in fact, lost a case at the WTO, which was brought by Brazil against US protectionist measures in its cotton sector. Mali, Benin, Burkina Faso and Chad were parties on Brazil’s side in that litigation.
One reason the current liberal trade system has survived despite its huge flaws is that the US and other violators of WTO rules have made pretences of being bound and abiding by these free trade rules. They have taken advantage of some weak WTO rules that have allowed them to increase the amount of subsidies and in several instances still remain within accepted levels of subsidies. However, current amounts are huge and the stakes are high. The US economy is sinking fast and rapid assistance is needed. While it is difficult to say whether the chosen form of stimulus is the right one, I believe that this preferred route could get people into work as they build infrastructure. Money will flow into businesses as these projects stimulate the economy.
But all other countries are going to similarly prioritise their economies and then consider international trade obligations second. If that happens then the international trade system would be undermined. The undermining of international trade has its consequences such as the high costs of trading due to high tariffs, and also the availability of few goods in some countries that depend on international trade. In these circumstances, the US stands to lose in many ways.
One way, is difficulty in enforcing the intellectual property rights rules. Other ways include the availability of fewer cheap imports and difficulty in conducting liberal trade with its (US) developed world counterparts. Many of the developed countries have voiced concern over the “Buy American” initiative. This approach will worsen the US’ already negative balance of trade position.
If the US presses ahead with the blatantly protectionist measure of the “Buy American” initiative, other member countries will not feel obliged to implement the WTO intellectual property rights rules that protect goods and services from the US. They will argue that if the US is not fulfilling its WTO obligations, it should not expect cooperation from other members. The US has always argued that its intellectual property rights are being infringed upon in other countries around the world and as a result lose significant potential earnings.
If this state of affairs were to be reached and the US being a major global trader, then it would have lost a strategic liberal multilateral platform to advance its interests and channel its trade concerns with various countries. It is upon such a basis that the “Buy American” initiative could be altered by President Obama to seem to conform to WTO rules because the US stands to lose a lot in international trade that is not based on liberal and multilateral rules.
The developing world has always argued that the developed world and indeed the US are undermining its economic progress by continuing to employ protectionist measures against its products and services. And those protectionist measures have been a major cause for the stall in the Doha Round trade talks.
It would be difficult for the developed countries to achieve progress on the trade talks if the US blatantly disregards the WTO rules and goes ahead with the “Buy American” provision. Besides, the US has huge business operations as well as interests in emerging markets and other developing countries. For the US to maintain these economic interests and avoid having its companies and goods discriminated against, it should uphold the rules-based liberal international trade system. Flawed as it is, it presents a better alternative for the US in the long term.
If the US decides to press ahead anyway with the “Buy American” initiative disregarding the WTO rules (Even the WTO Box System cannot accommodate such huge amounts) then one of its options is to use bilateral trade relations. But that still will encounter some weaknesses such as those currently covered under the WTO trade rules like the most favoured nation status. Pushing ahead regardless of the obvious disadvantages of such action would require that the US use threats and adopt an aggressive foreign policy that would move President Obama away from being a democrat to a neo-conservative. There are reports already that say the Obama Administration might push congress to reconsider the “Buy American” provision. He better do so.
The world does
not have the capacity to deal simultaneously with the twin consequences
of the global financial system and trade protectionism. Allowing these
two phenomena to co-exist would cause an economic crisis of the 1930s
proportion that could lead to serious trade wars and even conflicts
between states.
Kuthula Matshazi is a Zimbabwean journalist and host of
African Perspective, a current affairs programme on CHRY Radio, Toronto,
Canada. Contact: kuthulamatshazi@yahoo.co.uk
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