'Buy American' law will cost more than we think

Andres Oppenheimer

writes for the Miami Herald

The conventional wisdom is that the "Buy American" provision that Congress passed last week has been diluted enough to avoid a trade war like the one that led to the Great Depression. Well, I'm not that sure.

Granted, after strong protests by several foreign governments and President Obama's statement that Congress should avoid triggering a trade war, House and Senate negotiators substantially watered down the original "Buy American" clause in the $787 billion stimulus package.

The revised clause calls not only for ensuring that government infrastructure projects use exclusively U.S.-made steel, iron, and manufactured goods, but also that this be done "consistent with U.S. obligations under international agreements."

Supporters of the "Buy American" clause say it meets Democratic and labor unions' demands that the stimulus package be used to create jobs in America - and not abroad - while ensuring that it won't drive other countries to retaliate with their own protectionism, triggering a global trade war.

Even the U.S. Chamber of Commerce, which had led the fight against the clause in recent weeks, ended up supporting the final version. "It's an important win," chamber vice president John Murphy told me. "There was a huge uproar from the business community and foreign governments, and with President Obama showing leadership and taking the lead, the Congress unequivocally has stated that this provision will conform to our international agreements."

Supporters of the "Buy American" provision note that its text, which refers mainly to U.S. government procurement bids, still leaves the United States with one of the world's most open government-bidding systems.

Under U.S. law, 42 other signatories to the World Trade Organization agreement on government procurement - the European Union, Japan, and South Korea among them - can participate in most U.S. government bids for public works, with exceptions such as iron and steel.

But European laws contemplate many more exceptions, and other countries that are not signatories to the agreement - such as China, Brazil, and India - have even more restrictive "Buy national" laws, say "Buy American" clause supporters. "You cannot ask the United States to be holier than the pope," Murphy said.

Peter Hakim, head of the Inter-American Dialogue, a centrist, Washington-based think tank, told me that the law was not likely to hurt Latin American countries. "They have managed to contain the damage," Hakim said, referring to the Obama administration. "It now looks like the 'Buy American' clause shouldn't be seen as a major concern of our trade partners."

But many well-placed congressional sources and economists fear the clause will do more harm than good. Congressional trade experts note that, while previous laws allowed that a U.S. product could usually win a government bid if its price was not more than 6 percent higher than that of a foreign good, the new provision raises the bar to 25 percent. That means a U.S. product could be 25 percent more expensive than a foreign good and still win a bid, they say.

More important, the U.S. government will have plenty of room to raise protectionist barriers without violating international obligations, critics say.

"Our international obligations don't require us to keep the existing level of openness in the U.S. market," said Gary Clyde Hufbauer, of the pro-free-trade Peterson Institute for International Economics. "That's the important point."

Hufbauer says that Washington is likely to take measures that, while legal, will still restrict foreign access to the American market. This will drive others to respond in kind and cause a reduction of world trade flows that will result in fewer jobs everywhere.

"It's the me-tooism phenomenon," he said. "There are plenty of protectionists in Brazil, Argentina, and other countries who will say, 'Look, the Americans are doing it. We should do it as well.' "

My opinion: The president deserves credit for having stood up to his party's congressional leaders and for expressing concern over the possibility of sending a protectionist signal to the rest of the world.

But, even if the final version of the "Buy American" clause abides by international laws, I'm under no illusion that protectionist industrialists around the world will not use it as an excuse to demand that their countries adopt tougher "Buy national" laws.

They will, and we all may get hurt.