US Protectionism in the Stimulus Bill

U.S. Protectionism in the Stimulus Bill. By Philip I. Levy
AEI, Jan 28, 2009

Lurking inside the proposed stimulus bill is a provision that threatens to stoke global protectionism and weaken U.S. leadership. The "Buy American" clause requires the new infrastructure projects in the bill to use American steel exclusively in a misguided attempt to create jobs. Its proponents fail to consider the worldwide repercussions.

The federal government of the US is currently consumed with an effort to craft a fiscal stimulus that will save the economy. Even before assuming the Presidency this month, Barack Obama called for a major stimulus package and warned that without quick action "we could lose a generation of potential and promise . . . our nation could lose the competitive edge that has served as a foundation for our strength and standing in the world." In the process, however, the US is poised to lose some of its standing through its flirtation with protectionism.


Flirtation with protectionism

The $825 billion stimulus bill introduced in the US House of Representatives includes the following provision:

"None of the funds appropriated or otherwise made available by this Act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron and steel used in the project is produced in the US." (Sec. 1110(a)) The bill allows for exceptions if the clause would boost project costs by more than 25% or "would be inconsistent with the public interest." It would take an unusually brave Obama Administration official, however, to seek a waiver on public interest grounds.


Fiscal stimulus as protectionism Trojan Horse

The inclusion of this "Buy American" clause is a deliberate attempt to translate stimulus dollars into American jobs. One group advocating the measure, the Alliance for American Manufacturing, cites a report it commissioned as finding that:

"[M]anufacturing employment gains from such an infrastructure program could be improved significantly if the percentage of US-made material inputs were increased. Simply put, a higher share of domestically produced supplies would have a significant impact in terms of generating new manufacturing jobs. Utilizing 100% domestically produced inputs for infrastructure projects would yield a total of 77,000 additional jobs nationally."

They argue that the provision would disproportionately help manufacturing, raising the number of stimulated manufacturing jobs by 33% (AAM 2009).


Protection and the open economy multiplier

The underlying report argues that:

"the most important source of leakages for the kinds of investment we consider in this report is the use of imported goods and services in the production of infrastructure. Spending on imports does not raise the demand for domestic output and therefore does not create additional jobs."

The report never mentions the word 'export.' (Heintz, Pollin, and Garrett-Peltier 2009, p. 23)


US traditional policy: level playing field on procurement and the GPA

With some exceptions, the US has generally taken a different stance in the past. The website of the US Trade Representative, as yet unchanged from the Bush Administration, lauds the Government Procurement Agreement (GPA) and states that a "longstanding objective of US trade policy has been to open opportunities for US suppliers to compete on a level playing field for foreign government contracts." It cites WTO estimates that the parties to the GPA receive annual access to more than $300 billion in government tendering procedures.


What comes around goes around

Were there careful consideration of the implications, the US would seem to have little incentive to start a procurement fight. According to OECD figures (OECD 2008, pp. 56-57) the US in 2007 trailed only Switzerland, Mexico, Turkey, and Luxembourg in the race among members for lowest government consumption expenditure as a fraction of GDP.


Opposition from US business and trade groups

The "Buy American" stimulus provision has sparked opposition from US business and trade groups. They argue that it could prompt retaliation, undermine US leadership, and violate the pledge at the November 2008 G20 Summit in Washington not to adopt protectionist measures (Drajem, 2009).

It is unclear whether this lobbying will block the measure, though. There is extraordinary pressure to deliver the stimulus package to President Obama before the end of February. That allows little time for deliberation and debate. The rationale for the rush is the urgent need for the spending, though the Congressional Budget Office estimates that almost 60% of the new spending projects would take place after September of 2010 (CBO, 2009, p. 3).


Keynesian multiplier and the fallacy of composition

As significant as government procurement may be, the flawed mercantilist logic of the "Buy American" provision is even more dangerous because of its broader applicability. Dani Rodrik (2008) argues that one way to enhance the Keynesian multiplier effects of any fiscal stimulus would be to raise import tariffs. He writes: "Yes, yes, import protection is inefficient and not a very neighborly thing to do--but should we really care if the alternative is significantly lower growth and higher unemployment?"

Such analysis is flawed at several levels. Among them, there are the failings of Keynesian analysis more generally (see, e.g., Barro 2009), and the globally integrated nature of production, which would be exceedingly difficult and costly to unwind and which is uncaptured by simplistic macro models. But the idea is clearly seductive.


Obama's first test on protectionism

The protectionist urges in the stimulus debate pose a major challenge for President Obama at a difficult time.

He has not seemed to emphasize the importance of international economic relations in his appointments to date. His nomination for US Trade Representative, Ron Kirk, was one of his last, remains unconfirmed, and is inexperienced in global trade matters. President Obama has yet to name a new Secretary of Commerce after his first choice withdrew. His new Treasury Secretary, Tim Geithner, will likely be consumed with domestic aspects of stimulus and with averting financial collapse.


Campaign promises: Multilateral approach to foreign policy

In his campaign last year, President Obama called for a multilateral approach to foreign policy and a restoration of America's image in the world. It may fall to other world leaders to remind him of the role that global trade plays in US international relations.