America’s free trade promises must be honoured


The Financial Times (UK)
By Gary Hufbauer and Jeffrey Schott
May 20 2009

When Washington enacted its $787bn (€580bn, £509bn) stimulus bill in February with Buy American provisions, the law promised – at the urging of President Barack Obama – that the language "shall be applied in a manner consistent with US obligations under international agreements". That is not happening.

When the Group of 20 leading nations met in London in April, their communiqué – at the urging of Mr Obama – declared they would "refrain from raising new barriers to investment or to trade in goods and services". The US seems to be violating that pledge, too, in its rescue efforts for General Motors and Chrysler. After months of its deflecting protectionist demands in the face of declining output and soaring unemployment, protectionism is now on the rise.

Under the North American Free Trade Agreement (Nafta) and the government procurement agreement (GPA) of the World Trade Organisation, US government contracts are not allowed to discriminate against suppliers or parts from GPA signatories or from Canada or Mexico.

In the stimulus bill, Congress insisted that federal funds could be applied only to projects that used US-made goods – unless that condition violated US trade obligations. But funds for many of the projects funded by the stimulus are funnelled to state officials – many of whom ignore or do not know the details of US trade agreements and insist on US content for fear of losing federal windfalls. The federal government designed the stimulus programme and provided the funds to pay for it. In our view, simply because a state official tenders the contract does not void the international obligation. The WTO and Nafta judges would surely agree.

If the Obama administration wanted to back up the president’s fine words, the Office of Management and Budget should have insisted on applying federal procurement standards to all contracts funded by the stimulus. Instead, the Environmental Protection Agency, states and cities have been given leeway to set their own guidelines. Lobbied by congressmen, their procurement officials have made it difficult or impossible for foreign components to be part of a bid. In practice, the result is to take big contracts from US companies that have long used foreign components to build roads, lay pipes or construct bridges. What remedy do they have? A costly lawsuit and the prospect of victory long after the contract has been awarded and the project completed.

Meanwhile, congressional voices are calling for the attachment of still more Buy American provisions to any cap-and-trade system designed to curb carbon emissions. On Monday, congressmen Henry Waxman and Ed Markey altered their draft climate legislation to secure the "strong support" of the United Auto Workers’ union by doubling subsidies for retooling industry to $50bn, paid for by auctioning carbon permits. UAW leaders approved, noting "these provisions will ensure that these vehicles of the future and their key components will be built in the US, providing jobs for American workers".

As the US rescues GM and Chrysler, it is succumbing to intense pressure to make federal help conditional on maintaining domestic production. The call to use US funds for US jobs is alluring, but is Congress better at crafting survival plans than the new GM and Chrysler teams, who argue some US sales should be sourced from US-owned plants overseas? An unintended consequence of the bail-out is to dismantle the car industry’s global integration.

Other countries are taking notice. Already the Obama administration faces trade frictions with the immediate neighbours. Canadian municipalities in Ontario are boycotting US products, while Mexico has slapped retaliatory tariffs on $2.4bn of US exports after Congress barred Mexican trucks from working in the US – despite Nafta rules, twice upheld in arbitration.

Beyond North America, the greatest danger is not that governments will retaliate against US misdeeds but that they will emulate them. Buy national and source local policies would create new barriers to international trade and impede global recovery. The G20 commitments were meant to pre-empt such measures, but are not being honoured.

Most damaging is the stain on the US reputation as a country that keeps its borders open in times of crisis and that respects its international obligations. Mr Obama needs to practise the multilateralism he so fervently preaches.

The authors are senior fellows at the Peterson Institute for International Economics

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