Wednesday, February 4, 2009

Congress's Bad Trade Policy

. Wednesday, February 4, 2009

It's very suspicious that the "Buy America" Condition is not receiving wider attention in US media outlets.  Perhaps Daschle's brouhaha was really smart political strategy to steal the spotlight from a really bad policy proposal that would probably be very popular with the median voter.


The EU, however, wasted no time decrying a return to Smoot-Hawley era protectionism.  Sending a letter to the US Congress, EU Ambassador John Bruton warned of trade wars, WTO dispute settlement court, and further protectionist spiraling.  Bruton, as well as Democratic and Republican leadership in the Senate called upon the moral authority of the US to resist the urge towards insularity.  President Obama came out today strongly against the condition, but it seems he may have difficulty reigning in Congress. (see here too)

Quickly, the problem with protectionism is that it tends to spiral - when one country initiates protective measures, other countries retaliate.  This pushes down trade, which is income-depriving on the aggregate level.  The political challenge to combating protectionism is that gains and losses for trade are unevenly distributed.  In the case of the "Buy America" clause, the United Steel Workers Union is lobbying to protect its interests.  The Steel lobby tends to hold a lot of sway since Congressional seats in many mid-west states are heavily influenced by the Union's endorsements and disparagements.  However, protection for one industry means losses to others, especially exporters.  That's why we see Caterpillar, GE, and other major exporters coming out against the provision.

It was really a matter of time until grandstanding on the stimulus turned from arguments over fiscal responsibility to arguments over protectionism.  What's scary is the wide-spread support for myopic policies that favor one industry over an entire economy.  What's relieving is Obama's turn from populist protectionist rhetoric to clear-minded understanding of the dangers of such a policy.   

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Congress's Bad Trade Policy
 
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