Wednesday, February 4, 2009

Playing Both Sides

. Wednesday, February 4, 2009

From the FT:

The US Senate voted on Wednesday to soften a ”Buy American” plan in its $900bn stimulus bill after President Barack Obama expressed concern the original language could trigger a trade war.

Senators, on a voice vote, approved an amendment requiring that provisions that upset Canada, the European Union and other trading partners be ”applied in a manner consistent with US obligations under international agreements.”

The underlying Senate bill had required that all public works projects funded by the stimulus package use only US-made iron, steel and manufactured goods -- potentially putting the United States in violation of its commitments under the North American Free Trade Agreement and the World Trade Organisation’s government procurement agreement.

Obama, asked about the Buy American provisions in television interviews on Tuesday, said the United States had to be careful not to include any provisions in the stimulus bill that could ”trigger a trade war.”

”I think it would be a mistake ... at a time when worldwide trade is declining, for us to start sending a message that somehow we’re just looking after ourselves and not concerned with world trade,” Obama said on the Fox network.

Okay, so, the way I read this is that the US Senate, under pressure from President Obama (who himself is under pressure from Canada and the EU), decided to so weaken the 'Buy American' provision of the stimulus bill as to make it pointless. The original point of the 'Buy American' provision was pure protectionism. The "provisions that upset Canada, the European Union and other trading partners" were the parts that were protectionist. So if we're gonna remove the teeth from the 'Buy American' section of the bill, why not just remove it entirely?

An incident from the early years of the last president may be instructive. Recall 2002, when President Bush signed steel tariffs into law in exchange for fast-track negotiating authority for the Doha round of WTO negotiations. One the one hand, this move made little sense: Bush was a convinced free-trader, and he had a Republican majority in both houses of Congress. So why do it?

Fast-track authority in the Doha round gave the US credibility in negotiations that it would lack if any agreement required Congressional approval. President Bush could have known that the Doha round was fraught with difficulties that would make reaching an agreement difficult, and any sign that Bush was negotiating without pre-approval from Congress would make negotiating even more difficult. President Bush also could have known that the steel tariffs would be immediately challenged in the WTO dispute settlement court. Indeed, this happened, as the EU, Japan, Brazil, Korea, China, Switzerland, and others challenged the US policy. The steel tariffs were an obvious violation of WTO obligations, and the dispute settlement body ruled against the US. In 2003, Bush removed the tariffs, but kept the fast-track authority. Plus, he could credibly tell the American people that his hands were tied: he had to abide by our international agreements. It was win-win-win for Bush.

Perhaps President Obama is hoping for something similar: keep the 'Buy American' language to appease domestic political factions and get the stimulus bill passed, but sufficiently neuter it to avoid a confrontation with the EU, Canada, and the rest of the world.

(ht: DeLong)


Playing Both Sides
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