Thursday, February 05, 2009

A Trade War?

Earlier I brought up the question of a possible trade war. Burton Malkiel, the author of the excellent A Random Walk Down Wall Street, addresses the issue further in today's Journal:

As the world-wide recession deepens, protectionist sentiments are rising. The House of Representatives' version of the economic stimulus bill contains a provision that only American-made steel and other products be used for the infrastructure projects. Wrapped in the cloak of "Buy American" patriotism, the Senate version of the bill contains even stronger anti-free-trade provisions.

This Buy American momentum is bad economics, and by threatening to destabilize trade and capital flows, it risks turning a global recession into a 1930s-style depression. Asked about Buy American on Tuesday, President Barack Obama told Fox News that "we can't send a protectionist message." He said on ABC News that he doesn't want anything in the stimulus bill that is "going to trigger a trade war." He's right.

Yes, I would agree that he doesn't want a trade war, but that doesn't necessarily mean he won't start one. In reality it is really up to Congress, and they do not seem settled on the matter.

US senators voted overwhelmingly, late on Wednesday, to require the "Buy American" provisions "be applied in a manner consistent with US obligations under international agreements".

However, an amendment put forward by Republican Senator John McCain which would have removed the clause altogether was defeated.

Speaking before a vote on that amendment, Mr McCain warned that if the provisions were passed it would "only be a matter of time before we face an array of similar protectionism from other countries - from 'Buy European' to 'Buy Japanese' and more".

The problem with this of course is that "in a manner consistent with US obligations" is a matter of interpretation, and any law which promotes favoritism towards US companies can still provoke a backlash, as other countries will just do the same thing.

President Obama could of course veto the bill if he feels the language is too strong, but he is not very likely to do that after arguing that not passing the bill will bring on a catastrophe.

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