Is the 'Buy American' provision a trade buster?

What could be the most controversial component of the roughly $787 billion fiscal stimulus package, as it relates to investors? The "Buy American" clause. Proponents and opponents offer starkly differently interpretations of the clause's impact.

Organized labor and other pro-union groups argue that the the clause is needed to guarantee that U.S. taxpayer dollars are deployed in such a way that they create the most domestic jobs as possible, thus creating a strong ripple effect on U.S. GDP. They argue that without it companies and others who receive federal dollars could use outsourced, overseas personnel to complete tasks, and U.S. GDP will not feel the full impact of stimulus dollars.

Conversely, industry groups and other business leaders argue the clause will restrict commerce, increase business costs, and go against the nation's policy of free trade. They add that the clause also could spark a new round of trade wars -- encouraging regions like Europe to impose their own "Buy Europe" clauses, a development that could represent a return to protectionism that's so destructive to international trade.

At issue: impact on commerce

Economist Richard Felson, who typically favors nearly all pro-union and organized labor legislation, says this is one labor-oriented measure he's opposing.

"My stance is driven by the fragility of the global economy. International trade is set to decline in 2009 for the first time in more than 20 years, others regions will not stand by and let the United States restrict foreign company access, and it could lead to retaliatory measures," Felson says. "That would represent a new round of protectionism, which is exactly what took hold in the 1930s and worsened the Great Depression. We have to avoid that at all costs."

Felson says a new round of protectionist measures by the world's major economies "could cut as much as 1 percentage or more off of global growth." After six years of strong growth, the global economy is expected to slow to a scant 0.5% GDP growth level in 2009, according to an International Monetary Fund forecast.

"It's naive to assume other countries will not pursue trade policies in their national interest if the United States does the same," Felson adds.

Economic Analysis: If the clause sought to shield only young, vulnerable U.S. sectors, it could be supported, but it does not. Hence, the view from here argues the Congressional conference committee should remove the language favoring American manufacturers and producers altogether from the legislation. If it doesn't have time to do that, Congress, in subsequent legislation, should neutralize the "Buy American" provision. A new era of protectionism -- like the one that devastated world trade beginning in 1930 -- is precisely what the U.S. and global economies do not need at this juncture.
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