The 'Buy American' clause and the fate of the global recovery

The election of Barack Obama was hailed around the world, and many saw its as the beginning of a return of the U.S. to the circle of Western nations. But Obama soon surprised us with one of the most protectionists of policies -- the Buy American clause in the stimulus bill. The clause stipulates that the steel and manufactured goods bought with federal stimulus funds must be made in the U.S. So not only is the American financial system blamed for the global economic crisis, now the opportunity to join a significant part of the recovery will be off limits to other nations.

Outside the U.S., many people are not impressed. Worse, some are starting to worry about the effects of this questionable rule.

Already, many businesses in Canada have suffered from the rule with lost sales and denial of access to contracts. Many have had to shed jobs either as they were forced to downscale or close up shop altogether, or move operations south of the border. And as the language of the clause has been so obscure and vague, many American companies are making their own rules, most often buying only U.S.-made supplies just to play it safe.

But lately, criticism of the Buy American clause has been mounting, and not just from outside the U.S.

Clinton has already acknowledged the problem the other day, promising the U.S. will work with Canada to find a way to alleviate these concerns. "Obviously, Canada is our No. 1 trading partner. It is a mutually beneficial relationship that we intend to not only nurture, but see grow," she said.

The U.S. Chamber of Commerce, a major U.S. business group, has also recently joined Canadian Manufacturers and Exporters in pushing the Obama administration to loosen Buy American purchasing restrictions. The group said the clause is putting billions of dollars at risk for U.S. businesses and local governments if friendly countries such as Canada and European nations retaliate with protectionism of their own.

Indeed, Prime Minister Harper, who made a personal appeal on Friday on the matter, warned the U.S. risks triggering a trade war with Canada and sending the "worst possible signal" to the rest of the world. Already, the Federation of Canadian Municipalities passed a resolution last weekend shutting out U.S. bidders from similar projects in Canada. Canadian cities buy roughly $15-billion worth of American goods and services every year.

But many in Canada disagree with this tit-for-tat attitude. Instead, they would rather see true free trade devoid of protectionism of any sort. In a world so interconnected, as the recent crisis has so well demonstrated, protectionism is the worst solution. It even conflicts with capitalism as it doesn't encourage buying the best product at the best price. And since economies are so intertwined, any stimulus money that flows out of the U.S. will come in from other countries if there are truly universal open borders.

Surprisingly, these views aren't just Canadian. World Bank president Robert Zoellick warned that protectionist Buy American rules threaten the global economy. And former U. S. secretary of state Madeleine Albright said, "It would be folly to forget the lessons of 1930s and fall into the trap of protectionism. The philosophy of every nation for itself will not lead us out of the recession -- it could drive us instead toward an economic Armageddon."
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