Friday, January 30, 2009

Obama's Very Short Honeymoon

Canadian newspapers are headlining a recent decision by the US Congress to "buy American" [Obama's 'Buy American' plan blasted].

Both versions of the U.S. economic stimulus package block the use of foreign-made iron, steel, textiles and manufactured products according to the report in the Toronto Star. Canadians think that is an illegal example of protectionism but the US Vice-President disagrees, according to the report in The Toronto Star.
Liberal foreign affairs critic Bob Rae said bluntly the position taken by the U.S. Congress is illegal.

"A country cannot bring in a measure that restricts international commerce and international activity in this way," he said.

However, late yesterday, Obama's administration signalled a different view. In an interview with CNBC, U.S. Vice-President Joe Biden defended the "Buy America" steel provision.

"I don't view that as some of the pure free traders view it, as a harbinger of protectionism," Biden said.
Canada and the USA have signed a free trade agreement (NAFTA) that is legally binding in both countries (and Mexico). The USA has failed to live up to its commitments before but it has lost when the issues went to arbitration. Unfortunately, the legal proceedings take many years and during that time US protectionism benefits American countries at the expense of Canadian and Mexican companies. Meanwhile, America benefits by selling its goods and services in Canada and the Mexico.
As officials at Canada's embassy in Washington scramble to lobby U.S. senators to water down the language in the bill, Canada's trade and industry ministers suggested the measures could be challenged under the North American Free Trade Agreement or at the World Trade Organization.

"We are reminding the Americans that they have legal obligations under NAFTA, under WTO," said International Trade Minister Stockwell Day. "History shows clearly that you can't fall back into protectionist measures. That happened in the 1930s and what could have been a bad one- or two-year recession turned into, as we know, the Great Depression. So we want to curtail that."

But a NAFTA challenge will be neither easy nor a quick way to resolve anything.
Canadian policians were worried about Obama's commitment to international trade. So far it looks as though those fears were justified.

It was a very short honeymoon for Barack Obama. It will be interesting to see how he handles this problem. He has promised to work toward restoring America's stature in the international community. Setting up protectionist trade barriers in violation of international treaties isn't going to advance that cause.


  1. You might hold judgment until the Senate bill is produced; right now my guess is that the House bill was designed to placate labor.

    These sorts of provisions lead to the following types of outcomes: a company that, say, uses ball bearings is hurt because it, say, can't buy the best (which is, say, made in Germany) and ends up building an inferior product.

  2. A few notes, from a disgruntled American:

    1) American perception of trade imbalance is completely off from reality. In reality, the U.S. still produces (or could produce without much effort) plenty of raw material; it's manufactured goods which are the cause of import imbalance, and the imbalance with Mexico and Canada is not particularly bad; it's Asia where the real issues are.

    2) Ollie can rest assured: there will be loopholes for any company which actually wants to import goods. Like any bill passed which gets play in the media, this is mostly symbolic, and large companies will ignore it. The only real-world impact on manufacturers will be that the ones who wanted an excuse will use this to either leave for China or cheapen their product, and those cases will happen anyway because the companies have already made up their minds.

    3. NAFTA is deeply unpopular in the U.S. right now. Basically, the left feels that labor gets screwed by it, and the right hates anything which prevents the U.S. from screwing over other countries, which as you point out NAFTA does. (And regardless of intent, it's true that NAFTA makes it harder to justify higher wages for any job which can be outsourced.) The only real proponents of NAFTA at this point are the people who believe that globalism will solve all our problems, and they're getting very rare these days, at least in public. Even the very rich are getting wary of expressing that idea, and they're the ones who benefit from it.

    4. You will be unable to change American perception of NAFTA anytime soon. This may well be the presidency under which the U.S. pulls out of it; I'm pretty sure that if Obama doesn't do it, the next Republican to get into office will.

  3. This kind of protectionims is designed to protect the "Big" USa companies but it is detrimental to the consumers, that is, the majority of US population (that actually voted for Obama).
    By protecting US big companies from foreign competition, they can lower their standards allowing them to sell a worse product for more money.

  4. My hunch is that this is going to go away pretty quickly. Obama has come up with some dumb ideas in the past, and mostly dropped them pretty quick once people have gone after them. Hopefully this is just a signal of him not having good contact with his advisers yet.

    However if Obama does end up going through with this he takes a big plunge down in my book.

  5. What the point of the buy American provision is is that funds from the eight hundred billion stimulus package be spent on American made products as the idea behind the whole exercise is to reduce unemployment in the US. Companies not taking stimulus funds are still perfectly free to outsource production to China. It makes no sense for the Government of the US to borrow money to stimulate the Chinese economy.

  6. @SLC

    The idea of the bailout is to create jobs by stimulating the economy. Giving an artificial advantage to domestic companies not only means that the bailout is being spent less efficiently but it also encourages other countries to adopt protectionist measures. I've heard a lot of analysis that suggests a slide into protectionism is part of what made the great depression so bad.