Stimulus Package’s Buy American Clause In The News

President Obama, at the "Three Amigos" summit today in Mexico, responded to Canadian and Mexican complaints about the “Buy American Clause” in the stimulus package, reiterated that the clause is legal within existing trade agreements and does not threaten our trading partners. From an Edmonton Sun report, Obama: 'Buy American' won't hurt Canadian trade [1]

While he didn’t leap to the defence of the contentious “Buy American” program, U.S. President Barack Obama urged Canadians to take a deep breath and put things in perspective. The policy is a one-off to help weather tough economic times and will have minimal impact on multi-billion trade between our two countries, he said.

. . . Obama said the policy is geared only to the massive American stimulus package, not part of a larger pattern of protectionism. He insisted it complies with World Trade Organization rules, and suggested provinces and states can work on cross-border procurement practices that expand trade.

Back in February Paul Krugman wrote about “policy externalities,”pointing out that the only way a stimulus package can work is if it stimulates. In the absence of a coordinated worldwide response to the financial crisis each country has to be responsible for stimulating its own economy. Or not. Since the world’s economy is far too large for just the U.S. to provide adequate stimulus, our stimulus needs to focus on our economy. Other countries need to stimulate their economies. In Protectionism and stimulus (wonkish) [2], Krugman wrote,

Let’s be clear: this isn’t an argument for beggaring thy neighbor, it’s an argument that protectionism can make the world as a whole better off. It’s a second-best argument — coordinated policy is the first-best answer. But it needs to be taken seriously.

What’s the counter-argument? Don’t say that any theory which has good things to say about protectionism must be wrong: that’s theology, not economics.

The right argument, I think, is in terms of political economy. Everything I’ve just said applies only when the world is stuck in a liquidity trap; that’s where we are now, but it won’t be the normal situation. And if we go all protectionist, that will shatter the hard-won achievements of 70 years of trade negotiations — and it might take decades to put Humpty-Dumpty back together again.

Also in February, the Alliance for American Manufacturing [3] published a report, Buy America: Key To America’s Economic Recovery [4] (PDF), that knocks down several myths about the legality of the clause, points out the steps that other countries take to protect their own economics, and points out that this provision is essential to creating the necessary jobs in America. From the report,

The recovery package will create an estimated 3,675,000 jobs, 408,000 of which will be in manufacturing. Buy American provisions will maximize the number of recovery program jobs that are created in America, kick starting domestic demand and economic growth here at home. A recent analysis found that application of Buy American requirements to recovery projects would raise the number of jobs created by such projects by as much as 33 percent.

It is important to note that the Hufbauer and Schott estimate of additional manufacturing jobs created directly by the inclusion of Buy American provisions in the recovery legislation is based on the understanding that, absent the inclusion of such provisions in the legislation, domestic preferences already in existing legislation would apply to economic recovery spending. Thus, their estimates only measure the additional jobs created due to including Buy American language in the recovery legislation itself, not the number of jobs owed to the application of any Buy American rules at all.

The President is correct to say that the "Buy American" clause is beneficial and necessary. The package, with this clause has already saved hundreds of thousands of American jobs and stands to save millions more.