US Free Trade Promises Must Be Honored

Op-ed in the Financial Times

May 20, 2009

When Washington enacted its $787 billion stimulus bill in February with "Buy American" provisions, the law promised-at the urging of President Barack Obama-that the language "shall be applied in a manner consistent with US obligations under international agreements." That is not happening.

When the Group of 20 leading nations met in London in April, their communiqué-at the urging of President Obama-declared they would "refrain from raising new barriers to investment or to trade in goods and services." The United States seems to be violating that pledge too, in its rescue efforts for General Motors and Chrysler. After months of deflecting protectionist demands in the face of declining output and soaring unemployment, protectionism is now on the rise.

Under the North American Free Trade Agreement (NAFTA) and the government procurement agreement (GPA) of the World Trade Organization, US government contracts are not allowed to discriminate against suppliers or parts from GPA signatories or from Canada or Mexico.

In the stimulus bill, Congress insisted that federal funds could be applied only to projects that used US-made goods, unless that condition violated US trade obligations. But funds for many of the projects funded by the stimulus are funneled to state officials, many of whom ignore or don't know the details of US trade agreements and insist on US content for fear of losing federal windfalls. The federal government designed the stimulus program and provided the funds to pay for it. In our view, simply because a state official tenders the contract doesn't void the international obligation. The WTO and NAFTA judges would surely agree.

If the Obama administration wanted to back up the President's fine words, the Office of Management and Budget should have insisted on applying federal procurement standards to all contracts funded by the stimulus. Instead, the Environmental Protection Agency, states, and cities have been given leeway to set their own guidelines. Lobbied by congressmen, their procurement officials have made it difficult or impossible for foreign parts to be part of a bid. In practice, the result is to take major contracts from US firms that have long used foreign parts to build roads, lay pipes, or construct bridges. What remedy do they have? A costly lawsuit and the prospect of victory long after the contract has been awarded and the project completed.

Meanwhile, congressional voices are calling for the attachment of still more "Buy American" provisions to any cap-and-trade system designed to curb carbon emissions. On Monday, Congressmen Henry Waxman (D-CA) and Ed Markey (D-MA) altered their draft climate legislation to secure the "strong support" of the United Auto Workers' union by doubling subsidies for retooling industry to $50 billion, paid for by auctioning carbon permits. UAW leaders approved, noting "these provisions will ensure that these vehicles of the future and their key components will be built in the US, providing jobs for American workers."

As the United States rescues GM and Chrysler, it is succumbing to intense pressure to make federal help conditional on maintaining domestic production. The call to use US funds for US jobs is alluring, but is Congress better at crafting survival plans than the new GM and Chrysler teams, who argue some US sales should be sourced from US-owned plants overseas? An unintended consequence of the bailout is to dismantle the car industry's global integration.

Other countries are taking notice. Already the Obama administration faces trade frictions with its immediate neighbors. Canadian municipalities in Ontario are boycotting US products, while Mexico has slapped retaliatory tariffs on $2.4 billion of US exports after Congress barred Mexican trucks from working in the United States, despite NAFTA rules twice upheld in arbitration.

Beyond North America, the greatest danger is not that governments will retaliate against US misdeeds but that they will emulate them. Buy national and source local policies would create new barriers to international trade and impede global recovery. The G-20 commitments were meant to preempt such measures, but are not being honored.

Most damaging is the stain on the US reputation for keeping its borders open in a time of worldwide crisis and for respecting its international obligations. President Obama needs to practice the multilateralism that he so fervently preaches.

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Gary Clyde Hufbauer Senior Research Staff
Jeffrey J. Schott Senior Research Staff

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