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Op-ed

US Free Trade Promises Must Be Honored

by Gary Clyde Hufbauer, Peterson Institute for International Economics
and Jeffrey J. Schott, Peterson Institute for International Economics

Op-ed in the Financial Times
May 20, 2009

© Financial Times


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.


RELATED LINKS

Book: Understanding the Trans-Pacific Partnership January 2013

Book: The Trans-Pacific Partnership and Asia-Pacific Integration: A Quantitative Assessment November 2012

Policy Brief 12-21: How Can Trade Policy Help America Compete? October 2012

Policy Brief 11-20: The United States Should Establish Permanent Normal Trade Relations with Russia November 2011

Policy Brief 11-8: What Should the United States Do about Doha? June 2011

Book: The Long-Term International Economic Position of the United States April 2009

Op-ed: Trade: An Opportunity About to Be Lost? May 20, 2011

Op-ed: New Imbalances Will Threaten Global Recovery June 10, 2010

Op-ed: How Best to Boost US Exports February 3, 2010

Op-ed: Cooling the Planet Without Chilling Trade November 13, 2009

Paper: Submission to the USTR in Support of a Trans-Pacific Partnership Agreement January 25, 2010

Working Paper 09-2: Policy Liberalization and US Merchandise Trade Growth, 1980–2006 May 2009

Policy Brief 09-2: Buy American: Bad for Jobs, Worse for Reputation February 2009

Paper: Report to the President-Elect and the 111th Congress on A New Trade Policy for the United States December 17, 2008

Book: American Trade Politics, 4th edition June 2005

Op-ed: The Payoff from Globalization June 7, 2005

Policy Brief 08-5: World Trade at Risk May 2008