'Buy American' clause raises trade tensions - Jonathan Watson
Many believe that the US decision to include a ‘Buy American’ clause in its economic recovery package symbolises a new age of protectionism.
The American Recovery and Reinvestment Act of 2009 was enacted by the US Congress and signed into law by President Barack Obama on 17 February 2009. Designed to provide a stimulus to the US economy in the wake of the economic downturn, it includes tax cuts, an expansion of unemployment benefits and other social welfare provisions. It also provides for domestic spending in education, health care and infrastructure, including the energy sector.
Of the Bill’s several hundred pages, one section in particular attracted enormous attention. This was the ‘Buy American’ clause, which forbids the use of stimulus funds for construction, repair or maintenance of a public building or public work unless all of the project’s iron, steel and manufactured goods used have been made in the United States. The law applies to all federal, state and local government purchases that use stimulus funds. Under the final version of the law, stimulusrelated ‘Buy American’ provisions have to comply with US trade treaty obligations. They include a waiver for goods and services coming from the countries involved in the North American Free Trade Agreement (NAFTA) and the 36 countries involved in the World Trade Organization (WTO) Government Procurement Agreement (GPA).
‘We’re not going to find our way out of this recession by throwing walls up around particular industries or pursuing protectionist policies’
Senior Partner for Global Issues, Sidley Austin
The clause did not go down well with US trading partners. John Bruton, the European Union’s ambassador to the United States, expressed his dismay in an open letter to the country’s politicians. ‘Open markets remain the essential precondition for a rapid recovery from the economic crisis, and history has shown us where measures taken contrary to this principle lead us’, he said. ‘The European Commission is particularly concerned about the message such measures would send to the world, at a time when most countries are faced with the same situation of looking for the best means to tackle the crisis.’
Many in the United States also disapprove of the ‘Buy American’ provision. They include Dan Price, Senior Partner for Global Issues at Sidley Austin. He recently completed service as Assistant to the President and Deputy National Security Advisor for International Economic Affairs in the administration of George W Bush. ‘We’re not going to fi nd our way out of this recession by throwing walls up around particular industries or pursuing protectionist policies’, he told IBN.
|American Recovery and Reinvestment Act 2009 – ‘Buy American’ clause
Provides that all government projects funded by the recovery plan must use US iron, steel and manufactured goods, unless this violates obligations under WTo or US free trade agreements or a federal agency head waives the requirement because of costs or non-availability.
The final version of the clause – President Obama opposed the original draft, and sought to have it removed – states that it should be implemented in a manner consistent with WTO obligations. However, Price thinks this is not enough. ‘The touchstone of whether a measure is protectionist is not whether it violates WTO obligations’, he says. ‘It is whether it constrains trade or disrupts the global supply chain. For the developed world to start throwing up protectionist measures which turn their backs on the very global supply chain their policies helped to create really is unacceptable.’
Mauro Berenholc, a partner at Pinheiro Neto Advogados in Brazil and Vice-Chair of the IBA Trade and Customs Law Committee, takes a similar view. ‘Free trade, not protectionist measures, should be the common response of countries to the worldwide economic crisis’, he says.
A slippery slope
One of the biggest concerns about the ‘Buy American’ clause is that other countries will introduce similar measures of their own. This recalls the protectionist policies that helped to drag down the world’s economy in the 1930s. ‘Other countries [are likely to] echo US legislation by further restricting the ability of foreign fi rms to bid on public contracts’, write Gary Clyde Hufbauer and Jeffrey J Schott in a report published by the Peterson Institute for International Economics. They cite Fred Smith, chairman and CEO of Federal Express, who has said there will be ‘retaliation’ around the world.
Although other countries have not yet enacted their own ‘buy local’ measures, they are taking action that many consider protectionist. Much of this action focuses on the motor industry. In France, the government has agreed to give car manufacturers Renault and Peugeot-Citroen €3 billion in preferential loans in return for maintaining sites and jobs in France. Sweden has produced SKr28 billion (US$3.4 billion, €2.6 billion) in loan guarantees and support for research and development for Volvo and Saab. Fiat is seeking, and likely to get, similar help from the Italian Government.
These moves are not confined to the developed world. The state-run Banco do Brasil is making US$1.7 billion available to car-makers’ financing units and cutting carpurchase taxes, while Russia has imposed tariffs on imported cars for nine months. Russia has also promised 83 billion roubles (US$2.3 billion, €1.8 billion) in direct help to domestic car-makers, including assemblers of foreign-branded vehicles. China has halved the sales tax on cars with engines of less than 1.6 litres and offered subsidies for trade-ins of high-emission vehicles for cleaner ones.
Matthew Nicely, a partner in Thompson Hine’s international trade and customs practice group, says that measures such as these are understandable. ‘Bailouts are not uncommon during an economic downturn’, he says.
‘Often they focus on companies that deal mainly with their domestic markets. It’s true that they can turn into subsidy cases at the WTO. But sometimes governments just have to put aside concerns about those issues and let the chips fall where they may. Hopefully wiser heads will prevail than those that prevailed in the 1930s. Most people recognise that shutting down the borders is not really the way to get our economy back on its feet. There is a wide spectrum of policy choices between closing the borders and allowing completely free and fair trade.’
Mark Clough QC is a partner at Addleshaw Goddard and a member of the IBA Antitrust Committee and the Trade and Customs Law Committee. He makes the point that in a global economy, protectionism has become much more difficult. ‘There’s a question mark over the extent to which protectionism can work at a high level’, he says. ‘If you say “Buy American” or “Buy European”, that can have an impact. But what are these goods if they carry the brand names of European companies and are made in India or China? What’s the effect of buying European in that case? Paradoxically, the globalisation of world markets limits the possibility of protectionism.’
‘Free trade, not protectionist measures, should be the common response of countries to the worldwide economic crisis’
Partner, Pinheiro Neto Advogados; Vice-Chair of the IBA Trade and Customs Law Committee
Nicely argues that the Buy American clauses may not have a huge effect. ‘The GPA of the WTO is full of exceptions’, he says. ‘It’s a plurilateral agreement, which means that not every member of the WTO signed it, and each signatory to it agreed to its own variations on the levels of commitment involved. It’s very similar to the services agreement in that regard.’ Brazil, which has been vociferous in its denunciation of the ‘Buy American’ clause, would not be able to take action against it at the WTO because it has not signed the GPA. Berenholc says that if a WTO member state chooses to challenge the US approach through the WTO dispute settlement system, an interesting discussion could emerge about the proper definition of government procurement. ‘It would concern the interpretation of WTO rules and/or case law’, he says. ‘Does “government procurement” refer only to purchases made directly by the government or can it also apply if those purchases are subcontracted or made by an entity that has received economic benefi ts from the “package”? Would those circumstances fi t into one of the exceptions set out in Article III of GATT 1947 or could they form the basis of a future dispute at the WTO?’
In the United States, in particular, stimulus funding could flow through states and agencies not covered by trade obligations. By passing the funds to the states, many of which are immune from trade obligations, the United States could avoid accusations of breaking its WTO obligations. Only 37 states have agreed to join the GPA, in whole or in part. Thirteen, such as Ohio, New Jersey and South Carolina, are not bound by the GPA’s obligations at all. Critics of the ‘Buy American’ approach feel that these are relatively minor issues. According to Schott and Hufbauer, the policy means the United States ‘[has forfeited] the moral high ground when it comes to slowing the protectionist juggernaut that now threatens the world economy’. Enacting the clause ‘opens the door for countries worldwide to walk away from their trade obligations – or simply to raise barriers where they have no obligations’.
Price argues that they key point is a very simple one: the United States does not produce enough steel to satisfy domestic demand. ‘This means that we are going to have to import steel as we embark on signifi cant infrastructure programmes’, he says. ‘In the end the “Buy American” clause may be more symbolic than anything else. But the symbolism is decidedly unhelpful.’
Jonathan Watson is a journalist specialising in european business, legal and regulatory developments. He can be contacted by e-mail at email@example.com
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