Editor's Note: The final version of the fiscal stimulus plan weakened the "Buy American" provision requiring the use of only U.S. iron and steel in construction work funded by the bill. Nevertheless, business groups continue to criticize the provision. In a new Q&A, Eswar Prasad discusses global concerns.
Q: The “Buy American” clause included in the current version of the fiscal stimulus plan last week has prompted many concerns from trading partners around the globe. What’s at stake for our trading partners and emerging markets?
The Buy American clause puts short-term political expediency and a narrow set of economic interests ahead of the much broader benefits of free trade to American consumers. It also sets back the cause of international economic cooperation and multilateralism that the new administration was expected to usher in.
Erecting barriers to trade could disrupt world trade if other countries retaliated with their own protectionist measures (as they are likely to do). These barriers will ultimately be a further blow to the U.S. economy as well as the global economy.
Q. How would you rate the political prospects for the “Buy American” clause? What about the political and economic pressures surrounding the effort?
In these difficult economic times, it is natural that politicians clutch at straws. Protecting domestic industries from foreign competition has a knee-jerk appeal, but the effort is likely to backfire if it sets off a trade war with other countries. This would mean more jobs lost, higher prices for many goods, and a more prolonged recession.
Politicians' efforts would be far better spent coming together to design an effective and broad stimulus package that gets the economy back on its feet and improves its competitiveness in the long run.
Q. What does the insertion of the clause signal for global trade and global economic cooperation for the months ahead?
The world economy is in a fragile state, with economies mired in recession and the confidence of consumers and firms shattered. It is a particularly inopportune time to trigger a trade war, which would compound the downward spiral of confidence and weak economic activity.
The U.S. should lead by example, setting standards for free trade that other countries could take their lead from. By contrast, the "Buy America" clause in the stimulus bill would be a perfect case of the U.S. leading the world down a path of self-destructive protectionism by shooting itself in the foot.