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Global Economic Crisis: Made in America

Intervention by the state to protect citizens of Western countries from the devastation of the economic crisis is beginning to slip into a protectionist groove that could, if unchecked, sink the world into a 1930s-style ‘depression’. Since that time, when the US ‘beggar thy neighbour’ policy was enshrined in the Smoot-Hawley Tariff Act, brought about economic ruin, the world has become so much more integrated that a trade war could cause incalculable social unrest and political convulsions.

A foretaste of the political fallout to come has been apparent in Europe in recent weeks. Normally placid Icelanders pelted their prime minister with eggs and stones for failing to prevent the collapse of the country’s economy. While Iceland government has collapsed, angry demonstrators in Bulgaria, Hungary, Latvia and Lithuania too threatened to bring down their governments. If that were to happen the successors would likely be more inward-looking ones, focused on insulating them from further foreign contagions. Should they succeed in doing so, however, they would ultimately usher in a new period of disastrous isolation and misery.

As the global financial crisis began on Wall Street, the eye of the protectionist storm could well be hovering above Capitol Hill. With the ranks of laid-off workers swelling daily and businesses hanging ‘going out of business’ signs in US towns, a rattled Congress has been feverishly drawing up legislation to save American jobs. As the stimulus package goes through Congress, lawmakers from the hardest-hit states have attached ‘buy American’ provisions to the rescue plan. For instance, $64 billion of the $825-billion stimulus bill is devoted to repairing US roads, bridges and waterways. Under amendments offered by representatives of states where uncompetitive US steelmakers have had to shutter their mills, strings have been attached to block the disbursement of allocated funds “unless all of the iron and steel used in the project is produced in the US.” Another amendment requires that any health information technology system acquired with taxpayer money must be produced by American programmers and engineers. As one sponsor of the amendment put it, “[t]his is a US jobs bill — let’s keeps those tech and IT jobs here.”

In the current mood of deepening crisis, moves to bail out US car manufacturers have also been accompanied by calls to buy American cars, even to buy only American in shopping malls. This seemingly logical and patriotic call to ‘buy American’ at a time of crisis runs up, however, against two realities. First of all, consumers will struggle to find any article of clothing, shoes, toys or electronics that are not made abroad or that do not contain foreign components. At a time when nearly all industrial products, certainly American cars, are built from foreign parts, if not manufactured wholesale in low-wage countries, the line between American and ‘foreign’ products has been entirely obscured. Would it be unpatriotic, for example, to buy a GM car if that car was made in Mexico? Secondly, the call to exclude foreign goods and workers from US government-funded projects could violate WTO rules. Under a Government Procurement Agreement signed by 28 countries, signatories are committed to procurement rules that do not discriminate against foreign products or suppliers.

The legal challenge aside, one unavoidable consequence of any ‘Buy American’ provisions in the stimulus package would be the retaliation from China, Europe and other countries now in the process of allocating government funds to boost their sagging economies. Concerned about the wider ramifications of this retaliation, US business groups and major companies such as Boeing, Caterpillar, and General Electric — have called on the Congress to resist such protectionist pressure.

Despite the lessons of history, the dangers posed by protectionism are often seen as a problem for tomorrow while saving jobs is a fiercely urgent task. The world now needs leaders who can stay calm in the face of the raging storm and work together to stimulate their own economies without triggering a new wave of protectionism.

The Great Depression that produced trade battles and contributed to the rise of strident nationalism culminating in World War II stands as a singular warning against the seduction of narrow nationalist solutions. ‘Buy American’ provisions may temporarily provide job security for some Americans, but the contagion of protectionism will stunt global trade bringing misery to Americans and rest of the world.

Nayan Chanda

Former Brookings Expert

Director of Publications, Yale Center for the Study of Globalization; Editor, <em>YaleGlobal Online</em>

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