In 1930, as the Great Depression tightened its grip on the country, Congress passed the Smoot-Hawley Act, erecting a high and onerous tariff wall around the U.S. economy. The lawmakers thought they were helping American workers; instead, they greatly lengthened and deepened the Great Depression, here and worldwide.
What the Congress is considering doesn’t rise to the level of Smoot-Hawley but "Buy American" is protectionism and protectionist measures tend to feed on themselves. We enact them, our trading partners retaliate and on it goes in a downward spiral.
Just the prospect of it caused the European Union to complain to the White House and the Treasury and State departments that Congress was about to set "a very dangerous precedent."
The House added a measure to the stimulus bill requiring that only U.S.-made iron and steel be used in federally funded public works projects. The Senate is contemplating an even more drastic step; that "manufactured goods" used in public works projects come from U.S. supplier.
This sounds simple but it could be a nightmare to administer in an era when U.S. and foreign companies own big chunks of each other and there’s a huge foreign manufacturing presence in the United States.
President Obama is against it. He has said that the U.S. should avoid doing anything that "signals protectionism," which this clearly does, and he told ABC News this week, "I think that would be a mistake right now. That is a potential source of trade wars that we can’t afford at a time when trade is sinking all across the globe."
It is more than just potential. EU officials have said if these provisions go into effect they very likely will complain to the World Trade Organization and one outcome might be that the WTO would allow the EU to retaliate against U.S. exports.
And, European officials pointed out, at the G20 meeting in Washington the U.S. backed a resolution that the members would not let themselves be stampeded into protectionist measures by the global recession.
This will be a tough call for Obama. "Buy American" is a great political sound bite but bad economics. The president’s natural allies, the Democratic congressional leadership and the unions are strongly for the Buy American provisions, and his opponents on much of the stimulus measures, the Republican congressional leadership, are against it. But it is a call the president has to make.