In an interview with Fox News, President Obama has come out and expressed disapproval of the "Buy America" clause in the House version of the stimulus bill, which would require that all iron and steel used in federally funded construction be sourced completely from the US. We blogged recently on how this risks re-igniting a trade war which would surely send the world into a deep depression.
As we expected there has been a strong reaction from United States' trading partners. For example, The Times reports:
The European Union warned the US yesterday against plunging the world into depression by adopting a planned “Buy American” policy, intensifying fears of a trade war.
The EU threatened to retaliate if the US Congress went ahead with sweeping measures in its $800 billion (£554 billion) stimulus plan to restrict spending to American goods and services.
Gordon Brown was caught in the crossfire as John Bruton, the EU Ambassador to Washington, said that “history has shown us” where the closing of markets leads — a clear reference to the Depression of the 1930s, triggered by US protectionist laws.
Last night Mr Obama gave a strong signal that he would remove the most provocative passages from the Bill.
“I agree that we can’t send a protectionist message,” he said in an interview with Fox TV. “I want to see what kind of language we can work on this issue. I think it would be a mistake, though, at a time when worldwide trade is declining, for us to start sending a message that somehow we’re just looking after ourselves and not concerned with world trade.”
However, it is not at all clear what might be done. The Bill belongs to the Congress in the end: Obama's hands are tied. Presidential power is power to persuade, not command. He cannot control what goes into the Bill or what is taken out of it. And there is strong Democratic support for protectionism, it would seem. According to the Sydney Morning Herald today, the Senate Democrats have extended the "Buy America" rule to include all goods and services funded by the federal government as a result of this Bill.
This is unbelievable, but presumably true. We are looking at the beginnings of a genuine trade war--somewhat akin to a rogue state mobilising its armed forced prior to an invasion. The options available to Obama are limited, as the Sydney Morning Herald notes:
Mr Obama has no power to knock out the individual provisions; he can only veto the entire bill. His alternatives are to ensure the clause is either removed, he is given a waiver clause, or it is somehow made consistent with existing trade law.
We doubt very much that if Buy America were to remain in the final bill Obama would veto it. He has invested far too much political capital in getting a stimulus bill passed, and we know that he has demonstrated strong protectionist instincts in the past. If it remains in the bill and is signed by Obama, we would expect massive and swift trade retaliation, plus a host of legal challenges under existing treaties and cases before the World Trade Organization. The genie would be out of the bottle.
There may be a significant risk that New Zealand would be caught in the cross fire and effectively shut out of our export markets. If that were to happen we should run a poll on how long the dole queues in New Zealand would stretch. On the other hand, maybe we would weather the storm better than most. In a trade sense, New Zealand is quite non-aligned. It is friends with all, and enemies of none. Moreover, it produces foodstuffs which would likely continue to be in high global demand and escape the worst of protectionist measures--particularly in the Middle East and Asia. Depressions lead people to focus upon the basics--and there is nothing more basic than food.
On the other hand New Zealand has some significant structural and "secular" problems that make it vulnerable and weak. We labour under the burden of generations of socialist welfare and entitlement policies, so that over half our households depend upon government payments to live--and that is after having gone through nine years of economic growth and prosperity. A significant and growing number of people are unemployable, will never work, and will take from others all of their lives. Our notoriously low savings rate coupled with our propensity to high debt and consumer spending means that we are as dependant upon overseas lenders as a drug addict on the next fix. The Athenian dogma of human rights and entitlements is a poisonous brew that kills in the end.
In the event of a severe downturn, the entitlement-millstone would get bigger and heavier; government finances would deteriorate rapidly, and an international credit downgrade would be almost inevitable. That would push the cost of borrowing up for everyone, including the government. And so the vicious cycle would turn.
If a world-wide depression were to eventuate, it would likely not be a pretty sight. Let's hope "Buy America" gets skewered.
No comments:
Post a Comment