'Buy American' rules still topic of debate

Although Congress has reached a compromise, there are still questions about whether protectionist language in the stimulus bill could spark a global trade war.

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By Chris Isidore, CNNMoney.com senior writer

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NEW YORK (CNNMoney.com) -- The heated war of words over "Buy American" laws may be nearing a truce in Congress, but there are still fears among critics that it could spark a new global trade war.

The reworked stimulus bill that the House and Senate are due to vote on Friday has language on "Buy American" provisions that provides even tougher requirements to limit materials used in public works projects paid for by stimulus to those made in U.S. factories.

Many major steel producing countries, such as China, Brazil and Russia, will essentially be blocked from selling their products for use in construction and energy projects being paid for under the program.

But because the "Buy American" provision will not trump existing trade agreements, it allows companies in many major trading partners, such as Canada and the European Union, the chance to sell steel, pipes and other products that can be used in the projects.

An effort by Sen. John McCain, R-Az., to strip the "Buy American" language completely out of the stimulus bill fell far short in the Senate, as nine Republicans joined Democrats to keep it in place.

Still, just the presence of the "Buy American" language has some free trade advocates worried that the bill could spark a rash of protectionist actions around the globe.

While Canadian officials say they are confident their goods will be able to be included in U.S. public works projects, Canada's ambassador to the U.S. wrote to Senate leaders voicing concern.

He argued that the U.S. had lost the moral authority to pressure other nations not to erect their own trade barriers, especially as they consider their own stimulus measures to deal with the global recession.

"A rush to protectionist actions could create a downward spiral like the world experienced in the 1930s," said Ambassador Michael Wilson in his letter. "In the end we got into this economic crisis together. We need to work together to build ourselves out of it."

Caterpillar wary of protectionism

One company expected to benefit from an increase in infrastructure spending that has been critical of rules that would be too protectionist is heavy equipment manufacturer Caterpillar (CAT, Fortune 500).

Jim Owens, the CEO of Caterpillar, wrote a column in Sunday's Chicago Tribune supporting the stimulus plan but opposing any "Buy American" provision.

"If the U.S. sends the message that regardless of value, countries should only buy locally produced products, Cat's exports, as well as the U.S. jobs they support, will be hurt." Owens wrote. "Turning inward and embracing protectionism is what turned a bad recession in the 1930's into the Great Depression."

Caterpillar spokesman Jim Dugan said the changes in the "Buy American" language are a sign the bill "was moving in the right direction compared to the House, but as a general rule any protectionist language was a concern."

Still, despite the disagreement on the "Buy American" provision, Owens has agreed to serve on the administration's new Economic Recovery Advisory Board.

And President Obama traveled to the Peoria, Ill., home of Caterpillar Thursday to push for the stimulus package, telling workers that it could help the company rehire some people who were recently laid-off by the company.

Obama didn't mention trade deals or the "Buy American" provisions in his speech at Caterpillar Thursday. The president was a critic of some of the nation's free trade agreements during the campaign, saying he would push for unspecified changes.

But in interviews last week, Obama said he didn't want the stimulus bill to be used as a way to enact new protectionist trade policies, especially if they violate existing trade deals. White House spokesman Robert Gibbs said Wednesday that the current form "Buy American" language doesn't clash with that goal.

Trying to avoid a trade war

Advocates of the "Buy American" provisions say they believe U.S. manufacturers are on a more level playing field when competing against Canadian or European steelmakers than they would be when faced with imports from China or Brazil.

But the language also has the support of Edward Gresser, trade policy director for the Progressive Policy Institute, an advocate of free trade deals and generally a critic of "Buy American" provisions. He said as long as trading deals are being respected, he can live with its inclusion in the stimulus bill.

"What the Senate did was keep it within balance of World Trade Organization and trade agreements," he said. "What I'm most pleased about is in this first test of trade policy, it's important to avoid a trade war."

Still, other critics of "Buy American" language aren't as satisfied as Gresser. They are still concerned that the "Buy American provisions will spark other countries to start the kind of trade war that would hurt the global economy.

Jeffrey Schott, senior fellow with the Peterson Institute for International Economics, agrees the Senate language is better than what had earlier passed the House.

But he said it could still cause trouble to the U.S. and global economy. He said any manufacturing jobs gained here under the provision could be quickly lost on other areas of the U.S. economy if countries around the world become more protectionist and global trade grinds to a halt.

"We have to be very careful not to let down the defenses against protectionist pressures building all over the world," he said. "It is much much more costly if it is seen that the U.S. is pursuing protectionist measures, whether it is legal or not." To top of page

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