Protectionism And The Stimulus: The spirit of Smoot-Hawley lives on in stimulus bills' 'Buy American' language.

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During the past few months, as the severity of the recession has become clearer, drawing parallels with the Depression of the 1930s has been a staple of economic commentary. Rightly so: This may yet turn out to be the worst economic setback for 70 years, and the Great Depression says something about how bad things can get if governments fail to respond quickly and about the need to learn from history.


Speaking of that, remember Smoot-Hawley? One can overstate its role, no doubt--it did not actually cause the Depression--but most economists, I think it fair to say, believe that the effort in the 1930s to boost domestic output by restricting imports made things worse. The collapse of world trade, and hence global output, was helped along by deliberate policies in the United States and abroad, as governments tried to keep employment high at home by shifting unemployment overseas. In the end, everybody was worse off.


I had thought this lesson had sunk in. Smoot-Hawley is a byword for economic incompetence and illiteracy. In a global slowdown, "Beggar thy neighbor" is a formula for disaster. Who dissents? The issue, I had supposed, arouses no controversy--causing far less disagreement than how to mend the banking system; less than whether a big fiscal stimulus is needed to revive demand; and less than whether tax cuts or increases in public spending are the best way to stimulate. Yet both the House and the Senate have drafted stimulus bills that include protectionist "Buy American" language. The spirit of Smoot-Hawley lives.


The House measure calls for U.S.-made iron and steel to be used in the public works financed by the bill. I had naively supposed that the Senate, in its greater wisdom, would take this out. In fact, it did the opposite in the early drafting of the measure. It widened the provision by calling for the government to buy U.S.-made manufactures wherever possible. On Wednesday, it defeated Sen. John McCain's attempt to delete the provision altogether, but softened it by affirming U.S. obligations under existing trade treaties. The trouble is, trade treaties leave a lot of wiggle room. Even as amended, the measure has plenty of protectionist potential.


If thinking back to the 1930s strains the mental resources of legislators, perhaps they could think back as far as November 2008. At the G-20 summit in Washington--an emergency meeting of world leaders summoned to agree to a coordinated response to the crisis--the governments' communiqué said: "We underscore the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty. In this regard, within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services." The summit failed to do much else, as I complained at the time. But it did at least say that. No more Smoot-Hawleys. That was something. Less than three months later, Congress has expressed its contempt for this commitment.


So what, you might say. At a time like this, the national economic interest must override legal technicalities and so-called promises to cooperate with friends abroad. Expressing such an attitude is an odd way for this new Democratic Congress to introduce itself to the country's trading partners, especially at the dawning of the age of Obama. What was that about restoring America's standing with its allies? Yet put that aside for a moment. Would these provisions actually serve the national economic interest?


No. Gary Clyde Hufbauer and Jeffrey Schott of the Peterson Institute for International Economics have looked at the numbers. (You can read their study, "Buy American: Bad for Jobs, Worse for Reputation," on the institute's website, iie.com.) Of course it is impossible to be precise. Exactly how the measures would be implemented is unclear, and you can calculate the direct and indirect effects on the economy in various ways. But the IIE economists' best judgment is that the House bill's Buy American provision would preserve or create about 1,000 jobs. Set that against a total labor force of 140 million, and against the administration's estimate that its fiscal stimulus would save or create nearly 4 million jobs.


The first number is so small mainly because steel is an extremely capital-intensive industry. The original Senate measure would, in the first instance, be more effective, preserving or creating approximately 9,000 jobs, according to the study.


Better than none, you might say--but consider the likely reaction of other governments. Trading partners will retaliate, and American exporters will find their access to foreign-government buyers curbed in return. Hufbauer and Schott quote Fred Smith, the CEO of FedEx: "If the Congress passes this Buy American provision, I can assure you--and we operate in 220-some-odd countries around the world and are a huge part of the import-export infrastructure of the United States--we will get retaliation, and it will be American jobs at risk."

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Cyra Master

Cyra Master is a W.E.B. Du Bois fellow at the Atlantic. Previously, she was an editor at the nonprofit Center for Law and Social Policy and was a reporter for the New Hampshire Eagle Tribune. She is a graduate of Emerson College.
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