A Canadian Defends Buy American Stimulus Provisions

From The National Post www.nationalpost.com

In defence of 'Buy America'
by Eric Weir
February 05, 2009,

The National Post, most other media, the Canadian government and its
Official Opposition all appear to agree that the "Buy America"
provisions contained in the proposed U.S. stimulus package comprise
unfair protectionism. They should think again: In fact, the Buy
America provisions are economically justified, and could even be
beneficial for Canada.

For Canada, the best-case scenario is not a removal of Buy America
provisions from the stimulus legislation, but a specific Canadian
exemption from them. When the United States applied tariffs to steel
imports in 2002, it exempted Canada and Mexico. Such arrangements
allow Canada to continue selling into the U.S. market with less
competition from other countries.

In a world where all labour and capital is fully employed, free trade
is arguably beneficial because it encourages countries to specialize
based on comparative advantage. But in a world of unemployed workers
and excess capacity, countries have an undeniable interest in keeping
production at home, rather than importing products from abroad. The
orthodox argument for free trade, which assumes full employment, is
unconvincing amid rising job losses.

Opponents of Buy America rules characterize them as a revival of the
infamous Smoot-Hawley Act, which allegedly worsened unemployment in
the 1930s. But the act's gravest shortcoming was that it did not
provide, or accompany, a significant fiscal stimulus. In effect, the
United States tried to use tariffs alone to grab a larger slice of a
shrinking global economic pie.

Today's Buy America requirements, on the other hand, are part of the
American Recovery and Reinvestment Act, a large stimulus plan.
It is important to note that the Buy America requirements apply only
to public investment and would not affect private ventures or
personal consumption. And given the goal of this public investment,
they are justified: If a major purpose of increased spending on
public infrastructure is to stimulate a country's economy, it surely
makes sense to ensure that a large portion of such spending remains
within the country.

One might even ask why there wasn't a "Buy Canadian" policy in last
week's federal budget. On the contrary, the budget eliminated
Canada's few remaining tariffs on imported machinery and equipment,
and offered a 100% accelerated capital cost allowance for computers.
Both measures seemed designed to encourage businesses in Canada to
buy more inputs from abroad.

The world economy needs as much stimulus as it can get. If other
countries can catch a free ride on Canadian and American stimulus by
selling more goods to North America, they have little incentive to
incur public debt to finance their own stimulus packages. By limiting
foreign access to U.S. stimulus, Buy America policies encourage all
countries to contribute the deficit spending needed to propel a
global economic recovery.

This approach is particularly important for steel. With the recent
collapse of shipping costs, more infrastructure projects could easily
prompt increased steel imports rather than increased steel
production. In recent years, Canada has imported anywhere from three
to nine dollars of steel from overseas for every dollar of steel
exported overseas. Much of the stimulus supposedly provided by
additional infrastructure spending could leak out of the Canadian
economy through this glaring trade deficit.

By contrast, the larger volume of steel trade between Canada and the
United States is balanced. Which means that Americans cannot improve
their balance of international payments by trading less steel with
Canadians. If Buy Canadian policies were adopted, we could offer the
United States an exemption from them in return for an exemption from
Buy America policies.

The balanced, integrated nature of the Canada-U.S. steel trade
provides a compelling rationale for exempting Canada from Buy America
rules. Canadian politicians and editorialists should start making
this case, rather than lecturing Americans about the theoretical
virtues of global free trade and the evils of Smoot-Hawley.

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