'Buy American' clause stirs up controversy

A contentious debate over a "Buy American" provision in the economic stimulus package poses an early test for President Obama on both domestic politics and foreign policy.

The Senate this week is considering an $885 billion bill designed to help mend the ailing economy, which requires all "manufactured goods" purchased with stimulus money to be made in the United States. The House already has approved a narrower bill mandating the use of domestic iron and steel.

To supporters, including labor unions that helped the Democrats retake the White House last year, a "Buy American" requirement is just common sense at a time of economic crisis and rising unemployment. Factories have been hemorrhaging jobs for years; manufacturing employment is now 12.9 million, down from 17.2 million at the end of 2000. If Congress doesn't insist upon the use of U.S.-made materials, taxpayer funds could line the pockets of European or Chinese workers rather than hard-hit Americans.

"If we're gonna spend many billions of taxpayer dollars in an effort to get the economy up and moving again, it's obvious that money should be spent in our economy," said Jim Robinson, a United Steelworkers (USW) official in Gary, Ind.

Opponents, however, say the new language could breach U.S. trade commitments and ignite a disastrous round of beggar-thy-neighbor retaliation like that which worsened the Great Depression. Both the European Union and Canada already warned the administration against the consequences of resurgent economic nationalism. If other countries enact similar limits, U.S. exporters such as Caterpillar cat and Boeing ba would lose lucrative foreign sales.

Obama's view

In an interview Tuesday with Fox News, Obama cast doubt on the measure, saying, "We can't send a protectionist message."

The U.S. debate comes amid a blizzard of government bailouts and similar political pressures elsewhere. From Indonesia to Sweden, countries have carved out protected turf for favored industries even as Uncle Sam shovels money at wounded banks and automakers.

"The real problem here is not the legality. It's that it will undoubtedly trigger retaliatory actions," said Stanley Marcuss, a partner at the law firm Bryan Cave in Washington, D.C.

The new provisions would expand to more products existing laws dating to 1933 and 1982 giving preference to domestic goods in government programs such as highway building. The president could waive the domestic content rule with a finding that "the public interest" required the use of foreign material or if buying at home was 25% more expensive than abroad.

Gary Huffbauer, an economist at the Peterson Institute for International Economics, says the "Buy American" requirement could violate U.S. treaty commitments if applied to Canada, Mexico or the 37 countries that signed the World Trade Organization agreement on government procurement.

And he disputes claims that steering more stimulus cash to domestic suppliers will dramatically boost employment. The Alliance for American Manufacturing, for example, says "Buy American" language would create 77,000 more jobs.

But only 4% of federal procurement spending on manufactured goods goes to foreign companies, says Huffbauer. Based on that, he says the extra steel industry jobs spawned by domestic content requirement could be as few as 1,000 and would be swamped by the export jobs lost in any new trade war.

Community interests

The stakes can be seen in individual communities. Steel plants across the rust belt are feeling the effects of the depressed economy and auto industry meltdown. An ArcelorMittal plant in Burns Harbor, Ind., is representative. Last year, the company and USW agreed on a plan to avoid involuntary layoffs of up to 2,400 workers with some voluntary pink slips and a shortened workweek.

"These plants certainly can produce the steel necessary for infrastructure," says Robinson, director of the USW's District 7, representing about 70,000 workers in Illinois and Indiana.

ArcelorMittal spokesman Bill Steers declined comment on the "Buy American" measure's impact.

About 200 miles southwest of Burns Harbor is a Caterpillar factory where roughly 3,500 other Midwesterners could be hurt by the potential boomerang effect of new domestic content legislation. The company's Decatur, Ill., plant produces heavy equipment for customers all over the world. About 80% of its output is exported, including massive mining trucks used in Canada's Alberta oil sands development.

"The world economy is at a tipping point. If the U.S. embraces protectionism, it will send a signal that will be hard for anyone to resist," says Bill Lane, Caterpillar's head of governmental affairs.