The U.S. trade deficit dropped markedly in November as imports from the rest of the world plunged in reaction to the global recession.
U.S. imports from China and Japan declined at double-digit rates, and in response to this, U.S. lawmakers are scrambling to find strategies that will re-ignite global trade, and in their desperation to find a panacea it is clear that some of them are grasping at straws.
A proper measure of domestic and international consternation greeted the latest congressional effort to create U.S. jobs through the inclusion of "Buy American" provisions in the $825 billion fiscal stimulus package designed to kick-start the U.S. economy.
The provisions require that all public works projects funded under the package use only U.S.-made iron and steel.
The House bill also requires that the uniforms and other textiles used by the Transportation Security Administration be produced in the U.S..
A Senate version still being considered goes further, requiring that all stimulus-funded projects use only American-made goods and equipment.
The measures are controversial, to say the least. Business groups in the U.S., including the U.S. Chamber of Commerce, the Business Roundtable and the National Foreign Trade Council, are rallying support to hinder the progress of the measures and the international community has reacted with fear and anger at the U.S.' flirtation with protectionism.
The fundamental problem with the proposed measures is that they simply will not work: Large swathes of the U.S. business community know it, the international trade community knows it.
Recent U.S. history has shown that "Buy American" provisions can raise the cost and reduce the value of a spending package.
In rebuilding the San Francisco-Oakland Bridge in the 1990s, the California transit authority complied with state rules mandating the use of domestic steel unless it was at least 25 percent more expensive than imported steel.
A domestic tender came in at 23 percent above the foreign bid, and so the more expensive American steel had to be used. Due to the large amount of steel used in the project, Californian taxpayers had to pay US$400 million more for their bridge.
While this was particularly good news for the steel company, the wider California economy was the inevitable looser: Steel production is expensive and the rules reduced the amount of money available for other construction projects that could have put many more to work.
Analysts from the Peterson Institute have pointed out that the new provisions will have little impact on U.S. jobs.
They estimate that the additional U.S. steel production created by the "Buy American" provisions will amount to 0.5 million metric tons.
This in turn translates into a gain in steel industry employment equal to roughly 1,000 jobs (by comparison, the steel industry in Quebec, Canada, alone would be forced to shed 2,000 jobs if the measures are adopted).
The impact on jobs will be small because steel production is capital intensive. The U.S. economy has a labor force of roughly 140 million people, so that 1,000 jobs is merely a rounding error.
Of bigger concern is the threat that the new measures will cost the U.S. jobs if the other countries emulate American policies or react against them.
There are currently moves towards this in both the UK - where oil refinery workers are striking because Italian and Portuguese workers are taking their jobs - and in France where the government is threatening a domestic jobs clause on funds earmarked for its car industry.
When the U.S. imposed the Smoot-Hawley Tariff in 1930, it helped set in motion a worldwide movement toward higher tariffs. When everyone attempted to restrict imports, the combined effect was a much deeper economic slump and it took many decades to unravel the accumulated trade restrictions that characterized that period. U.S. lawmakers should reflect upon this.
(Shanghai Daily February 12, 2009)