Page last updated at 09:45 GMT, Wednesday, 4 February 2009

Will US stimulus trigger a trade war?

By Philippa Thomas
BBC News, Washington

The massive economic stimulus package being debated in the US Senate this week has a hugely controversial condition attached.

An American flag flies outside a Caterpillar plant, California, 26 january 2009
Caterpillar has come out against the "Buy America" provisions

It is called "Buy American" and it means that all of the projects financed by the government's $800bn (567bn) bailout should favour American iron and steel. It could, perhaps, even mandate American preference for all "manufactured goods".

Could this be the start of a new American protectionism? Even a new trade war?

There are big principles - and great passions - on both sides of the argument.

It seems to be abstract, but it could have a huge global impact.

More jobs

I met the president of the United Steelworkers Union Leo Gerard this week.

He had two reasons to celebrate: his football team - the Pittsburgh Steelers - had just pulled off a Superbowl victory against the Arizona Cardinals; and he had seen the "Buy American" provision attached to President Obama's economic stimulus plan clear its first hurdle in the House of Representatives.

The bill was up for debate in the Senate on Tuesday and may jump that hurdle by the end of the week.

What does it mean?

The steelworkers say it is about putting stimulus cash - American taxpayers' dollars - towards American jobs.

This at a time when the domestic steel industry has fallen below 40% capacity for the first time in history.

Mr Gerard is known for his straight-talking.

Why should we send dollars to China, so that they can ship us more junk steel?
Leo Gerard
President, United Steelworkers UNion

It is "baloney", he says, to argue the case for spending billions to prop up US banks, then cry foul about a commitment to buy US steel.

His case has strong backing in Congress from Democrats who represent big steel states - Pennsylvania, Ohio, Indiana.

Ohio Democrat Tim Ryan has calculated that using wholly domestic input for infrastructure projects here will yield an extra 77,000 jobs across America.

"We're going to spend this money in Youngstown, Warren, Akron" he says. "Not Beijing, Mumbai or Dubai."

Mr Gerard is blunter still: "Why should we send dollars to China, so that they can ship us more junk steel?"

But there is a predictable backlash in Congress.

The senior Republican in the US Senate, Mitch McConnell, has warned that the provision could lead to trade wars.

"The entire world is experiencing a downturn in the economy," he says.

"I think it's a very bad idea".

'Tipping point'

Even American industry itself is split.

Blue-chip companies like General Electric, Boeing, and Caterpillar have come out against the "Buy American" provisions, which could funnel millions their way. The reason? Exports.

William Lane speaks for Caterpillar here in Washington.

He told me this could be the "tipping point" into global economic depression, if the measure goes ahead.

His company wants to ship tools and trucks and excavators not just around America, but across South-East Asia.

More than half of Caterpillar's sales go abroad.

Nobody will take this lying down
John Bruton
EU ambassador to Washington

He believes a trade war will end up costing his company at home - and that is on top of its current layoff estimate of 20,000 jobs.

Free-traders are using words like "shortsighted", "foolish", "selfish" and "stupid" to describe the "Buy American" provision.

The Dallas Federal Reserve president Richard Fisher - who is a former deputy US trade representative - warned on Monday that "protectionism is the crack cocaine of economics".

"It provides an immediate high that leads to economic death," he said. "We cannot afford to go down that route."

Would retaliation be inevitable?

Yes, according to international leaders from Canada to the EU to the WTO.

Looking for leadership

John Bruton, the European Commission's ambassador in Washington, and former Irish leader, says: "Nobody will take this lying down."

He says it would take the world right down the road it travelled in the 1930s - when, he believes, retaliatory protectionism led to the Great Depression lasting years longer than it would otherwise have done.

It would be "very helpful", he says, if the new US administration would make it clear where it stands.

So what does America's new president do about the campaign to "Buy American"?

During the election campaign, touring key swing states like Pennsylvania and Ohio, Barack Obama promised to stand up for American workers.

During the election campaign, touring European capitals like London and Berlin, he promised a new multilateral American foreign policy.

Now, can he pull those two pledges together with a demonstration of clear leadership on US trade policy?

President Obama's first comments came on Tuesday night in a series of interviews with the US TV networks. There wasn't much detail, but the message seemed designed to head off foreign fears.

To one network, he said "we can't send a protectionist message"; to another, "any provisions that are in there are not going to trigger a trade war".

Does that mean he's applying pressure to his own party leaders behind the scenes? We'll see as the debate continues in the US Senate this week.

What's clear is that Obama's current high standing outside America's borders could be diminished if - on one of his first foreign forays to the G20 meeting in London this April - he has to admit that he's overseeing a shift in American outlook towards a new protectionism.

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