The U.S. is exporting unemployment with ‘Buy America’

Everyone should be concerned about the increasing tone of trade friction in the global economy.  While Chinese Premier Wen and U.K. Prime Minister Gordon Brown are setting a positive tone in London today regarding bilateral trade agreements, the U.S. is doing its best to put off trading partners.  In fact, in Canada, there seems to be a lot of rancor regarding the ‘Buy America’ provision now being attached to the U.S. stimulus package.

Comment: ‘Buy America’ policy a veiled attempt to export unemployment

Free trade afforded by goodwill in times of economic expansion is ending rapidly with the lurch of the world economies into recession.

Plans by U.S. Congress and President Barack Obama to put a fence around its US$825-billion stimulus package by implementing a “Buy America” policy is a veiled attempt to export unemployment to the rest of the world. The result could be slower growth and a higher cost of credit for the U.S. economy, two good reasons for investors to “Sell America” now.

Attaching a “Buy America” policy to the US Stimulus Package is a futile and dangerous attempt to protect American jobs. America’s best export right now is unemployment. U.S imports are falling and the trade deficit is improving due to the fall in U.S demand. U.S imports fell 12% in November taking the trade deficit to its lowest level since 2003.

China’s export sector is reeling from the sharp fall in U.S demand. Exports in China fell the most in a decade in December and are likely to continue falling over the next six months as demand from the U.S, Europe and Japan dries up. Manufacturing in China has contracted for the past six months and has made roughly 10-million migrant workers jobless.

President Obama should tread very softly when it comes to trade policy. Firstly, it is widely acknowledged that free trade contributed to global economic prosperity. Free trade with China brought an era of low inflation to the United States and to the rest of the developed world. Trade in general leads to higher productivity and potentially higher levels of global growth.

On the flipside, rising trade barriers that protect industries lead to the misallocation of resources, lower productivity, higher prices and lower levels of economic growth. They are especially dangerous in times of recession. They are tantamount to suicide for the U.S administration given the high level of savings that China has shipped abroad.

The U.S Treasury Department is justified in pointing the finger at China for practicing mercantilist-style trade policies: China’s massive trade surplus and multi-trillion dollar store of foreign exchange reserves provides strong evidence that trade policy in China is designed to keep its currency weak. But the timing is all wrong.

Agitating for a revaluation of the Yuan and a “Buy America” policy could backfire in a big way. The U.S is like a junky with a US$2-billion a day borrowing habit, so getting on the bad side of its best dealer could be a big mistake.

China has been a major source of cheap credit to the U.S over the past few years. The People’s Bank of China has parked roughly US$680-billion in U.S Treasury securities making it the single biggest source of credit to the U.S Treasury from abroad. This “savings glut” as it has been referred to allows the U.S Treasury to borrow money at very low rates of interest, and China could end that by easily converting those reserves to Euros or Yen. U.S Treasury Secretary Tim Geithner might get the revaluation of the Yuan he is looking for in the form of a dollar rout.

Access to cheap credit has never been more critical to the U.S economy at this juncture. The U.S Federal Reserve Bank has been buying mortgage securities to reduce the cost of credit to U.S homeowners, to slow the rate of foreclosures, and to support the price of mortgage securities held by U.S banks.

Moreover, the U.S Treasury will need to borrow heavily to support its multi-trillion dollar fix to the U.S economy. President Obama’s attempt to keep every dollar of his stimulus package from leaving the U.S by issuing a “Buy America” policy could cause the unintended consequence of foreign capital flight.

This is an editorial comment in today’s Financial Post, a leading newspaper in Canada. One should note how strong the language is in this editorial.  While the quote concentrates on trade between China and the U.S., Canada itself is quite worried about the increase in protectionism in the United States.  The Financial Post is angry that the United States is looking to foist its own unemployment problem off on its trade partners.

The long and short here is this:  China, the EU, and Canada have now all warned the U.S. about “Buy America.’ Any protectionist measures implemented by the United States WILL be met in kind by retaliatory measures.

The tone in the U.K. is very different where Gordon Brown announced in a press conference with Chinese Premier Wen that he is looking to double trade in the next eighteen months. Wen may be using the U.K. as a foil to the United States, in effect saying, “Look America, we have other options.” Nevertheless, Brown and Wen are demonstrating that global trade does not have to collapse due to the economic downturn despite protests because of job losses.

When I find a video or quote from the press conference, I will post it.  Also, you should note that the Financial Post editorial begins with a picture of Obama and Biden, linking the Obama Administration with Canada’s perception of protectionism.

Sources Comment: ‘Buy America’ policy a veiled attempt to export unemployment – Financial Post Wen Says China to Begin European Procurement Missions – Bloomberg

Related Reading

The Pig Iron Aristocracy, The Triumph of American Protectionism
Lonely Planet China (Lonely Planet China (Spanish)) (Spanish Edition)
The Constitution of the United Kingdom: A Contextual Analysis (Constitutional Systems of the World)
China Road: A Journey into the Future of a Rising Power
Regional Landscapes of the US and Canada

More on this topic (What’s this?)

Unrest in China Worse Than Widely Reported (naked capitalism, 1/31/09)
Setser: Hot Money Fleeing China (naked capitalism, 1/13/09)

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Originally published at Credit Writedowns and reproduced here with the author’s permission.

2 Responses to "The U.S. is exporting unemployment with ‘Buy America’"

  1. Sailingwindward   February 2, 2009 at 9:54 pm

    Well it’s time we start thinking about the American workers for once, so called FREE TRADE is what brought the US to high unemployment and eventually this recession we are in, when the US gets out of the recession first then we can help the rest of the world.

  2. Douglas   February 3, 2009 at 3:25 am

    You assume that “free trade” is truly free. It is not except with very few countries. We played the game but they did not. They profited immensely but we did not and you expect the United States to continue a policy that has failed in such a dramatic way. You are not being realistic in saying the protectionism is coming from us. In reality China, Japan and many others have been much more protectionist than the US for a long time. Of course they want to continue to benefit from their free ride. If they don’t want to buy our bonds then let them. We will still survive. The ball is in their court now. We are adjusting now but they are just in the same mindset. The world has changed for them also and those countries need to face the fact that the party’s over.