Ever since US Congress passed “Buy American” provisions as part of its recovery and stimulus packages, protectionist rhetoric worldwide has increased. Those “Buy American” provisions were watered down before final passage, therefore some but not all of the damage was contained.

However, China’s new ‘Buy China’ policy is sure to raise tensions.

China has introduced an explicit “Buy Chinese” policy as part of its economic stimulus programme in a move that will amplify tensions with trade partners and increase the likelihood of protectionism around the world.

In an edict released jointly by nine government departments, Beijing said government procurement must use only Chinese products or services unless they were not available within the country or could not be bought on reasonable commercial or legal terms.

Just a few months ago Beijing was raging against a proposed “Buy American” clause included in the US economic rescue package.

“Some countries raised clauses to prioritise the purchase of products of their own countries in their economic stimulus packages,” Yao Jian, a Chinese commerce ministry spokesman, told reporters in February. “We express deep concern about these [measures] … under the current financial crisis, measures issued by all countries should not cause negative impacts, and especially they should not send out wrong messages.”

Most economists agree China’s economy is starting to recover as a result of its aggressive stimulus package but the country is still struggling with unemployment and fears widespread layoffs could lead to serious social unrest.

“The whole world is dying to see China spread its orders around and save their economies,” said Mr Tao. “But what this policy reflects is heightened anxiety about these job pressures and the potential for social unrest.”

Trade data in recent months show import volumes, particularly of raw materials, have stabilised and started to increase strongly, while exports have stabilised but remain very weak following precipitous drops in both exports and imports since the fourth quarter of last year. China’s trade surplus rose 15.7 per cent to $88.8bn in the first five months from the same period a year earlier.

Buy American Law Will Backfire

Please consider Call to curb Buy American law as retaliation hurts US workers

The Obama administration faces mounting pressure to wind back Buy American measures passed by Congress this year amid growing concerns that they hurt some US workers they were designed to help.

The measures, which were in the $787bn US stimulus bill, require any project funded with stimulus money to use only US-made steel, iron and manufactured goods.

An outcry from the US’s trading partners saw the bill amended at the last minute as the White House urged that it not contravene existing trade agreements. Some businesses and officials say that amendment is proving virtually meaningless in practice.

More than a third of the stimulus money is being disbursed by states and local authorities, which are not party to free trade accords such as the North American Free Trade Agreement.

Canadian manufacturers complain that their goods are being shut out of contracts funded by the US stimulus even though Canada is party to NAFTA, which prohibits discrimination.

In retaliation, some Canadian municipalities have passed “do not buy American” resolutions to shut out US-made goods. That has rattled some exporters. Texas manufacturer JCM Industries told the Financial Times that it might have to lay off workers if the situation worsened.

Canada’s government fears the problems could worsen, according to Tony Clement, the country’s industry minister. He warned that protectionism was seeping into the US’s long-term laws after the House of Representatives added Buy American provisions to two ordinary non-stimulus bills, a move he called “a distressing trend”.

These are little reported stories but critical ones. Congress is tied up now with all kinds of other nonsense, but if protectionist sentiment in Congress heightens in response to China’s actions, world trade will be seriously affected.

The last thing the world economy needs right now is another Smoot-Hawley Tariff act out of US Congress. It should be obvious that a global “Buy Me” policy by every country in the world cannot possibly work, but that may be where we are headed.

Mike “Mish” Shedlock
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