"Buy American": Obama Walks a Knife-Edge On Trade

Obama has been walking back his rhetoric on trade protectionism. Specifically, the “Buy American” clause in the fiscal stimulus bill now under debate in the Senate.

Think about it. We’re getting ready to borrow trillions of dollars that our children will need to repay some day. We’re going to give it to the governors of the fifty states, to spend on teacher salaries, Medicare and Medicaid, condoms, candy and bubble gum, new paint and computers for government buildings, a vast array of left-wing spending priorities, and a small number of roads and bridges.

Doesn’t it make sense to keep as much of that money here, and keep it from leaking out to other countries?

Well, the $650 million that Nancy Pelosi wanted to spend on condoms would just have to leak away. Condoms are made in China. But what about the steel and other building materials for the roads and bridges? Doesn’t it make sense to reserve as much as that spending as possible for American companies?

Ask your average person on the street, or certain Democratic Senators, and the answer would be some hyper-vigorous form of YES.

Ask the political and policy leaders of every other country in the world, and they’ll say NO. And the anti-protectionists aren’t being shy about pointing out that they have history on their side. The Smoot-Hawley Act of 1930 is generally believed to have exacerbated the collapse in global trade that occurred in the early Great Depression.

Unfortunately, Obama and his people (including Tim “Obama believes China is manipulating their currency” Geithner) have handled this problem without finesse.

Obama has to walk a knife-edge between political sensitivities here in the US, and those of our trading partners, who haven’t hesitated to take him to school on the issue.

So he’s now softening his anti-free trade rhetoric, to cool off the harsh criticism from abroad. And in so doing, he opens himself to criticism from unions and other domestic interests.

Here’s what I don’t like about this. We live in an interconnected world. Until we cure the global imbalances which result in large deficits here and large surpluses abroad, we will depend on imported capital. This makes our position relatively weak. Meanwhile, other countries depend on being able to export their products to us. And that makes our position relatively strong.

The previous Administration well understood this balancing act. For the most part, they kept the negotiations in back channels, out of open view. Obama is a young, inexperienced man who lacks this kind of finesse.

Obama is doing the right thing by softening the trade-war rhetoric, there’s no doubt about that. As good as it feels, no one benefits from trade war, least of all the American companies who would suffer the retaliation from other countries.

But the way Obama has handled this is very disappointing. He’s put the weakness of our position on display in a way that Hank Paulson wouldn’t have dreamed of doing.

This post also appears at MarketsAndPolicy.com.