A Retaliatory Spiral

Jagdish Bhagwati
Jagdish Bhagwati

Despite protectionism rearing its ugly head from time to time during the campaign, Barack Obama has been mostly silent on trade issues. This was a disappointment for many of us who are supporters of free trade. We were reassured when he finally argued--and the Senate agreed--that the buy-America provisions in the stimulus package bill must be consistent with World Trade Organization rules. But more needs to be said, and done.

First, having the buy-America provisions stay in, even with the W.T.O.-consistency qualifier, is much less satisfactory than what Senator John McCain suggested, which was to take them out altogether. The truth is that lobbyists can spend vast amounts of money challenging the qualifier, leaving protectionism alive and well.

The buy-American provisions unravel previous trade agreements unilaterally and in violation to the concessions we made.

Second, the notion that even an effective W.T.O.-consistency qualifier in our procurements will soothe other nations and prevent trade retaliations and trade wars is naive. Contrary to what others believe, countries like Brazil, China and India, which have not signed the W.T.O.'s 1995 agreement on governmental procurement and, therefore, do not enjoy those rights to our procurement purchases, will retaliate. They can raise many current tariffs also in a "W.T.O.-consistent" way. (Remember that China and India have large public sectors.) They can easily shift their purchases of aircraft, nuclear reactors and other high-value goods from us to Europe and Japan. We would then retaliate, prompting retaliations by the others: all in a W.T.O.-consistent fashion. Indeed, President Obama would find himself in a W.T.O.-consistent trade war.

The A.F.L.-C.I.O. argues that the Europeans, for their part, protect certain domestic sectors in their government procurement decisions, so it is O.K. for us to close their access to our procurement via buy-American provisions. But this is a mistaken argument.

The W.T.O.'s agreement on government procurement allows signatories to choose the sectors to which they will apply it. So, we have chosen our sectors where the others can bid for our contracts just as the European Union has chosen their sectors where we can bid. These choices, and therefore exclusions of other sectors, are part of the overall balance of concessions that were reached in several areas like agriculture, services and manufactures. To argue that we are now free to terminate access to our procurement in areas we previously agreed to open to bids from the Europeans is to unravel that bargain unilaterally and in violation to the concessions we made.

With the bailout to Detroit straining the 1995 W.T.O. agreement on subsidy and countervailing measures and inviting a spread of mutually harmful subsidies worldwide, and with the demands for "fair trade" also being assiduously pressed on him by the unions lobbies wrongly fearful of external competition, President Obama faces several protectionist challenges. It is time now for him to make one of his resounding speeches, this time on the virtues of free trade and the perils of protectionism.

Jagdish Bhagwati is an adjunct scholar at AEI.

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