TWN Info Service on WTO and Trade Issues (Feb09/12)
21 February 2009
Third World Network

US stimulus bill criticised for its Buy American condition
Published by SUNS #6641 dated 17 February 2009

Washington, 16 Feb (Martin Khor) -- The $787 billion stimulus package passed by the United States Congress on 13 February is being criticised for retaining a "Buy American" condition that is likely to shut out products of most developing countries from the additional spending that the US government will undertake to counter the recession.

The bill stipulates that none of the funds appropriated may be used for public works projects "unless all of the iron, steel and manufactured goods used in the project are produced in the United States."

China's state-owned Xinhua news agency attacked the Buy American clause in an opinion article entitled: "Protectionism a poison to financial crisis solutions." Noting that the bill containing the US stimulus retains the controversial "Buy American" provisions, it commented that "history and economics have told us, facing a global financial crisis, trade protectionism is not a solution, but a poison to the solution." (See end of article for more details).

On Monday, a spokesman of China's Commerce Ministry said that it was deeply concerned over trade protectionist measures that some countries were adopting amid the economic crisis. "Some countries raised clauses to prioritise the purchase of products of their own countries in their economic stimulus packages," said Yao Jian, according to an AFP report. "We express deep concern about these measures."

Another news report from AP said that China had avoided "Buy China" protectionist measures in its own multi-billion-dollar stimulus effort. Deputy Commerce Minister Jiang Zengwei said in early February that China would "treat domestic and foreign goods equally so long as we need them."

The World Bank President, Robert Zoellick, told journalists in Rome that at the meeting (last Friday and Saturday) of the G7 finance ministers, he had warned of the need to avoid the protectionist policy errors of the 1930s. "The Buy American provision is very dangerous," he said, according to the New York Times.

The response from other developed countries was muted. When a draft of the bill containing the Buy American clause was made known a few weeks ago, it led to protests from political leaders in Europe and Canada.

US President Barack Obama then promised that the bill would be amended to avoid protectionism. The final bill adds this line: "This section shall be applied in a manner consistent with US obligations under international agreements."

This is taken to mean that the Buy-American principle would not be implemented if it violates the obligations that the US has undertaken under the World Trade Organisation and bilateral and regional free trade agreements.

This is cold comfort to most developing countries because the WTO's multilateral rules do not forbid a country from having measures requiring that spending by the government on its projects should be on locally produced goods and services.

The WTO does however have a plurilateral agreement on government procurement (GPA), under which members agree to open up their procurement business to other members of the agreement through a schedule listing the sectors offered and the extent offered.

There are currently 39 members in the GPA, most of which are developed countries (including European countries, the United States, Japan and Canada). Only three developing country members of the WTO -- Singapore, Korea and Hong Kong, China -- are members of the GPA.

Under the stimulus package bill, the US is to meet its obligations under the GPA by continuing to open the business in its public-sector projects and expenditure to the other GPA members in line with what it has offered under the GPA.

It is also to keep open its offers contained in the procurement chapter of the free trade agreements it has signed. Only a few developing countries have signed up to FTAs with the US.

The clause that the Buy American condition in the stimulus package will be applied in a manner consistent with US obligations under international agreements seems to have placated the other developed countries, since their companies' market access in the GPA and FTAs will be maintained.

The bill also enables least developed countries (LDCs) to have access. However, the LDCs generally lack the supply capacity to take advantage of this.

The larger developing countries, such as China, India or Brazil, which are more equipped to potentially benefit from the stimulus package, are the ones that may be affected by the Buy American clause. This may explain why the Xinhua opinion article described the protectionist measure as "poison", especially since Chinese officials said the country did not have a buy-local clause in its own fiscal stimulus package.

The Buy-American provisions in the final version of the Bill passed in Congress are as follows:

Sec. 1605. Use of American Iron, Steel, and Manufactured Goods.

(a) None of the funds appropriated or otherwise made available by this Act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron, steel, and manufactured goods used in the project are produced in the United States.

(b) Subsection (a) shall not apply in any case or category of cases in which the head of the Federal department or agency involved finds that --

(1) applying subsection (a) would be inconsistent with the public interest;

(2) iron, steel, and the relevant manufactured goods are not produced in the United States in sufficient and reasonably available quantities and of a satisfactory quality; or

(3) inclusion of iron, steel, and manufactured goods produced in the United States will increase the cost of the overall project by more than 25 percent.

( c) If the head of a Federal department or agency determines that it is necessary to waive the application of subsection (a) based on a finding under subsection (b), the head of the department or agency shall publish in the Federal Register a detailed written justification as to why the provision is being waived.

(d) This section shall be applied in a manner consistent with United States obligations under international agreements.

The conferees' report (from the conference between the members of the US House of Representatives and the Senate, which negotiated the final joint Congress Bill) made the following note regarding Buy America provisions:

"Section 1605 provides for the use of American iron, steel and manufactured goods, except in certain instances. Section 1605(d) is not intended to repeal by implication the President's authority under Title III of the Trade Agreements Act of 1979. The conferees anticipate that the Administration will rely on the authority under 19 U. S. C. 2511(b) to the extent necessary to comply with US obligations under the WTO Agreement on Government Procurement and under US free trade agreements and so that section 1605 will not apply to least developed countries to the same extent that it does not apply to the parties to those international agreements. The conferees also note that waiver authority under section 2511(b)(2) has not been used."

According to Lori Wallach, director of the Washington-based Public Citizen's Global Trade Watch, 19 U. S. C. 2511 is part of the Trade Act of 1979 which grants the US President waiver authority to Buy America provisions and to have these provisions conform with US procurement obligations in trade agreements.

It was put in place initially so that if other countries voluntarily gave the United States national treatment, the US President could waive the domestic preferences and effectively implement the WTO's non-binding Tokyo Round Procurement code, said Wallach. This statute is separate from the stimulus bill; rather it is an existing law now in effect that the stimulus bill references.

"The mention that President Bush did not use section 2511 (b)(2) refers to one of the ways in which countries can qualify for waivers," said Wallach. Section 2511 (b)(1) allows a waiver of a country that is in the WTO's government procurement agreement, or in a FTA with the US.

Section 2511 (b)(2) allows the president to make an independent finding that even if a country is not in one of these agreements but it is willing to give national treatment on a reciprocal basis for some sector, that country can have the Buy America and Buy American provisions waived. Also, Section 2511 (b)(4) provides for waivers for all least developed countries.

"That Bush never made a finding that the ( b)(2) category of countries can get the domestic preferences waived does not bind any future president," said Wallach. "Bush stuck to waivers for the countries that are in the WTO procurement agreement or NAFTA or an FTA (sub 1 countries) or are Least Developed Countries (sub 4 countries) but did not do determinations of waiver for sub 2 countries during his eight years."

Under the Buy-American section of the stimulus bill, the Buy-American condition can be waived if it violates the United States' obligations under the WTO's procurement agreement and its FTAs. Also, it can be waived if applying the condition is not in the public interest, or if the goods cannot be produced in the US in sufficient quantity or satisfactory quality, or if using the US-made products will increase the project cost by 25% or more.

For a country that is not in the WTO's procurement agreement (GPA) or an FTA with the US, and which is not a least developed country, the US goods get the 25% price reference for the contract vis-a-vis goods coming from the other country, said Wallach.

The US firm or a firm from one of the signatory countries gets the contract, unless the non-GPA, non-FTA country's iron, steel or manufactured goods are so lowly priced that they make the overall cost of the project 25% less than if the competing US goods are used, she added.

According to Wallach, this is in line anyway with the law that is now in place. In fact, the various provisions of the Buy American condition in the new bill repeat what are already in existing US laws, said Wallach.

The commentary in China's Xinhua media agency, by Fei Liena and Ming Jinwei, said that the US Congress' stimulus package bill retains the controversial "Buy American" provisions, which prohibit the purchase of foreign iron, steel and manufactured goods for any stimulus-funded infrastructure projects.

"History and economics have told us, facing a global financial crisis, trade protectionism is not a solution, but a poison to the solution," said the commentary. "Experience has shown trade protectionism can protect nothing. During the Great Depression in the 1930s, the protective measures taken by countries like the United States triggered trade wars, further hurting international trade and the world economy.

"From the economic perspective, trade protectionism is an out-of-date mentality. In free trade, participants can show their advantages over others through free and fair competition, which benefits all.

"Of course, it is necessary to be concerned with vulnerable groups of people in the development of free trade. It is also necessary to help various industries to grow their comparative advantages, and necessary to establish a fairer, more rational international trade system. However, that is not what protectionists think. In nature, protectionism rejects competition. It tries to close the door to protect the interests of a minority. In a globalized world today, protectionism is bound to fail.

"There is no doubt that the re-emergence of trade protectionism will not only stimulate trade disputes, cause an impact on the international trade system, but also exacerbate poverty in the world and give rise to more tragedies.

"History has told us the more critical the situation is, the firmer we should stick to opening-up and cooperation. Trade protectionism will only deepen and prolong the crisis." +