C. Eradicate domestic content subsidies

Although it has been many years since the USA was truly able to lead the world on trade, the Buy American policies championed by the Obama Administration and Congress have seriously undermined the reputation of the USA. While it is true that the USA is hardly the only country that has championed economic nationalism since the financial crisis,[1] the fact that the USA was willing to do something so blatantly protectionist without evincing much embarrassment showed the world how little other countries could depend on the USA for leadership at a time of economic crisis. The American Recovery and Reinvestment Act[2] of 2009 was unprecedented in size ($787 billion) and scope of subsidy ambition. The Act’s Buy American provision prohibits state and local governments from using newly provided federal aid for a public works project unless all ofthe iron, steel, and other manufactured goods used are produced in the USA.[3]

Much ofthe literature on this provision assumes that it is WTO-legal,[4] but that hypothesis is questionable when one looks closely at the WTO law of subsidies, in particular Articles 1 and 3 of the Agreement on Subsidies and Countervailing Measures (SCM Agreement). The key question is whether a grant from the US federal government to subnational governments qualifies as a ‘subsidy’. If it is a subsidy under the SCM Agreement, then this measure would seem to be a violation of SCM Article 3.1(b) because it would be a subsidy contingent upon domestic content.

The SCM Agreement does not clearly indicate whether a financial contribution from one WTO Member to another or a subsidy from one level of government to another is covered by the definition of subsidy in SCM Article 1. Obviously, there is a benefit to the recipient,[5] since a subnational government gets a direct transfer of funds. Consequently, the only definitional question is whether grants that go to individuals or to other governments, rather than to enterprises, are covered. In my view, US federal aid to states is not excluded from being a ‘financial contribution’ under the SCM Agreement and is distinguishable from funding movements that occur between agencies of the federal government. When the federal government gives budget aid to a state contingent on the use of domestic over imported goods, the goal of the federal government is to exert influence not only on how the federal dollars are spent but also on how the matching state dollars are spent. By using the lure of federal dollars, the Obama Administration was able to pressure states into not purchasing foreign-made goods even when states would have preferred a more cost-effective approach to building public works.[6] To argue that no prohibited subsidy has occurred because the recipient is a government agency rather than an enterprise would be to confound both the purpose and the letter of the SCM Agreement.

D. Avoid demagoguery

Finally, let me note one other dangerous aspect of the US President’s economic policies, which is the constant anti-business rhetoric from the White House. By fomenting public hatred ofbusiness, the government makes it harder for banks and businesses to engage in new investment and job creation. While there was certainly considerable unprincipled behavior by some banking executives who were at the centre of the financial crisis, I have seen no evidence that the private sector acted more irresponsibly than the public sector. In that regard, one can recall how during the Great Depression, John Maynard Keynes chided President Franklin

D. Roosevelt for his criticism of businessmen with the sage advice that ‘it is a mistake to think they are more immoral than politicians’.[7]

  • [1] A recent study by Global Trade Alert lists the buy-national provision in the US stimulus packageas being the second largest of 22 jumbo protectionist measures enacted since November 2008. SimonJ. Evenett and Johannes Fritz, ‘“Jumbo” Discriminatory Measures and the Trade Coverage of Crisis-Era Protectionism’, in Evenett (ed) Global Trade Alert, Unequal Compliance: The 6th GTA Report, (visited 27 June 2010) 49—58 at 55.
  • [2] Public L. 115—5, approved 17 February 2009.
  • [3] Section 1605, (visited 27 June 2010).
  • [4] For example, see Jagdish Bhagwati, ‘Defending an Open World Economy’, in Terry L. Andersonand Richard Sousa (eds), Reacting to the Spending Spree: Policy Changes We Can Afford (Stanford:Hoover Institution Press, 2009) 139—47, at 141—4.
  • [5] See Joseph Francois, ‘Subsidies and Countervailing Measures: Determining the Benefit ofSubsidies’, in Kyle W. Bagwell, George A. Bermann and Petros C. Mavroidis (eds), Law and Economicsof Contingent Protection in International Trade (Cambridge: Cambridge University Press, 2010)103-15.
  • [6] Jay L. Eizenstat, ‘ “Buy America”: A Regrettable Step Toward Protectionism’, BNA InternationalTrade Reporter, 9 July 2009, 938.
  • [7] John Maynard Keynes, Letter to Franklin D. Roosevelt, 1 February 1938. As quoted in AmityShlaes, ‘How to Make a Weak Economy Worse’, Wall Street Journal, 2 February 2010, A19.
 
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