Wednesday, June 24, 2009

During the 2008 primary, Hillary Clinton and President Barack Obama did their best to out-protectionist each other. Obama was critical of the North American Free Trade Agreement (NAFTA) during the campaign, while Hillary said she was going to "stand up to China and other non-market countries."

All of this talk was geared to earn the support of the unions, who support protectionism. Before we go any farther, let's define protectionism. According to Wikipedia, protectionism "refers to policies or doctrines which "protect" businesses and workers within a country by restricting or regulating trade with foreign nations."

As president, Barack Obama has eased his rhetoric, but his protectionist moves have already started two trade wars.


NAFTA required the United States to allow Mexican truck drivers to drive on all border state roads. This started in 1995. Outside of the North American Union crowd, the biggest complaint about this is the safety of Mexican trucks.

In 2007, Senator Byron Dorgan (D-ND) inserted an amendment into a $106 billion transportation and housing spending bill and the Senate voted to cut off funding for the program. In an Associated Press article, Sidney Weintraub, a professor emeritus at the University of Texas LBJ School of Public Affairs in Austin said, "Under NAFTA, Mexico can seek retaliation against the U.S. for failing to adhere to the treaty’s requirements, including retaining tariffs on goods that the treaty eliminates."

In 2009, Dorgan returned. He inserted another amendment into a $410 billion spending bill. Congress passed it and Obama signed it, ending the program.

Mexico retaliated "against the U.S. for failing to adhere to the treaty’s requirements" by "retaining tariffs on goods." Mexico applied $2.4 billion worth of tariffs to close to 90 items from 40 U.S. states. Most of the products were agricultural.

In 1995, American exports to Mexico were $46 billion. After 10 years of NAFTA, the total had almost tripled, reaching $120 billion. Mexico is America's second biggest export market.


The $787 billion stimulus bill Obama signed into law contained a "Buy American" provision that economists warned against. The protectionist provision mandates that "only U.S.-made goods be used in projects funded by the bill." At the time, the Canadian government voiced concern.

Prime Minister Stephen Harper attempted to calm fears, saying, "I think President Obama himself said that he wants to ensure that these stimulus packages do not lead to protectionist measures in the U.S. or anywhere else."

Fast forward three months and you find The Washington Post reporting that Canadian suppliers are being turned away from jobs in America.

Ordered by Congress to "buy American" when spending money from the $787 billion stimulus package, the town of Peru, Ind., stunned its Canadian supplier by rejecting sewage pumps made outside of Toronto. After a Navy official spotted Canadian pipe fittings in a construction project at Camp Pendleton, Calif., they were hauled out of the ground and replaced with American versions. In recent weeks, other Canadian manufacturers doing business with U.S. state and local governments say they have been besieged with requests to sign affidavits pledging that they will only supply materials made in the USA.

What happened is simple, and rather devious. Rather than create federal programs to spend the stimulus money, Canadian firms say the United States is "filtering billions of federal dollars, which are subject to NAFTA rules, to municipalities, which let out the infrastructure contracts and are not subject to any trade agreements."

Canadians have responded in kind, with towns in Ontario putting measures in place to bar U.S. companies from municipal contracts. This could be the first shot in a growing trade war with Canada that threatens to lock U.S. based companies "out of billions of dollars worth of Canadian projects."

America exports more to Canada than to any other country, to a tune of $211.9 billion a year.

At Home

The "buy American" clause is even hurting businesses based in America. The Duferco Farrell Corp., located in Pennsylvania, has lost a job with its largest client, Wheatland Tube.

Here's the problem:

Due to the “buy American’’ provision in the $787 million national stimulus package, Wheatland Tube acknowledged Friday the company can’t buy steel from the Farrell steelmaker which is just several hundred yards from its local offices. The provision is being interpreted that steel used for public projects must be melted in the U.S.

Duferco’s Farrell plant buys slabs, which it said are generally not available in the U.S., overseas and then rolls them into coils.

A clause intended to stimulate jobs in the United States could end up costing 600 Americans theirs. Bob Miller, executive vice president of Duferco Farrell, told the Washington Post, "You need to tell me how inhibiting business between two companies located one mile apart is going to save American jobs. I've got 600 United Steel Workers out there who are going to lose their jobs because of this. And you tell me this is good for America?"

Ironically, the one person who fought for the clause was Leo Gerard, president of the United Steelworkers Union. He told CTV flat out, "The fact of the matter is, this isn't protectionism."

There were people who said just the opposite. Kurt Karl, head of economic research at Swiss Re said, ""It's not a good time to initiate protectionist measures in any shape or form."

Bill Lane, the government affairs director for Caterpillar said, "There is no company that is going to benefit more from the stimulus package than Caterpillar, but I am telling you that by embracing Buy American you are undermining our ability to export U.S. produced products overseas,"

The Wall Street Journal wrote, "Increased protectionism didn't stimulate the American economy in 1930 and it won't now."

Time wrote that we were about to make the same mistake we made in the 1930s, hoping "government leaders have learned the lessons of the past." They are referring to the Smoot-Hawley Tariff Act of 1930, which raised tariffs on over 20,000 imported goods. More than a thousand economists petitioned then President Herbert Hoover not to sign the protectionist Smoot-Hawley tariff act. He did it anyway, and between 1929 and 1934, world trade declined by about 66%.

Rather than learn from the failures of the past, America is repeating them on a grand scale. To not expect the same results would be insane.