Why Europe Is Fuming About the Stimulus Package

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A Steel Mill in Cleveland, Ohio

Europe's euphoria over Barack Obama is fading fast. As Congress wrangles over the President's $819 billion stimulus package, a "buy American" clause has the European Union threatening legal action and retaliatory sanctions and opening up the prospect of an explosive trade war. (See pictures of the world reacting to Obama's Inauguration.)

Just weeks after hailing Obama's election, E.U. officials are now howling that his plans are putting a global economic recovery at risk. They want Obama to resist any retreat into protectionism, warning that it could turn the recession into a 1930s-style slump.

The "buy American" clause in the President's economic stimulus package states that only U.S. iron, steel and manufactured goods can be used in construction projects funded by the bill. The package has already been approved by the House of Representatives, and the Senate is currently debating an $888 billion version of the bill.

The provisions might protect U.S. jobs in the short term, but the E.U. says they would hobble global trade, a key motor for the world economy. John Bruton, the E.U. ambassador in Washington, has described the measures as "setting a dangerous precedent, and "neither the right or effective response to the situation." German Chancellor Angela Merkel has said that "past world economic crises showed protectionism would be the completely wrong answer."

Similar measures to "buy American" have been adopted or considered in Argentina, China, Indonesia, Ecuador, India, Russia and Vietnam. Pascal Lamy, director-general of the World Trade Organization, warned on Feb. 2 that any go-it-alone route would foster a spiral of retaliation. "Today we run the risk of sliding down a slippery slope of tit-for-tat measures. It was Mahatma Gandhi who said 'An eye for an eye makes the whole world blind,' " Lamy said.

The E.U.'s alarm is partly a reflection of its own precarious situation in the face of a widespread backlash against globalization. The commission is now scrutinizing the E.U.'s own stimulus schemes for potential discrimination against foreigners. In focus are plans such as France's $10 billion move to bail out its car industry by requiring firms to source car parts from local suppliers.

"In this climate, many people resent seeing billions of tax dollars leak outside the country. But if this 'buy American' clause is adopted, it will make it harder for those in Europe in arguing for markets to stay open," says Simon Tilford, chief economist at the London-based Centre for European Reform (CER) think tank. "Also, after Europe's huge expectations for Obama, there is bound to be a huge disillusion with him if the U.S. goes down this road."

"Buy American" is highly popular among Congressional Democrats and trade unions. Obama supported it during his White House campaign, even distributing campaign buttons and flyers with a special emblem.

But the move is opposed by most Republicans, and Senate minority leader Mitch McConnell has demanded that it be stripped from the bill. Major U.S. companies like General Electric and Caterpillar have also opposed the provision, saying it will hurt their ability to win contracts abroad — and impose layers of bureaucracy on what is already likely to be a cumbersome contracting process.

The provision would also cost far more jobs than it created, according to a study by the Peterson Institute for International Economics in Washington. Although it focuses on iron and steel provisions, the "buy American" clause would save just 1,000 U.S. jobs because steel is very capital intensive, the study's authors Gary Hufbauer and Jeffrey Schott say. "In the giant U.S. economy, with a labor force of roughly 140 million people, 1,000 jobs or less is a very small number," they wrote. That number, they contend, would be exceeded by the jobs that would then be lost if other countries emulate U.S. policies or retaliate against them.

In the face of the criticism, Obama sent out signals on Tuesday that he was prepared for a rethink. He did not promise to remove "buy American" but said he would take another look at the language in the bill. "I think we need to make sure that any provisions that are in there are not going to trigger a trade war," he told TV network ABC. And speaking to Fox News, he said, "I think it would be a mistake though, at a time when worldwide trade is declining, for U.S. to start sending a message that somehow we're just looking after ourselves."

But he will have to twist arms in his own party to tone down the measures, especially since the Senate is currently looking at an even tougher version of the provisions. If he fails to extract the offensive language, Europe may indeed be readying itself for an old-fashioned trade battle.

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