Trade Wars Brewing In Economic Malaise

In a new twist to protectionism, local governments in the US have reduced purchases of products from traditional partners like Canada due to “buy American” clauses in the federal government’s stimulus package. Unlike usual protectionist measures such as tariffs, quotas, or subsidies, buying from domestic suppliers is not open to litigation via the World Trade Organization. Yet it seems the implementation of the “buy American” clause is having unintended consequences even at home. Some domestic-based manufacturers whose products may contain even a fraction of foreign-based parts are being shut out of contracts because customers are opting for 100% American-made goods. This phenomenon could potentially lead to layoffs of US workers, exactly the opposite of what is intended by the “buy American” clause. In fact, the negative consequences are already visible. Some Canadian cities, that have seen their domestic businesses shut out of US infrastructure projects, are now barring US companies from municipal contracts. And such protectionism is not specific to North America: some European banks have reduced loans to foreign customers. The counter argument is that the stimulus package intended to jump start domestic growth should treat US goods preferentially. Yet in today’s interconnected economy, it’s difficult to find goods that are produced solely in one country. Such creeping protectionism could spell creeping death for the global economy. – YaleGlobal