Buy American, Says Canadian

Right Democrat also has this, by Eric Weir:

The National Post, most other media, the Canadian government and its Official Opposition all appear to agree that the "Buy America" provisions contained in the proposed U.S. stimulus package comprise unfair protectionism. They should think again: In fact, the Buy America provisions are economically justified, and could even be beneficial for Canada.

For Canada, the best-case scenario is not a removal of Buy America provisions from the stimulus legislation, but a specific Canadian exemption from them. When the United States applied tariffs to steel imports in 2002, it exempted Canada and Mexico. Such arrangements allow Canada to continue selling into the U.S. market with less competition from other countries.

In a world where all labour and capital is fully employed, free trade is arguably beneficial because it encourages countries to specialize based on comparative advantage. But in a world of unemployed workers and excess capacity, countries have an undeniable interest in keeping production at home, rather than importing products from abroad. The orthodox argument for free trade, which assumes full employment, is unconvincing amid rising job losses.

Opponents of Buy America rules characterize them as a revival of the infamous Smoot-Hawley Act, which allegedly worsened unemployment in the 1930s. But the act's gravest shortcoming was that it did not provide, or accompany, a significant fiscal stimulus. In effect, the United States tried to use tariffs alone to grab a larger slice of a shrinking global economic pie.

Today's Buy America requirements, on the other hand, are part of the American Recovery and Reinvestment Act, a large stimulus plan. It is important to note that the Buy America requirements apply only to public investment and would not affect private ventures or personal consumption. And given the goal of this public investment, they are justified: If a major purpose of increased spending on public infrastructure is to stimulate a country's economy, it surely makes sense to ensure that a large portion of such spending remains within the country.

One might even ask why there wasn't a "Buy Canadian" policy in last week's federal budget. On the contrary, the budget eliminated Canada's few remaining tariffs on imported machinery and equipment, and offered a 100% accelerated capital cost allowance for computers. Both measures seemed designed to encourage businesses in Canada to buy more inputs from abroad.

The world economy needs as much stimulus as it can get. If other countries can catch a free ride on Canadian and American stimulus by selling more goods to North America, they have little incentive to incur public debt to finance their own stimulus packages. By limiting foreign access to U.S. stimulus, Buy America policies encourage all countries to contribute the deficit spending needed to propel a global economic recovery.

This approach is particularly important for steel. With the recent collapse of shipping costs, more infrastructure projects could easily prompt increased steel imports rather than increased steel production. In recent years, Canada has imported anywhere from three to nine dollars of steel from overseas for every dollar of steel
exported overseas. Much of the stimulus supposedly provided by additional infrastructure spending could leak out of the Canadian economy through this glaring trade deficit.

By contrast, the larger volume of steel trade between Canada and the United States is balanced. Which means that Americans cannot improve their balance of international payments by trading less steel with Canadians. If Buy Canadian policies were adopted, we could offer the United States an exemption from them in return for an exemption from Buy America policies.

The balanced, integrated nature of the Canada-U.S. steel trade provides a compelling rationale for exempting Canada from Buy America rules. Canadian politicians and editorialists should start making this case, rather than lecturing Americans about the theoretical virtues of global free trade and the evils of Smoot-Hawley.

Paxo couldn't believe his ears when a Canadian union leader came on Newsnight earlier this week and not only defended Buy American but bemoaned the absence of Buy Canadian. It is increasingly clear that the political consensus on this in Canada is wildly out of touch with the view on the ground there. Did someone say "Canadian jobs for Canadian workers"? If not, why not?