Rightwing Canadian Government Trying to Sabotage Obama Administration
Double Standards for Banks and Builders

Broken Promises from Buy America Opponents

Back in 1992, economist Gary Hufbauer of the Peterson Institute for International Economics famously predicted that NAFTA would create 170,000 new jobs, because the U.S. would be running a $9 billion trade surplus with Mexico.

But, as we know, our Mexican trade surplus instead turned into a raging deficit, now at $91 billion, accounting for an estimated 1 million lost manufacturing jobs.

By 1995, when we were already running a $23 billion deficit with Mexico, Hufbauer famously told Bob Davis at the Wall Street Journal that, "The lesson to me is that I should stay away from job forecasting." (Bob Davis, "Free Trade is Headed for More Debate," WSJ, 4/17/95.)

Unfortunately, Hufbauer has broken his occupational promises like they were so many NAFTA job-creation promises. And while economists like to preach that blue collar workers should lose their jobs when they screw up, there is no such accountability for the neoclassicals.

In a new paper for Peterson, Hufbauer and colleague Jeffrey Schott estimate that the Buy America provisions of the stimulus package would create 1,000 to 1,900 jobs, but destroy 6,500 to 65,000 jobs due to foreign retaliation. While the job creation estimates are based on something approaching a sound methodology, the job destruction estimates are pulled out of a hat, and retaliation is simply assumed.

But as we pointed out this morning, the rumors of retaliation are part of a joint scare campaign by right-wing governments and corporations that have offshored U.S. jobs. For the right-wing Canadian administration in particular, this is a continuation of their attacks on Obama that began in the Ohio primaries.

But the allegations of trade-law violations are misleading, as Hufbauer and Schott at least have the decency to point out:

While US commitments under the [World Trade Organization's Government Procurement Agreement] cover many federal government entities and 37 states, the proponents of Buy American provisions argue that a large portion of the projects funded by the stimulus bills are not covered in the GPA. For example, there is a general exclusion for federal funds destined for mass transit and highway projects. Moreover, many of the 37 states that acceded to the GPA also reserved sensitive procurement areas, such as motor vehicles, construction-grade steel, and construction services... [emphasis added]

Existing laws already provide Buy American preferences for much of the public procurement authorized in the stimulus bill...

Of course the bigger question continues to be why political leaders signed up government procurement rules – a quintessential, non-trade domestic issue – to comply with so-called “trade” agreements in the first place. It's clear that, going forward, these rules need to be changed. But the immediate task is to put America back to work.

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Pete Murphy

Believe me, no one is more angry with U.S. trade policy of the last few decades than I, but we do have to be careful with "buy American" provisions that lock out all of our trade partners. There are many nations with whom the U.S. enjoys a balance of trade or even a surplus in manufactured products. We need these countries on our side when it comes to addressing the real root cause of our trade problems. Canada is one of those countries. In addition to enjoying a slight trade surplus in manufactured products with Canada, they are also our number one source of imported. We do not want to anger valuable trade partners like Canada!

We need to understand the real root cause of our trade deficit and focus policy like a laser on that problem. The problem is not China. Nor is it currency manipulation or low wages or unfair trade practices. A careful analysis of our trade results reveals that the real culprit is a huge disparity in population density between the U.S. and many badly overpopulated nations like Korea, Japan, Germany, China and others. The reason population density plays such a critical role is too complicated to explain here, but to illustrate how powerful a factor it is, consider the following: Of our top twenty per capita trade deficits in manufactued goods in 2006 (the trade deficit divided by the population of the country in question), eighteen were with nations much more densely populated than the U.S. Even more revealing is this: with the half of nations below the world's median population density we had a $17 billion surplus in manufactured goods in 2006. With the more densely populated half (the same number of nations), we had a $480 billion deficit!

What's needed is a tariff structure on manufactured goods that's indexed to population density - zero for nations reasonably populated like our own (and like Canada and Australia, for example), but progressively higher for more densely populated countries.

This would provide the logical rationale needed to focus our trade policy on the real problem without jeopardizing our many beneficial trade relationships. You can bet that the nations affected will retaliate with tariffs of their own, but we'll have the backing of the rest of the world - something we wouldn't have if we took an approach that shuts out everyone.

Pete Murphy
Author, "Five Short Blasts"

Pete Murphy

Correction: I left out a word. Canada is our number one source of imported OIL.

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