The US Congress has finally passed the American Recovery and Reinvestment Act of 2009 which contains a protectionist "Buy American" clause. All funds authorized by the Act must be used to buy American made iron, steel and manufactured goods for public works projects even though they cost 25 percent more than imported goods.

It is regrettable that American politicians seem to have forgotten the bitter lesson of the Smoot-Hawley Act of the 1930s, which sparked off the Great Depression. In line with the Act, the US imposed high tariffs on some 20,000 imported goods, which immediately invited retaliatory measures from Europe. World trade suffered an almost complete stop. The Smoot-Hawley Act was thought to be the biggest mistake the US made in the 1930s.

This new act says that the "Buy American" clause should be applied in a manner consistent with US obligations under international agreements. It would actually exempt NAFTA members Mexico and Canada and signatories to the WTO Government Procurement Code such as the EU and Japan. China, Brazil and India, which are not signatories to the Code, would be the main targets.

"Buy American" is protectionist and discriminatory in nature. China seems to be one of the few singled out for such discrimination, and will probably need to consider an appropriate response.

The argument that American taxpayers' money can only be used to create jobs for American workers is totally wrong. All major economies have adopted economic stimulus programs with taxpayers' money. They are free to emulate the "Buy American" policy, but if they do so, the outcome may backfire on American lawmakers and may even lead to a global trade war.

When they met in Washington in November 2008, the leaders of the Group of Twenty made a commitment to an open global economy. They underscored the critical importance of rejecting protectionism and not turning inward during times of financial uncertainty. The United States has not honored this commitment and has set a negative example by enforcing the "Buy American" clause. This has actually undermined the political environment for the next meeting of the Leaders of the Group of Twenty to be held in London in April.

The United States has also stated its intention to introduce the controversial issues of labor standard and environment at the Doha Round of multilateral trade negotiations. This will likely torpedo the agreement on the existing Doha Round package that is already within reach. If this is the case, developing countries will suffer a severe setback in their long struggle for the so-called development agenda for differential and more favorable treatment. The least developed countries and cotton producers in Africa will be hit the hardest.

The US stance looks suspiciously like a strategy to resist reform of the international monetary system. The current global economic crisis is caused by mismanagement of the US financial system and the repercussions spread quickly throughout the world. Both for their own sake and for the sake of the global economy, the US should work with the international community to fundamentally reform the outdated international monetary and financial system.

The early conclusion of the Doha Round and the reform of the international monetary and financial system are the prerequisites to rescuing the global economy from the current crisis. China has responded positively to US call for China to be a responsible stakeholder. The United States should respond positively to the Group of Twenty's call on it to honor its commitment to an open global economy.

The author is former senior WTO negotiator, and now works with EU-China Trade Project as WTO Lead Expert

(China Daily 03/16/2009 page2)