US Stimulus: Neglecting the Global Perspective?
By Peter A Buxbaum for ISN
The thing about the global economic recession is that it is just that - global.
Never in current memory, say economists, has economic contraction been worldwide. The economies of the US, Europe, and Japan are projected to post real losses this year while emerging economies like China and India are expected show significant slowdowns.
Overall, real global economic output is projected to contract by at least one percent in 2009, according to statistics published by IHS Global Insight, an economic consultancy based in Lexington, Massachusetts. This comes after growths of 3.9 percent in 2007 and 2.4 percent in 2008.
"This would be the first time in the post-war period that output will have contracted in a synchronized manner in all of the world's major economies," said Desmond Lachman, a resident fellow at the American Enterprise Institute, a neoconservative Washington think tank, wrote in a external pagereport.
"A pernicious feature of the synchronized nature of this crisis is that it precludes the possibility of any of the major industrialized countries from exporting its way out of its recession."
In a globalized economy, the precipitous drop in US consumer spending has had a deleterious effect, not only on US retailers, but on Chinese manufacturers, among others, that depend on exports to the US. The slowdown in China, in turn, negatively impacts US exporters, such as heavy equipment manufacturers, which have been doing well in recent years in the Chinese market.
Lachman foresees lower demand in the industrialized countries having a profound impact for the exports of emerging market economies. "This will be particularly painful for those Eastern European and Asian economies which are highly dependent for their economic growth on exporting," he said.
The global scope of the recession would suggest for some that the US government should try to stimulate consumer spending and encourage international trade. And, with a new president and Congress installed in Washington, the world's eyes are focused on what the US government will do to lead the world out of its current straits. But the US government is looking in a different direction.
The US$787 billion economic stimulus package passed by the US Congress and signed by President Barack Obama is really an economic life-support measure that directs domestic government spending toward a recovery program for banks, mortgage reform, infrastructure building and refurbishment, aid to state and local governments and health care technology.
The legislation also contains US$268 billion in income tax cuts, which may or may not lead to increased consumer spending. Not everyone would agree that attempting to stimulate US consumer demand is the answer in any case. That would put a burden on US consumers they might not now be in a position to shoulder.
Perhaps of greater concern is the trade protection provisions included in the economic stimulus bill because of its potential reverberations throughout the world trading system. The "Buy American" provision of the economic stimulus measure, which provides protection to the domestic steel industry, has become a lightening rod for criticism of Obama administration policy.
An earlier US government policy included a preference for domestic steel by tacking on a 25 percent price premium to bids for highway construction projects that included imports. The new legislation would require 100 percent domestic steel content for road construction and would expand the program to include projects funded by the Department of Defense and the Department of Homeland Security.
For Charles Freeman, a China expert at the Center for Strategic and International Studies, a bipartisan Washington think tank, the danger in the Buy American provision lies less in its substance than in its symbolism. "It will have an almost geometric impact," he said in media reports. "If the US sends a signal that seems protectionist, other countries will have difficulty refraining from protectionism."
"Some say that until we address the domestic economy we can't talk about trade," added Carla Hills, US Trade Representative under the former president George H W Bush. "But trade is the one tool that could extricate the US from the global economic crisis. The adverse effects of restricting trade across borders is greatly magnified in a global economy."
Brazil is considering filing a World Trade Organization petition against the US over the steel trade, according to Hills, and other countries may join the effort. "It makes no sense when the aim is to maximize American job creation not to be able to buy competitively priced foreign steel," she said. "It will allow the funding of more projects and will create more jobs. Encouraging protectionism will only cause an echo effect."
Of course, not everyone sees things this way. The US domestic steel industry says the issue is about domestic jobs and economic prosperity. The industry stands to benefit from the US$90 billion in steel-hungry infrastructure projects included in the package, and to also receive a bonus from the requirement that government-funded construction projects use domestic steel. The US steel industry has long lobbied for greater protection from cheap imports, particularly from China.
"By requiring the use of American-made steel products in federal construction projects, the legislation helps to ensure that our national infrastructure is made with quality domestic steel products," said Thomas Gibson, president of the American Iron and Steel Institute, a group which advocates for the protection of the domestic industry. "The use of these steel products will also create economic prosperity for steelworkers and steel communities across the nation."
The American Institute for International Steel (AIIS), a trade group that advocates liberal steel trade policies, oppose the Buy American provision. "The highly stringent Buy American preference program did not need further strengthening," said David Phelps, the group's president.
The AIIS has promoted the elimination of national preferences through the international Government Procurement Agreement (GPA). "The expansion of open competition by signatories to the GPA has benefited many American companies, especially steel-consuming companies providing construction equipment, power generating equipment and other critical infrastructure-related products to foreign governments," said Phelps.
US exporting companies like Caterpillar Inc, a construction equipment manufacturer based in Illinois, are convinced the Buy American provision in the stimulus package will backfire. "The so-called Buy America amendment is really an anti-export provision," company spokesperson Jim Dugan told ISN Security Watch. "Caterpillar is doing everything to export American-made products to the numerous infrastructure projects being proposed around the world, particularly in China. Embracing new Buy American restrictions would totally undermine those efforts to increase US exports."
Caterpillar has depended on exports for 60 percent of its sales in recent years. The company announced earlier in the year that it was laying off 16 percent of its employees and slashing its manufacturing capacity in anticipation of poor performance in 2009. This comes despite record sales and profits in 2008.
With all of the chicken-and-egg complexities and interdependencies of the global economy, is it realistic to pin hopes of recovery on the US consumer? Will US purchases of Chinese apparel and furniture help Caterpillar sell its heavy equipment? Some believe the US, and in particular, US consumers, must resume their role as the engine of global economic growth.
China and Japan are looking to the US to spark the global economy, according to Freeman. "Asian economies are looking at the US stimulus as a way to restore the status quo ante," said Freeman. "But they were hugely over reliant on the US market to begin with."
But can the prospects for global economic recovery be pinned on only one player? Overspending by US consumers stretched the credit system to its breaking point and is one of the causes of the current economic conundrum.
"I can't believe that even under the best of circumstances," Freeman said, "we will be getting back to a situation where the US consumer will be the global driver of global economic growth."