Via Tyler Cowen, a story about a trade war launched in the waning days of the Bush administration. On its own, this isn’t a very important issue to many people, but it illustrates a serious potential problem with including “Buy American” rules in the stimulus bill—a point to which I’ll eventually return. It seems that the European Union banned “U.S. beef containing hormones” (by which I assume they mean hormone additives, I take it that cows naturally have hormones). This, we felt, violated World Trade Organization rules. And thus entitled us to issue retaliatory tariffs on European products.
The way we do this is normally by slapping fees on imported luxury goods, because those normally aren’t inputs in U.S.-based production and don’t cause undue hardship on poor Americans. Thus, on January 13, U.S. Trade Representative Susan Schwab “imposed a 300 percent duty on Roquefort, in effect closing off the U.S. market.” Roquefort happens to be my favorite cheese. And the roquefort is not alone, the list of newly taxed goods “includes, among other things, French truffles, Irish oatmeal, Italian sparkling water and ‘fatty livers of ducks and geese,’ which apparently is how Washington trade bureaucrats say foie gras.” But the hammer’s come down unusually hard on roquefort:
But the cheese producers and sheep farmers around Roquefort do not see it that way. Only Roquefort got hit with such a high duty that it amounts to a ban, they complain. In their view, this unfairly undermines not only the economy of Roquefort, which depends entirely on cheese, but also the well-being of the 4,500 people who herd special ewes on 2,100 farms producing milk for Roquefort in a carefully defined oval grazing area across the Larzac Plain and up and down nearby hills and valleys.
The details of roquefort’s problem, the key issue is that in a “trade war” like this, everyone loses:
- The Europeans won’t buy our beef. We’re mad.
- So we refuse to buy their cheese.
- This doesn’t help our cattle guys. But it does make me sad, since I love roquefort.
- And it’s terrible for some French dairy farmers.
- So maybe they’ll have enough political clout to persuade the Europeans to retaliate by refusing to buy a wider set of our goods.
- At which point everyone is even more worse off.
- Bad scene.
It’s a downward spiral of mutual retaliation that makes people on both sides of the Atlantic poorer.
Which brings us to the “buy American” concept. One problem with fiscal stimulus measures is that we don’t have a closed economy. So some of the increase in aggregate demand associated with a fiscal expansion will “leak” outside the borders of the country as the demand is met by imports. Indeed, a small open economy could conceivably reap all the benefits of a global trend toward stimulus without enacting any stimulus measures of its own. In other words, if the United States and Japan and China and Germany and the U.K. and France all enact big stimulus packages, the people of the Netherlands will reap some meaningful benefits even without spending any of their money. Under the circumstances, it’s natural that a big economy like the United States that can’t free ride might enact anti-leakage measure. That, in essence, is the purpose of “buy American” provisions in a stimulus bill. It’s an effort to ensure that the money spent actually goes to help Americans.
On its own terms, this is a perfectly reasonable idea. But European governments wouldn’t take it lying down. As in the case of the beef-cheese trade war, if we act like this they’re going to retaliate with measures aimed at hurting our producers. The we’ll have to think of further measures to hurt their producers. And much the same would apply to Japan and Chinese. This cycle of mutual recriminations will ultimately leave us worse off than we would have been if we’d just let the leakage happen.
What’s needed is a more direct solution to the leakage problem. We need international cooperation to ensure that all the substantial countries are pulling their weight in terms of reviving the global economy. Then we need to accept that, yes, some of our stimulus will leak out, but some foreign stimulus will leak in and it should roughly equal out in the end.