Crisis Fuels Backlash on Trade

A "Buy American" drive in the U.S., spreading protests against foreign workers in Britain and various countries' efforts to prop up their own beleaguered industries are fanning fears of a rise in economic nationalism that could deepen the global recession.

In Washington, President Barack Obama faces an early test as international concern mounts over moves in Congress to bar foreign suppliers from winning business on most projects funded by a new economic-stimulus package.

In the U.K., Prime Minister Gordon Brown confronted a different test, as hundreds of workers at oil refineries and power plants walked off the job as part of spreading protests in the industry against the use of foreign labor. That's a new phenomenon for the formerly booming country, known for being open to foreign businesses and workers. Meanwhile in Spain, the government is offering immigrants money to return home, while France has introduced stimulus measures that would route many government-sponsored projects to French companies.

The developments underscore the difficult balance world leaders must strike as they seek ways to ease the pain of a deepening global downturn. On one hand, they see maintaining free trade and international cooperation as essential to helping the world economy recover.

On the other, as they move to bail out banks and support struggling companies, many turn to subsidies or even protection for local firms. And as unemployment rises, governments are under increasing pressure at home to raise barriers.

"Hardship triggers anxiety for protection," said Pascal Lamy, head of the World Trade Organization, in an interview at the World Economic Forum in Davos. "Scapegoating the foreigner is an old trick in politics."

The Obama administration appears divided over how to respond to the "Buy America" push within Congress. Some aides want to resist encouraging what they describe as a protectionist tilt in the very first days of the administration, while others argue that mandating that taxpayer money go to benefit U.S products is appropriate at a time of economic hardship.

Mr. Obama already has issued several pro-labor measures in his first days in office, but has yet to say publicly whether he supports this union-backed initiative. Vice President Joe Biden spoke in favor of it on Thursday, telling CNBC that "it's legitimate to have some portions of 'Buy American'" in the stimulus legislation.

White House spokesman Robert Gibbs told reporters Friday that the administration is reviewing the issue "and understands all of the concerns."

Charges and countercharges of economic nationalism increasingly are flying across national borders, as countries come under domestic pressure to match moves by other capitals to rescue key industries, in a race to provide greater state support that could clash with free market and trade policies.

"There is a certain schizophrenia," said French finance minister Christine Lagarde, in an interview on Friday. "On the one hand, we're saying we have to fight protectionism. On the other, we have to explain to taxpayers what this gives them. We have to manage that struggle."

German Chancellor Angela Merkel Friday bluntly criticized the U.S.'s efforts to prop up its beleaguered auto industry. In a speech to economic and business leaders gathered in Davos, Switzerland, to discuss the global economy, she said the U.S. measures "quite frankly, constitute protectionism" and should be temporary.

The U.S. has committed more than $15 billion to rescuing General Motors Corp. and Chrysler LLC. But it's no longer alone: The U.K. is providing debt guarantees for its auto industry. The French government said earlier this month that it is prepared to inject as much as €6 billion to jump-start French auto makers. Ms. Merkel's own government, after initial resistance, has promised GM's German-based Opel unit conditional bailouts of €1.8 billion (about $2.3 billion).

In Britain, hundreds of workers at U.K. oil refineries and power plants walked off the job Friday as part of protests against the use of foreign labor, a sign of how deepening hardship is prompting a backlash against economic openness. Local contract workers at more than eight sites in Scotland, Wales and parts of England joined a wildcat strike that began earlier this week at the Lindsey oil refinery on the U.K.'s eastern coast.

The workers were protesting a decision by the refinery's owner, French oil company Total SA, to award a £200 million (about $290 million) construction contract to an Italian firm that planned to use foreign workers.

"They're saying, we come first, we live in the community," said Bernard McAulay, national officer for trade union Unite, as he stood outside the Lindsey refinery Friday. A spokesman for the prime minister said Mr. Brown's government would hold talks with representatives of the construction industry "to make sure that they are doing all they can to support the U.K. economy."

So far, most major nations have generally avoided turning to trade tariffs and other extreme forms of protectionism that are widely seen as having exacerbated the Great Depression of the 1930s. Overtly protectionist steps can deliver big blows to international commerce, raising unemployment and reducing demand for exports, key to the economy of many countries.

A World Trade Organization assessment, completed last week, found that most countries so far are keeping domestic protectionist pressures at bay. But the report warned that a slide toward protectionism "would only worsen the economic situation for all and diminish prospects for an early recovery in activity."

With unemployment in many countries forecast to keep rising sharply, policy makers are becoming increasingly concerned about a potential backlash against globalization and free trade. A number of countries already have moved to curb imports or protect embattled industries and economies, despite pledges by a group of 20 top industrialized countries last fall to avoid taking steps that would restrict trade flows as the economy worsened.

Since then, India has raised tariffs on some steel imports; Argentina has imposed new obstacles to imported shoes and auto parts; and Russia has raised duties on imported cars.

In Spain, which is facing its worst recession in decades as the effects of a property bust spread to other sectors, the government is paying immigrants to go home. During the boom years, Spain's construction industry sucked in millions of immigrants. Now it is offering to pay legal immigrants all the unemployment benefits they are entitled to in a lump sum if they agree not to return for at least three years. So far, only 1,400 have taken up the offer.

This week, the French parliament approved a €26 billion stimulus plan, the bulk aimed at infrastructure projects such as high-speed railroads, a business dominated in France by Alstom SA, and nuclear power plants, on which the country's Areva SA has a monopoly there.

Across Europe, many countries have sought to shore up their own lenders, despite an effort last October to present national bailout plans as part of an EU-wide master scheme. Now, many are pushing their bailed-out banks to focus lending on borrowers in their home countries. German's economic minister said he wants Commerzbank, which received €18 billion of fresh capital from the government, to support German companies in return. The U.K. government has required banks that receive its support to lend more to British businesses.

The U.S. and China have been at loggerheads recently over several trade issues. Chinese Premier Wen Jiabao warned that protectionism would only deepen and extend the global crisis, and Beijing responded angrily to allegations by U.S. Treasury Secretary Timothy Geithner that China was manipulating its currency by keeping it artificially low. That would make its exports cheaper and, therefore, more competitive in global markets.

On Friday, Mr. Obama spoke by telephone with Chinese President Hu Jintao, stressing "the need to correct global trade imbalances as well as to stimulate global growth and get credit markets flowing," according to a White House statement.

Some world leaders, as well as U.S. business groups including the U.S. Chamber of Commerce, have begun to cry foul over the proposed "Buy America" provisions in the new U.S. stimulus legislation, saying they could violate international trade rules and trigger a protectionist backlash. Officials within the European Union, as well as in Canada and Australia, have warned Congress and the administration against approving the provisions.

The House passed an $819 billion version of the stimulus bill, which aims to jump start the country's ailing economy, on Wednesday. The Senate is expected to vote on its version, with a price tag of nearly $900 billion, next week.

The provisions, if enacted, would result in tens of billions of dollars to be spent on roads, power lines and other major projects going mainly to American producers. The House bill would require that iron or steel used in stimulus-backed projects be American-made. The Senate bill seeks to stretch the requirement to apply to all "manufactured goods."

Trade experts say the House provision is most likely compliant with World Trade Organization rules on government procurement, which allow some leeway for the use of domestic steel in government projects. But the Senate's broader restrictions could violate agreements meant to maintain international competitiveness within government contracting.

Still, support is building in Congress for the restrictions. Congressional Democrats who support them said they have received no clear signals on the issue from the White House. Senate Majority Leader Harry Reid "supports strong 'Buy America' provisions in general and particularly for the economic-recovery package," said his spokesman, Jim Manley. "We hope to have the strongest 'Buy America' provisions consistent with our international obligations."

Senate aides say that they intend to be mindful of international trade rules while crafting any final versions of the legislation.

Critics of the provisions also say they could raise the price of projects and create bureaucratic bottlenecks, as federal agencies and companies wrestle with establishing the origin of many things they buy.

Unions and steel manufacturers argue that taxpayer money should bolster hard-hit U.S. manufacturers, which, they say, would in turn help reinvigorate the world economy.

online.wsj.com