A lot of ink, virtual and otherwise, has been spilled over the last few days with respect to the “buy American” revisions to the Obama administrations 800 billion stimulus package. In particular the whole of the Canadian continentalist establishment is up in arms, not to mention a good section of the respectable left. Left or right in Canada it seems we are all continentalists and “free” traders now. The question for Canadians is are we all Free Riders too?
On the one hand, for Canadians critical of NAFTA the buy-American provisions demonstrate once again that NAFTA was not quite the shibboleth that Canadian continentalists had hoped for. Time and again when the going gets tough the Americans demonstrate their unwillingness to play by rules when it comes to free trade: soft wood lumber being and example of how American intransigence is actually reworded given the asymmetrical power relations between the US and Canada. The buy-American provisions are just one more example of how despite what the Americans do, Canada will remain continentalists. Is there anyone who actually takes the tough talk of Stockwell Day seriously?
On the other hand, it must be pointed out that the US has no obligation to introduce any stimulus at all. If you listen to the right in the US like the Heritage Foundation you quickly realize that the necessity of stimulus (rightly or wrongly) is hardly a consensus position. A policy of no stimulus would however amount to a beggar-thy-neighbour policy. That is, the US would be widely (and rightly viewed) as free-riding on other nations’ stimuli.
So how does a US stimulus package with the buy American provisions wash out on the free trade-autarky spectrum? And it is a spectrum because no country can ever perfectly occupy one pole or the other. Part of the problem lies in how even those who should know better explain the situation. Paul Krugman argues thus:
“Now ask, how would this change if each country adopted protectionist measures that “contained” the effects of fiscal expansion within its domestic economy? Then everyone would adopt a more expansionary policy — and the world would get closer to full employment than it would have otherwise. Yes, trade would be more distorted, which is a cost; but the distortion caused by a severely underemployed world economy would be reduced. And as the late James Tobin liked to say, it takes a lot of Harberger triangles to fill an Okun gap.”
That all sounds very good but there is a slip-up right in the first sentence “…if each country adopted protectionist measures that “contained” the effects of fiscal expansion within its domestic economy.” However, the buy American policies do not attempt to contain the all of the effects of the stimulus within the domestic economy. What they do attempt do is to contain the first round effects of the stimulus within the domestic economy. That is, the buy American provisions are only partially protectionist in that they do not attempt to contain the second round effects of the stimulus to the domestic economy.
For example, imagine that a state government takes some stimulus money for an infrastructure program say 200 million. The initial 200 million is spent on locally sourced material and labour but that is where the protection stops. The incomes and profits earned from that 200 million is free to be spent (the second round effects) on any goods or service no matter of its country of origin (well ok not Cuba Iran or S-Korea). Thus the second round effects of US stimulus will still leak out to the rest of the world. It is so odd to see a New-Keynesian like Krugman miss this point given the whole basis of the effectiveness of stimulus relies on a multiplier. The buy-American provisions do not apply after the first link in the chain of the multiplier.
Given the degree to which the production of goods and services is globally integrated and given that the buy-American provisions do not contain any calls for erecting barriers to trade in general such that the protectionism only applies to the first round effects of the fiscal stimulus it is hard to argue that this is the thin edge of Autarky’s wedge.
Moreover, there remains the problem of free-ridership by other nations. The extreme case would be where the US was the only nation to engage in stimulus. This is, of course, not the case other countries are engaging in stimulus of their own. So the question of free-ridership comes down to degrees. China, Japan and then the US have announced by far the biggest stimuli: well over 4 % of GDP (by some measures China’s totals 18% of GDP! Cut that in half and it still pretty impressive). Canada sits with Europe, including England, in the cheapo-seats not even managing to achieve 2% of GDP with their stimulus programs. And curiously it has been Canada and Europe who have been crying the loudest about the tepid protectionist elements of the buy-American provisions.
If I was a US legislator I might conclude that Canadian continentalists were fair-weather friends as well. And interestingly in Canada, the continentalist establishment which includes almost every major media outlet—including the CBC—was more than happy to focus on the buy-American provisions of the US stimulus package instead of focusing on how the inept, incoherent, ineffective and paltry Conservative stimulus package meant that Canada was basically hoping it could have an economic recovery on the cheap by begging-off of Asia and the US.
Such, I suppose, is the state of nationalism in Canada.
Stimulus as a % of GDP
Japan: (+/-) 15
China: (+/-) 9-18
US: (+/-) 5-7
Germany: (+/-) 1-2
France: (+/-) 1.4
UK: (+/- ) 1.1
Canada: (+/-) 1.5 *Reuters