The Obama Stimulus Program Violates WTO Rules

Last week I wrote a post suggesting that the federal “cash for clunkers” program did not violate the WTO subsidies program because it did not have the de facto or de jure effect of discriminating against foreign imports. But what about the broader Obama stimulus program? Does that pass WTO muster?

This article from Bloomberg published last week leaves almost no doubt that the “Buy America” component of the stimulus package is a per se violation of the WTO subsidies rules. According to Bloomberg,

President Barack Obama’s stimulus spending has run into a problem: A shortage of General Electric Co. water filters. GE makes them in Canada. Under the program’s ‘Buy American’ rules, that means the filters can’t be used for work paid for by the $787 billion fund. Contractors are searching the U.S. in vain for filters as well as bolts and manhole covers needed to build wastewater plants, sewers and water pipes financed by the economic stimulus. As officials wait for federal waivers to buy those goods outside the U.S., water projects from Maine to Kansas have been delayed.

Daniel Indiviglio from the Atlantic has argued that this is bad economics:

In a global market, a protectionist measure isn’t only bad from an economic standpoint: it’s also disastrous from a practical standpoint…. It’s one thing to require that stimulus projects be completed in the U.S. It’s another thing to require that parts in those projects have been manufactured in the U.S. That’s just not a realistic requirement in today’s world.

But it’s also bad law. The WTO subsidies laws flatly prohibits any subsidies that impose local content requirements. Article 3 of the Agreement on Subsidies and Countervailing Measures provides that the following subsidies are prohibited, “subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods.” These subsidies are called “red light” subsidies because you don’t need to show any adverse effects in any other country, they are per se prohibited.

As a legal matter, Canada (or almost any other WTO member state) could quite easily challenge the “Buy America” requirements in the Obama stimulus package and win. But it should act fast, because WTO remedies are prospective only, and at best an adverse WTO decision will prevent the United States from imposing local content obligations on future funding of projects. Such action would put a place holder on the Obama Administration discriminating against foreign products with future government subsidies.