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Beijing Borrowing from Washington's Playbook

As the saying goes, you reap what you sow. In early June, Chinese authorities announced the commencement of Beijing's own version of the "Buy American" clause. Yes, it now seems Washington's pandering to populist sentiments in the American Recovery and Reinvestment Act of 2009 is going to actually result in jobs losses right here in the United States. Why? China has now imposed a requirement that Beijing's economic stimulus projects be accomplished using domestically manufactured goods.

Under the new regulations, "Government investment projects should buy domestically made products unless products or services cannot be obtained in reasonable commercial conditions in China." The order goes on to stipulate, "Projects that really need to buy imports should be approved by the relevant government departments before purchasing activity starts."

If you are a Caterpillar employee reading this column the time for gnashing of teeth and bemoaning the world's injustices has arrived. Caterpillar did approximately $2 billion of business in China during 2008. In July 2008, the firm went so far as to predict this figure could double by 2010. I'm betting that is no longer the case. In fact, it looks as though the 2,200 Americans Caterpillar laid off in March 2009 are going to remain on the unemployment rolls.

And I'm willing to bet the former Caterpillar employees won't be the only ones who get to pay for Washington's myopic behavior. In May, the Washington Post reported Canadian officials in towns along the U.S. border implemented regulations that essentially barred American firms from bidding on municipal contracts. It would appear that alienating our largest trading partner -- Canada -- is no brighter than aggravating our largest creditor -- China -- and yet Washington continues to act as though we are the only game on the planet.

The days of threatening to quit and take our ball home are over. In mid-June Washington announced Beijing's U.S. Treasury note holdings had dropped to $763.5 billion in April 2009. This was down $4.4 billion from China's U.S. Treasury note holdings in March 2009. The cause of the decline? As one of Barclays Capital Research analysts put it, the decline "seems to stem from net selling of Treasury bills."

I hasten to note the Chinese are not selling these holdings as a means of responding to a domestic economic emergency. Last week the World Bank raised its forecast for China's economic growth -- that's right, growth -- in 2009 from 6.5 to 7.2%. According to the World Bank, some of this rosier forecast can be explained by Beijing's $586 billion stimulus package. This does not mean China is out of the woods. Chinese officials and the World Bank agree the nation's dependence on exports is worrisome, particularly as it appears it may be years before we finally shake off this latest recession.

But perhaps that's why Beijing decided its economic stimulus projects be completed using domestically produced goods. American economists and politicians have been warning China about the need to promote consumption at home. Of course, the first time Chinese officials seriously set about accomplishing this task they are immediately ensnared in a classic case of Catch-22. That is, Beijing's efforts are condemned as protectionist and discriminatory -- language that has also been used to describe China's focus on stimulating growth through a focus on exports. It would appear there is just no keeping Washington happy.

So what to do? Well, if I were a Chinese official my first response would be to remind Washington that what is good for the goose is also profitable for the gander. Then I would suggest U.S. authorities need to spend time mulling over the consequences of the Smoot-Hawley Tariff Act. This fine bit of protectionist legislation signed into law on June 17, 1930, raised U.S. tariffs on over 20,000 imported goods to record levels. (The law specifically imposed an effective tax rate of 60% on more than 3,200 products and materials imported into the United States.) The ultimate result? A tit-for-tat retaliatory tariff war that served to curtail global trade by approximately 10%.

Don't think it could happen again? I would recommend taking a close look at Moscow's recent efforts to protect its struggling automotive sector. In a bid to save the estimated 1.5 million people employed by the Russian automobile manufactures and their suppliers Moscow essentially made buying a used import as expensive as purchasing a new domestically produced Lada. I'm betting similar proposals are being floated elsewhere.

In the mean time, don't expect any apologies or second thoughts from Beijing. Like their American counterparts, Chinese officials have learned to cover their tracks through obfuscation and semantics. Rather than admit the new regulations were protectionist, China's Foreign Ministry declared, "The purpose of issuing the notice is to ensure a fair and competitive market." Adam Smith must be spinning in his grave.

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