The BBC has this developing story:

"The EU has increased its pressure on the US to reconsider the "Buy American" clause in the $800bn (£567bn) economic recovery package now before Congress.

The clause seeks to ensure that only US iron, steel and manufactured goods are used in projects funded by the bill. A European Commission spokesman said it was the "worst possible signal" the Obama administration could send out.

The EU will launch a complaint with the World Trade Organisation (WTO) if the clause remains, the spokesman said. The EU and Canadian ambassadors to Washington have already warned that the clause could promote protectionism and trigger retaliatory moves. continue reading at source

The Guardian has an update:

"Barack Obama is expected to water down "Buy American" plans in his economic stimulus package after European diplomats privately threatened to launch a trade war in retaliation." coninue reading at source

Background & Quick legal reference

The source of the tension is to be found in the articles of the "American Recovery and Reinvestment Act of 2009"(Amendment in Senate) at the end of january, 2009. With this act, the US House of Representatives has passed President Barack Obama's $819bn economic stimulus package.

Here is the disputed part of the act:

"SEC. 1604. USE OF AMERICAN IRON, STEEL, AND MANUFACTURED GOODS.

(a) None of the funds appropriated or otherwise made available by this Act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron, steel, and manufactured goods used in the project are produced in the United States. "

"This Agreement applies to any law, regulation, procedure or practice regarding any procurement by entities covered by this Agreement"....

• Applicable rules:

"Buy domestic" policies are individually irrational too, by Nick Rowe:

"Most (all?) economists agree that in a global recession, when each country wants to boost demand for the goods it produces, policies which steer demand to domestically-produced goods are individually rational (provided other countries don't retaliate), but collectively irrational when all countries do the same.

I think most economists are wrong. It's not just collectively irrational, but individually irrational as well, at least for countries with flexible exchange rates. "

The NYTimes has this op-ed by Prof. DOUGLAS A. IRWIN:

"WORLD trade is collapsing. The United States trade deficit dropped sharply in November as imports from the rest of the world plummeted in response to the financial crisis and global recession. United States imports from China, Japan and elsewhere declined at double digit rates. The last thing the world economy needs is for governments to give a further downward shove to trade. Unfortunately, we may be doing just that."

He concludes with this note:

"Remember the golden rule, or the consequences could be severe. When the United States imposed the Smoot-Hawley Tariff in 1930, it helped set off a worldwide movement toward higher tariffs. When everyone tried to restrict imports, the combined effect was a deeper global economic slump. It took decades to undo the accumulated trade restrictions of that period. Let’s not make the same mistake again."

read full article at source