President Obama supposedly placated fears that his $787 billion "stimulus" package would spark a trade war by voiding the language referring to stimulus-receiving projects that would have been required to exclusively buy "American" goods and services.  Unfortunately, those fears were actually well-founded: there is already evidence that "Buy American" is turning the friendliest of trading partners against each other, and threatens to escalate into a full-fledged and self-mutilating trade war.

According to this article, the authorities running stimulus-receiving projects are actually engaging in protectionism anyway, by explicitly denying "foreign" producers the opportunity to submit bids for contracts.  The immediate negative impact of these policies is being felt at home and abroad:

"There are reports of companies forcing supply chains to use US products for fear of losing contracts. Duferco Farrell, a Pennsylvania-based steel company, has warned it may have to cut 600 staff after its biggest client said it would cancel orders because Duferco's products were not "buy American" compliant.
Others say some projects are not achievable with only US-manufactured products.
Agnes Fowler, finance officer for Conrad, a town in Montana, had a project that could use the money: a $5.5m wastewater treatment facility. But it needed parts US companies did not make. A lot of paperwork ensued. "There were so many strings attached that we didn't realise were there. There are some communities that are just saying 'we can't afford to take the free money'."

Predictably, the inward-looking focus is provoking resentment, and in some cases tit-for-tat retaliation, in America's closest trading ally:

"Canadian municipalities launched boycotts of US-made products in public works projects in reaction to America's stimulus package, which Canadian companies say is shutting them out of contracts."

Obama's sought to placate those worried that his Government's response to the economic crisis would isolate the American economy and trigger a 1930's-like wave of protectionism by assuring that existing U.S. trade agreement commitments -- especially those under the Government Procurement Agreement, which provides clear rules that government contracts must be won competitively and not just handed out to crony local companies, and the North American Free Trade Agreement (NAFTA) -- would be honoured.  However, those assurances have proven largely useless because of the nature of the stimulus package.

"This is because more than a third of the stimulus money is being disbursed at a local level by states and local authorities. Unlike the federal government, many authorities are not party to pacts such as the North American Free Trade Agreement and the government procurement pact of the World Trade Organisation."

While these trade scraps are largely confined to companies and industries directly involved with government-run projects, there are just a few short steps between the current situation and a full-fledged trade war, involving more arbitrary and far more harmful trade barriers.  "Buy American" might soon lead to "Buy Belgian" and, of course, "Do Not Buy Belgian".  That would be a disaster for the global economy and must be avoided at all costs. 

David Ricardo, the first to speak eloquently on the laws of comparative advantage and why politicians must not seek to ignore them, must be spinning in his grave.