Suppose the Democratic Congress passes and President Obama signs a stimulus bill that triggers a worldwide Depression rather than forestalling one? We may be on the brink.

Like many Obama supporters, I've spent a lot of time lately fretting about what Republican opposition might do to the stimulus. Will they cut out $200 billion? Will they raise the ratio of tax cuts to spending?

But those concerns pale beside the "buy American" provisions in the bill. In the House version, these stipulate that any iron and steel used for projects funded by the bill be produced in the U.S. The current Senate version extends the requirement to all manufacturing products.

Leaders in Europe and Asia are warning that these provisions could trigger a global trade war -- a cascade of "beggar-thy-neighbor" protectionist measures. Economists and financiers across the political spectrum echo that warning (two are noted in the prior post). As the world looks to the Obama Administration for leadership, a protectionist stimulus would cause swift and widespread disillusion -- and equally widespread retaliation.

Most galling, as a new Peterson Institute study makes clear, the provision would trade U.S. global credibility for a pittance -- approximately 1,000 steel industry jobs in a labor force of 140 million people.

The negative effects of the provision may be moderated in various ways. It may be jiggered to remain in nominal compliance with WTO and NAFTA commitments. Specifically, additional cover could be built into its current public interest waiver, stating that the "buy American" provision will be waived where it proves "inconsistent with the public interest." The Peterson brief suggests that negative effects could be mitigated "by stating explicitly...that the public interest waiver is intended to be used to avoid violations of US trade obligations." Another option, according to the Peterson brief, is a presidential statement (signing statement?) that the U.S. will respect its international obligations.

Even with such a caveat, however, as the Peterson brief and Jagdish Bhagwati point out, the provision would cut out major steel suppliers hat have not signed the WTO's Agreement on Government Procurement -- namely China, India and Brazil. Yes, the measure with the appropriately positioned waiver could be used to "encourage" those countries to sign on. But it will more likely prompt them to impose their own import restrictions.

It's distressing that the Peterson brief appears to assume that the political imperative to include this poison bill is too strong to resist. What an opportunity this is for Obama to walk the bipartisan walk and outflank even most Republicans from the "right" -- though part of his broader political message should be that getting a free trade/fair trade balance right does not fall into "the tired categories of left and right." The real issue, framed trenchantly by the Peterson brief, is leadership:

Very early in his presidency, George W. Bush's free trade credibility was gutted when he kowtowed to the steel industry and imposed tariffs on steel imports. What a bitter irony if Obama makes the same mistake in his first month in office - selling the U.S.'s global leadership birthright for a mass of protectionist pottage.

UPDATE: Buy American provision has been softened but not dissolved - FT: