OTTAWA–International Trade Minister Stockwell Day is holding out hope that Canada can avoid a disastrous trade war with the United States sparked by protectionist Buy American provisions in President Barack Obama's proposed economic stimulus package.

"I'm cautiously optimistic that something can be worked out," Day said in a telephone press conference from Davos, Switzerland, where he is attending the World Economic Forum.

Fears of protectionist measures in Obama's $820 billion (U.S.) pro-growth plan were a source of widespread concern at the annual gathering of international business leaders and political figures at the Swiss ski resort.

Prime Minister Stephen Harper and other world leaders have expressed alarm about proposals before the U.S. Congress that could require that all steel or manufactured goods purchased with money from the stimulus package be made in the United States.

But Day said his talks in Davos with Peter Allgeier, the acting U.S. trade representative, led him to think that Canada, America's biggest commercial partner, might be exempted from the Buy American stipulation.

"In no uncertain terms they're telling us: `We hear you, we recognize you've got concerns with this, we're doing some work. Keep talking to us, and stay tuned.'"

That, said Day, "is sort of the message I'm getting from the U.S. trade representative."

Legislation containing Obama's stimulus package has passed the House of Representatives.

It contains a rider requiring iron or steel used in projects funded under the $820-billion plan be made in the United States.

A version of the bill that goes to the Senate this week expands the stipulation so that most foreign-made manufactured goods would be barred from these projects.

The issue presents Obama with his first major dilemma.

While the Buy American provision would be seen around the world as an abandonment of Washington's traditional support of free trade, it could be a domestic political winner among protectionist lawmakers and the unions that helped Obama capture the White House.

So far, the president has not taken a position on the Buy American strategy, but a White House spokesperson said on Friday that the new administration is examining how to handle the issue.

Day said he is encouraged by the White House's willingness to consider Ottawa's interests.

"Their awareness of our concern, and wanting to do something, appears genuine at this point. And we'll just keep working closely with them," Day said.

"The last thing we need now is a retaliatory trade war."

But he cautioned that he could not guarantee that Canada would be spared the impact of the protectionist rules being considered in the economic stimulus package.

Loading... Loading... Loading... Loading... Loading... Loading...

And Day hinted that the trade issue, if unresolved, has the potential to cast a shadow over Obama's visit to Canada on Feb. 19.

The trip, the first foreign foray by the president, will come just a few days after Obama hopes to rush the economic stimulus package into law.

Asked if that could be an irritant when Obama meets Harper in Ottawa, Day said: "You can clearly make suppositions from there that if it's not resolved by the time the president arrives here, I know how concerned our PM is about this.

"You can do your guesswork from there."

Day also said Canada is preparing for the worst by assiduously examining its legal options under the open-trading regimes of the Canada-U.S.-Mexico NAFTA agreement and the World Trade Organization.

Finance Minister Jim Flaherty, also in Davos, told reporters the United States should expect stiff resistance from its trading partners around the world if the Buy American provisions remain in the stimulus package.

"There is a clear consensus here that protectionism needs to be avoided, that protectionism is a direction we need not go," Flaherty remarked.

But he said it's obvious that, in the midst of a recession with plummeting employment, protectionist measures can be "populist and popular in the short term."

However, such beggar-thy-neighbour policies create long-term damage to the world economy, he added.

Both Flaherty and Day warned that protectionist polices could spur retaliation around the world and choke off economic growth in a repeat of the Great Depression of the 1930s.

Flaherty said that, with the world mired in a recession, the mood at Davos this year was "quite sombre."

Read more about: