Feb. 3, 2008 -- Washington is planning billions in subsidies for the ailing automobile industry, and the US Senate is debating a 'Buy American' provision in its economic stimulus package. The European Union fears the US is trying to seal off its market -- and is using its diplomatic arsenal in a bid to stop the move.

The European Union is unhappy about a "Buy American" clause in the United States bailout program making its way through Senate this week that officials say reeks of protectionism and could threaten to spark renewed trade wars between the US and Europe.

"President Obama has a major opportunity to give leadership to the world," said the EU's ambassador to Washington, John Bruton, on Monday. "If the first major piece of legislation that he signs is one that is seen as damaging to the economic interests of other countries in a way that is unnecessary and wasteful, then his capacity to give the sort of leadership the world needs at this time is considerably and unnecessarily reduced."

Last week, Congress prompted international concern that its planned bailout package would include protectionist measures that could seal the US market off from foreign competitors, including those in export-dependent Germany.

Congress, controlled by President Barack Obama's Democratic Party, is calling for a provision that would only allow US steel and iron to be used in infrastructure projects planned in the $825 billion (€643.2 billion) bailout package. At issue is a sum of about $300 billion that would be invested in infrastructure projects in the coming years like sewage treatment plants, new railroads and bridges as well as the modernization of the US electrical grid, wind farms and solar panels.

EU Ambassador Bruton, in a letter sent to top US politicians including Secretary of State Hillary Clinton, said that, if approved, the measure would set a "dangerous precedent." According to the Associated Press, which obtained a copy of the letter, Bruton wrote that the US and other countries had pledged not to resort to protectionism in dealing with the crisis at a meeting of world leaders in November. Failure to meet that obligation "risks entering into a spiral of protectionist measures around the globe that can only hurt our economies further."

In Germany, the world's largest exporter, companies export goods worth some €70 billion to the US each year.

The Obama administration has not yet stated its official position on the "Buy American" clause, but Vice President Joe Biden said in an interview last week, "I think it's legitimate to have some portions of 'Buy American' in it."

On Monday, however, the chairman of the conservative Republican Party in the Senate, Mitch McConnell, said he opposed the measures.

"I don't think we ought to use a measure that is supposed to be timely, temporary and targeted to set off trade wars when the entire world is experiencing a downturn in the economy," McConnell said. "It's a bad idea to put it in a bill like this, which is supposed to be about jump-starting the economy."

European steel manufacturers have already called on the European Commission to sue the US at the World Trade Organization if necessary. Bruton said that any "Buy American" clause would, at best, be legally questionable. And, in his letter, Bruton wrote: "Measures of this nature, if they breach WTO rules, are likely to be the subject of legal action. There is always the possibility of retaliatory measures to be taken."

On Monday, the US Senate began negotiating the economic stimulus package after Congress passed an €819 billion bill. In the Senate, however, that amount is expected to rise to up to €900 billion.

In the Senate version, the "Buy American" clause goes even further, stating that funds from the stimulus package cannot be used "unless all of the iron, steel and manufactured goods used in the projects are produced in the United States."

'A Negative Signal'

In both the House of Representatives and the Senate, the Republicans have broadly rejected the protectionist provisions. They have also criticized the package for not containing sufficient tax breaks. The Republicans believe the package, in its current form, won't have the immediate stimulus effect the Democrats are hoping for.

White House spokesman Robert Gibbs denied those charges on Monday. He also said that President Obama would review the "Buy American" provisions, and that changes were likely in the Senate draft before it is put to a vote on Friday. Afterwards, the drafts of the House and Senate version must be reconciled before it goes to President Obama for his approval. Given the divisions over the measures, Obama himself has expressed readiness to compromise. Obama is seeking to implement the stimulus package by mid-February.

In Germany, industry insiders are viewing the draft legislation with skepticism. "The fact that this clause even came to be is a negative signal that worries us," said Sigrid Zirbel, regional director for America at the Federation of German Industry (BDI), who said she viewed the legislation as a "sign things are moving in the direction of protectionism." But she said any final conclusions would have to be drawn after the bill is finalized.

On Friday, White House spokesman Gibbs said the Obama administration would review the "Buy American" provisions. "It understands all of the concerns that have been heard, not only in this room but in newspapers produced both up north and down south."

German Chancellor Angela Merkel would likely welcome any shift in American thinking. She has warned against national subsidies and protectionism in the wake of the global economic and financial crisis. "I am very wary of seeing subsidies injected into the US auto industry," Merkel said last week. "Such periods must not last too long because they inevitably lead to a certain degree of distortion and, quite frankly, constitute protectionism."

Merkel was also speaking out against comments made by the French government. On Friday, French Economics Minister Christine Lagarde described a little bit of protectionism during times of crisis as a "necessary evil."

-- dsl with wires