The desire by Congress to include “buy American” provisions in the stimulus package has set off alarm bells in the free-trade community. The World Trade Organisation is so alarmed by the move and by other countries’ lurch to protectionism that it is convening an international meeting tomorrow to attempt to defuse the protectionist time bomb.

With reason. During his presidential campaign Barack Obama made it clear he is unhappy with the way the world trading system works – draining factories and jobs from America. And not because American workers are inefficient or lazy.

Rather, it is because the system is somehow rigged against America, with its free-floating currency and open markets. So he thinks. Or thought. Now he says he wants to avoid any measures that “signal protectionism . . . That is a potential source of trade wars that we can’t afford”. Whether he can persuade Congress to delete the “buy American” provisions in the draft stimulus bill is uncertain.

Meanwhile, free traders are scrambling for their dog-eared copies of Adam Smith’s The Wealth of Nations and the great Scot’s explanation of the enriching nature of free trade. “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.” To which those who are upset by the costs of freer trade respond by citing Smith’s defence of retaliation when it “will procure the repeal of . . . prohibitions” imposed by other nations.

Such “prohibitions” on the free movement of goods and services abound. France prevents foreigners from taking over any of its “national champions” (including a yogurt maker), and President Sarkozy has told leading manufacturers to confine layoffs to plants in other countries. In a display of Gaul, French trade minister Anne-Marie Idrac told the Davos attendees she finds it “extremely preoccupying that one of the first acts of the Obama administration could be a measure [“buy American”] that is clearly protectionist and a distortion of competition”.

Russia welcomes the inflow of foreign capital, which it then confiscates and cooperates with the Opec oil cartel to restrict output. The EU restricts imports of US chickens and beef. But, most important to US politicians, China manipulates its currency so as to keep its value down and its powerful import machine humming.

Which is why a rumour circulating in Washington is so interesting. Recall: Treasury secretary Tim Geithner, during the course of his confirmation hearings, told the Senate that he wants to crack down on China’s manipulation of the yuan. Tough talk, especially his use of the word that the Chinese hate – “manipulation”. But rumour has it that Geithner informed the Chinese that, to assure his confirmation, he would be using the m-word. And just last week, Geithner safely installed at the Treasury, President Obama hinted that he is unenthusiastic about precipitating a trade war. Perhaps he has decided such a war would destroy as many jobs as it would create, and that there are better ways to dampen protectionist pressures.

There is an emerging consensus among the policy wonks with access to the president and his advisers that a trade war can be avoided if several new policies are adopted. The first would be to find some way to compensate the innocent bystanders, those workers who have lost their jobs to foreign competition, much of it from the more than one billion workers in China and India who have, in recent years, entered the international labour force. The various programmes now in place are too complicated, too restrictive, to provide enough relief, and the tax laws too tilted in favour of investing overseas rather than in America, say the Obama team. Some method must be found to share the gains of the winners – Wal-Mart shoppers – with the losers. That has nothing to do with the efficiencies of free trade, but with an equitable sharing of itsbenefits that would dampen congressional enthusiasm for protectionism.

Then, something must be done to persuade protectionist-leaning legislators and their trade-union masters that China can be brought into the international trading system as a full and fair partner. That won’t be easy. The country’s communist leaders have built their economy around the jobs created by exports; domestic demand is too limited to absorb all the job-seekers in China, including the 20m rural Chinese thrown out of work in coastal factories and heading home.

The nation’s rulers will be willing to bring their currency more in line with its market value only if pressured to do so. And America, in debt to China to the tune of billions of dollars, is not well positioned to apply that pressure. Waiting in the wings is New York Democratic senator Chuck Schumer, who wants to levy a tariff of 27% on Chinese products to offset the regime’s currency manipulation. And soon to come is the administration’s report to Congress on whether China is, indeed, engaging in such manipulation. Geithner has to write that report, and it won’t be easy for him to get around his earlier testimony unless he can wring some at least cosmetic concessions from his friends in China.

But this administration knows that in the end its success will be measured by its ability to create jobs – millions of them. Best done before the 2010 congressional elections, but definitely in time to affect the presidential battle in 2012. If that means living with the long-run inefficiencies created by trade barriers, so be it. Obama’s flaccid performance during the crafting of the stimulus package has convinced observers that the president will not or cannot stand up to a Congress that is dominated by members of his party who are ideologically on his left, and for whom the displeasure of the trade unions can mean early retirement, and a return to deserved obscurity.

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