Lord Mandelson risked causing the first clash between Britain and President Obama's Administration yesterday with an outspoken attack on US plans to launch a “Buy American” campaign.

The Business Secretary turned his fire on a provision written into Mr Obama's $825 billion fiscal stimulus plan presently in the US Congress. If passed into law, the proposal would prohibit foreign-made steel from being used in US projects paid for by the economic rescue package.

In a broadside against the plan, Lord Mandelson said national schemes to encourage countries' own consumers to buy products made at home created a serious danger of igniting protectionist trade confrontations.

“I understand why people want to make their own choice. That is why if these ‘Buy American', or ‘buy this', or ‘buy that' campaigns get underway you will stand at risk of translating that into real barriers to trade, which is the last thing we need in the global economy,” he said.

His warning came as he joined Gordon Brown at the forefront of a wave of warnings against protectionism made during the World Economic Forum in Davos.

Lord Mandelson condemned what he said were emerging protectionism moves being taken by some governments across the 27-nation European Union. “We created the single market to sustain economic growth and not to start turning in on each other.” However, at a keynote lunch in Davos for British business leaders, he emphasised that the trend was evident not just in Europe but across the world.

“Global trade is going to go backwards this year for the first time since 1982. I think that there is a real risk that governments and businesses will see protectionism as the necessary medicine in these conditions but it is also the poison as far as the recovery is concerned,” he said. “That is the lesson we should draw from the 1930s — mistakes we should not repeat in the 21st century.”

Lord Mandelson reinforced an earlier warning from Gordon Brown over what he called “financial mercantilism” - an emerging trend that is seeing banks pull back billions from foreign markets to their national home bases.

The Prime Minister said that this financial mercantilism would put the prospects for a recovery in grave peril.

He said: “This, if we do nothing, will lead to a new form of protectionism, a retreat of globalisation and a reduction of trade and cross-border activity that will be followed quickly by the old trade protectionism of the past. This is a time not just for individual, national measures to deal with the crisis. This is the time for the world to come together as one.”

Some observers were quick to accuse the Prime Minister, Lord Mandelson and Britain of hypocrisy. They pointed out that the Government and Alistair Darling, the Chancellor, were pressing Britain's biggest banks to give first priority to lending to British business and corporate borrowers.

Just a day after the International Monetary Fund sounded a warning that the UK was most exposed among the world's big economies to the global slump and would shrink this year by 2.8 per cent, the Prime Minister renewed his claims that Britain was better placed than other countries to weather the storm.

Challenged at a press conference on how this view was compatible with the IMF's assessment, Mr Brown pointed to the national debt remaining lower than in other economies, even though it is rapidly climbing, with the Government set to borrow £118 billion or more in the 2009-10 financial year alone. He said Britain benefited from “low debt, low inflation, low interest rates, low corporate debt” and was “making the right decisions about the future”.

Lord Mandelson admitted later that it remained vital that the Government retained the confidence of the international financial markets or it could find itself unable to finance the spending needed for fiscal stimulus. He said that an evaporation of that confidence would put recovery in jeopardy.

“If we don't continue to enjoy the confidence of the markets in what we are doing in our fiscal stance and our borrowing, then it would make it very much more difficult, if not impossible, to sustain the stimulus.”

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