THE EUROPEAN Union warned of possible trade litigation against the US if Washington pressed ahead with a “Buy American” provision in its forthcoming economic stimulus Bill.

EU officials have expressed concern that the requirement for companies to use US steel and manufacturing products in projects funded by the Bill could encourage a wave of protectionist measures from other countries.

A study by two trade experts at the Peterson Institute, a leading Washington think tank, concludes that if the measure provokes retaliation it could cost more US jobs than it creates.

The European Commission says it will examine any legislation to determine whether it violates a World Trade Organisation (WTO) treaty signed by the US, EU and Japan. Signatories of the Government Procurement Agreement (GPA) must open government contracts to foreign companies.

“If the provisions finally passed by the Senate and approved by President Obama infringe the provisions of the GPA, to which the US is a signatory, this is something we will have to consider taking them to the WTO over,” said Peter Power, EU trade spokesman. He indicated that the EU was hoping to make its position clear to Washington before a Bill was approved.

The US steel industry has strongly backed the provisions, but business associations representing multinational companies have been critical.

John Castellani, president of the Business Roundtable, an association of chief executives, said yesterday: “My counterparts in Europe and Canada and around the world have been calling me and saying: this is a really bad idea.”

Barack Obama yesterday sought to reclaim the initiative in the debate over the proposed US fiscal stimulus amid mounting concern in the White House that Republicans are winning the battle for public opinion.

A group of Republican senators offered a $445 billion alternative plan to boosting the ailing economy, about half of which would be in the form of tax cuts.

The stimulus package would include cutting payroll and income taxes for a year, as well as lowering the 35 per cent corporate tax rate to 25 per cent and offering home buyers a tax credit worth $15,000 or 10 per cent of the purchase price, whichever is less.

Senators John McCain, John Thune, and Mel Martinez were among the group of lawmakers offering the alternative to the $885 billion package crafted by Democrats who control the Senate.