The European Union warned the United States today that attempts to enshrine “Buy America” conditions in the country’s economic rescue package could fuel protectionism, worsen the current crisis and lead to a bitter transatlantic trade dispute.

The first openly critical reaction from Europe to President Obama’s ambitious domestic and foreign policy agenda came in a letter from the EU’s ambassador in Washington, John Bruton.

The former Irish Prime Minister urged the new Administration to respect the decision taken by the world’s 20 leading economic nations in Washington last November not to resort to protectionism as a defence against the current crisis.

“Failing this risks entering into a spiral of protectionist measures around the globe, that can only hurt our economies further,” he wrote.

Commenting on the warning a Commission spokesman added: “We are particularly concerned about the signal that these measures could send to the world at a time when all countries are facing difficulties. Where America leads, many others tend to follow.”

The European Commission, which speaks for all 27 EU countries on trade issues, insisted that ring-fencing domestic markets against foreign competition was neither an economic nor legally legitimate route to take.

The Commission believes that attempts to insist that only American iron, steel and manufactured goods are used in projects financed by the $800bn US rescue package currently before Congress violate international trade rules policed by the Geneva-based World Trade Organisation.

In particular, it points to the WTO’s Agreement on Government Procurement (GPA) which allows American companies to pitch for contracts in the EU and European firms to tender in the US.

In careful diplomatic language indicating that the Commission was prepared to lodge a legal challenge against any form of discrimination with the Geneva international trade referee, Mr Bruton noted: “I expect that you will ensure that US obligations under the GPA will continue to be observed.”

Fears of the consequences of European and other companies being locked out of lucrative American contracts were echoed in the European Parliament which is meeting in Strasbourg this week. Syed Kamal, the Conservative’s international trade spokesman, insisted that “Buy American” commitments would send a terrible protectionist signal to the rest of the world.

“Free trade helps facilitate wealth creation and distribution and it assists with keeping the peace. If the EU and the US abandon free trade, so will the rest of the world,” he said.

Mr Bruton sent his letter on Monday to key players in the Obama Administration who have already been confirmed in their new posts. They include Hilary Clinton at the State Department, Timothy Geithner at the Treasury, Peter Orszag at the Office of Management and Budget and Larry Summers, the director of the National Economic Council.

It was also delivered to majority and minority leaders in both Houses and to several committee chairmen.

Times Recommends

• Henning Mankell: ‘If Wallander was alive, I wouldn’t be a friend of his’
• Secret society's skull and crossbones for sale
• Nigerian leader vanishes after medical treatment