DAVOS, Switzerland - The Canadian government expressed optimism Saturday that the U.S. might climb down from a so-called "Buy American" trade policy that several countries have warned could start a trade war.

Conciliatory signals from the White House and from American officials at the World Economic Forum in Davos, Switzerland, have fuelled hopes for a resolution.

Canada says a range of possible solutions is being discussed -- including an exemption for Canadian goods.

As currently written, the Obama administration's massive stimulus bill would require major public works projects to favour U.S. steel, iron and manufactured goods over imported ones.

Canada and other U.S. trade partners have warned that that's precisely the type of protectionist tit-for-tat that turned the stock market crashes of 1929 into the Great Depression.

But International Trade Minister Stockwell Day said he's hearing supportive messages from American officials in Davos, including from the acting U.S. trade representative, Peter Allgeier.

"I'm cautiously optimistic that something can be worked out," Day said in a conference call.

"In no uncertain terms they're telling us, 'We hear you, we recognize you've got concerns with this, we're doing some work. Keep talking to us, and stay tuned,' is sort of the message I'm getting from the U.S. trade representative."

Day compared the provisions in the stimulus bill to the U.S. Smoot-Hawley Act of 1930, a tariff law which many economists believe fuelled the Great Depression.

That bill set record-high tariffs on more than 20,000 goods imported to the U.S. Over 1,000 American economists warned against it in a petition, but then-president Herbert Hoover signed the bill.

Countries retaliated swiftly, with Canada slapping tariffs on 16 American products that accounted for about one-third of imports from the U.S., and America's global imports and exports both plunged more than 60 per cent.

The current controversy has placed the new Obama administration in a political quandary.

On the one hand, the U.S. risks angering its allies and triggering a trade war at the worst possible moment, in the midst of a global economic downturn.

On the other hand, any administration retreat could infuriate two powerful constituencies: the unions who helped get Barack Obama elected, and the protectionist members of Congress whose votes the White House will need to pass any future legislation.

The controversy has begun generating news coverage in the U.S. and an Obama spokesman was grilled over the issue at a press briefing on Friday. White House press secretary Robert Gibbs suggested changes could be made.

"I'm going to say this for, like, the fourth time: The administration is reviewing that provision," Gibbs said.

"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."

If the wording of the legislation can't be changed before the U.S. Senate votes on the stimulus bill, Day suggested Canada or other countries could still be exempted afterward.

Day also said the president has the power to overturn legislation that violates America's international agreements.

"I want to be clear: I'm not saying (Obama) is going to do that. But that is within their legal framework, for him to do that, if he makes that determination," Day said.

He said he believed the White House was acting in good faith.

"Their awareness of our concern, and wanting to do something, appears genuine at this point. And we'll just keep working closely with them," Day said.

"The last thing we need now is a retaliatory trade war."

But those provisions are likely to find support among Americans outraged that money from a stimulus package likely to top $800 billion could go to foreign competitors of U.S. firms.

"I believe that when taxpayer dollars are used, they should support the things produced here at home," Democratic Senator Byron Dorgan, author of one of the provisions, said in a statement.

Many analysts say the measures reflect the interests of small sectors over the larger economy, which could suffer from reduced trade and higher steel prices.

"The result, according to my calculations, is that the U.S. will lose more jobs than it will gain," said Gary Hufbauer, an economist with the Peterson Institute for International Economics, a Washington think-tank. "We are going to poison the wells of world commerce, if we do this."

The provisions are in a bill already approved by the U.S. House of Representatives, and in a stronger version currently under consideration in the Senate.

Both versions of the bill include language that would allow the president to waive the protectionist measures if it's in the best economic interests of the United States.

Federal Finance Minister Jim Flaherty, also at Davos, called protectionism a short-sighted response to economic problems.

He said it plays to populist sentiments, and gives people the impression that the government is standing up for workers who've lost their jobs, but causes far more damage in the long run.

Flaherty also said he was hearing encouraging things in Davos.

But he warned that Swiss summits wouldn't be where protectionist threats would usually arise.

"The danger is not here. The danger is when politicians go back to their home countries," Flaherty said in an interview.