In the Nation's Interest
Buying America Won’t Make Us Better Off
The Senate agreed Wednesday (February 4, 2009) to water-down the highly controversial ‘Buy America' provision of President Obama's stimulus bill. If the revised language of the bill means what it says--that the provision must be "applied in a manner consistent with U.S. obligations under international agreements"--we're relieved. But the battle, we're sure, is not over yet. The ‘Buy-America' clause still puts a simple-minded political calculus before the collective interests of all Americans. It still risks job loss across several export-producing sectors, all of which will need unfettered access to international markets to help pull the U.S. economy out of the current recession. And it still constitutes a potential set-back to international trade, with material welfare implications for folks at home and abroad.
The House version of the ‘Buy America' provision mandates that infrastructure projects created and/or completed with stimulus money use only iron and steel produced in the United States. The Senate initially added the condition that all stimulus-financed ‘manufactured goods' be made in America. But late Wednesday night, at the urging of the White House, the Senate approved an amendment recognizing the obligations of the United States under existing international agreements, such as NAFTA and the WTO.
The impulse to support home-based industry is normal and logical to an extent. It stems from the same politically potent but intellectually dishonest critique of free trade that's united the populist right with the protectionist left: "Free trade hurts the American worker," or, more dramatically, "Free trade kills jobs."
In stimulus-speak, politicians on both sides of the aisle seem to be making a slight variation of these arguments, namely, that absent protectionist policies, the money spent to jump-start the American economy will disproportionately benefit China's economy; that infrastructure projects will rely on relatively cheaper raw materials produced by foreign firms, thus creating a policy externality whereby the U.S. taxpayer gets stuck with the bill but other countries' businesses and workers get the buck. The "Buy America" clause, or perhaps more aptly titled "Don't Buy China, India, Brazil, or Russia," becomes a way to reassure voters that the stimulus will create jobs at home, not abroad. It becomes the solution to a political problem, not an economic one. For example, Sen. Byron Dorgan, chief proponent of "Buy America," remarked last week that "If we want to put people back on payrolls to try to put this country back on track...the way to do that, with the hundreds of billions of dollars that are in this bill, is to say, at least try to buy things that are made in America." He went on to add: "That is not unfair. It is not selfish; it is the right thing to do."
The lure of such argumentation is one reason why we have joined in international agreements and passed national laws to make it much more difficult to follow this false path. The same illogic applies to each nation that is trying to lift itself out of an economic recession. Unless each nation shuns the temptation to ringfence for itself the benefits of government programs, all will lose out. Such was the history of the Great Depression and the result of the Smoot-Hawley Act in the United States and similar protectionist acts elsewhere.
"Buy America" will likely cost more jobs than it saves, rendering the economic argument false on its face and the political argument shortsighted. According to a recent economic study, the House "Buy America" provision would save just about 1,000 U.S. jobs, as steel is very capital intensive.
As Gary Hufbaur and Jeffrey Schott, of the Peterson Institute for International Economics and authors of the study, remarked, "In the giant U.S. economy, with a labor force of roughly 140 million people, 1,000 jobs or less is a very small number." These gains could be wiped out entirely (and then some) by the loss of U.S. sales abroad. Hufbaur and Schott calculate that losing 1 per cent of exports destined for overseas government procurement would cost 6,500 jobs; losing 10 per cent would eliminate 65,000 jobs. Even the U.S. steel industry could lose jobs if trading partners enact protectionist measures that put the steel industry, which exported 9 million tons of steel in 2007, at a comparative disadvantage. And despite the Senate's effort to quell anger abroad, the threat of beggar-thy-neighbor protectionism is real.
Our trade partners are already telling us what the consequences of a "Buy America" provision might be. Australian Trade Minister Simon Crean said, "This is the wrong course of action; they [the U.S.] have got to reverse their decision." Crean added that "it will result in retaliatory action; it will result in a trade war." Pascal Lamy, Director General of the WTO, rightly remarked that "If you start killing imports, you will kill exports."
In an interdependent world reliant on international supply chains, slowing or shrinking trade flows reverberates throughout the global economy, cutting production levels and shedding jobs. During a global recession, as China and other major trade partners consider large stimulus projects while at the same time standing firmly committed to global trade, preferences for domestic producers only put American firms at a competitive disadvantage. And while the U.S. might technically be within its right to discriminate against China and other non-signatories to the government procurement code, doing so risks jeopardizing our increasingly important relations with China. According to Walter Russell Mead of the Council on Foreign Relations, "If at this time of crisis we slam the door in China's face, or China thinks that that's what we're doing and the Europeans are doing...that is probably the most dangerous thing we could do."
All of these outcomes bear materially on the long-term interests of American citizens. And all of them should be avoided like the proverbial plague. But the current debate over the "Buy America" provision raises a question perhaps more pertinent to our future common prosperity: On matters related to international economics, how will the United States lead?
In his inaugural address, President Obama, referring to national security strategy, remarked that "we reject as false the choice between our safety and our ideals." He went on to add that "those ideals still light the world and we will not give them up for expedience's sake." These lessons apply also to international trade: we should reject as false the choice between our common prosperity and those same ideals that founded our nation and have sustained our commitment to trade over all these years. It's time to put petty politics aside, and lead.
Commentaries are the views of the authors and do not necessarily represent policies of the Committee for Economic Development.