“Buy American” is bad for the economy

The massive economic stimulus plan contemplated (now passed) by Congress has one buried feature that is wrong-headed:  “Buy American”.

The idea behind “Buy American” is seductive to President Obama and Congress.  To shore up the economy and protect American jobs, infrastructure projects will be forced to use only American steel, iron, and other construction equipment like picks and shovels.

“Buy American” is a mistake.  It will cost American jobs and cost international cooperation in American security.

Win some, lose some more
“Buy American” can generate 1,000 jobs in the steel industry according to analysts at the Petersen Institute for International Economics.  The cost? 63,000 Americans will be added to unemployment lines when our trading partners retaliate.

And retaliate they will.  While United Steelworkers Union President Leo Gerard claims that “Buy American” is not protectionism, the EU has already threatened retaliation should the plan go through, with similar saber-rattling from other friendly nations like Canada and Mexico.  Together, these trading partners account for nearly half of all US trade (US Census Bureau).

Economic retaliation against the US could begin an economic downward spiral similar to the Great Depression.  The protectionist Smoot Hawley tariff act of 1930 increased tariffs on imports, which quickly led to retaliatory tariffs on US exports.  The result? Unemployment rates increased from 8.7% to 24.9% by 1933.

That’s 1 out of 4 Americans out of work.

Manufacturing job losses have been a legitimate concern for years.  Nevertheless, U.S. exports have risen by nearly 70% in the last decade, driven by sectors in which America is the global leader – high tech and services.  The venture capital industry is the envy of the world, with world leaders trying to recreate the “Silicon Valley model” of entrepreneurship and technology.  If the goal of the stimulus plan is to revive the US economy and the US steel industry in particular, a far better use of the funds is to invest in technologies and education that increase US industrial competitiveness.

We are not the lowest cost manufacturer of most items. We are not a standalone economy.  Most US households own cars from Japan, clothing from Malaysia, and dog food from China.  The popular Apple iPhone is “designed in Cupertino, CA” but assembled mainly from parts sourced in Singapore and Taiwan.  Apple makes more profit (50% according to iSuppli) than their entire foreign supply chain.  And they would make substantially less profit if they had to produce the whole thing in the USA.  It’s not Apple’s specialty.  The healthy flow of trade keeps our standard of living the envy of the world and reduces the impact of this economic crisis.

Trade One War for Another?
As we begin the long process of restoring our international image as a world leader and beacon of freedom, we are about to break a commitment that could squander the international goodwill and spirit of cooperation inspired by the inauguration of President Obama.

As the worldwide financial market spun out of control last year, representatives from twenty nations – the so-called G-20 – met in Washington to devise a global strategy for containing the economic crisis. The centerpiece of the strategy was simple: no new trade barriers. The logic of this move was equally simple: we may not know how exactly to get the economy moving again, but we do know that increased trade barriers will make the situation worse.
If we renege on the G-20 commitment we made just three months ago, we likely create greater difficulties across our relationships. Canada, Germany, Britain, Italy, and France are all NATO allies deployed in Afghanistan, and are all among our top sources of steel. They are likely to be less willing to deploy more troops in Afghanistan if we harm their economies. China, our second largest source of steel, will be less willing to reexamine its artificially undervalued exchange rate – a major cause of job losses in the United States. And protectionism will further exacerbate a belligerent Russia, another major steel resource.

A New Deal Better
Smoot Hawley led not just to a trade war, but deepened the destabilizing economic conditions that led to the rise of Adolf Hitler, Nazi Germany and the last World War.  While the world landscape is drastically different than the 1930s and “Buy American” is smaller than Depression era policies, America deserves a better deal.  A New Deal Better between the laissez-faire dismantling of financial regulation that contributed to our current economic crisis and the protectionism represented by “Buy American”.  Investments that will build infrastructure, educate the workforce, and stimulate innovation for the future.  Investments that will reap benefits decades in the future.  Investments that can start immediately.