The Real Costs of ‘Buy American’
Feb 06, 2009
You could say it’s been a good week for steel. The Pittsburgh Steelers won the Super Bowl. A guy named Michael Steele became the chairman of the Republican Party. And U.S. steel producers are giddy about the economic stimulus bill winding its way through Washington.
Steelers fans and Republicans are entitled to whatever joy they feel about these recent events. All of us, however, will pay a high price for Big Steel’s special-interest muscle.
A provision in the economic stimulus bill would require government contractors to purchase steel and iron from domestic producers. Another would demand the Transportation Security Administration buy uniforms made from American textiles.
I understand the emotional appeal of requirements to “Buy American.” They certainly sound patriotic. The members of Congress who sponsor them may even believe they’re acting patriotically. Everyone wants American workers to prosper, after all.
Yet this policy is fundamentally misguided. It would raise the cost of infrastructure projects that are already very expensive --and that means fewer of them actually will get done. At a time when Americans are struggling economically, our public officials shouldn’t squander taxpayer dollars for the sake of feel-good rhetoric. Instead, they should try to make the most of what they’ve been given.
These so-called “Buy American” provisions pose a major test for President Obama in the early days of his administration. Does he understand that the free flow of goods and services across borders promotes economic prosperity? Or does he think that our country can somehow defy the lesson of the 1930s, when the protectionist Smoot-Hawley Tariff Act transformed a bad recession into the Great Depression?
Recent signs are positive. On Tuesday, President Obama voiced some doubts about the “Buy American” scam: “I agree that we can’t send a protectionist message, “he said. “I think it would be a mistake….at a time when worldwide trade is declining, for us to start sending a message that somehow we’re just looking after ourselves and not concerned with world trade.” Obama may want to copy the vice president on his next trade-policy memo. Last week Joe Biden made it sound as if “Buy American” isolationism is just fine. “I don’t view that as some of the pure free-traders view it, as a harbinger of protectionism,” he said. “I don’t buy that at all.”
Biden may not have noticed the irony of his words: “I don’t buy that at all” is precisely the problem. Telling contractors that they can’t purchase material from Big Steel’s rivals limits competition, which leads to wasteful spending.
When California renovated a bridge over the San Francisco Bay in the 1990s, it had to comply with a state rule that required the use of domestic steel unless it was 25 percent more expensive than foreign steel. So guess what? Domestic steel producers charged 23 percent more than imported steel. Douglas Irwin of Dartmouth recently described the unfortunate result: “While this is a windfall for a lucky steel company, steel production is capital intensive, and the rule makes less money available for other construction projects that can employ many more workers.”
It turns out that “Buy American” doesn’t help very many Americans. Instead, it’s a handout to a special-interest group with lobbying clout. Everybody else loses, including American workers whose projects don’t receive funding and American drivers who can’t cross new and improved bridges.
This debate is about far more than what’s in the economic stimulus bill, of course. Protectionism has a way of spreading like a bad virus. As soon as we start building barriers to what other nations can sell here, they’ll start building barriers to what we can sell there. This is precisely what happened in the 1930s, when a struggling global economy came to a grinding halt.
Farmers appreciate the importance of international trade because about one-third of what we grow is sold to foreign consumers--people who already choose to “Buy American” because of the quality of what we produce. The last thing we need is to lose a share of the overseas markets that we’ve earned because Washington wants to pay off a completely different industry.
But that’s what could happen--if Japan imposes a “Buy Japanese” law and Canada institutes a “Buy Canadian” law, all because politicians in Washington sparked a new and unnecessary trade war.