“Buy American” Policies: More Hurtful than Helpful?

Last week’s $787 billion dollar stimulus promised aid to education, infrastructure projects, jobless benefits, and a whole host of other programs designed to stimulate the economy. While the bill was pretty straight forward, there were a few provisions that stood out and inevitably were nixed (i.e.,  the clause specifying that no federal money was to go to former Illinois governor Rod Blagojevich). However, one short, but very controversial clause on page 189 did make it to the final bill. There, section 1605 states: “None of the funds appropriated or otherwise made available by this Act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron, steel, and manufactured goods used in the project is produced in the United States.”

There are some exceptions (for instance, if the cost of American raw materials will increase the overall cost of the project by 25 percent, the party purchasing the materials can apply for a waiver) but the real significance of this clause is that it sets a very negative and narrow tone on the global economic crisis. Even President Obama stated in an ABC interview that this stipulation was “a potential source of trade wars” and John Bruton, the EU ambassador to the US, cited it as a “dangerous precedent.” Although the provision does state that it “shall be applied in a manner consistent with United States obligations under international agreements” it still forces many companies, such as the struggling Caterpillar, to spend more of their fiscal resources on raw materials instead of preserving jobs or raising wages. Also, given the fact that 37 percent of all manufactured goods sold in America are not made here, this stipulation seems hard-lined and, at some level, woefully misguided.

Moreover, the other underlying and more significant impact of this “Buy American” policy is this: If American companies are forced to purchase domestic raw goods for the public works projects, then what is stopping other countries from enacting the same jingoistic economic policies? This economic crisis is a global one and if every country decides to enforce a “buy me first” approach, this crisis will get far worse before it gets better. Not long after Congress announced its plan, major international news outlets such as Japan Today, Canada’s CBC NEWS, and China’s Xinhua criticized the measure. The International Herald and Tribune also noted that the United State’s protectionist policy could incite a backlash in which other nations stipulate a Don’t-Buy-American policy on foreign goods.

Although I understand Congress’s desire to promote the construction of new roads and bridges, green technology, and car manufacturing while supporting what little domestic manufacturing industry we have left, the reality is that (a) we don’t produce enough of these materials to support the sweeping projects they want to see enacted, and (b) even if we did, we may be shooting ourselves in the foot, so to speak, if we don’t work to stimulate other nations’ struggling economies in the process of stimulating our own. Maybe this approach would be acceptable, or even relevant, if this were just an ordinary American recession. But we are in the midst of a global crisis, and our economy will not get better if everyone else’s is suffering.

I believe a smarter and more fitting approach would have been a “Make American” initiative. Not an ultimatum like the “Buy American” provision, but a tax-break incentive encouragement for either domestic companies to expand their production of vital goods or for foreign ones to locate some of their operations in the United States. In both scenarios, there would be job creation and more spending. Instead of forcing companies to purchase domestic raw materials, encourage them to make products that can be purchased here or abroad. In Louis Uchitelle’s article on this issue for the New York Times last week, he cited the example of mass transit—while the stimulus bill calls for the expansion of mass transit, there are no US companies that manufacture the train cars necessary for that expansion. Now these projects will have to rely on American steel, iron, and manufactured goods while they also negotiate their express need for a specific foreign good they cannot get domestically. Wouldn’t it be nice (and much cheaper for taxpayers) to let cities purchase some raw materials from China or India and let the United States encourage these more specialized industries to move some of their operations here since we will be purchasing such a high volume of these products?

Of course, America will never return to its manufacturing hey day, and I’m not suggesting that domestic production will solve all our economic woes. But by encouraging a responsible, inviting economic policy, we could perhaps not only pave the way for global economic recovery, but also mend some broken foreign policy fences we need to repair from the past administration. Yet, despite the demands of this myopic economic policy, I hope that the Obama administration can find other ways to encourage growth domestically and promote more foreign investment in America’s future without ostracizing our trade partners and fellow economically struggling nations.