"Buy American" Will Bury America
By Benjamin Artz
World trade has been demonized in America in the last two decades as manufacturing and simple service jobs have gone overseas to cheaper shores. It is not surprising then that the new congress is signing into law a step toward protectionist trade doctrine. The “Buy American” provision in the American Recovery and Reinvestment Act of 2009 is the first, and hopefully last, hint of protectionism we see from this new government.
The support for trade restrictions of any kind stems from the prevention of cheaper or possibly even better imports from crowding out domestic industry products and their corresponding jobs. This of course is a political cost of the largest magnitude. Thus the support for restricting imports is even stronger in a recessionary economy that is already shedding jobs in large numbers. The same ideology was used during the Great Depression in June of 1930 when the Smoot-Hawley Tariff Act was signed into law. The Act was intended to raise tariffs on imports into the US to protect domestic industries. As a result imports into the US fell dramatically, but so did US exports. Foreign countries retaliated against the tax imposed on their products and raised their own tariffs on US goods. It is widely believed that this economic protectionism made the Great Depression even worse and significantly decreased world trade in general.
After World War 2 ended, the US helped to pioneer efforts to increase world trade and reverse the damage that had been done during the Great Depression. The General Agreement on Tariffs and Trade was signed in 1947 and led the world into economic expansion for the following six decades. Loosening of trade restrictions would significantly reduce worldwide poverty while allowing the size of the middle-class to soar to include over half of the world’s population for the first time.
History, along with simple economic theory, has shown us that trade is better off unhindered and that domestic industries should not be protected from foreign imports. In contrast, the “Buy American” provision in the stimulus bill requires all the public works projects in the bill to utilize only American made products and equipment, unless this requirement increases the cost of the projects by more than 25%. As in the Smoot-Hawley case, congress is hoping our trade partners will not care if we do not buy their equipment and resources. This is a serious mistake.
As the world economy plunges deeper into recession, other governments are proposing and implementing stimulus bills much like the US. They will likely need resources from the US, but may decide to buy elsewhere in protest of “Buy American”. US exports will subsequently fall, adding more pain to the already harsh recession.
Most agree the worldwide recession can best be mitigated through carefully planned international stimulus efforts. In essence, success in the current economic climate requires a team effort. The US has historically acted as the team captain but is now threatening to try and “go it alone”, effectively sending the wrong signal to its teammates around the world. “Buy American” must be the last protectionist trade policy implemented by the government. If there is more to come, prepare for the worst.
-February 19, 2009