The Buy America provisions in the House stimulus bill were bad enough. The Senate version threatens to make them even worse, extending them from government purchases of steel to government purchases of all manufactures. These measures are possibly illegal in international law, flatly contradict a commitment that the US made at the G20 summit in November, and (most important) are likely to hurt the economy more than help it. Is this the new spirit of US multilateralism? Smoot Hawley, anyone?
Read the analysis by Gary Hufbauer and Jeff Schott of the Peterson Institute.
Based on economic and legal analysis, the authors conclude that the Buy American provisions would violate US trade obligations and damage the United States' reputation, with very little impact on US jobs. They estimate that the additional US steel production fostered by the Buy American provisions will amount to around 0.5 million metric tons. This in turn translates into a gain in steel industry employment equal to roughly 1,000 jobs. The job impact is small because steel is very capital intensive. In the giant US economy, with a labor force of roughly 140 million people, 1,000 jobs more or less is a rounding error. On balance the Buy American provisions could well cost jobs if other countries emulate US policies or retaliate against them. Most importantly, the Buy American provisions contradict the G-20 commitment not to implement new protectionist measures--a commitment that was designed to forestall a rush of "beggar-thy-neighbor" policies.
What should be done? The best result would be to simply delete the Buy American provision in the House-Senate conference. Next best would be to keep the House version, applying the Buy American restriction only to iron and steel, but stating explicitly--in either the statutory text or in the legislative history--that the public interest waiver is intended to be used to avoid violations of US trade obligations. The third option is a presidential statement--preferably before legislation is finalized--that the United States will respect its international obligations when it applies the Buy American provisions.
It is an article of faith among free traders that the Smoot-Hawley Tariff Act prolonged the Great Depression. One hardly hears any claim to the contrary bring to mind Lenin's famous quote "A lie told often enough becomes the truth". Some even go so far as to say Smoot-Hawley caused the Depression. This can not be because the Depression started in 1929 whereas Smoot-Hawley was passed in 1930 as a response to the Depression and did not become effective until 1931. Here in reverse order of importance are reasons to doubt Smoot-Hawley had that much impact:
7) Not much was heard about Smoot-Hawley being a cause of the Great Depression until free traders were presented with a public relations problem: large numbers of American losing good manufacturing jobs. Free traders needed a reason to support their free trade no matter what the impact. To a generation that lived through the Great Depression this was a powerful reason to support free trade.
6) United States tariffs were high before Smoot-Hawley was passed.
5) The Smoot-Hawley tariff came with a $160 million tax cut.
4) Smoot-Hawley tariffs which went into effect in 1931 began to come down with the 1934 passage of the Trade Agreements Act.
3) The United States was a tariff protected economy from 1828 until 1947. Why were tariffs so bad in the 1930s when they had been a source of economic growth at all other times? During the period of high tariffs the United States economy overtook free trade Great Britain as the world's most advanced economy.
2) Free traders point to a graph showing that in the 1930s as tariffs go up unemployment goes up. What makes that less than convincing is that if they plotted the same data for the 1920s they would have seen the opposite result. That is as tariffs increased unemployment went down. Presented with two pieces of data showing opposite results choosing one over the other says more about bias than the underlying process.
1) Foreign trade was not that important in the 1930s. This is the most important reason to doubt that Smoot-Hawley had that great a role to play in the Great Depression. Ask your elders what foreign products they used. Coffee and tea for sure. But not much else. The general rule was we bought only what we could not make ourselves and sold to others only what they could not make themselves. Smoot-Hawley did not make trade go to zero. In September, 1938 Neville Chamberlain flew an American built Lockheed model 14 to Munich to meet Adolph Hitler.
Many Journalists and other quasiacademics raised in the era of Ronald Reagan and the corporate takeover of American trade law actually believe laissez faire economics and one-way trade actually works. When the United States imports more goods and services than it exports, the result is a current account deficit. The US must finance that current account deficit through international borrowing or by selling more capital assets than it buys internationally. Condemning the government for wanting to spend federal money at home is idiotic. If such a trade treaty forbidding US money being spent on US products exists, we should withdraw from it immediately. It will take several years to roll back the irresponsible laissez faire lunacy of the last 30 years. Hopefully we won't go completely bankrupt before we can do it.
It is impeccable economic logic to add “Buy America” language to the stimulus package. The whole rationale for spending $820 billion is to generate economic activity in the United States to end the recession, renew production, and put people back to work. Money that leaks—or pours, out of the U.S. economy weakens the nation’s recovery.
The misdirection of funds overseas was one of the reasons the recovery from the much milder 2000 recession was so slow despite the Bush administration’s strong actions to cut taxes and interest rates. As Business Week magazine noted in April 2003, “the fiscal and monetary stimulus of the past two years has helped global producers as much as U.S. companies.” Business Week returned to this problem with its December 8, 2008 cover story by chief economist Michael Mandel who stated, “The financial crisis was caused, in large part, by U.S. consumers borrowing trillions of dollars from the rest of the world to buy imported cars, clothes, and gasoline, even as jobs slipped overseas. As long as the U.S. is running a big trade deficit and borrowing from abroad, a fundamental cause of the crisis remains.”
Objections to “Buy America” come from two sources. First are those transnational corporations who want government money, but who still want the “freedom” to outsource the work overseas to widen profit margins. They have no internally-generated desire to help the country, so must be told what to do in the national interest.
The other group comprises those foreign governments who have been running large trade surplus accounts with the U.S. They are already siphoning off American money to support their own economies (over $4 trillion worth 2000-2007) and want this to continue. The claim that if the U.S. were to ever act to protect its own interests would provoke retaliation is backwards. It is time the U.S. reacted to the wide array of mercantilist practices used by foreign rivals, from currency manipulation to subsidies to informal trade barriers. They also direct their public spending towards their home economies, but in ways not as transparent (but more effective) than our “Buy America” language. It is the U.S. that has been running $700 billion annual deficits and which needs to retaliate against those who have put us in this hole.
Guys, trade is good. Economic isolationism is bad.
Why have prosperous cities historically flourished on rivers and harbors? Why do regions that become connected to networks of roads or canals suddenly take off toward higher levels of development? Because trade is the lifeblood of a healthy economy.
Just as I would be much worse off if I relied solely on what I can produce myself, and as my city would be worse off if we walled ourselves in, and as our states would be worse off if the Union declared a ban on interstate trade, so will our country be worse off to the degree that we restrict the international flow of goods and services.
We have made some poor decisions as individuals, as citizens, as a country. Those who mistrust, and I would suggest misunderstand, markets would have us believe that our current plight is due entirely to a surplus of economic freedom. But I hope that the majority of people will take a broader view. It should be understood that we are in this situation at least as much due to the actions of our government and other governments around the world, as due to their inaction (laissez-faire).
I think that the only way that we will emerge from this trauma stronger, that we will be able to continue to lead the world toward a brighter future, is to embrace the flexibility and power of markets, to become more deeply engaged with the international community, and to stand for true freedom (not its Bushian Doppelganger) for individuals around the world.
The failure of historical great powers tends to come from their desire to lock their dominance into place, to preserve an historical self-conception of their greatness. But the eminence of America is due to its dynamism, its ability to keep changing and to embrace the future. If we try to turtle up and wall ourselves in we've already lost.
Thank you Hank for introducing some sanity into the comments.
In the short-term, free trade will suck by those negatively affected.
In the long-term, if you only buy American, keep stretching it into a buy local argument until you realize how ridiculous it sounds - not even to get started on the economics of this which is so basic it's boring to explain again.