To Buy American, Or Not To Buy American -- That Is Obama's Question

[Brad Kenney]

In his post Get Your Made In USA Stamp, Jon says:

First the president tried to squeeze (Buy American provisions) into his stimulus plan, requiring that only U.S.-made products be included in projects funded by the bill before the Senate eventually softened the clause to ease international anxiety over the plan.

Not sure where he got that narrative from, but a fairly cursory search will reveal that President Obama has come out quite publicly against the Buy American provision in the stimulus, as he feels it would likely constrict the interlinked, crisis-ridden global economy at a fairly critical time.

Here's a representative quote (freely available, like a lot of other information, on the internet):

President Obama has come out against a Buy American provision that would require stimulus-funded projects to use U.S.-made materials.

"I think that would be a mistake right now," Obama said on ABC News on Tuesday. "That is a potential source of trade wars that we can't afford at a time when trade is sinking all across the globe."

So to set the record straight on this particular issue, both the House and Senate have seen fit in their collective wisdom to introduce provisions of this nature into the stimulus legislation. And yes, the Senate eventually softened their language to respect international trade agreements.

Not to mention, to come out "for" or "against" this type of economic protectionism is reductionist and misleading in itself. Unlike what you read about in Congressional rantings, or in blogs, global trade is a fiendishly complex issue. (If you'd like a free headache, here's a Cato Institute rundown on Buy American provisions over the years -- let's just say that there's a reason most legislation cracks the 500 page barrier.) And despite the globe-spanning mess we're in right now, the global trade game will probably continue to be played going forward the same way everyone has always played it in the past -- you protect some strategic industries (usually dependent upon the lobbying power of an industry), while you let others float freely on the global markets. That said, even for someone like myself that is deeply skeptical of how a number of our bilateral agreements are written, anything that sends a overly strong protectionist signal to global markets right now is bad policy.

President Obama's team is too smart to not get that.

[Abogle]

There are a few overiding principles that must be considered:

First is that it is the US taxpayers money - it is absolutely within the US taxpayers right to demand that preferrential treatment be given to US products, materials and services, afterall its intent is to stimulate the US economy

Second - the constitution clearly lays the authority and responsibility to regulate trade on the congress - whose job as also spelled out by the constitution is to represent US citizens interests. Current trade agreements cede far to much authority to international organizations, as did "fast track" cede too much to the executive branch. The US congress is absolutely within its bounds to have such a buy american provision. We should not be letting foreign entities and multinnational interests dictate our trade policy over the proper representation of the US citizenry

Thirdly fears of a trade war are overblown for two main reasons - the govts own data as well as many known economists including Nobel laureate Krugman have shown that the effects of Smoot Hawley on the depression were negligible at worst. The times were diferent then when the US held huge trade surpluses and a case could have been made that a trade war would hurt US exports Secondly we are already in a trade war and losing it against currency manipulators, intellectual property thieves, product dumping, industry subsidizing, home market protecting, regulation skirting and human rights exploiting mercantilist countries - totally working against the theory of comparative advantage. One need only look at the growing trade imbalance and vacant industrial properties to see the results of unilateral "free" trade - how could a trade war possibly hurt US industry any more than it already has?

And Fourthly - labelling those critical of unilateral free trade using extreme terms such as "protectionist" are counterproductive. No one is suggesting we should not trade, however there is a HUGE amount of room to renegotiate trade deals to make them fairer, smarter, sustainable and advantageous to US based mfrs and workers - thus conforming to the idea of comparative advantage.

BTW, I wouldn't put a whole lot of stock into what Neo-conservative pro-globalist Cato has to say, they sure got that whole iraq war thing "right" didn't they?. They get it right on the desciption of the std provisions, but reach an entirely erroneous conclusion at the end - again the whole point of this stimulus bill is to stimulate the US economy, not china's

[rbrooku]

It is a certainty that adding a publicly stated policy of protectionist sentiments would create very bad PR for U.S. foreign interests. In the long run it could be very costly, but allowing for the spending of stimulus "infrastructure" money with clauses for preferences of using "local" goods and services would be far less of a diplomatic and trade problem. This could be accomplished via states and local governments using the money in this fashion and by the federal government avoiding any overt policy.

It's all in how it's done and presented...

[strout0123]

Buying American voluntarily is a great idea, perhaps it is even patriotic in this economy. However compelling businesses to buy American is not such a good idea. It can create some very uncompetitive situations and ultimately do more harm than good.

I have called for state and federal officials to create an internet accessible database to help businesses find opportunities to buy locally when they are considering a purchase. Knowing where something is really manufactured is not always obvious.

[superdavemcmahan]

How is "protection" a bad word. Is the whole concept of the US military a bad thing, because it is "protectionist"? (!).

Fact is, US industry BOOMED from 1948 through 1978 (with some relative "recessions" along the way- all of which look good by today's standard), because we had the more technologically-challenging "protection" of two great oceans around our country (communication and transportation limitations at that time made those oceans tougher to span) and our would-be competitors were decimated from WW II.

This modern thing with its emphasis on "consumerism", rather than production, is a down-ward spiral to the bottom for America- you can't consume your way to prosperity (however, you can consume your way to bankruptcy), you have to "produce" your way to prosperity. We have an $800 billion dollar per year trade deficit!!!

The US Congress is well within its Constitutional boundaries (and, even, "required") to manage (even limiting or eliminating)
our international trade for our national interests (does "CUBA" ring a bell?). You and I do not have an inalienable right to the cheapest goods from the cheapest international places if Congress decides it is not within our national interest.

[unlawflcombatnt]

Originally Posted by superdavemcmahan

How is "protection" a bad word. Is the whole concept of the US military a bad thing, because it is "protectionist"? (!)....

The US Congress is well within its Constitutional boundaries (and, even, "required") to manage (even limiting or eliminating)
our international trade for our national interests (does "CUBA" ring a bell?). You and I do not have an inalienable right to the cheapest goods from the cheapest international places if Congress decides it is not within our national interest.

Amen to that. And since someone mentioned the Smoot-Hawley Tariff, here is a good place to debunk the myth, and thew related myth that somehow TARIFFS and "protectionism" hurt our economy. They do not.

Tariffs: The Smoot-Hawley Fairy Tale

All of the "damage" caused by the Smoot-Hawley Tariff is just a Globalist fairy tale. Below is a copy of U.S. GDP from 1929 through 1939. These are official government figures from the U.S. Bureau of Economic Analysis.

For the chart below: GDP: 1929-1938 only

The Trade Balance is underlined in red. Exports are underlined in blue. Imports are underlined in orange.



(Since space limitation prevented inclusion on chart of years 1939 to 1941, the same chart covering 1929 to 1941 can be found here.)

Notice that there is a slight decline in both exports and imports by the end of 1930. The trade balance remained around 0 during the entire time. Exports bottomed in 1932 — 2 years before any revision or modification of Smoot-Hawley occurred.


The Smoot-Hawley Tariff was signed into law on June 17, 1930, and raised U.S. tariffs on over 20,000 imported goods. Legislation was passed in 1934 that weakened the effect of the Smoot-Hawley Tariff. In effect, the legislation functionally repealed Smoot-Hawley. Thus, the effects of Smoot-Hawley cover only the period between June 17, 1930, and 1934. This is the time frame that should be focused on.


So in reviewing the chart, where is the evidence that the Smoot-Hawley Tariff caused major damage to the economy?? Is there any at all?

The US was already in a Depression. Prior to Smoot-Hawley, the 1929 Trade Surplus was +0.38% of our GDP.

Let's focus on exports alone. Exports were $5.9 billion in 1929, and had declined to $2.9 billion in 1933. This $3 billion decline was roughly 3.8% of our 1929 GDP, which had declined by a whopping 46% over the same period of time. Thus, of the -46% GDP decline, only -3.8% of it was due to a fall in exports.

But the gain from import reduction must also be included. (A decline in imports increases GDP). If the import decline is added back to the GDP total (to measure the net trade balance), the "loss" was only $0.2 billion from our GDP — or less than ½ of 1% of the total GDP decline.

In other words, the document-able "loss" from the Smoot-Hawley Tariff — the "net export" loss — was less than ½ of 1% of our our GDP decline


To put this in perspective, let's compare all the GDP components together:

1929 .................................................. ........ 1933

GDP $103.6 billion--------------------->$56.4 billion ( decreased -$47.2 billion)
Consum. Expend $77.4 bil-------------->$45.9 billion ( decreased -$31.5 bill)
Private Invest $16.5 bil----------------> $1.7 billion ( decreased -$14.8 billion)
Trade Balance +$0.3 bil--------------->+$0.1 billion ( decreased -$0.2 billion)
Exports $5.9 billion--------------------> $2.0 billion ( decreased -$3.9 billion)
Imports $5.6 billion--------------------> $1.9 billion ( decreased -$3.7 billion)

Again, at the risk of being repetitious, how much difference to US GDP did the export loss make? The Trade Balance worsened by only -$0.2 billion, or about -0.19% of our 1929 GDP, or less than 1/5th of 1% of 1929 GDP. Meanwhile, our total GDP a whopping -46%.

How much effect did a 1/5th of 1% loss of GDP have on the Great Depression, especially when spread over a 4-year period?

Based on available statistics, Smoot-Hawley had almost NO effect on the Great Depression. At the very most, caused a -3.8% decline in GDP from loss of exports. But factoring in the GDP increase from a decline in imports, it caused less than 1% of the GDP decline.

The Smoot-Hawley Tariff did not cause the Great Depression, nor did it worsen it or extend it. Claims to the contrary are false and easily refutable. The evidence to disprove those claims is abundant, overwhelming, and freely available to the public. The available GDP numbers completely exonerate the Smoot-Hawley Tariff from any contribution to the Great Depression.

The Smoot-Hawley myth needs to be put to rest, once and for all. The claim that it worsened the Great Depression is nothing but a fairy tale.

[Abogle]

Nobel Laureate Paul Krugman - who has written extensively in favor of trade says right on his website that suggestions Smoot Hawley had any major negative or causal effect on the depression are inaccurate and revisionist

One might make the case (no matter how tenuous) that tariffs or a so called "trade war" could be harmful at a time of trade surplus, which the US did have thru most of the first three quarters of the 20th century.

Today the opposite is true, at a time of record trade deficits there can only be an upside to encouraging domestic production and discouraging importation - the damage has already been done in terms of lost productive capacity, eroded technological and innovative edge, intellectual property theft, reduced product quality and safety and so forth.

The US still has the greatest market in the world - exporter and mercantilist countries need our markets for their goods. we need to get smarter about leveraging this need to our benefit - rather than our detriment