The Illusion of 'Buy American' Policy

All national governments, to varying degrees, seek to protect their industrial sectors and labor workforces from foreign competition. The United States is no exception.

These protections come in many forms ranging from mild import tariffs and indirect subsidies, to restrictive domestic content quotas. Such deliberate trade obstacles usually are effective for a brief period before the real cost of such policies settle in, but often too late to save the actual domestic industrial sector they were designed to protect. The Heritage Foundation recently estimated eliminating all domestic content requirements in the United States alone would result in more than 300,000 additional net private-sector jobs and contribute $22 billion in GDP, illustrating well that protectionism almost always does more harm than good.

As a discrete example, successive administrations and Congresses have required American-made iron and steel in federally funded public works with the objective of maintaining a robust domestic manufacturing capacity. While these were laudable goals, the American taxpayer ended up overpaying for these projects even as the U.S. steel industry shed about 75% of its workforce between 1962 and 2005, approximately 400,000 employees. Moreover, with “Buy American” rules already deeply embedded in U.S. law and regulation, the rationale to expand such restrictions are unfounded and invite trade retaliation.

Despite the futility of these and similar protectionist measures, markets of the affected industrial sectors adjust over time to the added burdens associated with so-called “Buy American” rules. However, when new regulations are imposed such as under the 2009 “American Recovery and Reinvestment Act,” the resulting experience has been heavier compliance burdens for companies, reduced competition, increased costs of domestic production, and ultimately higher prices for consumers.

Since the enactment of the General Agreement on Tariffs and Trade (GATT) in 1947, the United States has opposed foreign government initiatives to impose domestic sourcing requirements on the private sector. In contrast to the protectionist-leaning “Buy American Act” passed by Congress in 1933 (shortly after the Smoot-Hawley Tariff Act) U.S. GATT negotiators understood such nationalistic policies would disproportionately discriminate against U.S. exporters and investors and the workers they employ. Notably, the United States has consistently and successfully challenged domestic content requirements: those imposed by Argentina regarding import licenses; Canada with regard to auto parts; China on tax refunds as well as auto parts; and India on solar cells, all to defend American companies from unfair competition.

With global trade topping $20 trillion annually, proliferation of protectionist measures would only serve to jeopardize the ability of U.S. companies and their workers to sell goods and services to the 95% of the world’s consumers who live outside our borders. President Trump and his administration have many effective policies under discussion to give American workers and American businesses a big boost.

These should be the priority, not counterproductive and defensive measures like expanding the application of “Buy American” policies.