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Buy America Or Bye America

Nothing in the Democrats' stimulus bill has created as much fuss as a provision in the House bill that requires that American steel be used in the infrastructure projects that it funds. Washington business lobbies dominated by multinational corporations have mobilized against it. The Washington Post and The Economist have railed against it, accusing the Democrats of re-enacting Smoot-Hawley legislation, the 1931 tariff that is often blamed for contributing to a world depression in the 1930s. Vice President Joe Biden has come to the defense of the provision, but the President, his press secretary said, "is reviewing that provision."

So with all those voices of authority lined up against it, and with the White House waffling, there must be something wrong with the provision. Well, not really, or not necessarily. If the U.S. enjoyed full employment, and a trade surplus, then a provision like this would be unnecessary, if not superfluous or harmful. But that's not the situation in the U.S. today. We're in a classic downward spiral that the private sector cannot hope to reverse by itself. The government has to step in to create demand for consumer and investment goods. And if it wants to create or preserve jobs, it has to make sure that the money is not used to widen the trade deficit.

Suppose the government spends, say, $100 billion on bridges and buildings, and that $500 million of that is used to buy steel. If it is used to buy imported steel, and if that $500 million doesn't come back to the United States in the form of demand for its exports, then you can subtract $500 million from the stimulus. And you can be pretty sure--given our current trade deficit--that something like that would happen. So, without a requirement that these government projects use domestic steel (with mills currently running at 43 percent capacity!), there is a very great possibility that the government would be throwing away money rather than doing anything about the problem.

But isn't this Smoot-Hawley all over again? Not exactly. Smoot-Hawley put a tariff on broad classes of imports. This only affects government procurement. The U.S. also passed Smoot-Hawley at a time that it was running trade surpluses. It was truly a beggar-they-neighbor measure. This provision, if successful, might help the U.S. revive and even reduce its yawning trade deficit--which would have a favorable effect on the world economy that depends on a healthy American economy. 

Of course, countries are going to complain--and some already have--but it's likely that they recognize that the U.S. has to do something like this to ensure that its spending doesn't simply disappear in a flood of imports. If they still insist, then the U.S. can have a talk with these nations about how to end global trade imbalances that have been caused in good measure by Asian countries pursuing export-led growth. In that respect, the Buy American provision will have been a useful negotiating ploy--call it a stimulus of a different kind--even if the American steel industry remains stuck in the doldrums.

--John B. Judis

Update:  Rob Scott, an economist at the Economic Policy Institute, explores the motivation of American multinationals that have lined up to oppose the “buy American” provision in the House stimulus bill.  “Multinational companies such as General Electric and Caterpillar, and their allies in the Chamber of Commerce, are attacking “Buy American” provisions included in the economic recovery bill passed by the House on January 28th.  They claim that these provisions will provoke a “trade war” with foreign governments, but foreign governments have long histories of supporting their own domestic companies.  These companies are self-interested, simply wanting unlimited access to imports, many of which are illegally subsidized and unfairly traded.”