Buy American initiatives, while well intentioned, are ineffective and counter-productive.
Domestic economic difficulties tend to produce protectionist responses and understandably so: high unemployment must be dealt with and political leaders must respond in short order to the needs of the electorate. This type of initiative is not new: the first Buy American Acts was passed into law in 1933. In 2009, reflecting the dire economic conditions we faced, some 500 governmental entities at all levels adopted one form or another of Buy American resolutions while one of the provisions of the 2009 Stimulus Bill required more than 50 percent of the components in any end product procured by the Department of Homeland Security to be mined, produced or manufactured inside the United States.
Not that the U.S. has a monopoly on this type of initiative, quite the contrary: hidden and explicit subsidies in Europe and China also tend to distort trade flows and favor local companies.
Members of the Connecticut Congressional delegation in general, and Rep. Chris Murphy of Cheshire in particular, have been strong supporters of Buy American initiatives with special focus on Defense Department spending, asking that Connecticut contractors be given preference over foreign competitors.
Supporters point out that this approach offers many benefits: jobs stay here at home, receipts from income taxes and Social Security levies are higher while consumer spending increases. They go on to say that Buy American requirements protect our manufacturing industry from unfair competition and supporters discount the possibility of a trade war with our trading partners. In reality, however, the evidence indicates that this unilateral approach to global trade simply does not work or at best produces marginal benefits:
• It forces foreign nations to take similar measures therefore hurting our exports.
• It discourages competition and innovation as local companies are “guaranteed” their piece of the economic pie.
• It has failed to protect important economic and industrial segments of our economy such as steel and auto.
• It violates the spirit and the letter of the many trade agreements signed by the United States with such partners as Canada, Mexico, etc. ( new legislation seems to have found a way to avoid this issue by requiring that buy American actions conform with existing trade agreements).
• Products cost us more while quality may suffer.
Most of all, Buy American initiatives send the wrong message to the world: the greatest economic power in the globe is afraid of competition.
History tells us that we have faced these difficulties before and overcome them. In the 1980’s Japan’s economy was growing exponentially and using its huge trade surpluses to acquire such well known American landmarks as Pebble Beach, Columbia Pictures and Rockefeller Center. Analysts in drove predicted the end of American global economic dominance: they could not have been more wrong.
While our economy went thru some very painful times and restructurings, Japan refused to deal with its structural problems in an effort to limit the pain to its population. Result: Japan’s economy has been stuck in a rut for the last 20 years while our economy has produced record growth and employment, at least until 2008.
The pain felt during the Great Recession has been and continues to be very real and deep as we struggle to recover the millions of lost jobs. What should be our response? When it comes to International Trade, I am very supportive of the policies being pursued by the Obama administration. These include:
Coordinated efforts to double exports in five years with a special focus on key emerging markets such as Brazil, China, etc. Buy American initiatives will not help achieve this goal.
Expansion of foreign trade agreements and approval of completed ones. The U.S. has recently finalized a trade agreement with Korea, KORUS, which will boost GDP by at least $12 billion through expanded exports and create more than 70,000 American jobs. I hope that state officials will take pro-active steps to prepare our small and midsize companies for this opportunity.
Aggressive enforcement of existing trade agreements against countries providing direct or indirect subsidies to their industries.
Train displaced workers and provide extended financial support.
Initiate and expand more private / public cooperative programs such as the ones offered locally by the Connecticut Center for Advanced Technology.
Continue to focus on high value jobs in key advanced technologies and renewable energy projects.
America’s economic system is the most flexible in the world and will produce the adjustments to rebalance itself, adjustments which are painful indeed but also necessary. We have met similar challenges before and I have no doubt that we will overcome our current difficulties as well.
Paul Pirrotta is president of Paul Pirrotta International in Glastonbury and writes on global trade issues. Reach him through the company’s website at: http://italy-usatraderep.com/aboutus.html
