Looming large in the stimulus package passed by the U.S. House
of Representatives Wednesday--and currently under consideration in
the U.S. Senate--is the expansion of "Buy American" provisions that
discriminate against foreign goods and services in U.S. government
procurement. House legislation would require that only iron and
steel products made in America be used in the myriad public works
projects funded in the stimulus package--unless domestic steel adds
more than 25 percent to the cost of the project. The Senate version
is even more restrictive, banning the use of any import in
Advocates of Buy American rules claim that limiting competition
for U.S. government contracts to domestic firms will protect U.S.
jobs and help prop up firms in troubled industries. Regrettably,
the cost of such protectionism will be inflicted on the American
public, who will fail to get the best value for their hard-earned
taxpayer dollars; the U.S. workers who lose their jobs when the
companies they work for go out of business as countries retaliate
in kind; and the economy as a whole, which will become less
Rather than expand on the Buy American provisions the U.S. has
long maintained, a better approach would be to open competition in
government-funded projects even wider. This expansion will help
ensure that America gets the most benefit it can from vast new
government spending. It will also send a critical message to the
world that the U.S. is committed not only to its own welfare but to
that of the international economic system as well.
Protectionism Is Not the Right
The devastating economic effects of such protectionist measures
are well-documented. The Smoot-Hawley Tariff Act of 1930, for
instance, raised U.S. tariffs on more than 20,000 imported goods to
record levels. Introduced as a means to reduce imports and protect
American businesses and jobs, Smoot-Hawley did cut the
amount of imports between 1929 and 1933 in half. At the same time,
exports dramatically declined, and unemployment grew from
3.2 percent in 1929 to 8.7 percent in 1930 and peaked at 24.9
percent in 1933--the heart of the Great Depression. Large majorities of
economists and historians now say that Smoot-Hawley played a
significant role in worsening the Great Depression. While not the same,
the expansion of the Buy American program represents a step toward
the same type of destructive protectionism instituted by
With countries' economic vitality linked through trade and
investment, the need for all nations to protect open markets is
crucial to helping the global economy recover and return to a path
of growth. Therefore, given the effects of previous protectionist
schemes, expanding the Buy American program as part of a
stimulus package is perverse.
Leading by Example
In November 2008, the U.S. and other leaders in the G-8 publicly
acknowledged the role trade plays in mitigating the cost of
economic contraction and committed to avoid any new protectionist
measures in their plans to spark their domestic economies.
According to recent reporting from the WTO, although the economic
downturn has prompted a few instances of protectionism, nations are
largely sticking to that promise.
That said, the longer it takes for the world's economies to
recover, the higher the risk that trade and investment barriers
will find their way into domestic stimulus schemes. While some
countries may cave to the temptation to protect the special
interest groups and industries clamoring for assistance, the U.S.
cannot afford such a response. Implementing new, more restrictive
Buy American provisions not only breaks the promise America made to
the world in November, but it also opens the door for other nations
to introduce similar domestic bias in their own recovery plans.
Such retaliatory measures would result in U.S. firms being
denied the chance to compete for billions of dollars in foreign
government contracts in support of stimulus projects in Australia,
China, France, Germany, the U.K., and elsewhere around the world.
While the Buy American provisions might protect 3 million U.S.
manufacturing jobs (as claimed by White House spokeswoman Jen
Psaki) by shutting out foreign competition, it
would threaten many of the more than 57 million Americans employed
by firms that depend on international trade if nations retaliate
against U.S. protectionism.
Moreover, while much of the U.S. economy has retrenched since
the current crisis started, U.S. export performance has improved--a
source of economic strength that has so far helped mitigate the
cost of the downturn. However, as countries fall prey to global
economic weakness, it will be increasingly difficult for U.S. firms
to find customers abroad. Opportunity to participate in other
nations' stimulus projects would provide a new source of foreign
demand as traditional international markets weaken.
No New Trade Restrictions
Tougher Buy American provisions protect the few at the expense
of the many. Under these provisions, regardless of whether America
protects only steel or a broad swathe of industry, American
families already struggling to make ends meet will have to pay more
for goods and services. U.S. businesses and their employees that
depend on global markets will find it harder to stay afloat, and
economic recovery will take much longer to come to fruition.
Economic recovery depends not only on preserving a competitive,
transparent business climate in the U.S. but on preserving the open
markets on which so much of our prosperity is based and which even
now are helping keep the U.S. from slipping deeper into
Daniella Markheim is
Jay Van Andel Senior Trade Policy Analyst in the Center for
International Trade and Economics at The Heritage Foundation.