What’s Wrong With the Federal Government Buying American?

St. Louis Screw and Bolthas been in business since 1887. As its name suggests, it manufactures heavy-duty steel bolts, nuts, screws and other fasteners that hold up bridges and buildings across the country.

At its peak post-World War II, the company had 400 workers on the payroll but shrank to just 10 workers in the 1990s when cheaper Chinese imports flooded the market. Today, says its General Manager Bill Germuga, the company has around 60 employees, half of whom work on the factory floor and half in distribution. Its manufacturing operations survive, Germuga says, because of longstanding federal “Buy America” and “Buy American” policies that require the federal government – and federally funded transportation projects – to use U.S. companies and suppliers.

“If Buy America goes away, eventually I would expect our manufacturing will go away,” Germuga adds.

Preserving manufacturing jobs like those at St. Louis Screw and Bolt is why “Buy American” is a rare point of agreement between Presidents Joe Biden and Donald Trump. Trump made “Buy American, Hire American” a signature issue. Biden, for his part, issued a “Made in America” Executive Order, creating a “Made in America Director” charged with closing loopholes in existing regulations and improving enforcement of current requirements. Incoming U.S. Trade Representative Katherine Tai, whose confirmation process began recently, has promised a “worker-centered” trade policy, another indication that the Administration will prioritize domestic industries and jobs. “[W]e are going to use taxpayers’ money to rebuild America,” Biden said at a January event unveiling his Made in America effort. “We’ll buy American products and support American jobs, union jobs.

There’s no doubt that the Biden Administration’s embrace of Buy American is politically smart. Pre- and post-election surveys conducted by the polling firm Lincoln Park Strategies for the Hinrich Foundation found that three out of four ⁠Americans support Buy American policies, including 73 percent of Democrats and 88% of Republicans. Respondents also ranked Buy American as the most important trade policy to be pursued over the next four years, ahead of negotiating new trade agreements or increasing U.S. exports. Four in five Americans (79 percent) also believe the policy creates jobs. (Disclosure: I helped draft and commission these surveys.)

Unfortunately, Biden’s Buy American push won’t save the nation’s economy or rescue its manufacturing. In fact, it may do more harm than good, if it has much effect at all.

For one thing, Buy American only deals with what the federal government buys, which—at about $600 billion a year—accounts for only a single-digit percentage of the nation’s $21 trillion economy. Moreover, Biden’s executive order merely adds a layer of bureaucracy to federal purchasing requirements, some of which date back to 1933. Already, 97 percent of federal procurement already goes to U.S. companies, according to the Chamber of Commerce. In fiscal 2017, according to the Government Accountability Office, just $7.8 billion went to foreign firms.

Even as limited as it is, Buy American is still dubious policy. It restricts competition for government contracts and entrenches incumbent players, raising costs. For federal transportation projects, current law⁠ requires contracts to go to domestic firms unless the lowest-priced domestic bid is at least 25 percent more expensive than that of a foreign competitor. This effectively means the government pays up to a 25 percent premium to buy American.

“Taxpayers will pay more for a given amount of road, broadband or whatever the government is buying,” said Gary Hufbauer of the Peterson Institute for International Economics. “And then because the money doesn’t go as far—there are always more projects than money available—some projects just wouldn’t get done.”

Buy American policies also invite retaliation from other countries. Scholars have, in fact, noticed a noticed a rise in “Buy National” policies over the last decade. Many countries—most notably China—are increasingly relying on “local content requirements⁠” to favor domestic producers and exclude foreign competition. An arms race in “Buy National” could cost American jobs and hurt American exporters in business services like insurance or banking, where America enjoys a competitive advantage. This means everything from the US accounting firms hired by foreign governments to turbines and heavy equipment bought for foreign construction projects could be at stake.

Buy American also lulls Americans into believing that this quick-fix policy is all it takes to grow the economy and create new jobs. It denies the interdependence of the global economy and the tradeoffs that come with trade restrictions. It gives policymakers a pass on doing the hard work of developing policies that will promote growth—education, apprenticeships, infrastructure investment and the like – as well as trade policies that can help, such as enforcement of intellectual property rights and a strong stand against currency manipulation and other unfair practices.

Americans support policies like Buy American because its modest upside is tangible. We know, more or less, which jobs would be lost were Buy American to be repealed (The jobs at St. Louis Screw and Bolt would surely be among them.) One of the frustrations of free trade advocates is that the  benefits of trade are diffuse while the damage is acute. Factories close so that consumers can spend less at Walmart. The cumulative savings are large, but not obvious to individual shoppers.

Americans also support Buy American because many of them are increasingly questioning some of the fundamental tenets of free-market capitalism and trade. Consumers happily pay more for “fair trade” coffee or “sustainably produced” goods, and there has been burgeoning interest in socially conscious investment. Companies are increasingly measured and rewarded for their attention to “environmental, social and governance”⁠ factors in their operations as well as their profits. It’s no stretch to understand why Americans would want their tax dollars going to U.S. firms—albeit at higher prices—rather than to foreign companies

Policies like Buy American also serve legitimate strategic interests, even if indirectly. A case in point is the Charlotte Pipe and Foundry Company⁠ in North Carolina, which runs one of only three cast-iron foundries left in the United States, says its Vice President Brad Muller. These foundries produce everything from electric turbines to Army tanks to sewer pipes. But the U.S. has lost nearly 500 foundries ⁠over the last 15 years due to foreign competition, according to the American Foundry Society.

Founded in 1901, Charlotte Pipe employs 1600 workers across seven plants, about 500 of whom work at the iron foundry. Muller argues that preserving the foundry is a matter of national security. “If we don’t have foundries in America like Charlotte Pipe and our competitors, we can’t defend the nation,” he said. “We don’t have the infrastructure in place to build our own ships and planes … These foundries are important – you don’t just turn them off and turn them back on when you need them. Once they’re gone, they’re gone. It’s not like you can pop one up overnight and meet demand if we, God forbid, go to war with China.” While the company is not heavily dependent on business from Buy American, the policy helps it survive. “It’s hard for us without some protection from federal Buy American to compete with heavily subsidized imports,” said Muller.

Nevertheless, Trump’s trade policies—like his tariffs on aluminum and steel and his trade war with China—prove that ham-handed economic nationalism is counterproductive. A 2019 study by Moody’s Analytics concluded that Trump’s trade war destroyed at least 300,000 American jobs, while the Federal Reserve Bank of New York estimated that U.S. companies lost $1.7 trillion in shareholder value as a result. And while Trump metals tariffs did create several thousand jobs in the steel industry—it cost about $900,000 taxpayer dollars per job saved, according to the Brookings Institution.

The challenge for Biden will be to avoid the same traps. He’ll need to devise an agenda that creates new U.S. jobs, addresses the impact of globalization, and preserves the industries and assets vital to our security – but also rejects the perniciousness of protectionism. Buy American, for all its appeal, falls short of these measures. But since it’s here to stay, and the president is likely to take a tougher line on trade than either of his most recent Democratic predecessors, Bill Clinton and Barack Obama, Biden should temper expectations, rather than promise what can’t be delivered. The native son of Scranton, with its depressed manufacturing base, is also a Delawarian, with Wilmington’s huge port and global banking and corporate presence. Biden knows firsthand the upsides and downsides of trade. He should also give us some of his patented straight talk about the downside of policies like Buy American.

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