Buy American

Buy American sounds good & it feels real good to say it. But wait, is there trouble lurking? If I have concern with the American Recovery and Reinvestment Act, it is trade protectionism.

It's difficult to come by an economist who thinks this is a smart thing to do. Harvard economics professor Greg Mankiw surveyed economists and found that 93% believe that tariffs and import quotas usually reduce general economic welfare.

Yes, it may protect a few steelworker jobs, and garner some higher prices for their goods sold for US infrastructure projects--of course, costing taxpayers even more.

But it's not the extra cost I'm concerned about. You have to look no further than Peoria, IL to discover that Caterpillar employees may be harshly effected...when foreigners retaliate for US protectionist policies. This provision may put far more workers out of jobs than it preserves for those in a couple industries.


In early February, 100 business groups and companies, such as the U.S. Chamber of Commerce, General Electric, Caterpillar and other major construction, defense and high-tech companies wrote a letter to Senate leaders.

They warned that a far-reaching Buy American rule will harm American workers and companies across the entire U.S. economy, undermine U.S. global engagement, and result in mirror-image trade restrictions abroad that would put at risk huge amounts of American exports.

I am very concerned that this Buy American clause will totally backfire on the US. There is a chance it could undo whatever stimulus comes from the $787 billion package.

I was very pleased to see that our Chinese trading partner will not adopt a "buy Chinese" products policy to stimulate its economy. That would be imposing trade protectionism, says Vice-Commerce Minister Jiang Zengwei. Domestic and foreign products will be treated on equal footing as long as there is demand.


Fortunately in the final version of this bill, the Buy American clause was watered down:

• The Buy American policy must not violate U.S. obligations under existing international trade agreements.
• The rule doesn't apply if American goods aren't available in sufficient quantities.
• Nor does it apply if the cost of the overall project will increase by more than 25%.

That's not how it was received overseas, however. Robert Zoellick, president of the World Bank, says it is crucial to avoid the protectionist policies of the 1930s. The Buy American provision is very dangerous, he said.

The Times of London says the symbolism of the clause is ugly. The Administration must give a stronger message domestically and to America's allies that it knows trade barriers destroy wealth and will impede recovery.

Czech Finance Minister Miroslav Kalousek denounced protectionism. At a press conference he said, It is our duty to explain, at the cost of our popularity, that this is the road to hell, that we need our neighbors more than ever before. We have to prevent populists from going on with the Buy Czech, Buy American, Buy French campaigns.


Let's learn a little from history. The Smoot-Hawley Tariff Act was signed into law in 1930. It that raised U.S. tariffs on over 20,000 imported goods to record levels.


After it was passed, many countries retaliated with their own increased tariffs on U.S. goods. American exports and imports plunged by more than half. In the opinion of leading economists, the Smoot-Hawley Act was a catalyst for the severe reduction in U.S.-European trade from its high in 1929 to its depressed levels of 1932 that accompanied the start of the Great Depression.

As a result of the Smoot-Hawley Tariff and other countries' responses to it, the world moved towards multilateral trading agreements that would prevent a similar situation from unfolding. This led to the Bretton Woods Agreement, in 1944.

US trade restriction was a hot topic at the 2009 World Economic Forum in Davos, Switzerland. Watch the following new video from Newsy.com to see what I mean.




More recently the Group of Seven leading industrialized nations vowed not to resort to protectionist measures as they seek to turn their economies around. In a published statement they said, The G-7 remains committed to avoiding protectionist measures, which would only exacerbate the downturn, to refraining from raising new barriers. This is fabulous news.

The G-7 nations are comprised of Canada, France, Germany, Italy, Japan, the U.K. and the United States.