Wednesday, February 4, 2009

The "Buy American" Problem

President Obama has included a "Buy American" clause in the newest stimulus package that has been passed by the House and is under consideration by the Senate. The idea is relatively straight forward, money from the US government from the stimulus package should try to create more jobs for US workers. But the actualities are not so simple.

If this "Buy American" clause passes, the United States will be in effect promoting protectionism, meaning that we will be giving preferential treatment to US produced goods and discriminating against foreign produced goods. The question is how will other nations react to this preferential treatment by the US government to buy only US produced goods? While some argue that this clause will violate international trade treaties - which I think is correct, although don't take my word for it since I am not a lawyer - the other real option is for other nations to create retaliatory measures to buy only their domestically produced goods - which is exactly what some in Europe are thinking, and frankly I would be thinking the same thing. If nations start retaliating in trade restrictions, this leads to a total decline in trade between nations, and if trade declines, so does overall domestic income for both sides. In effect this is what happened in the late 1920's with the passage of the Smoot-Hawley Tariff Act, which raise tariffs (taxes on international trade).

Yet, even that may not be the real reason to toss this idea in the scrap heap of bad idea. The real reason is that it may end up costing more jobs than it creates, since the US uses more capital than labor in producing steel many other firms in other nations. Furthermore, not only are foreignors worried about this clause, so are US producers who sell their products in foreign markets. If - or rather when - other nations put up restrictions on purchasing good produced in the United States will lower some production and cost the very jobs this bill is trying to create.

While the idea is full of good intentions, the reality is that it will result in a world that is economically worse off.


Mike said...

Hello there former professor-Yes-still tracking your terrific blog! I think you're meaning to refer to the smoot-hawley tariff act. ;) I read that almost 150 million is now included for honey bee insurance in the new stimulus bill--the bee 60 minutes special must have sparked some interest.

Stacey said...


You of course are right. I have corrected this in the blog.

I did not hear that there is honey bee insurance in the new stimulus bill, but with so much pork in one bill, many things are bound to get overlooked.