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Buy American?

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February 06, 2009 – Comments (9)

I don't think anybody knows exactly what the final version of the often talked about stimulus bill will look like - after all, the House and Senate have to hammer out their differences, but there is one thing about it that troubles me.

From an article on CNN.com:

A debate is brewing at home and abroad over an economic stimulus measure that would require materials used in the program's infrastructure projects to be purchased from American companies.

In the $819 billion House bill passed Wednesday, the so-called "Buy American" provision would, with some notable exceptions, ensure that only U.S.-produced iron and steel be used for construction.

This, in my opinion, is a huge mistake.  While I understand the desire to try to protect American jobs, this kind of economic protectionism is almost always counterproductive and ultimately costs the American economy more jobs than it preserves or creates.

A good article on this, entitled The return of economic nationalism, points out, in part, that “...Buy American” provisions in the stimulus bill are alarmingly nationalistic. They would not even boost American employment in the short run, because—just as with Smoot-Hawley—the inevitable retaliation would destroy more jobs at exporting firms.

While retaliation is certainly a risk, the problem with economic protectionism is much, much bigger.

Actually, the problem has a lot to do with my economic refrigerator.

As you may recall, I pointed out that taxes (and the subsequent spending) and refrigerators have something in common.  They both move something from where one doesn't want it (money or heat) to where one does - but the processes have built-in ineffeciencies.  Protectionist economic policies are no different.

Imagine, purely for the sake of argument, that instead of the iron and steel in the economic stimulus bill the U.S. government decided it wanted to protect the largely long-gone U.S. textile industry.  You know, charge a tarriff on all those cheap Chinese imports showing up in places like Wal-mart (and just about everywhere else, for that matter).

Granted, U.S. textile companies, and their employees, would benefit.  Jobs in the textile industry would be protected, or perhaps even expand.  More Americans working is a good thing, right?

Sure... until you consider what else would happen.  Clothing would be more expensive.  That means consumers of clothing (which is everybody I know) will have less money to spend on other things...  which of course leads to job losses in those other areas/industries.

Okay... so under protectionist policies, the protected producers win, the consumers lose, and it all comes out pretty even in the end, right?

Well... no...  time to roll-in the 'economic refrigerator'.  The fact of that matter is that the losers in this situation lose more than the winners win.  It isn't a zero-sum game.  Overall, such a policy would result in a net job loss because of the inherent ineffeciency of the system (forcing the less effecient producers to produce means fewer economic resources in the system to go around for everyone).  I'm not suggesting that encouraging or requiring domestic production of certain things is always a bad idea...  but only when doing so makes sense despite the cost to our overall economy (national security reasons could be one example).  Enacting protectionist policies in the hope of bolstering the domestic economy is not only futile, it is entirely counterproductive.

And this happens even if other nations don't retaliate!

Now imagine how big the problem becomes if in response to the U.S. passing an economy damaging protectionist policy, other countries around the world follow suit and pass similar policies of their own.  President Obama likes to talk about keeping the current crisis from turning into a catastrophy - it's hard to imagine anything that could more quickly and easily bring about the very thing that the President is trying to avoid.

Also from The return of economic nationalism:

Barack Obama says that he doesn’t like “Buy American” (and the provisions have been softened in the Senate’s version of the stimulus plan). That’s good—but not enough. Mr Obama should veto the entire package unless they are removed.

I couldn't agree more wholeheartedly.  The last thing our fragile economy needs is the enacting of well-intentioned yet completely misguided polices that cost our economy more jobs than they preserve or create.

Regards,

Russell (a.k.a. TMFEldrehad)

 

9 Comments – Post Your Own

#1) On February 06, 2009 at 7:01 PM, abitare (49.90) wrote:

I just posted on this, good time to stock pile if they are going to start a trade war.

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#2) On February 06, 2009 at 7:14 PM, Option1307 (29.97) wrote:

My thoughts exactly. This would be the single biggest mistake ever in terms of "fixing" our economy. I agree that it is well intentioned, but it has dire consequences that many fail to recognize. An act like this would likely push us (if we aren't already headed there) into a depression...

 

Your fellow co-worker posted something similar a few days back, TMFLomax: Buy American? Give it a read.

 

I'm glad to see the Fools over at TMF understand the problems associated with protectionist legislation.

 

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#3) On February 06, 2009 at 9:21 PM, devoish (99.10) wrote:

It seems to me we went a lot to the lax side with "protectionist" legislation. In the United States we have child labor laws. We should have verified that competing countrys met the same standards.

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#4) On February 07, 2009 at 10:57 AM, kdakota630 (29.86) wrote:

"Buy American" is a fine if it's personal choice, not when it's implemented as policy.

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#5) On February 09, 2009 at 5:18 AM, StockSpreadsheet (74.76) wrote:

Just to play devil's advocate.  In a trade war, we could lose, but others could lose more.  The U.S. currently runs a current account deficit in the hundreds of billions of dollars.  Therefore, if all of the stuff that we currently import started being made here, (employing the people that would make all the stuff), and we lost all of our exports, (and all the jobs that go with those industries), it seems that we could come out ahead to the tune of hundreds of billions of dollars worth of production.  Therefore, it seems that the world would have a lot more to lose in a trade war with us than we would.   I am not advocating that we start a trade war, I'm just saying that it might be more damaging to other economies, (such as China and Japan, which run huge trade surpluses with us), than it might be to us.

What I think they should do it put a "Fair Trade" clause in any bill.  If we are allowed to trade freely with any country, (most of Europe, for example), then they would be able to bid on the projects.  If our trade is severely limited due to various government actions, (dollar pegs, laws or actions that limit us exporting to the other country, laws or actions that limit our companies opening plants or offices in the other country, etc.), then those countries should not be able to bid on any of the government contracts in the bill, (or any other government contracts for that matter, in my opinion).  If we can't compete on a fair basis, (such as GM not being able to compete with domestically built Toyotas, for example), then the companies should fail or at least not be given any special consideration by the government or anyone else.  If they can't compete due to foreign subsidies, then that is a totally different matter and should be considered when assigning contracts.

Just my opinion.

Craig 

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#6) On February 12, 2009 at 9:40 AM, Sridhartoronto (< 20) wrote:

Ok...I will be getting flamed for this but....I support trade barriers.

 Let me explain: Take the textile example , let's say Mr.Consumer earns 100 dollars a month and buys 1 shirt a month for 10 dollars from China and 1 Widget costing 90 dollars from an U.S manufacturer. China pays the labourer 10 cents and invests 9.90 in US treasurys. We are ceding away 10 dollars worth of US assets in exchange for a shirt. China's direct imports from the US is negligible.

Now let's stop importing shirts. A shirt becomes 20 dollars. Either Mr.Consumer can choose to buy 1 shirt every two months or negotiate with the Widget manufacturer for a 10 dollar discount or negotiate with his employer for a ten dollar raise. The end result will be somewhere inbetween. Maybe Widget Iinc. will make less profit and his emloyer too. But China doesn't get a dime and Textile Inc. is doing great business. The poor labourer in China will have to go back to his village.   And U.S assets remain in U.S hands.

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#7) On February 13, 2009 at 2:20 PM, TMFEldrehad (99.99) wrote:

Opinions differ on this matter, and I respect those who have different viewponits than I do - but consider the following:

When Mr. Consumer has to negotiate the discount with the widet manufacturer, or negotiate with his employer for a raise, the widget manufacturer and/or his employer will have less money with which to employ people and jobs will be lost in those areas.

What I am saying is that the jobs gained by U.S. textile companies will be smaller than the jobs lost by everybody else (maybe Mr. Consumer goes out to eat at a restaurant less often, resulting in a server losing his/her job, etc.)

In economics, this is called a deadweight loss.

Now, in any artificial reallocation of resources (which is what trade barriers are), there are winners and losers.  If the U.S. were to put up a trade barrier against Chinese imports, the loss to China would likely be greater than the loss to the United States, but that doesn't change the fact that a trade barrier actually harms, overall, the domestic U.S. economy due to the deadweight loss.

Now, if you're a textile worker, you're going to like the idea - and that in my opinion is part of the problem.  The jobs gained or protected are generally readily visible as they are concentrated in one business/industry/sector.  The jobs lost are spread-out over the rest of the economy and therefore aren't as easily noticed.  That doesn't mean that they aren't lost, however.

And while we Foolishly disagree, I appreciate your comments.

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#8) On June 08, 2009 at 9:28 PM, tastless (< 20) wrote:

When I was born we made 30% of all the manufactured goods. Now we make almost nothing. The trade deficits are in the billions and we are somehow thinking we dare not buy American because it will cause retaliation.  There isn't much left to protect. It is a free country and we can buy what we want but don't think there are not consequences. To buy so many foreign products is killing our industries.  China and Japan then loan our money back to our government and charge us interest. We rightfully condemn Obama for wanting to control the wages of the CEO yet make it clear that Japan and China etc. determine the salary of all most in industry.  We condemn the UAW for paying more than transplant foreign car companies. It is a double standard. We buy what we think is a bargan because it is cheaper and have driven one company after the other out of business.We drive to the store in our Honda to get our goods made in China and cry foul with every company which needs help. A government take over of any company is wrong but the things the ME GENERATION has done to the strongest industrial country in the world built by the GREATEST Generation is just as wrong.  Third world countries will soon bring in products and transplant factories from them will come and drive down  prices and also wages too. Then will we stop buying the cars built by Japan because the new kids on the block are cheaper?  Only time will tell.

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#9) On June 09, 2009 at 10:08 AM, tastless (< 20) wrote:

 The Government promotes what they call Fair Trade knowing full well that the cheap labor will kill many job sectors.Thousands of businesses cut jobs, wages benefits etc. only to be undercut again and ran out of business.  Still existing Companies cut wages and benefits and at times do away with healthcare and things altogether.They knew the advantage for instance a transplant factory with no pensions would have and made no protections for the established American Company.

 As usual the American Companies make sacrifices along with all their workers but guess who made no cuts.  The American Government has the SECOND LARGEST CORPORATE TAX in the world and it sure looks like in some ways we will raise it again.

 I understand cutting the tax helps business and would actually give the government more but that is another issue. 

 What I am saying is the law makers put American industry between a rock and a hard place calling upon them to cut wages and benefits to exist but can't join in the pain. 

 We are at the point where no new trade laws can help.  The American consumer must willingly change their buying habits or the door will close on the last American factory and the last man out who chains the door shut will be told it is his fault because his wages and benefits were to high and that is why we bought foreign products.

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