The False Promise of “Buy American”

By Daniel J. Ikenson of Cato.

"If patriotism is the last refuge of scoundrels, where will President Trump turn when his “America First” policies lay waste to the very people he professes to be helping?

The ideas conjured by “Buy American” may appeal to many of President Trump’s supporters, but the phrase is merely a euphemism for doling political spoils, featherbedding, and protectionism. The president may score points with union bosses, import-competing producers, and some workers, but at great expense to taxpayers, workers and businesses more broadly.

Cordoning off the estimated $1.7 trillion U.S. government procurement market to U.S. suppliers would mean higher price tags, fewer projects funded, and fewer people hired. In today’s globalized economy, where supply chains are transnational and direct investment crosses borders, finding products that meet the U.S.-made definition is no easy task, as many consist of components made in multiple countries. And by precluding foreign suppliers from bidding, any short-term increases in U.S. economic activity and jobs likely would be offset by lost export sales – and the jobs that go with them – on account of copycat protectionism abroad.

Buy American laws have been used to limit competition for government procurement to domestic firms and workers since 1933. General Buy American restrictions already apply to all government procurement of supplies and materials for use within the United States. Those provisions require that all “unmanufactured” products (essentially, raw materials) procured be mined or produced in the United States and that all “manufactured” articles procured fit the definition of a “domestic end product,” which is an article manufactured in the United States from components, which are at least 50 percent (by value) U.S.-produced.

Those Buy American restrictions can be waived if any one of three conditions applies: (1) a waiver would be in the public interest; (2) the products are not available from domestic sources in sufficient quantity or of satisfactory quality, or; (3) the cost of using US-made products is deemed “unreasonable.” Under the Federal Acquisition Regulations, “unreasonable cost” is defined as a situation where foreign supplies and materials are offered at a price that is six percent or more below the price of domestic supplies and materials.

But there are even more restrictive Buy American provisions governing Transportation Department procurement rules for highway and related projects. These rules require that all of the iron, steel, and manufactured products used in these projects be produced in the United States. The definition of U.S.-manufactured products is the same here as under the general Buy American provision, and the same thresholds for public interest and short supply waivers also apply. However, the unreasonable cost waiver is considerably different. Under this provision waiving the restriction on the basis of unreasonable cost requires that the total project cost (not the input cost) be at least 25 percent higher. That is an enormous cushion for domestic suppliers, which accords them license to tender their bids at exorbitant prices.

There is another set of waivers that are supposed to ensure some competition in the U.S. government procurement market. Under the Trade Agreements Act of 1979, the president is authorized to invoke the public interest waiver of the Buy American rules and exempt countries which reciprocally waive their own buy-local restrictions for U.S. firms. Those countries include signatories to the World Trade Organization’s Government Procurement Agreement or parties to U.S. free trade agreements (like the North American Free Trade Agreement) that contain full government procurement chapters.

Whether these waivers would be invoked by President Trump seems highly unlikely – it would at least contradict his inaugural rhetoric.  Moreover, Senator Sherrod Brown (D-OH) plans to introduce new legislation next week to broaden the scope (and limit the potential for exemptions) of government spending that is subject to Buy American rules, to effectively ensure that the $1 trillion or more of infrastructure spending likely to be authorized by Congress is off limits to foreign companies and workers.

With low-cost suppliers of crucial materials and some of the world’s most experienced and efficient civil engineering firms (think dredging America’s too shallow harbors to accommodate the large Post-Panamax container ships) effectively excluded from the infrastructure spending bonanza, U.S. suppliers will be less restrained in their cost proposals, which means fewer, more expensive public projects.

As individuals spending their own money, most Americans seek to maximize value. That often means shopping for groceries at a big supermarket chain instead of the gourmet market or patronizing Home Depot instead of the hardware store on Main Street. Shouldn’t we expect Washington to spend our tax dollars with a similar eye toward prudence and value?

The instinct to want to insulate “our” markets, protect “our” businesses, and prevent “our” resources from leaking into other jurisdictions at “our” expense is easy to grasp.  But the idea that restricting government procurement spending to American goods, services, and workers will produce that outcome is misguided, nonetheless.

When we artificially reduce the pool of qualified suppliers or the variety of eligible supplies that can satisfy procurement requirements, projects cost more, take longer to complete, and suffer from lower quality. Only a basic understanding of supply and demand is required to see that limiting competition for procurement projects ensures one outcome: taxpayers get a smaller bang for their buck.

Sure, some U.S. companies will win bids, hire new workers, and generate local economic activity. What will be less visible — but every bit as real — are the contracts denied numerous other U.S. businesses and workers because the resources have been stretched and depleted to satisfy restrictive procurement rules. Some U.S. companies and some U.S. workers may benefit, but the real value of public spending  — the actual products and services procured — will decline.

While President Trump seems to be prioritizing U.S. companies and workers, he must know that well over 6 million Americans work for foreign-headquartered companies here in the United States.  He must know that over $1.2 trillion of foreign direct investment is parked in the U.S. manufacturing, undergirding valued added activity, and supporting jobs and the tax base.  Tightening Buy American rules will hurt these firms and possibly chase them and their investments offshore.

It is the responsibility of elected officials who tax, borrow, and spend to be prudent stewards of the public’s finances. Yet the temptation to breach that implicit contract to advance self-serving ends often proves irresistible – especially when the action finds refuge in patriotism."