Buy American . . . Again
Like a mild cold, Buy American keeps coming back. It may inconvenience us, but it’s not going to kill us. The analogy is imperfect because a cold makes us feel bad while Buy American makes us feel good, as long as we don’t think about it in detail. Indeed, that is the main reason why it has lingered so long (since 1933 as far as legislation is concerned)—it’s good politics. It’s patriotic. It creates jobs.
When President Biden spoke to Congress last week, he spent more time on this than I expected: “There’s no reason the blades for wind turbines can’t be built in Pittsburgh instead of Beijing,” Biden said. “No reason. None. No reason.” And, not surprisingly, he linked it to jobs. His proposal will “create millions of good-paying jobs—jobs Americans can raise a family on.”
Interestingly, and this was surprising, he ad-libbed: “And I might note parenthetically—that does not—that does not violate any trade agreement. It’s been the law since the ’30s: Buy American.” This was not in his prepared remarks. He may be wrong about that, but it was nonetheless reassuring to see a president thinking, and presumably worrying, about consistency with our trade obligations.
So, the question is, is Buy American a good policy or not? Unfortunately, the answer is not clear. CSIS’s examination of rules of origin in supply chains, using United States-Mexico-Canada Agreement auto rules as a case study, concluded that rules that discriminate in favor of U.S. content will create U.S. jobs, but at the cost of making the affected industry less competitive globally. Companies will have to spend time and money to restructure their supply chains, and the products they produce domestically will almost always be more expensive than the products they produce in lower wage countries.
Companies don’t move offshore simply to spite the U.S. government. They move because it makes economic sense—either to produce more cheaply or to better access a foreign market in order to grow faster. When Biden says there’s no reason why wind turbine blades can’t be built in Pittsburgh, he’s missing the point. Of course they can be built in Pittsburgh, but it may not make economic sense to do so.
The usual argument from Buy American opponents is the consumer price issue: Buy American will make prices of everyday products more expensive. That is probably true, but there is not a lot of evidence that anybody cares, particularly if the price increase is marginal. A stronger long-term argument is that it makes the United States less competitive globally. Making wind turbines in Pittsburgh is fine if you’re only going to sell them in the United States, and the government is the only one that is going to buy them. If you want to export them, however, good luck. In the short run, that doesn’t matter much because of the expected post-Covid demand surge in the United States, but in the long run, our future competitiveness depends on our ability to market to the world, and if Buy American actually works, it will end up a liability rather than an asset.
Whether it will work also turns out to be a complicated question. One issue is scope; the other is administrability. With respect to the first, federal procurement for goods in fiscal year 2019 was $231.4 billion, a small fraction of total federal spending ($4.4 trillion) and an even smaller fraction of total U.S. economic activity. For a few sectors—subway rail cars are a good example—federal procurement is important, but for most it is not. That means if federal requirements, including Buy American rules, are too onerous, many manufacturers will simply forego selling to the government and concentrate on the private sector where the real money is.
The complexity of and ability to administer the rules primarily relate to how parts and components are treated. One of the criticisms of Biden’s proposal has been that 97 percent of federal procurement is already domestic, so his policy will gain little, but that is a bit misleading because of the way parts and components are counted. Currently, a product counts as “American” if 55 percent of its content is domestic (a Trump-authorized increase from the original 50 percent). That leaves plenty of room for foreign inputs, and current policies that permit some components incorporated into others to be considered wholly American provide more room.
So, 97 percent is not really 97 percent, and the Biden administration seems determined to tighten up that process by eliminating exceptions, changing the way content is counted and possibly changing the 55 percent requirement. If they do all those things, Buy American will mean a lot more than it does now. But that means that the problems it causes will be greater as well.
One of those problems may be compatibility with our international obligations. Biden is right that the Buy American Act predates the General Agreement on Tariffs and Trade and the World Trade Organization (WTO) and is thus “grandfathered,” but the United States also subscribes to the WTO Government Procurement Agreement (GPA), which obligates us to open our government procurement to other GPA countries for the agencies we have listed in our accession agreement. Failure to honor our obligations will subject the United States to WTO complaints and ultimately cause us to owe compensation to countries we have disadvantaged.
So, the immediate impact of the Biden policy could be big or small depending on what the administration ends up doing. The long-term impact, however, will more likely be negative due to higher prices and a less competitive manufacturing base.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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