Buy American: Big Deal or Small Cheese?

Last week was Buy American week as the president went to Pennsylvania (where else?) to announce his proposed new rules on federal procurement. This has been a frequent topic of mine in the past, but now that there is something more concrete on the table, it’s time to take another look.

From a purely academic point of view, Buy American is now and always has been bad economics. The rules tell manufacturers that if they want to sell to the government, they have to abandon the normal market-based model of lowest price and highest quality and insert a new variable of geographic location into their calculations. That will inevitably mean higher prices (but hopefully not lower quality), which our taxes will end up paying. After all, if U.S. manufacturers were consistently the low-cost producers, Buy American would not have been necessary in the first place. 

The debate, of course, does not end in academia. In the real world there are other factors, including creating or preserving manufacturing jobs and deterring the off-shoring that has caused so many factory closures. In addition, Covid-19 has reminded us that for critical parts of our economy, it is handy to have secure domestic sources of supply in a crisis.

Those are important—and legitimate—goals too. My frustration as an occasional academic is that the administration wants to discuss only the benefits without mentioning the costs. The former may well outweigh the latter—that’s a legitimate debate—but pretending that there are no costs is not being honest with the American people. Since there is a 60-day comment period for the proposed rule, there will probably be comments pointing out the costs, and I hope the administration will respond by acknowledging them and explaining why it is important to impose the new requirements anyway rather than just denying there are any problems.

That was the rant. Now, on to the substance: Will the new rules make any difference? The short answer is probably not very much. First, federal procurement is somewhat more than $600 billion per year (only about half is goods) in a more than $22 trillion economy. That makes it a bit less than 3 percent of the U.S. economy (even less if you only count goods procurement), so any impact is going to be modest.

Second, 96 percent of current government procurement is considered “American” under the current rules. I’ve said before that is a phony statistic, since the current rules require only 55 percent U.S. content for a product to be considered “American,” but raising the level to 60 percent and ultimately to 75 percent will make only a marginal difference. The requirement that contractors provide more evidence of the sources of their parts and components may actually make more of a difference, if you assume that currently they may be giving themselves the benefit of the doubt knowing that nobody is checking.

Third, the unknown is whether companies will bother to change their behavior. Manufacturers whose domestic content may fall below the new floor will have to decide whether it is worth the effort and cost to meet the new reporting requirements and adjust their supply chains. The latter, by the way, is not so simple. Companies have contracts with existing suppliers they are legally bound to honor, and certification of the quality and reliability of alternatives takes even more time. A phase-in period helps, but the company must ultimately decide if the juice is worth the squeeze. A company that has substantial sales to the government that it is at risk of losing, for example, in the office furniture business, may make some changes. Companies for which federal sales play only a small role may decide not to bother. Switching suppliers to domestic sources may be more complicated and expensive for small and medium-sized businesses than for larger companies with more market power.

Also unknown is the trade impact. The administration has regularly said its proposals comply with U.S. international obligations, but details are lacking. The World Trade Organization (WTO) Government Procurement Agreement requires the United States to provide equal treatment to other signatories for the government agencies we listed in our accession document, and you can be sure Canada and the European Union will be watching closely to make sure those commitments are honored.

Finally, as with Covid-19, there is the risk of contagion. Congress, which has pushed the Buy American envelope in the past, seems poised to do it again. At the end of May, the Senate Finance Committee approved an amendment to raise the tax credit for purchasing electric vehicles (EVs) from $7,500 to as much as $12,500. The catch is that the first $2,500 of additional credit would only apply to cars assembled in the United States, and the second $2,500 only to cars made at facilities whose workers are union members. In addition to violating WTO rules, these provisions will slow the conversion to EVs and discriminate against cars that may well be cheaper and quite possibly better, including those made in the United States by non-union workers. It is hard to see this as a case where the benefits exceed the costs, and it will be interesting to see what position the administration takes on the amendment if it is included in either of the infrastructure bills moving through Congress.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C. 

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