Buy American Policy Backfires
Kurt Brouwer June 10th, 2009
Trade protectionism rears its ugly head yet again. Anyone who has studied the Great Depression knows that it was severely exacerbated by protectionism that was triggered by the Smoot Hawley Tariff Act of 1930. Now, we are seeing signs of protectionism yet again.
In an earlier post, we pointed out that protectionism could squelch the recovery (see How to Squelch an Economic Recovery). Our fearless leaders seem to have forgotten this point in their politically-inspired deployment of government funds.
This Bloomberg piece aptly illustrates the problems inherent in large scale projects guided by government [emphasis added]:
Cisco, Alcatel Chafe at ‘Buy American’ Mandate in Stimulus Plan (Bloomberg, June 10, 2009, Todd Shields and Mark Drajem)
Cisco Systems Inc. and Alcatel- Lucent want “Buy American” provisions waived for a $7.2 billion U.S. program to expand high-speed Internet access, saying the rules are difficult to meet and undermine the economic stimulus program.
Requiring U.S.-made parts would be “grossly inefficient” and a “radical departure” from normal markets, said Cisco, the largest maker of networking equipment. The comments were filed with the U.S. agency running the broadband initiative, part of the $787 billion stimulus package.
The rules may slow projects the stimulus was meant to spur because telecommunications networks contain parts from around the globe, the two equipment makers say. Congress, seeking to boost U.S. jobs, said funds provided under the law passed in February generally can’t be used for iron, steel and factory goods that aren’t U.S.-produced.
“We’re talking about technologies that are no longer made in the United States,” John Marinho, vice president of public affairs for Paris-based Alcatel-Lucent, said in an interview. The company operates in 130 countries, and “you need a global scale,” he said.
One obvious problem to this ‘Buy American ‘ proviso is that it just slows everything down. How do you define U.S. produced? Even cars made in America by domestic car companies have significant foreign-sourced components. And, the point of stimulus spending is to get things going while the recession is underway, isn’t it?
For example, a complex broadband network would require thousands of parts, each of which is made up of even more parts. Who is going to track the provenance of all these items? What will that cost? And, what happens when a given part is no longer made here? Do you need a pass from the regulators?
Bloomberg continues:
President Barack Obama and Congress gave the NTIA $4.7 billion to spend on broadband, and provided $2.5 billion to the Rural Utilities Service, part of the Agriculture Department. The funds are part of the program to speed recovery of the U.S. economy.
Complex procurement chains “cannot be easily reengineered and supplanted in a matter of weeks or months,” Cisco said in its comments.
“The public interest in generating jobs cannot be served if network construction on public projects is delayed” by a search for U.S.-based suppliers, Cisco said.
The NTIA and Rural Utilities Service are working to devise the program’s rules, which are to be released “in early summer,” Mark Tolbert, a spokesman for the Commerce Department unit, said in an interview. He didn’t provide a date and declined to comment on the requests for waivers.
Great. So, the money is supposed to speed recovery of the economy, yet the government is not even going to release the rules for procurement until ‘early summer’ and no guidance is given on waivers.
…The Telecommunications Industry Association, the trade group representing Cisco, Alcatel, Santa Clara, California-based Intel Corp. and ADC Telecommunications Inc. of Eden Prairie, Minnesota, said in a June 1 letter to the Commerce Department that thousands of components and parts are made around the globe and requiring documentation of their origins “will severely complicate” applications for funds.
…There’s no reason to exempt companies such as Cisco and Alcatel-Lucent from the Buy-American provision, said Debbie Goldman, Washington-based telecommunications policy director for the Communications Workers of America.
“This is about creating American jobs — not Chinese jobs,” Goldman said in an interview.
That last point is a rather xenophobic comment. I thought the goal was economic stimulus, not starting a fight with a major trade partner.
Granting a blanket exemption “in effect awards companies that have created a global supply chain that excludes the United States,” Goldman said.
In a filing, she said applicants should request exemptions for each piece of equipment, subject to possible NTIA vetting.
“Show us,” Goldman said in the interview. “If you’re claiming a router isn’t made in America, show us.”
Officials should approve use of equipment from 51 countries with U.S. trade agreements that may be considered as satisfying the Buy-American requirements, Goldman said.
The list, put out by the Office of Management and Budget, which supervises spending by government agencies, doesn’t include China.
Oops. The deal includes exemptions for 51 countries, but it just so happens to exclude China. What a coincidence. That could be a problem, right?
Bloomberg continues:
“I would caution against anything that adversely affects the flow of trade between the United States and China,” Marinho of Alcatel said. “It just doesn’t make sense to exclude them from any part of the game when it comes to broadband.”
…Broadband-equipment makers aren’t the only ones saying they’re feeling the pinch of the requirements. The stimulus spending includes $6 billion in municipal projects, and the wastewater industry isn’t sure what equipment it can use, said Dawn Kristof Champney, president of the Water and Wastewater Equipment Manufacturers Association in Washington, which represents companies such as Irving, Texas-based Flowserve Corp. and Siemens AG, based in Munich.
“American manufacturers are finding it difficult to comply with these new ‘Buy American’ rules because it is often impossible to avoid sourcing at least a portion of their content from other countries,” Thomas Donohue, the president of the U.S. Chamber of Commerce, wrote in a letter to Obama on May 22.
The rules are impeding projects for wastewater and water plants, and could eliminate jobs for some steel-pipe workers, Donohue wrote.
“We are a globally sourced industry,” Kristof Champney said in an interview. “It’s a very, very frustrating process, and it’s been stifling.”…
We are seeing the unintended consequences of politically-oriented policies. Sure, we want to improve the U.S. job market, but that will happen when the economy improves. Starting a trade war is not going to help the economy improve.
And, now we are seeing signs that other countries are considering retaliation. I don’t want to make too much of this, but we really don’t want to go down this road. If we erect trade barriers, it is not a big stretch to think other countries will also do so.
From Canada, we see some pushback on the “Buy American” policy included in the economic stimulus package passed a few months ago:
Canadian mayors have ended their annual conference with a renewed call to shut out U.S. bidders from municipal stimulus spending.
Mayors narrowly passed a resolution saying as much at their annual conference in Whistler, B.C., on Saturday in retaliation for a “Buy American” policy south of the border that some say is costing jobs in this country.
…Perrault, the mayor of Sherbrooke, Que., says the U.S. Congress has united Canada’s municipalities, provinces, territories and federal government with its “Buy American” policy…
The mantra of protectionist politicians the world over is jobs. Unfortunately, the end result of protectionism is to shut off economic growth and hurt jobs all over the world.
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