Just about every president promises a new-and-improved Buy America plan, and just about every president leaves with disappointing results. Joe Biden is likely to be the next.
Biden signed an executive order on Jan. 25 meant to boost federal purchases of American-made products, to strengthen the U.S. manufacturing sector. Federal law already requires this, but waivers are available if U.S.-made products cost too much. The Biden order will make it harder to get a waiver, while also requiring more components inside finished products to be American-made instead of imported. There will also be a new White House office enforcing the rules and making sure purchasing agencies don’t cut corners.
It might be good politics, but it’s bad economics. “It’s not a job-creating approach,” says trade economist Gary Hufbauer of the Peterson Institute for International Economics. “You kill downstream jobs in one of two ways. Either you make it more expensive, so less of the downstream product is purchased, or if you have a given amount of budget money you’re spending on this Buy America package, it’s not available for other things to spend on. You just can’t build as many miles of road when the price is higher.”
Buy America laws governing federal purchases have been on the books since 1933, and about 97% of federal goods purchased are assembled in the United States. Federal agencies can seek a waiver if a domestic product is considerably more expensive than a similar foreign product, with thresholds ranging from 6% more costly to 50%, based on the type of product. There are also rules requiring domestically produced components inside goods to be made in the United States, with 50% or 60% being common thresholds.
The Biden order doesn’t automatically set new targets, but it begins a process that will likely raise the the amount of domestic content required inside products considered made in America. Depending on the new targets, there could be significant changes for some sectors. “This is particularly true in the information and communications technology sector,” says William Reinsch of the Center for Strategic and International Studies, a former undersecretary of commerce for exports. “If the government ends up changing the content rules, that could result in a major upset of existing supply chains and have a big economic impact.”
Raising costs, depressing output
Most types of protectionism that limit competition raise prices, which is why several studies show that Buy America provisions depress economic output and overall employment. In most cases, it simply costs more to build stuff in the United States than in China, Mexico or other offshore havens manufacturers have flocked to during the last 30 years. The higher U.S. cost of rebar or piping or tires or solar panels protects those U.S. jobs, but it also raises the cost of projects and introduces distortions that undermine the whole point of the program.
The Peterson Institute estimates that each job protected by Buy America provisions already on the books costs $250,000 in taxpayer subsidies and lost output. A 2018 Canadian study found that Buy America policies protect about 57,000 U.S. jobs, but eliminating them completely would create 300,000 new jobs, on net. Canada routinely criticizes Buy America policies, since Canadian producers lose out, and the country’s foreign minister said on Jan. 25 she was concerned Biden’s new order could harm trade between the two countries.
Tougher Buy America provisions are a small part of Biden’s broader economic plan, and something he can implement quickly, without Congressional legislation. The measure will appease some liberal Democrats who favor more protectionism and would even like to see President Trump’s new tariffs on imports from China and other countries remain in place.
A much bigger challenge for Biden will be trade reforms that harness the power of free trade, which allows companies to organize themselves in the most efficient manner, while developing new ways to protect workers whose jobs are threatened by those same efficiencies. Most economists agree that free trade allows producers to get the most bang for the buck, but the United States has done a notoriously poor job of helping workers whose jobs go overseas. The decline of good-paying blue-collar jobs, with little to replace them, is one factor that fueled the Tea Party populism that ultimately helped Donald Trump win the presidency in 2016.
Biden says he wants to confront China on trade abuses in alliance with other nations, instead of the unilateral approach President Trump favored. But he hasn’t outlined a detailed plan on trade, and it will take time at any rate. His Build Back Better program calls for trillions of dollars in new investment in green energy and other parts of the economy that could fuel a manufacturing boom—but only if reluctant Republicans in Congress go along with the spending. Until then, Biden hopes voters will buy his Buy America plan.
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Rick Newman is a columnist for Yahoo Finance, offering insightful, provocative takes on many of the biggest stories of our time. He was previously Chief Business Correspondent, and before that Pentagon correspondent, for U.S. News & World Report. He’s also the author of four books, including Rebounders: How Winners Pivot from Setback to Success.