On January 28, 2009, the US House of Representatives passed the American Recovery and Reinvestment Act of 2009. Out of the bill's 700 text pages, a small half-page section attracted enormous media attention: the section requiring that all public projects funded by the stimulus plan must use only iron and steel produced in the US. The US Senate draft, which is being debated in Washington this week, includes a broad Buy American provision that goes further than the House bill, expanding the requirement to all manufacturing products.
Congress included these provisions in the legislation because it is popular to argue that “US taxpayer money should go to US workers”. Members gave short shrift to concerns that other countries would emulate US practices and retaliate against violations of US trade obligations. Nor did they calculate that foreign countermeasures could result in net job losses.
In a policy brief from the Peterson Institute for International Economics, a Washington-based think tank, we conclude that the Buy American provisions would violate US trade obligations and damage the US reputation, with very little impact on US jobs. We estimate that the additional US steel production fostered by the Buy American provisions of the House bill would translate into a gain in the steel industry of around 1,000 jobs. The job impact is small because steel is very capital intensive. In the giant US economy, with a labour force of roughly 140 million people, 1,000 jobs more or less is a rounding error.
The Senate version of Buy American provisions, by expanding provisions to all manufactured goods, might yield a gain of 9,000 jobs. Again the gain is relatively small, since even now only a small proportion of US government procurement is spent on imports. However, if just a small proportion of US exports purchased by public entities abroad was at risk of an echo effect or outright retaliation, the job loss entailed could range between 6,500 and 65,000 jobs – though reaching the higher end of that range seems extreme.
Foreign challenges emerged quickly after the House passed its Buy American provisions. The EU and Canada were among the loudest voices opposing the provisions. John Bruton, EU Ambassador to the US, sent letters to both Treasury Secretary Tim Geithner, and Secretary of State Hillary Clinton deploring the signal the US would send to the world. Domestically, all the main business organisations, along with dozens of major US corporations, lobbied strongly against the provisions, knowing that a drop in US exports to the world would harm the US economy, especially in time of crisis. Moreover, the Buy American provisions contradict the G-20 commitment not to implement new protectionist measures – a commitment that was designed to forestall a rush of "beggar-thy-neighbour" policies.
On February 3, 2009, President Obama stated that the provisions were “a mistake” as they would send a protectionist message to the world and risk a trade war. As a result, he wants “to see what kind of language we can work on this issue.” Our report suggests that the best outcome would simply delete the Buy American provision in the House-Senate conference. However, next best would be to keep the House version, applying the Buy American restriction only to iron and steel, but modifying the language to state explicitly – in either the statutory text or in the legislative history – that the public interest waiver should be used to avoid any violation of US trade obligations. The third option would be to issue a presidential statement – preferably before legislation is finalised – that the US will respect its international obligations when it applies the Buy American provisions and will use the waiver authority in law to that end.
The world is carefully watching the first moves of President Obama to gauge the tone of the new administration’s trade policy. Buy American provisions are an early test. Unless recast or waived, the provisions will be read as an Obama trade policy that leans toward protectionism – with severe consequences abroad.
Authors' Acknowledgement: Peterson Institute research assistants Matthew Adler, Claire Brunel, and Jisun Kim carried out much of the analysis for this piece.
Editors' note: This column is a Lead Commentary on Vox's Global Crisis Debate page; to read further discussion and/or post a Commentary on this, please go to the Open Markets theme of Vox’s Global Crisis Debate page.
Gary Clyde Hufbauer and JeffreyJ.Schott (2009). “Buy American: Bad for Jobs, Worse for Reputation” Peterson Institute Policy Brief No. PB09-2.