New York Times "Buy America" Debate

Graphic from New York Times blog (Photo: Maurizio Gambarini/European Pressphoto Agency)

I'm reading the New York Times blog on "That 'Buy American' Provision" while I wait to see what the conference committee did on this issue.   There are eight short contributions, four in favor of the provision, and four against. 

Robert Scott of the Economic Policy Institute argues that the provision will enhance the multiplier effect of the stimulus bill:

When the government buys steel for a bridge, for example, it has several objectives. Minimizing costs is one, but when the economy is in recession, there is added incentive to stimulate domestic employment. And when steel is purchased from a domestic producer the workers’ wages generate further spending, which supports yet more jobs in the domestic economy.

However, Hufbauer and Schott, at the Peterson Institute, have estimated that the Senate version - more comprehensive in its sector coverage than the House version - would only create 9,000 manufacturing jobs.  Even bumping that figure up to take account of secondary job creation, you're not going to get very much.  This relatively small number of jobs could easily be offset, or more than offset, by retaliation from our trading partners.

Scott argues that the provisions (the Senate explicitly, the House version implicitly?) would not violate U.S. trade obligations.  I think that's controversial - see Hufbauer and Schott, for example.  He does point out that the Senate amendment points to the value of participation in trade agreements.  I agree.

Ha-Joon Chang, of Cambridge, argues that sometimes developed nations need to use protectionism to buy themselves "breathing space" to allow their producers to restructure. 

Chang says there is no chance of a trade war in the short run - existing trade agreements and the WTO will prevent that.

However, existing trade agreements have enough slack to allow countries following them to the letter to wage a good sized trade war (using the space between actual tariffs and the upper bound constraints on tariffs, anti-dumping measures, creative interpretations of the rules, and so on).  Countries would very quickly begin shading their interpretations and engaging in violations.  Pretty soon they wouldn't even bother to try and justify their actions with respect to the agreements at all.  There's been enough foreign concern over this provision to suggest that there could easily be a trade war in the short run.  Chang's confidence seems misplaced. 

In the longer run

...if veiled protectionism continues, we run the risk of making a mockery of these agreements and destroying the global trading system. However, the solution to this problem should not be an adherence to the principle of free trade, which is not workable in practice anyway, but instead to establish a new international agreement that allows a transparent, forward-looking and time-bound protectionism as well as more infant-industry protection for developing countries.  In other words, by allowing more protectionism now in a controlled way, we will be able to preserve the international trading system better in the longer run.  

Chang described this proposal in a little more detail last fall in the Financial Times:The case for forward-looking protectionism in the US. Read the comments by Brett Williams and Martin Wolf, and Chang's response. 

Chang hopes that protectionism would provide a shield behind which the government could use sticks and carrots to encourage restructuring.  However, protectionism would reduce firm and industry incentives to restructure.  Moreover, the point of the provisions under consideration in this stimulus bill is not restructuring manufacturing sectors, such as automobiles.  Finally, there is a lot of scope for protection within the existing international system, but it does control and constrain it.

The pro-provision group also includes Ohio Senator Sherrod Brown and Roger Simmermaker (vice president of his local machinists union and the author of a book on buying American.  I didn't find much in these pieces.

Paul Krugman made a better argument in favor of the "buy America" provision (Protection and stimulus), but ultimately found it unconvincing (More on protectionism, wonkish).

On the anti-side, Jagdish Bhagwati did a fine job - reproduced in part below.  Gary Clyde Hufbauer reproduces his 9,000 job figure, but his longer policy brief at the link above is much more helpful.  Anne Krueger and Burton Folsom also make contributions.  While I think they are right, I don't think their efforts are very strong.

...First, having the buy-America provisions stay in, even with the W.T.O.-consistency qualifier, is much less satisfactory than what Senator John McCain suggested, which was to take them out altogether. The truth is that lobbyists can spend vast amounts of money challenging the qualifier, leaving protectionism alive and well. 

Second, the notion that even an effective W.T.O.-consistency qualifier in our procurements will soothe other nations and prevent trade retaliations and trade wars is naïve. Contrary to what others believe, countries like Brazil, China and India, which have not signed the W.T.O.’s 1995 agreement on governmental procurement and, therefore, do not enjoy those rights to our procurement purchases, will retaliate. They can raise many current tariffs also in a “W.T.O.-consistent” way. (Remember that China and India have large public sectors.) They can easily shift their purchases of aircraft, nuclear reactors and other high-value goods from us to Europe and Japan. We would then retaliate, prompting retaliations by the others: all in a W.T.O.-consistent fashion. Indeed, President Obama would find himself in a W.T.O.-consistent trade war.

The A.F.L.-C.I.O. argues that the Europeans, for their part, protect certain domestic sectors in their government procurement decisions, so it is O.K. for us to close their access to our procurement via buy-American provisions. But this is a mistaken argument.

The W.T.O.’s agreement on government procurement allows signatories to choose the sectors to which they will apply it. So, we have chosen our sectors where the others can bid for our contracts just as the European Union has chosen their sectors where we can bid. These choices, and therefore exclusions of other sectors, are part of the overall balance of concessions that were reached in several areas like agriculture, services and manufactures. To argue that we are now free to terminate access to our procurement in areas we previously agreed to open to bids from the Europeans is to unravel that bargain unilaterally and in violation to the concessions we made.

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