“We may likewise diminish our importations, if we would soberly refrain from excessive consumption of forraign wares in our diet and rayment, with such often change of fashions as is used, so much the more to encrease the waste and charge; which vices at this present are more notorious amongst us than in former ages. Yet might they easily be amended by enforcing the observation of such good laws as are strictly practised in other Countries against the said excesses; where likewise by commanding their own manufactures to be used, they prevent the coming in of others, without prohibition, or offence to strangers in their mutual commerce.”
That’s from Thomas Mun’s 1664 mercantilist treatise “England’s Treasure by Forraign Trade.” You’d be forgiven for finding it eerily familiar though.
Part of Obama’s $819bn stimulus bill currently being debated in the Senate contains this little gem:
The legislation, entitled “The American Steel First Act,” which the Buy America Coalition was instrumental in helping to develop, would require federally funded construction projects under the Department of Transportation (DOT), the Department of Defense (DOD) and the Department of Homeland Security (DHS) to use 100 percent American-made steel products.
In short – infrastructure projects funded by the stimulus would have to use US-made steel.
The domestic appeal of such a move is pretty obvious. But, should it pass the Senate, it will come at a cost — notably the ire of US trading partners.
Canada has already voiced its concern and the European Union is doing so today. We would hazard a guess that the clause is also unlikely to engender any good feeling from China, currently reeling from its own labour problems. Angering your biggest trading partner and treasury-buyer, during a global recession, when you’re issuing large amounts of debt to fund your own stimulus packages may not be the smartest thing to do.
But aside from the dubious international relations involved, Dartmouth economics professor Douglas Irwin points us to the economic hazard, with a bit of historical precedent:
… history has shown that Buy American provisions can raise the cost and diminish the effect of a spending package. In rebuilding the San Francisco-Oakland Bay Bridge in the 1990s, the California transit authority complied with state rules mandating the use of domestic steel unless it was at least 25 percent more expensive than imported steel. A domestic bid came in at 23 percent above the foreign bid, and so the more expensive American steel had to be used. Because of the large amount of steel used in the project, California taxpayers had to pay a whopping $400 million more for the bridge. While this is a windfall for a lucky steel company, steel production is capital intensive, and the rule makes less money available for other construction projects that can employ many more workers.
Adam Smith would be rolling in his grave.
Related links:
Brussels warns on ‘Buy American’ rule – FT
Economic Nationalism and the USD – FT Alphaville
Buyamerican.com