Starting a trade war with “Buy America”

June 19, 2009

diana-furchtgottroth

–- Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The views expressed are her own. –-

When Congress inserted “Buy America” protectionist provisions that required some goods (such as steel, cement, and textiles) financed by the stimulus bill to be made in America, our government invited a trade war with important economic partners.  Now China and Canada are imposing their own protectionist regulations, potentially destroying well-paid American jobs in the export sector.  Other countries may follow suit.

This week China reported that the government now requires stimulus projects to use domestic suppliers when possible, even though in February it promised to treat foreign companies equally.  The Chinese $585 billion stimulus package has resulted in a World Bank growth forecast of 7.2% for China this year, far above other industrialized countries.

And on June 6 the delegates at the Federation of Canadian Municipalities passed a resolution calling on “local infrastructure projects, including environmental projects such as water and wastewater treatment projects, [to] procure goods and materials required for the projects only from companies whose countries of origin do not impose trade restrictions against goods and materials manufactured in Canada.”

The tragic losers of “Buy America” are free trade agreements and potential job growth in the American economy. Seductively, “Buy America” promises workers they can have it all — cheap goods from China, oil from Canada, as well as protection from global competition. But real life just doesn’t work that way.  In reality, “Buy America” is shorthand for fewer jobs as other countries retaliate.

Many markets no longer have national boundaries but global reaches. America sits at the center of global markets for technology, equipment manufacturing, finance, banking, fashion, and advertising — to name but a few. When international markets expand, America grows. When barriers are erected to trade, jobs — and also wages —shrink.

Trade creates jobs not just through investments of foreign companies at home, but also by increasing employment at exporting firms. This effect, though less obvious, is far more significant. That’s why “Buy America” hurts employment.

Andrew Bernard, a professor at Dartmouth College, together with economists Bradford Jensen and Peter Schott, find that firms that trade goods employ over 40% of the American workforce. They conclude that approximately 57 million American workers are employed by firms that engage in international trade.

They analyze American imports and exports using customs documents that accompany shipments of goods crossing the border, along with reports of firms’ employment. The resulting information provides the most precise picture available of the employment effects of American trade.

Back in February, Caterpiller spokesman Jim Dugan declared, “Our position is that, while ‘Buy American’ may sound good, in fact we’re very concerned that if this stimulus legislation contains the ‘Buy American’ provision, other nations and regions of the world would follow our lead and pass similar provisions.”  He was right.

Trade also benefits millions of families who cut their shopping bills by buying low-cost imports. To take just one example, the amount that Americans spend on clothing has declined by 21% in real terms over the past 20 years, yet our closets are fuller than ever.

The benefits of free trade, such as increased employment, higher economic growth, and lower prices, are often taken for granted. But the disadvantages of free trade — such as the occasional instances of shuttered plants and lost jobs where American firms are not as efficient as international competitors — are all too visible.

Trillions of international dollars pass through America each year not because we are isolated, but because we are the hub of the world. Terrorists twice attacked the World Trade Center because the building symbolized international trade. They destroyed a building and murdered thousands of innocent Americans, but they failed to vanquish world trade. Sadly, politicians who erect barriers to trade are hostile not only to trade but to our country and to our jobs.

64 comments

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Yes our closets are full. They’re full of clothes sewn by children working in sweatshops, made from pesticide-contaminated cotton and that fall apart at the seams after a few washings.

How much plastic do we have to eat before we start making a bonfire out of globalists and stock analysts?

Posted by Jeff Griffin | Report as abusive

Diana,
Unemployment rate was higher than 5% and probably reached 9 or 10% in the 1970s but the trade deficit as a proportion of the US GDP was high as well and probably equivalent to the number you have quoted for 2006.
I am not too sure that there is a statistical correlation between unemployment rate and trade deficit. Unemployment rate is more likely a holistic effect of national and international trade, national and international consumer spending and government spending.
Kalahasti

>>>>>>>>>>>>>>
Dear Mr. Castle,

When America had a 4.4% unemployment rate, in December 2006, the trade deficit stood at $68 billion. Now, the unemployment rate is 9.4% and forecast to rise higher, and America’s trade deficit stands at around $29 billion. Almost everyone would agree, especially the unemployed, that people were better off with a higher trade deficit and lower unemployment. Should we also be concerned about trade deficits between individual states, such as Maryland and Virginia?

Diana

How many American goods did the Bangladeshi people buy?

Posted by MarkusR | Report as abusive

You want to protect a small number of jobs that pay more than $100,000/year. It’s a reflection of who you are and your view of America.

In short, you’re clueless. The last time America was a good place to work was during the Johnson administration. Many factory workers had vacation homes. Jobs were plentiful, NOTHING made in mainland China was for sale in the United States, we made T-shirts here in America.

Sadly, you won’t lose your job protecting a small number of wealthy people’s income, but if you don’t get a clue, you won’t succeed in doing it.

Posted by Randy Cunningham | Report as abusive