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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Dave wrote:
Our only hope for recovery now is to rebuild our manufacturing infrastructure and impose import taxes -to bring the jobs, industry and technology back home.

There one main problem with that.If you impose import taxes against them, they will impose import taxes against you.
You will end up with the US being a poor place to invest in industry because of this.
There is less incentive to invest in industry that ends up in an isolated country.Would you invest in such a country unless the wages were less maybe.Industry will not come back unless every other country becomes equally bad.Its a catch 22.
On the other hand becoming competitive means getting rid of the extreme pay differences that has been due to unions and going back to something relating to supply and demand.
It wont happen, unions will starve us all before they allow that.

If you actually made time to study economics and history, you would understand the power of free trade. Free trade increases the welfare of all countries participating in it, because countries trade goods that have comparative advantages and collectively produce more goods overall, thus higher welfare. Additionally, free trade brings about more efficient economies. The dislocations in the markets are eliminated because labor and capital can more easily move. Part of the reason the great depression was protracted was due to “buy American” policy, the Smoot-Hawley tariff.

Posted by John | Report as abusive

What is in a word? Some people say “Protectionism”, and mean it in a bad way, they usually have “Globalization” as a goal, and can make more money with “Globalization” since slave wages are used in Tyrannical governments, and those who say “Protectionism” is bad, say it because their “Profits” will decrease since people will actually get paid.

They say “Protectionism” is call it “Self Sufficiency”.
Why can’t Wal-mart buy the crap it sells in America?
(Remember when Wal-Mart advertised “Made in USA”?)
I guess Wal-Mart said F U America, Wal-Mart is all about money, not about Loyalty to Country. Why else would they mistreat their employees and fellow countrymen so horribly?

Wal-Mart, now “Globalized” and using words like “Protectionism” so they can keep buying cheap products from China to sell to you for cheap, hoping that cheap product breaks, so you have to buy another one, so more money goes to China through Wal-Mart, and it does nothing but take money OUT of America.

Now picture all the Wal-Marts all over the world sending all that Wealth to China. What does China do with that money? Do they improve their country like America did with her economic Might after WWII? NO! They use it to spread Communism, and Undermine all Western Economies by flooding the Western Economies with Cheap Products while stealing Jobs, leaving America nothing but “Service” industry jobs, leaving Americans nothing but subservient Jobs to the Rich.

How is Wal-mart helping America, the Land Wal-Mart started in, the land Sam was born in.

Wal-Mart could help the globe, help all Western Economies if they simply bought locally manufactured products. Manufacturing Jobs would be created in every country Wal-Mart now finds itself in.

Wal-Mart will not do it though. They will keep saying such things are “Protectionism”, but really, Wal-Mart and other “Globalized” companies are only “Protecting” their profits, and paying Communists to do it.

Posted by C. D. Walker | Report as abusive

To: Diana Furchtgott-Roth,

“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.”

We all know that between 2006 and today we had many major world wide events that affected both trade and employment. I wish you provide more details how foreign trade and employment related. So far you sound like:
if US gov will buy foreign goods worth $39 billions we will reduce unemployment by 5% :).

Here is another point of view that I hope you can prove wrong:
3rd world (China/India/Brasil) are going through Industrial revolution.
New agricultural technologies made 1,000,000′s small farm redundant. They cannot compete with big industrial farms and flood cities with cheep labor – 100,000,000′s farm workers.
Their governments more concern with providing these 100,000,000′s with meaning for today living rather than retirements money and health insurance :). US labor had advantage like better education and technology, but over last 30 yrs these 3rd world narrow these gaps. US labor just cannot compete. I heard 100′s story how free trade is good for 3rd world, I love to hear how it helps US/EU.
US Corporation enjoy benefits of US society while redirect investments to 3rd world undermining our future employment. US manufacturing is shrinking, technology is being outsourced, who is going to taxes to support our retirement in next 20-30 yrs? China or India?

Posted by Sergey | Report as abusive

Well it’s refreshing to see that the “free trade” propaganda hasn’t won over everyone. I was afraid more of the acolytes of globalism were going to come out and tell those of us who see the real results of their policies to steal our wealth for a select few or give it away to foreign governments. Lets see the statisticians argue the real facts as opposed to numbers they can manipulate. I’m sure some will come on to tell me how stupid I am, oh well we’ll see who wins out in congress and I’m going to say it’s not “free trade”.

Posted by Frank Castle | Report as abusive

Free trade is an inevitability. The benefits outweigh the loss.

It operates on the principles of efficiency and economics. You can argue the social effects, but not the economic ones.

If America seeks to participate in a globalised economy, then it must be efficient. If you coddle industries with protectionism, don’t be surprised when those industries can’t compete in the real world a decade later.

Congress can chose to take the protectionist path if it wishes. But sooner or later, the cost of such deadweight policies will be born by America’s citizens. And ultimately lead to the atrophy of America’s competitive advantages.

Economists know this very well. Which is why they rarely feel the need to argue the point, especially with those who have little or no economic knowledge.

But people have a natural rejection to information they don’t understand. After all, what would educated economists know about the economic forces behind the economy?

“My brother-in-law said they caused this fangled economic crisis, and that’s good enough for me.”

Posted by Anon | Report as abusive

The US exists in a world where self-sufficiency is an essential element of defense. Wholesale free trade, especially with potential enemies, with no planning or protection for vital industries is a stupid and suicidal approach. Vital industries include aircraft, construction and farm equipment, and auto manufacturing, food production, high tech industries, and even clothing and shoe production to meet our basic and emergency needs. The objective should never be to maximize trade, but to provide incentives for trade while ensuring long-term permanent capabilities of our vital industries.

Posted by Loren Furland | Report as abusive

Posted by bill
Imagine that we, and all workers of the world, got paid in gold for everything we did. Now imagine that we in America get paid more gold for the same work or making the same products as others in the world. Why would anyone in the world pay more gold for the same product?

Great post Bill you got it right.
For those that think free trade caused it all ask yourselves what would have happened if you did have trade barriers do you really think it would have helped if you are still not competitive.
Do I think that trade barriers could have helped you, well yes they probably could, but only and I say only if those other countries feel sorry for you and do not and I emphasize do not, impose equal barriers to your products.
Good luck with that one in today’s world.

Some of this whole problem may have something to do with the US dollar being the world reserve currency.Oddly I just read that this only came about due to the fact that the US got off the gold standard last if you could actually call it a gold standard.In the end they had to get off of it or lose all of the gold they had so ironically their may have still been something like inflation because fixing gold at 35.00 an ounce dose not necessarily guarantee that you money wont inflate making gold a better and better bargain.

By the way why is the US dollar still even used see c-gold and goldmoney as well as others to see why.
Would have loved to use then on ebay if it was possible but last time I read they would not allow them due to security not being good enough yet.But its much cheaper than wiring money and even cheaper than pay pal provided you can get anyone to accept milligrams or grams of gold ownership electronically transferred to them.No exchange fees either unless you convert to your countries currency.Those people must make a fortune off of us with about 2% each time I change US to Can dollars.Found out about it all when I could not qualify for a credit card and could not find a pre payed one offered here.
Loved the idea and will try them all and post what I learn on my web site.
Since gold is now used anywise someone please tell me why is the US dollar still used.I just do not understand.
Yes there is talk about getting off the US dollar but suspect most of this is hidden from the populace.

One thing that I failed to point out that everyone here should be aware of.
If the government goes with the printing of more dollars to lead to inflation this can also solve all of these trade problems.This is because while you cannot get anyone unions to accept lower wages at least not to the extent you need to, it is possible to inflate the money into less value making industries competitive again.Its funny how people get all extremely very upset if they look under their mattress and 1/2 the money is gone but only very irritated if prices go double.Most people still equate larger numbers of dollars with more wealth by a disproportionate amount.
But if they are going this route it will be very silent and may involve deals with others such as the Chinese so as to not get them angry.
Not sure what the government would need to do to keep the Chinese happy since so many of those US dollars are still in Chinese hands and they do not want the dollars value to go down by that much while they still hold them.
Not sure what they might be doing but a guess might be by kepping the value of gold down so they can buy more of it afterall that is what money is worth,its worth what it will buy.
Read somewhere recently about oil prices in US dollars depended on keeping the amount of gold it will buy up.In other words some Arabs see US dollars as foreign money anywise and only see the gold that the dollars will buy.To them its really only how many ounces of gold to so much oil even if dollars are involved in the middle and you only need to influence a small amount of the markets to influence whether you have shortages or surpluses and prices are influenced by that by a bigger amount than you might at first guess.
Article was old so its hard to say if its relevant today but it seams reasonable that it could.
This all effects trade gold and dollar values so I posted it here.

Yes “free trade” makes all countries better by balancing things out. Thus if you have a higher standard of living it’s going down so that lower countries can rise. That’s fine if you live in a lower standard country or are at the top of the food chain in the higher economy where you can take advantage. It’s a zero sum game, in order for others to rise some must fall, if you are interested in lowering your standard or living and that of your children then “free trade ” is for you, if you live in America. That’s why it’s called protectionism, and if protecting your children’s future is wrong then so be it.

Posted by Frank Castle | Report as abusive

Free trade should always be considered a means to an end rather than and end in itself. Consider the Philippines as a case example. This country once produced its own rice and had enough to export to other countries. I am sure somebody who took Economics 101 in college convinced the country to produce a high-value commodities since at the time cheap rice could be imported from elsewhere. Now rice is scarce and much more costly. The government has to control the retail price so the people do not starve.

I am tired of economists who praise the benefits of this monolithic abstract concept – free trade – as if simple academic concepts necessarily apply to real-life conditions. A nation that makes certain products might indeed be inefficient if we can import similar products at a cheaper price. The Smith family can buy all of its groceries from the local store since it does not make economic sense to produce vegetables in their back yard. But if the Smiths are unemployed, suddenly that back yard starts to look pretty good for vegetables.

The underlying truth is, we can have 100 percent employment for every person who wants to work if we have work for them to do. That’s the bottom line. We can easily create conditions where the work that they do directly and positively affects their ability to survive in society. Alternatively, we can entirely bet on the future of the nation on an economic model that depends on integration and a high level of consumer spending from high income levels.

Posted by Don | Report as abusive

America can take the protectionist route if it wants to. But only if the country can be efficient enough to justify it in the long term.

Otherwise, America’s future will be the loss of competitive exports, overly inflated domestic prices, lowered standard of living, falling currency values and economic stagnation.

And then any jobs gained from protectionism won’t be worth a dime. Not compared to the costs.

The irony is that if this all happens, the economists will probably still be blamed for it all. When non-economists are confronted by the failure of their great ideas, they tend to blame other people.

Posted by Anon | Report as abusive

I find that “trained” economists are the last people to ask about real world issues. Most of them have never held down a real job or ran a real company. Theory is fine in the abstract and in textbooks, not so much in the real world. I can’t honestly see how America’s standard of living would drop more due to protectionism than to losing all it’s jobs to the rest of the world. Anyways, apparently “free trade” is inevitable, lol, I don’t think that word means what you think it means. Is it inevitable like the rational market or some other such economic principle that works on paper but nowhere else? I’ve seen lots of inevitables fail so far, I’d put even money on outlasting this one too.

Posted by Frank Castle | Report as abusive

“I find that “trained” economists are the last people to ask about real world issues”

That’s interesting. I think the very same thing about non-economists and “untrained” economists. At least when discussing economic issues.

All economic principles apply in real life. In every single thing the market does, it can be partially or fully explained by economic theory.

In my reserved opinion most people who believe economic principles don’t apply to the real world are either:

1. Not familiar with economic principles, or
2. Not economists.

Posted by Anon | Report as abusive

To Dale & bill:
“…all workers of the world, got paid in gold for everything we did. Now imagine that we…”
Cool oversimplification. In attempt to grasp with issue you left huge pieces outside. Let continue with your line:
Imagine that all workers in world paid our taxes, insurances, educations, pension funds etc.

I just wondering why Free Trade Agreements tend to equalize prices for goods and materials while keep all other parameters outside of equation.
Here is a simple answer, because capital by its nature is only interested in return. Once we taxed Capital at West to boost our well being its flight to 3rd world. 3rd World provides less restricted environments to abuse less protected labor.
May be we should capture capital rather than follow fair tails about ‘Free trade’.

Posted by Sergey (SKV) | Report as abusive

Most educated people know that protectionism is self-defeating and therein lies the problem; a lack of education on basic economics.

Journalists both in print and on television should be clarifying the issue. Instead we get Lou Dobbs inaccurate nonsense and Keith Olbermann and Bill O’Reilly’s partisan drivel. On public television people hear actually socialists on Bill Moyers (progressives that advocate for socialism are by definition socialists) On AM radio people listen to drug addicts and Glen Beck moan about trade and immigration for 4 hours a day. No wonder people are confused.

Buy American is a horrible idea but when the economy gets bad people demand action; even if that action hurts America. We need for Fareed Zakaria and less William Greider and Lou Dobbs. Least Obama isn’t reopening NAFTA.

It’s a shame people continue to mistake education and intelligence. Do you know how to draw a supply/demand curve? Great that means you can draw a supply/demand curve, it doesn’t mean you know squat about how the real world works. The real world doesn’t go by simple curves and no matter how detailed an abstraction of reality you create it is still that an abstraction. Truly wise men know that they don’t know everything, the foolish think that they have a theory for everything. If the real world behaved the way economist say then why would we ever have any problems? It’s okay, the ivory tower crowd can talk about inevitabilities and efficiencies, those of us who are both educated and intelligent know that no theory survives contact with reality. but don’t let dissuade you, keep on thinking you’ve got all the answers. The rest of us will keep dealing with reality while you ideate or whatever it is you do to explain the inexplicable. It’s laughable that they call social sciences science, you can’t test them scientifically. But again don’t let the facts and evidence interfere with you theory.

Posted by Frank Castle | Report as abusive

More nonsense from the Davos global elite crowd. Where has Diana Furcthgott-Roth been the past 10 or so years when China dumped its cheap junk on U.S. shores while it simultaneously assessed sky-high tariffs on U.S. goods trying to enter Chinese shores? But suddenly *now* the cry of “protectionism!” sputters out of the mouths of the Cabernet Sauvignon economists. Spare us from your recycled “free trade” cliches, Ms. Furchthgott-Roth, and enter the real world of a United States made jobless by half-a$$ed deindustrialization.

Posted by Henry_Blankett | Report as abusive

To Diana Furchtgott-Roth,

I honestly trying to make sense out of free trade.
You refer to research that 57,000,000 US workers benefit from free trade. 2008 US workforce was ~ 155,000,000. Does it mean that ~100,000,000 don’t benefit from free trade?

I am not asking to building a wall around US and make everybody buy US goods. Car manufactures go bust because of wrong business model. Toyota & Honda won even on US soil. But it not the same when it comes to other industries like textile, building materials, mining, steel. China/Mexico/India abuse labor force and environment. Here competition is not fair!

You paint picture that US consumer benefit from cheep Chinese goods. US spend on clothing 21% less over 20 yrs. There is huge shift what used to be life long household items like knifes, appliances etc, being replace every 3-5 yrs becuse of low quality. Miser end-up paying twice!!! High quality goods today command huge premium. We end up spending more.

“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.”

We all know that between 2006 and today we had many major world wide events that affected both trade and employment. I wish you provide more details how foreign trade and employment related. So far you sound like:
if US gov will buy foreign goods worth $39 billions we will reduce unemployment by 5% :).

Here is another point of view that I hope you can prove wrong:
3rd world (China/India/Brasil) are going through Industrial revolution.
New agricultural technologies made 1,000,000’s small farm redundant. They cannot compete with big industrial farms and flood cities with cheep labor – 100,000,000’s farm workers.
Their governments more concern with providing these 100,000,000’s with meaning for today living rather than retirements money and health insurance :). US labor had advantage like better education and technology, but over last 30 yrs these 3rd world narrow these gaps. US labor just cannot compete. I heard 100’s story how free trade is good for 3rd world, I love to hear how it helps US/EU.
US Corporation enjoy benefits of US society while redirect investments to 3rd world undermining our future employment. US manufacturing is shrinking, technology is being outsourced, who is going to taxes to support our retirement in next 20-30 yrs? China or India?

Posted by Sergey | Report as abusive

Free trade should be substituted by Fair trade. It is all too easy to sit in the Ivory Tower of the Hudson Institutes and pontificate over free trade and how it generates American jobs.

The fact of the matter is that many of the countries that benefit from the transplantation of American jobs have horrible working conditions, are horrible polluters, and by in large exploit workers. Many American companies are moving their plants overseas to avoid the labor and environmental regulations of the US.

If you want to rebuild American manufacturing, measure the trade imbalance between the US and other countries. If they run a surplus, impose a corresponding duty that will be lowered when the country with the surplus buys more US manufactured goods. Limiting and reducing access to the American market will motivate other countries to buy American goods.

Posted by Bob | Report as abusive