Will the "Buy American" clause in the stimulus bill create or destroy jobs?
Tomorrow on February 17th President Obama plans to sign the $787 billion stimulus bill recently passed by Congress. One controversial portion of the bill is a clause for the public works and infrastructure projects to "buy American". The logic behind this is that if the money in the stimulus is spent to buy American products then Americans will have more jobs. However, this policy of protectionism is sparking many fears of a global trade war. Will this clause create or destroy jobs?
Many commentators are afraid that the "buy American" clause will repeat a global trade war that occured during the Great Depression. On June 17th, 1930, President Hoover passed the Smoot-Hawley Tariff Act which dramatically raised import taxes on over 20,000 imported goods. In retaliation, America's trade partners stopped buying American goods or raised tariffs on American products. This led to more job loss in America and world trade declined by 66% between 1929 and 1934.
Before the Smoot-Hawley Tariff Act was passed, Hoover's administration received many protests from foreign governments, and a similar barrage of protests is being reported around the world right now. China claimed that the "Buy American" clause is "poison". Japan, Canada, and Australia have also expressed their concerns to the Obama administration. The language of the "Buy American" clause is now softened so that Canada, Japan, the European Union, and several other countries may be exempt from the law. However, this leaves out giant trade partners such as Brazil, Russia, China, and India. These countries contain over a third of the world's population, and if they stopped or reduced their purchase of American goods out of retaliation then the American economy will undoubtedly suffer.
On the other hand, some people believe that America has been buying too much from foreign countries. It is true that there is a trade deficit of nearly $40 billion a month as of December 2008. So the logic is that if the stimulus spent as much as possible on American products then it would narrow the trade deficit and keep more jobs in America. However, considering that the public works portion of the stimulus bill is only about $73 billion, I doubt it would make a dent in the trade deficit. Instead, it is fueling a lot of anger in many trade partners for little gain.
So will this "buy American" clause create or destroy jobs? Only time will tell and I sincerely hope that another global trade war does not happen because that would hurt everyone. So far, China has promised to avoid a similar "buy China" clause in its own stimulus efforts, and I think Americans should be thankful for that.
For further reading about free trade and protectionism you can check out these books:
Do you exercise pocketbook patriotism by buying products made in your own country? Do you think this clause will help or hurt Americans? Feel free to leave your thoughts about this issue in the comments!