Will the "Buy American" clause in the stimulus bill create or destroy jobs?

by Xin Lu on 16 February 2009 25 comments

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.

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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:

Wealth of Nations by Adam Smith

The Choice: A Fable of Free Trade and Protectionism Updated Edition

Economic Sophisms

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!
 

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Guest's picture
Peter

Organized labor exacts its pound of flesh.

Guest's picture
funkright

Definitely a short sighted myopic view to take, impacting global trading partners will only lead to closing of various borders around the world (even tighter than they are today). This current economic malaise should be looked at as an opportunity, to redo what has not been done correctly and to make things better than they have been. I feel sorry for the USA, everyone else could/can adjust, but the USA will suffer the most.

Guest's picture
Guest

I doubt that this clause will cause a global trade war, or that it will have much benefit, either. Since the US is a net importer from most of the non-exempt countries, the US has less to lose. For example, if China stopped all imports of US goods, it would have an effect on employment and gdp. If the US stopped all imports of goods from China, the Chinese economy would collapse within days. Also, most exports to China from the US are high-tech goods, notably machine tools and sophisticated computers, unavailable elsewhere; Chinese exports to the US are almost entirely commodity goods, which other countries could quickly provide, and which the US has the capacity to build in country. For one example: China cannot produce a laser-guided milling machine of sufficient tolerance to build critical aerospace components, and the few other countries that can would be unlikely to sell to them. The US, on the other hand, can produce clothing, footwear and mainstream electronics, or buy from other Asian countries. The US has such a large trade deficit that it is difficult to inflict damage on the US with trade restrictions that would not redound with more damage on the partner country. There seems to be no great harm to this clause, though I cannot see how it will provide more than negligible benefit to, for example, the steel industry. In the end, I think this is much ado about nothing.

Chris

Guest's picture
Tariq Mahmood

It is presumptuous to believe that the Chinese economy would collapse if the U.S. stopped importing.

Yes China does produce goods that any other nation can, however that does not mean that China will descend into chaos if trade with America stops.

The Chinese are not importing all that much from the U.S. In total they imported $71,457,000,000 dollars worth of goods in 2008 while we imported $337,789,800,000 dollars from them.

Yes the chinese are primarily importing high tech equipment that is being installed in factories that turn around and produce those shoes and clothes that we buy from them. However in the $71 billion of goods they import is the luxury items for the rich such as red wine from California and Cadillacs.

Do the Chinese need Cadillacs, I mean if they drove Corollas would more Chinese die every year, would they be less healthy, would less work get done? No in fact life would be better, they would spend less on gas and it would cut pollution.

At the same time does America really need as many shoes, toys, or clothes that are sold every year? Seriously some people buy 4 pairs of clothes of every other month, it is waste soo much damn waste.

If the Chinese can no longer work as virtual slaves for their aristocrats that ship off $250 billion worth of product and receive nothing in return but I Owe Yous how can their standard of living be diminished?

The whole economic system exists to benefit aristocrats in the Third World, and perhaps Management in Corporate America, Certainly some Americans benefit from low prices, but ultimately America loses from Free Trade as it destroys jobs in the country and has resulted in us striping capacity.

Guest's picture

Politicians talk about a trade deficit like it's a bad thing. It just means we're importing more than we're exporting. That's a great thing because people are getting better products or getting the same products at a better price than equivalent items made domestically. That means increased buying power for everyone.

Restricting trade (under the guise of "buying American") will restrict competition, which leads to inferior quality products at a higher price. Sure you saved Jim the factory worker's job in the short term, but now Jim has to save for six months to get that new widget he wants when he could have gotten it in three with free trade. You mention The Choice, which has some great examples; I highly recommend it as well.

Guest's picture
Kelja

More of the left ideology which hasn't a clue when it comes to history.

As you point out, protectionism not only failed in the thirties, but caused the Great Depression to be deeper and more prolonged.

Same thing goes for raising taxes in a recession as is being attempted here in California. Heaping insult to injury. Why do the leftist scorn the taxpayer so?

Guest's picture
Beth

The U.S. has a huge debt -- could a trade war possibly escalate to the point where of one of its creditors calling in that debt in order to save it's own economy?

Guest's picture
Guest

Nicholi said "Politicians talk about a trade deficit like it's a bad thing. It just means we're importing more than we're exporting. That's a great thing because people are getting better products or getting the same products at a better price than equivalent items made domestically. That means increased buying power for everyone.' Unfortunately, a trade deficit means buying power is being drained away. While Americans may be able to buy things at a lower price, because less is being produced in the US, workers have lower incomes. Taken to the extreme, if we imported everything, even if costs were much lower, no one would have any income to buy. Henry Ford, not exactly a leftist-socialist-lover of labor, paid his workers a much higher than average wage because, according to Ford, it was important "that every worker (at Ford) could afford to buy a Ford automobile." If there were no trade ramifications, it would be better to pay slightly more for US steel than imported, because that money would remain in the US economy (workers would buy things from local stores, purchase local services, government would increase tax revenue, etc). Look at what Ohio's steel-industry region looks like. No matter how cheap imports are, people there have no money to buy. Trade deficits are, except in unusual circumstances, damaging in both medium and long term.

Chris

Guest's picture
Guest

Check out the broadcast from last night's 60 minutes. Steel workers in US cannot compete against China gov. subsidized steel prices. I think we ought to be supportive of US workers and follow trade guidelines.

Guest's picture
brista

I understand that obviously other countries want us to purchase products from them. But as we've seen from the plethora of products recalled that in China, I don't think buying everything from other countries at the cheapest possible price is a great idea.

In general, I think it's fine to buy products from other countries as long as they are absolutely safe and the working conditions are ethical. But I think that in regards to this specific plan, adding a Buy American clause is perfectly fine. If manufacturers receive "bail out money" or "stimulus checks" or whatever that's funded by taxpayer money, then they should be expected to use this money to support the American economy in all parts of the manufacturing process.

If the Obama administration suddenly called a press conference and ordered a ban on all imports, then yes, that would be a bad idea. But saying, "Here's some money and we strongly encourage you to use on products made in America," is just fine in my (non-economist) opinion.

As for whether it will do any good or if the whole world will completely collapse the day Americans reduce the amount of cheap junk imported from China...don't know but obviously I hope not.

Guest's picture
Guest

We must keep in mind that nothing in this package is even supposed to stimulate anything.It ties in with the "remaking"of America,as our fearless leader keeps emphasizing.They are making no bones about the fact that they are going to push a socialist agenda as far and as fast as they can"before it's too late".From the attempt to seize control of the census(to re-distribute delegates to more left leaning states)to the nationalization of our banking system.
The sad truth is that when all is said and done the evil corporate giants(who are the real suppliers of jobs and ergo economic relief)don't have to stay here,they will leave,leaving us to deal with this ourselves.So,I suggest opening an overseas account and depositing $13 a week for the next two decades.

Guest's picture

Xin, it's a good question. I don't care where a product is made, as long as it fits my needs and is of good quality. I don't really care where it's made. We're all people, we all have the same desires... if we can get past this petty 'U.S' vs. everyone else I think we would be better off.

We are no longer separate nations, we are one planet.

-Nate

Guest's picture
eeyor

If we move toward one big happy global economy then i guess it just doesn't matter where it comes from,one big happy world with one currency and,i guess,one to lead us all,eh?

Xin Lu's picture
Xin Lu

I agree with the commenter Chris when he said that this clause probably won't cause a full out trade war, but I think it was just a bad message to send out to the world.  The fact is that we do have a global economy now and the United States is a place a lot of other countries look toward for leadership.  If the United States turns too much inward then it would be setting a bad example for everyone else.  There are definitely benefits to buying local, but telling everyone else that you are refusing to buy their stuff just causes a lot of angst and hate.  I know that the Chinese are getting uneasy with this new administration, and that's not a good thing in the long run. 

Guest's picture
Maria

I try to buy local whenever I can. Obviously I can't do that all the time so I try to see where things are manufactured. I have a hard time buying things from China for a number of reasons. They don't do safety tests up to American standards. We have seen that recently in all of the massive recalls. I am also heart broken at their invasion and attack of the Tibetan people.

Guest's picture
lucille

This is really not a big deal. It is only tied to the spending projects not all consumption of the country. If China is nervous maybe they should consider cleaning up their act. People are reluctant about goods from China due to lax safety standards, poor conditions for the workers and the trade deficit.

International trade is not a bad thing but it does need some oversight to make sure things are not getting out of hand. It is also time to set some world wide standards regarding labor and product safety. US companies did not go overseas because they were benevolent and wanted to help people in that other country. They did it because it was a situation they could exploit for profit.

Guest's picture
Canadian Girl

In answer to the question from the title, I think this will destroy jobs -- though more in other countries than in the US. Unfortunately, I don't think many people care about that so long as it's not people in their own backyard who are losing their jobs.

Americans destroyed the world's economy. I don't think they should add insult to injury by saying "Buy American".

Guest's picture
The Economist

I think it's amazing to see how people, in particular politicians, fail to understand the country in which they represent. America, and what made it great was founded on trade. Trade that could be done freely and openly without government intervention.

For those who remember their U.S. History it was trade regulations and tariffs imposed by the British that brought about the Revolutionary War. And rightly so. After winning the war, it was the open use of trade between other countries that made the U.S. the superpower it is today. The minute we stop open trade is the minute we can kiss our 'superpower' status goodbye.

While I can sympathize with the politicians and others who think that we need to limit the money from the stimulus to U.S. companies, I can't support it. The truth is, there are better companies abroad which can probably do the work better and cheaper. And while domestic businesses may not make the grade, losing to people overseas is a great motivator to improve. Taking away that motivation to lose is depriving American companies of ever being competitive, stimulus money or not.

Good businesses last and poor ones die. That's how it's supposed to work. We'll all be better off if we do. If not, we'll all end up working for second rate companies.

Guest's picture
Brent

Other countries pay their workers less... If you want to treat the economy as global with free trade instead of a protectionist attitude you better get used to making less. Also if we do that, we will have to relax laws for minimum wages, safety standards, benefits, and all the other things we have grown to like. Then we need to subsidize the industries that other countries do... to keep it fair. Only then can we begin to think that we have a fair trade system. A complex system like a car combines so many regulations, taxes, and subsidies that a fair market value is impossible to determine. I think when we say overseas is better and cheaper we are neglecting the real price for that product.

Guest's picture
Wilson

A trade war might be the first war since WWII that the US can win.

Guest's picture
Guest

Before buying a product, I always check to see where it's made. Frankly, I think it's ridiculous we simultaneously owe China billions and billions of dollars in debt, and have a huge trade deficit with China, sending them billions MORE dollars every month. I'm no economist, but this seems like a bad balance. We're borrowing their money, to buy their goods? (And, of course, to ship their money off to destroy / rebuild Iraq, and simultaneously buy Iraqi oil.)

There's a few other reasons I prefer not to buy things made in China: it's often poorer quality, they don't have the same safety testing, a lot of the cost is going toward transport (oil, pollution) etc. Sometimes I still buy things made in China - sometimes I can't find certain products made anywhere else. But if I have the choice, I'll pay more and buy the made in USA item. I'd rather keep the money going around locally, maybe keep a neighbor or family member employed.

Guest's picture
wildgift

Well... these other countries have trade barriers too. How about they lower their trade barriers too?

Also, how much purchasing can be done with the stim money?
Doesn't a lot go toward labor?

(As far as companies leaving - they have already left. That's why so many things are imports. How are you supposed to buy American when America makes less stuff than the world?)

Guest's picture
JC

When did it become "OK" to be more concerned about other countries economic conditions than our own? When did it become "OK" to NOT protect the American economy? When did it become "OK" to put our personal self-interest above that of our country or our family?

How can we take care of other people if we can't take care of ourselves?

Without a strong manufacturing base we are at the mercy of other countries interests and agendas. If we manufacture it then they must compete for business, our business.

Most manufacturing companies left the USA not because they could no longer compete but because they could move and get cheaper labor which meant their profit could be higher. Shareholders could make more money.

The loss of jobs from a plant closing means millions of dollars less going into our economy. Hersey Corporation didn't move to Mexico last year because they weren't making money on the chocolate products they manufactured in Hersey, Pennsylvania - they moved because they can make MORE money by using cheap labor in Mexico. If we penalized such behavior though tariffs, taxes and boycotts these companies wouldn't move out.

Hersey's payroll provided over 1 Billion dollars to the local, state and federal economy in 2007. WE are paying the same price for their products now that we were when they were made here. The only difference is that WE now receive no benefit from the manufacturing of their product.

When you multiply this by the estimated 50,000 manufactures who have moved to other countries, in the last 20 years, you can begin to see why we need to "Buy American". Labor costs are the excuse not the problem. Hersey was exporting to every country on the planet and still is - we just no longer receive anything from the products they manufacture, except cavities; vacant homes and higher unemployment rates.

When Sunkist tuna moved their operations from California to Mexico, the US government gave them 50% of the money they needed to build their new plant in Mexico. Shutting down 4 plants on the California coast. Sunkist's operations in the USA had all been profitable prior to this move. We still buy Sunkist but they provide no jobs for any of us.

Poor people can't help poor people. Poor countries can't help poor countries. We must help ourselves first or we will become what Mexico was - poor.

When the "Made in America" label becomes the first thing we look for then we will be reversing this economy for all of us.

Guest's picture
Tariq Mahmood

I am no Communist but it looks as though the Third World is starting to absorb America.

We do not have oil wells like Saudi Arabia. When ever Saudis buy anything they essentially have to give oil in exchange for the product.

When GMC exports a car to Saudi Arabia the Saudi's flip the entire bill (and are probably stupid enough to pay more for it).

When Toyota sells a car in America that was made in a plant in Idaho, Americans are paying substantially less than the sticker price because labor costs, and perhaps even raw material costs, end up going to Americans. We do not have to flip a huge transportation bill either.

However things are turning around. America has been sold in the name of Free Trade.

The aristocrats of the Third World and Corporate America (IE Management and some Shareholders) are realizing most of the gains from subsistence wages (Workers in Mexico or China do not drive to work in their own car, nor do they live in 2000 square foot houses).

When will the American people wake up, when will the citizens of the Third World wake up.

We should be focusing on automation and increasing production.

Guest's picture
Guest

As a Canadian, I've got to say I'm a bit annoyed by the attitude that America's trading partners that matter are all 3rd world countries with crappy labour standards. We're losing jobs to AMERICA because it's got lots of stimulus money to bribe companies to keep jobs there, and crappy labour standards in a lot of areas.

The least the US could do is keep buying our lumber, steel, coal and agricultural products which are the lifeblood of the Canadian economy.