Buy American? Well, at least don’t buy from China!

Economists sure have had a lot on their plate lately with the stimulus package, haven't they? The debate over whether tax cuts or government spending is more effective in generating growth revealed a divide between Neo-Keynesians and supply-siders (If you don't know the difference, don't panic. After all, this is a Congress blog, not an economics blog!)

But another econ-centric debate emerged, sparked by this gem from page 190 of the bill:

GOODS. (a) None of the funds appropriated or otherwise
made available by this Act may be used for a project for the construction,
alteration, maintenance, or repair of a public building or
public work unless all of the iron, steel, and manufactured goods
used in the project are produced in the United States.

In plain English, transportation and construction projects must use American-made iron and steel.


This so-called "Buy American" requirement looks like the first shot in a global trade war. But Congress inserted some provisions that may make the requirement just an effective piece of populism. Analysis and some caveats after the jump.

If you're interested in the exact wording of the Sec. 1605 qualifiers, they're available here.

To put the qualifiers simply, Buy American can be waived if it is not in the interest of the United States, would make a project too expensive, or is deemed inappropriate by an agency head. It also "shall be applied in a manner consistent with United States obligations under international agreements."

It's that last bit (added during Senate consideration of the stimulus) that is the escape hatch. Let's take a look at the two main agreements relevant to federal procurement: NAFTA and the World Trade Organization's Agreement on Government Procurement (GPA).

Both have requirements that federal procurement processes treat domestic and foreign firms equally. NAFTA, however, exempts states and provinces from these rules. As a result, state-level procurement, which covers the lion's share of highway construction spending, need not give foreign firms a fair shake.

The GPA (participants listed here), on the other hand, is a little more complicated. It nominally covers most of the states. However, many states only have certain agencies follow the GPA's rules, and still more states exempt themselves from the rules concerning steel.

What does it all mean for the Buy American provision, and specifically the part that says it will be implemented in accordance with our international obligations? Existing international trade law effectively allows for rampant discrimination in transportation contract procurement, so even the anti-trade-war safeguard is largely worthless. The Buy American provision will have a very real effect. Or will it?

There already are many Buy American laws on the books, so in reality, the effects of this new rule will likely be limited — it fails to introduce requirements significantly more stringent than existing ones.

Three potential losers from this rule are Brazil, Russia and China, none of whom are party to the GPA. But once again, the effects should be limited — Buy American provisions already exist, so any procurement discrimination the rule would provoke was likely occurring before the stimulus bill's passage.

For what it's worth, many domestic producers are concerned the Buy American rules have too many loopholes. Check out this essay that appeared in Modern Steel Construction's February issue for an example.

President Obama has been attempting to allay concerns over protectionism during his recent trip to Canada.

“I think that if you look at history, one of the most important
things during a worldwide recession of the sort that we’re seeing now
is that each country does not resort to ‘beggar thy neighbor’
policies, protectionist policies, that can end up further contracting
world trade,” he told a Canadian television station. “And my expectation is, is that where you
have strong US competitors who can sell products and services, that a
lot of governors and mayors are going to want to try to find US
equipment or services, but that we are going to abide by our World
Trade Organization and NAFTA obligations just as we always have.”

What do you think? Is the US about to touch off a trade war? Please let us know by submitting a comment.