Welcome back!
For most of my professional life I have been pretty much a single issue voter. I’m not talking about abortion or gay marriage, but trade. I’m in favor of it. That has normally caused me to vote Republican, though I was reasonably happy with Clinton as President, mainly because of his solidly pro-trade stance and his vigorous promotion of NAFTA and AGOA (the Africa Growth and Opportunity Act). As much as I disliked Bush 43, I thought he was sounder on trade than Gore or Kerry.
This time it was different. As much as I admired and still admire John McCain, and trusted him more on trade, I didn’t think he was up to dealing with the financial crisis. And electing a black President would say something positive about America to ourselves and to the rest of the world. So I voted for Barack Obama, but with my eyes open, remembering the negative things he had said about free trade during the campaign and hoping, if not quite believing, that this was campaign rhetoric that would be tempered by economic and political reality. I remain hopeful that this is so.
We should find out very soon in what will be President Obama’s first big decision concerning trade, and the first big test of his leadership in both domestic and international affairs. This, of course, is the Buy American clause inserted in the $819 billion (or $900 billion, take your pick) economic stimulus bill now in the Senate’s hands, officially known as the American Recovery and Reinvestment Act. The signs are not encouraging. The House of Representatives’ version of the package, passed last week, calls for all iron and steel used in the roughly $300 billion in infrastructure projects to be funded by the package to be from U.S. sources only. The Senate version goes even further, requiring that all iron and steel and all manufactured products used in these projects be produced in the United States.
This is bad for all kinds of reasons. The Federal Highway Administration already has a Buy American clause for projects it funds or co-funds. Construction industry experts reckon this adds ten to fifteen per cent to the cost of steel used in these projects, or about one to one and a half per cent of the total project cost. Most projects funded by other agencies don’t restrict purchases to American products. But if the stimulus package goes ahead as currently written, and requires American steel to be used in all of the sewage treatment plants, schools, railroads, and wind turbines to be built it could waste several billion dollars. That may seem like pocket change now that we talk of trillions without batting an eye, but three billion dollars could pay the wages of 75,000 to 100,000 construction workers for a year.
It’s bad too because the trade protection it gives to American steel makers will make them fall even further behind their international competitors in product quality and cost. And it’s bad because there are some steel products that are made occasionally, if at all, by American mills or are made in inadequate quantities, so it can take a long time to get onto a mill’s production schedule. For a program meant to create jobs right away, that’s something of a disadvantage. It is possible to get a waiver to import a product that is not made in the U.S. But as one construction industry expert told me, you could die in the time it takes to get one.
That’s just for roads and bridges. Imagine if every project funded in full or in part by the Reinvestment and Recovery Act were also subject to Buy American requirements or – in the worst case scenario – the Senate version passes and all manufactured products that go into a permanent structure become subject to the same requirement. There must be hundreds of manufactured items that no one in the U.S. makes anymore, or that cost too much or don’t meet project specifications. If we had a Buy American requirement for TVs, Sony might not have had to close the last TV factory in America in December 2008, but we would have to wait months, if not years, to get one and it would be whatever model they decided to give us, at whatever price they decided to charge. This is how the Soviets used to do things, and look how well that worked.
Leaving aside how wasteful the Buy American clause is for us in the United States, it could shape up to be a foreign relations disaster and could give free trade a blow from which it and the world economy could take decades to recover. Our European and North American trading partners have already expressed their displeasure and can be expected to respond with countervailing tariffs or other retaliatory measures if we persist with this folly. U.S. manufacturers like Caterpillar, who sell more and make greater profits abroad than they do at home, have also opposed the measure. Responses from our trading partners in emerging markets have so far been more muted, but it is hard to imagine they are thrilled.
China is the second-largest exporter of iron and steel to the U.S. after Canada. Mexico, Brazil, South Korea, India, and Ukraine are among the top 10 suppliers, and several other emerging economies including Turkey, South Africa, and Indonesia, are high on the list. It’s a good bet that many of the little metal and plastic fasteners, connectors, and other doo-dads and components that go into heating and air-conditioning systems, water filtration systems, lighting assemblies, railroad tracks, and power lines come mainly from overseas, and mainly from emerging economies, and that domestic production, if any still exists, couldn’t possibly meet the increased demand. Did you know that U.S. manufacturers supply less than 20% of total consumption of nails in this country? Neither did I. It will come as little surprise if I tell you that China is by far the biggest supplier – though its market share has fallen with imposition of a 19% anti-dumping tariff in 2007 – followed by Korea, Canada, Taiwan, Poland, Mexico, Malaysia, and the UAE.
If there is one thing we know from decades of international trade negotiations it is that one bad decision begets another. WTO meetings, at least lately, have not been full of Kumbaya moments. The language gets intemperate pretty quickly, positions harden, and completion of the Doha round recedes further into the future. Passage of the stimulus package with the Buy American clause intact would almost guarantee retaliation, to which we would probably retaliate in kind, sparking an all-out trade war in which everyone would lose. The emerging economies, especially, have taken a perverse pride in scuttling previous negotiations, maybe because they believe their own protectionist rhetoric, maybe because they don’t know or don’t care that they are hurting other poor countries far more than they hurt the U.S. or Europe, or maybe because they want to show the folks back home that they won’t be pushed around by the imperialists in Washington or Brussels.
There has been a lot of talk during the campaign and since the election about making better use of “soft power,” rather than shooting first and asking questions later, if at all. I’m all for that, but not just in dealing with nasty enemies with nasty weapons. A big part of soft power is not retaliating even when you can. Another part of it is putting out an open hand instead of a closed fist. We can still have the weapon in our back pocket, just in case. It’s just possible that if we showed leadership on maintaining free trade by scrapping the Buy American clause in the stimulus package we might encourage others to resist protectionist pressures.
Here is where the leadership comes in. A recent Harris poll conducted on behalf of the American Iron and Steel Institute showed that 86% of Americans support the Buy American clause. A majority of Senators and Congressmen appear to share their view. Even though President Obama has supposedly said that we don’t want to send a protectionist message, how far will he go to make sure that we don’t?
Many commentators have suggested that the Obama honeymoon is already over, two weeks after it began. I’m not sure. But it will certainly be over if Mr. Obama defies the House and Senate leadership to protect free trade. He will lose a lot of the goodwill and political capital he has built up over the past two years, and it may take him a long time to get it back. You don’t want to do that unless it is really a cause worth fighting for. Free trade is a cause worth fighting for. It is sometimes said that you can judge a man by the enemies he has. President Obama, if he refuses to cave in on free trade, might collect the kind of enemies that suggest greatness.
{ 8 comments… read them below or add one }
I followed your link from the Columbia listserv. I agree with you. Trade protectionism is out, out, out. I can’t figure out what it was doing in that package but I know nothing about Congressional machinations. My sense is that Obama is not a trade protectionist; he has too much global understanding for that. I’m pretty sure that there has been at least one recent comment from him specifically about the clause in the package. Good blog.
I could understand the “buy locally” logic, if the issue was to boost one economy against another that might be growing at a significant higher rate;
This is not the case today:
The crisis is worldwide, and ALL economies need to be helped. Any measure that is aiming at helping only one region of the world will work against an other region, and therefore will fail to solve the issue.
Charles, I always pay attention to your email thunderbolts (for example, your cocoa analysis a couple of weeks back). This is a creditable first post, and thanks for drawing attention to it. I wish I had as much confidence in the notion that Obama will stand firm for free trade, as I do that you will reliably put up good stuff here.
D H Smith
http://www.the-grayling.com
I also voted for Obama, but he may not get the chance to show or not show free trade leadership in this instance. This “stimulus package” is anything but and will not work as well or as quickly as other solutions (think tax cuts), if at all. Hopefully, Republicans, perhaps joined by some principled Democrats, will kill it in the Senate. If not, Obama should veto it, for many better reasons than the “Buy American” provision, though that’s harmful enough to use as an excuse. I have commented on this pending legislation on my own blog – http://www.stockhound.com – as well.
Note: I’m a free trade guy who strongly believes in Ricardo’s (no, not Ricky) Theory of Comparative Advantage. This fits it perfectly and makes great economic sense. Tom
This may seem like a funny email but I was so surprised by what I discovered I had to share it with you. When I think of the job situation in this country I can’t help but think this helps in some small way.
I don’t know how many households there are in the US but if these were the only things we bought think of the impact….
This past weekend I was at Walmart. I needed 60 W light bulbs and Bounce dryer sheets. I was in the light bulb aisle and right next to the GE brand I normally buy was an off brand labeled “Everyday Value” I picked up both types of bulbs and compared the stats – they were the same except for the price. The GE bulbs were more money than the Everyday Value brand but the thing that surprised me the most was the fact that GE was made in MEXICO and the Everyday Value brand was made in – get ready for this – the USA
So throw out the myth that you cannot find products you use every day that are made right here – from a company in Cleveland OH ! So on to another aisle – Bounce Dryer Sheets….yep you guessed it Bounce was more money and made in Canada , the Everyday Value brand was less money and MADE IN THE USA! I did laundry yesterday and the dryer sheets performed just like the Bounce Free I have been using for years and at almost half the price!
So my challenge to you is to start reading the labels when you shop for everyday things and see what you can find that is made in the USA – the job you save may be your own or your neighbors!
If you accept the challenge, pass this on to others in your address book so we can all start buying American, one light bulb at a time. Besides you might save a little green in the process.
Stop buying the ‘American Brand Names’ from who knows where, people!………. We should have woken up a decade ago…… lets get with the program…. help keep and create more jobs here.
I will say one thing for Obama: he is consistent. Remember back to the campaign, he said he was for the rewriting of NAFTA and then his campaign staff told the Canadians that it was all rhetoric for the campaign. It certainly sounds real to me now. I think Obama’s instincts are protectionist, certainly Pelosi’s are. I don’t know how anyone who is a one issue voter (free trade) could have thought that Obama was a good person to back.
This is also not 1933. Now if countries turn protectionist, some companies will begin to relocate production to their markets. I can’t see building a steel or concrete facility in the US to serve a one time only infrastructure project, but it is very easy to arrange contract manufacturing of many HBA products much closer to the markets that are now slated to retaliate against us. To service the EU, it would be very easy to set up a subsidiary in Ireland, manufacture in France, Germany or Italy, do logistics from Rotterdam and pay taxes in, well Ireland. Nice coincidence that they have the lowest corporate tax rate in the EU and US. Oh well.
I was an avid free trader.
Now, I’m not so sure.
First, I think it is a strategic nightmare. Tell me how we start to produce all this stuff onshore in WWIII fast-planes, ships, tanks artillery. We no longer have the facilities.
There are 3000 boats that transport all our oil. Anyone with 3000 missiles can eliminate them. In fact, 3000 speedboats with an AK47 can do that. Never mind how we build ships since we have no more facilities.
Much of the advantage of foreign manufactures is labor and pollution and safety standards. Pollution is now global so allowing China to burn coal instead of us doesn’t help much (30% of the airborne pollution over the US now comes from China) and merely offshores it to reduce prices for the American Consumer.
As for labor, we are merely moving things offshore to the cheapest labor source to reduce prices to the American people. With all due respect, even if the American steel manufactures were the best in the world, we’d still offshore it for the labor costs if the differences were enough.
While I’ve understood that better jobs would come up behind the lost ones and replace them, that does not appear to be happening and no one can show me any credible plan. With the loss of millions of banking and finance jobs, the situation is even worse.
So here’s one free trader beginning to think maybe we should retain all this stuff onshore, be more self sufficient, reduce global pollution and have the American consumer pay $20 more for a pair of shoes. They can reduce the pairs of shoes in their closets by half to make up the difference.
Chip,
I definitely relate to the “one issue (TRADE) voter” thing… Although I too voted beyond that issue this time, I could not look past Obama’s campaign rhetoric. While I am still holding my breath nvertheless want to Prez to succeed, as you said, the signs are not encouraging on economic policy being formulated. The earmark-ridden Stimulus, the anti-NAFTA position on Mexican trucks, the Buy-American protectionist agenda… Still, when Obama backtracked on the NAFTA renegotiation pledge in Ottawa, we all saw a smooth operator and practical mind at work. I agree that there is still a chance!