Buy American: Bad for Jobs, Worse for Reputation

On January 28, 2009, the US House of Representatives passed the American Recovery and Reinvestment Act of 2009. Out of the bill's 700 text pages, a small half-page section attracted enormous media attention: the section requiring that all public projects funded by the stimulus plan must use only iron and steel produced in the United States. The US Senate draft includes a broad Buy American provision that goes further than the House bill, expanding the requirement to all manufacturing products.

Based on economic and legal analysis, the authors conclude that the Buy American provisions would violate US trade obligations and damage the United States' reputation, with very little impact on US jobs. They estimate that the additional US steel production fostered by the Buy American provisions will amount to around 0.5 million metric tons. This in turn translates into a gain in steel industry employment equal to roughly 1,000 jobs. The job impact is small because steel is very capital intensive. In the giant US economy, with a labor force of roughly 140 million people, 1,000 jobs more or less is a rounding error. On balance the Buy American provisions could well cost jobs if other countries emulate US policies or retaliate against them. Most importantly, the Buy American provisions contradict the G-20 commitment not to implement new protectionist measures—a commitment that was designed to forestall a rush of "beggar-thy-neighbor" policies.

What should be done? The best result would be to simply delete the Buy American provision in the House-Senate conference. Next best would be to keep the House version, applying the Buy American restriction only to iron and steel, but stating explicitly—in either the statutory text or in the legislative history—that the public interest waiver is intended to be used to avoid violations of US trade obligations. The third option is a presidential statement—preferably before legislation is finalized—that the United States will respect its international obligations when it applies the Buy American provisions.