Topic: Trade and Immigration

Deciphering the ‘Buy American’ Dispute

Many of you may have heard the argument that the United States already has Buy American laws, so therefore all of the whining about the provisions in the spending bill is nothing but bluster. Well, that’s not really an argument. That’s just the pep rally speech that Steel Caucus representatives give before sympathetic, unquestioning fans.

A short (but by no means complete) summary of Buy American laws might help give some perspective to the significance of the language in the spending bills.

Yes, since 1933, Buy American laws have been used to limit competition for government procurement projects to domestic firms. Under current law, there are general Buy American restrictions affecting all government procurement of supplies and materials for use within the United States. And there are even more restrictive Buy American provisions governing Transportation Department procurement rules for highway and related projects. In a nutshell, the language in the spending bill would subject its appropriations to the more restrictive Buy American process, while denying the waivers we currently grant to most major trade partners.

The “general” Buy American provision requires all “unmanufactured” products (essentially, raw materials) procured to be mined or produced in the United States and that all manufactured articles procured fit the definition of a “domestic end product,” which is an article manufactured in the United States from components, which are at least 50 percent (by value) U.S.-produced.

Those Buy American restrictions can be waived if any one of three conditions applies: (1) a waiver would be in the public interest; (2) the products are not available from domestic sources in sufficient quantity or of satisfactory quality, or; (3) the cost of using U.S.-made products is deemed “unreasonable.” Under the Federal Acquisition Regulations, “unreasonable cost” is defined as a situation where foreign supplies and materials are offered at a price that is six percent or more below the price of domestic supplies and materials.

The more restrictive Buy American provision governing Transportation Department procurement requires that all of the iron, steel, and manufactured products used be produced in the United States. The definition of U.S.-manufactured products is the same here as under the general Buy American provision, and the same thresholds for public interest and short supply waivers also apply. However, the unreasonable cost waiver is considerably different. Under this provision waiving the restriction on the basis of unreasonable cost requires that the total project cost (not the input cost) be at least 25 percent higher. That is an enormous cushion for domestic suppliers.

For example, under the general provision, a domestic supplier has to be mindful of the world price for steel. The domestic offer could be rejected in favor of a foreign supplier if there is more than a six percent price differential. But under the more restrictive Transportation Department provisions, the domestic supplier’s price is not even remotely disciplined by the potential of foreign participation in the bidding process because it is the total cost of the project—and not a competitor’s bid—that would trigger the waiver. So, if the steel in a highway project constitutes about 10 percent of the total cost of the project—say $10 million out of $100 million—then the steel price can rise from $10 million to $260 million before the project cost increases by 25 percent. Effectively, suppliers under the more restrictive Buy American rules can charge whatever they want to charge.

There is another set of waivers that are perhaps the most effective at ensuring some competition in the U.S. government procurement market. Under the Trade Agreements Act of 1979, the president is authorized to invoke the public interest waiver of the Buy American rules and exempt countries which reciprocally waive their own buy-local restrictions for U.S. firms. Those countries include signatories to the World Trade Organization’s Government Procurement Agreement or parties to U.S. free trade agreements (like the North American Free Trade Agreement) that contain full government procurement chapters.

The Buy American provisions in the recently-passed House bill and the still-pending Senate bill seek to apply the more restrictive Transportation Department rules to all public works projects funded by the legislation—with the exception that in the House version manufactured goods are excluded. Not only would the unrealistic 25 percent “unreasonable cost” waiver threshold apply, but the waivers granted to U.S. trade partners under obligation of international agreement would not apply. And that is why there has been so much resistance and opposition to this proposal from overseas.

Now we can properly assess the meaning of language inserted into the Senate bill last night. The amendment simply inserts the “assurance” that the Buy American provision will be “applied in a manner consistent with United States obligations under international agreements.” That is no doubt a subjective and therefore vague assurance. It doesn’t preclude the promulgation of new regulations that intend, but fail, to administer the law in a manner consistent with U.S. obligations under international agreements. It would be clear, objective, and reassuring to stipulate that the same waivers that firms in foreign countries enjoy now will be honored with respect to the appropriations authorized under the legislation. That would make things right with Canada, Europe, Mexico, Japan and about 12 other important trading partners, and the talk of trade retaliation would subside.But it still stinks for U.S. taxpayers (and will foster some ill-will abroad) because the U.S. government procurement market will be made even less accessible to suppliers from countries that are not signatories to the various procurement agreements. The more rigid cost waiver will exclude bids from, among others, Chinese suppliers of iron, steel, and manufactured goods (in the Senate version). And with low-cost suppliers of crucial materials effectively excluded from the process, U.S. suppliers will be less restrained in their cost proposals. And that means fewer projects, fewer higher, and more wasted resources.

‘Buy American’ Debate Is Not Dead Yet

The near-$1 trillion spending bill working its way through Congress has all the hallmarks of business as usual in Washington. It includes billions of dollars for home-state pet projects, billions more in spoils for majority-party benefactors, and numerous provisions that its sponsors hoped would elude close scrutiny.

One such provision is the Buy American requirement, which restricts competition to domestic suppliers on infrastructure projects financed through the spending bill. The provision clearly violates U.S. commitments under various international agreements to allow most major trading partners to compete for government procurement. And it invites frivolous waste of the kind reserved for people spending other people’s money.

By limiting competition, expanded Buy American requirements mean that taxpayers would get the smallest bang for their infrastructure buck. Cordoning off the market for U.S. suppliers would mean higher price tags, fewer projects funded, and fewer people hired. And by abrogating our obligations to allow major trading partners to compete for those projects, any short-term increases in U.S. economic activity and U.S. job creation likely would be offset by lost export sales–and the jobs that go with them–on account of copycat protectionism abroad.

Buy American requirements have been a part of U.S. procurement rules for 75 years. But those restrictions have been eased over the decades. Under various international agreements, the United States grants waivers to most major trade partners from many of the law’s restrictions. But the House-passed and original Senate-proposed legislation would supersede the waivers and raise considerably the threshold for issuing case-specific exemptions to foreign firms that wish to bid on procurement projects funded from the legislation.

On February 3, one week after passage of the House-version of the spending bill, President Obama finally broke his silence over the issue, expressing aversion to “sending a protectionist message” and opposition to provisions that could “trigger a trade war.”  The president’s comments were expected to soften the stance of some proponents of Buy American in both chambers.  Indeed those comments appear to have made some impression in the Senate.

Although the Senate voted down an amendment by Sen. McCain to exempt all of the infrasturcture spending in the bill from Buy American laws, it agreed to insert an amendment (sponsored by longtime trade skeptic Byron Dorgan, of all people) to ensure that the Buy American clause would be “applied in a manner consistent with United States obligations under international agreements.”  But that’s still no guarantee.  Unless the Buy American language is stripped entirely or the legislation includes language explicitly granting the waivers that currently exempt most of our major trade partners, there will be room for interpretation.

And there is still the problem of the House of Representatives, where the President’s concerns have not registered with the Congressional Steel Caucus or the chairman of the House Transportation Committee, James Oberstar, who said, “If [Buy American provisions are] not in, I’m not supporting this package and I’ll bring a lot of votes with me.”

So, will congressional Democrats very publicly shun their president on this issue or can they resist their growing habit of acting unilaterally and provocatively on trade?  The issue remains quite unresolved.

Welcome Developments on Trade

Yesterday, President Obama broke his long silence about the Buy American provisions in the congressional spending bills. In an interview with ABC’s Charlie Gibson, Obama expressed support in principle for removing the provocative language to expand Buy American provisions:

CHARLES GIBSON: A couple of quick questions. There are “Buy America” provisions in this bill. A lot of people think that could set up a trade war, cost American jobs. You want them out?

PRESIDENT OBAMA: I want provisions that are going to be a violation of World Trade Organization agreements or in other ways signal protectionism. *** I think that would be a mistake right now. That is a potential source of trade wars that we can’t afford at a time when trade is sinking all across the globe. (***Per the White House, President Obama misspoke and meant to say, “I want provisions that are not going to be a violation of World Trade Organization agreements or in other ways signal protectionism.” )

CHARLES GIBSON: What’s in there now? Do you think that does that? Do you want it out?

PRESIDENT OBAMA: I think we need to make sure that any provisions that are in there are not going to trigger a trade war.

And in an interview with Fox, the President said:

I agree that we can’t send a protectionist message…I want to see what kind of language we can work on this issue. I think it would be a mistake, though, at a time when worldwide trade is declining, for us to start sending a message that somehow we’re just looking after ourselves and not concerned with world trade. (my emphasis)

It looks like President Obama gets it, although I would be more convinced of that if his last statement didn’t seem to regard “world trade” and “just looking after ourselves” as mutually exclusive. More engagement in world trade is one of the best ways to look after ourselves.

Finally, just a word of caution to our friends in Europe and Canada, where this morning’s newspapers are gleeful about the development: even though the U.S. president opposes the Buy American restrictions, the Congress still needs to strip out those provisions. If Congress keeps those provisions in a final spending bill, which passes both chambers of Congress, it’s going to be very tough for the President to veto the legislation.

Administration Delays E-Verify for Federal Contractors

The Washington Post reports that the Obama administration is delaying the Bush administration plan to require federal contractors to use the E-Verify worker background check system.

Criticizing the move, Lamar Smith (R-TX), ranking minority member on the House Judiciary Committee, says, “It is ironic that at the same time President Obama was pushing for passage of the stimulus package to help the unemployed, his administration delayed implementation of a rule designed to protect jobs for U.S. citizens and legal workers.”

E-Verify may well have been designed or intended to protect jobs for citizens and legal workers, but that’s not at all what it would do. I wrote about it in a Cato Policy Analysis titled “Electronic Employment Eligibility Verification: Franz Kafka’s Solution to Illegal Immigration” (a 10-year follow-on to Stephen Moore’s “A National Id System: Big Brother’s Solution to Illegal Immigration”):

A mandatory national EEV system would have substantial costs yet still fail to prevent illegal immigration. It would deny a sizable percentage of law-abiding American citizens the ability to work legally. Deemed ineligible by a database, millions each year would go pleading to the Department of Homeland Security and the Social Security Administration for the right to work.

Even if E-Verify were workable, mission creep would lead to its use for direct federal control over many aspects of American citizens’ lives. Though it should be scrapped, the longer E-Verify is delayed, the better.

Capitol Visitor Center Forced to Return Politically Tainted Goods

In addition to the terrible ‘Buy America’ provisions in the stimulus package (blogged about by Dan here and here) comes news that vendors in the Capitol Visitor Center are being forced to remove items made in China from their shelves. In the words of Rep. Bob Brady (D, PA), the chairman of the House Administrative Committee that oversees the Capitol Visitor Center, it is wrong (you get that? wrong) for people to take home souvenirs made abroad. If operators have to pay shipping costs to return the iniquitous goods to China, then, he says, ”if we have to lose a little bit, we’ll lose a little bit.” Indeed.

HT: Jason Vines.

Buy American Is Politics as Usual

As I wrote in an earlier post today, the Buy American provisions in the just-passed House and currently-worded Senate spending bills will encourage similar measures abroad, threatening yet more tit-for-tat protectionism, as respect for international trade rules disintegrates.

It’s not too difficult to discern who’s behind the Buy American provision, which reads:

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 and steel [my emphasis] used in the project is produced in the United States.

Evidently, the once-and-for-always politically savvy U.S. steel industry has not lost its touch. Like profit-maximizing firms in any industry, America’s steel producers have devoted large chunks of their profits (which have been enormous and record-setting over the past five years, up until 4Q08) to their highest yielding input. For Big Steel, that input isn’t human capital or physical capital, but the far more productive enterprise of lobbying for taxpayer largesse. And this will be a pretty big payday for these modern-day robber barons.

But, it is absolutely stunning—even to those who have watched this industry impose its will over U.S. trade policy at great expense to other industries time and time again—that nobody in Congress has blown a whistle on this outrageous scheme. The incredibly profitable U.S. steel industry (which has fallen on harder times in the past several months like everyone else), consists of fewer than 100,000 workers. It is the ONLY beneficiary of this hair-brained provision that will undermine any incentive the industry has to remain efficient, and promises to spark reprisals and crush export sales for industries that employ millions of workers. That doesn’t strike me as a recipe for U.S. job growth.

That is not to say that Buy American coverage should therefore be expanded. It should be stripped entirely. All that those rules do is guarantee that a good portion of the billions of dollars the government is borrowing – on our children’s tab – will be wasted on unnecessary mark-ups. Think $300 light bulbs at the Penatagon? Each project will cost more than it should and do much less for the economy and for job growth than they would if those project dollars were in the hands of the private sector – where there is natural incentive for cost management.

The U.S. steel industry has already burdened taxpayers, consumers, and it’s much more economically significant customers (who support 50 jobs for every 1 in the steel industry and account for 10-times the steel industry’s share of GDP) over the decades. Just this decade, the steel industry dumped $13 billion of legacy costs on the taxpayer-funded Pension Benefit Guarantee Corporation and convinced the Bush administration to impose sweeping tariffs on imports for nearly two years. Not a dime of that was repaid during the industry’s subsequent boom years (which just ended a few months back).

These Buy American provisions are an outrage and someone in the Senate, or the White House, should speak up.

Trade Lessons Unheeded

Leaving aside the many other disastrous implications of the pork-laden “stimulus” bill, here are some thoughts about its impact on international trade. For all practical purposes there is no difference between the Smoot-Hawley tariff bill of 1930 and the “Buy American” provisions in the $819 billion spending bill that passed the House Wednesday.

Smoot-Hawley was the catalyst for a pandemic of tit-for-tat protectionism around the world, which helped deepen and prolong the global depression in the 1930s.  “Buy American” provisions will no doubt inspire similar trade barriers abroad and will have the same effect of reducing global trade—and therefore prospects for economic recovery.  It is not unreasonable to say that U.S. policymakers are on the verge of taking us down that same disastrous path.

The bill that passed the House includes the following language:

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 and steel used in the project is produced in the United States.

The version currently before the Senate contains the same language, which would seem to indicate that scrapping the provision won’t be necessary to reconcile the two versions in conference.  So, unless the “Buy American” clause is dropped in the final Senate bill or is somehow defused during conference, the U.S. will have fired the first shot in what could evolve into a much wider trade war.

It’s usually better to be circumspect and to issue such dire warnings sparingly, but I see little room for alternative conclusions here.