Monday, March 16, 2009

Buy American

It turns out that the "Buy American" provision in the US stimulus package will mean the government can't buy from American economic giants IBM, GE and Proctor & Gamble, all of which derive over half their revenue outside the US.

That's just one small indication of the problem with protectionism. We live in an integrated world, and it's simply no longer possible to "protect" jobs at home.

Some have argued that the Buy American provision will protect only 1,000 US jobs, but has the potential to lose many times that. The reasoning: the provision will mostly affect steel and iron, which are capital-intensive industries. It is estimated that banning government imports of steel will increase US output by 500,000 tonnes - or 1,000 jobs. On the other hand, retaliation could have huge effects. If other governments reduced US imports in their government procurements by just 10%, the US would lose 65,000 jobs.

Another writer reminds us that a "Buy American" provision in the building of a California bridge would have resulted in a $400M increase in the price of the bridge, just because of higher domestic steel prices.

I can't verify these numbers, and I don't know the specific effects on Canada from US protectionism. Recently I heard a steel union representative talking on CBC; he was very confident that US steel companies would not lay off workers here because they had recently invested a lot in the steel factories. A few days later a big US steel company laid off all 1,600 employees at one plant. My point: logical arguments about how "rational" economic agents will behave are not very reliable.

The Buy American provision has another bad consequence: it is leading Europeans like Angela Merkel to criticize growing US protectionism - including even recession-related expenditures like the auto industry bailout, which she calls "distortion and protectionism". Merkel could be laying the groundwork for a troubling new round of trade battles.


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