Don’t ‘Buy American’
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The free-trade era in America is over. Industrial policy is the new rage. After decades of trade with China and declining manufacturing employment, the U.S. is embracing a new economic theory: Build more, and build it all here.
President Joe Biden has signed historic laws to make more bridges, wind turbines, and computer chips in the U.S. In his State of the Union address yesterday, Biden announced a deeper “Buy American” policy that calls for “American-made lumber, glass, drywall, fiber optic cables.”
Part of me is thrilled by this idea. The U.S. desperately needs sharper focus on the supply side of the economy. It’s not enough to erect signs on our front lawns proclaiming that housing is a human right; we also need policies for our back yards to allow housing that’s ample and affordable. But although I support an abundance agenda, I’m concerned that an all-American abundance agenda might be two alliterations too many.
Before we get to my anxieties about Buy American rules, let me try to make an honest case for it. Fundamentally, the government wants to ensure that the U.S. doesn’t rely on flimsy supply chains for key materials, especially those that pass through our adversaries’ borders—specifically, China’s. In the past decade or so, we’ve awakened to two different “China shocks.” The first shock was economic: the lesson that free trade with China had a devastating and concentrated effect on manufacturing employment. This shock contributed not only to a Great Lakes mini-recession but also, perhaps, to the election of Donald Trump. The second shock was ideological: the realization that economic growth in China did not lead inexorably to cultural liberalism, as it had in the West. The Chinese economy grew alongside the authoritarian behavior and rhetoric of the Communist Party of China.
Buy American provisions can have several advantages. They funnel money to domestic businesses in important industries, theoretically raise the wages of workers in those sectors, and let the government support the development of crucial technology and infrastructure. For example, if the U.S. wants to build an all-electric economy, we probably need to be much more deliberate about creating a stable and thriving market for inputs such as lithium and copper.
But the Buy American philosophy has at least four problems that the White House, Democrats, and all policy makers should think about as they engineer a new industrial policy for the 21st century.
B.A. typically raises costs. The U.S. should be concerned about building more and building faster. To take one example: A disgraceful new report on New York’s Metropolitan Transit Authority found that it spent $4.5 billion on the first leg of the Second Avenue subway line. Reducing America’s complex system of construction bottlenecks to high material costs is wildly unfair; in fact, the MTA spent most of those billions on design, engineering, and construction of the tunnel. But building certainly won’t get any cheaper or easier if our policies increase the cost of essential materials by making foreign purchases of them illegal. All things equal, buying American might make building in America more expensive at a time when we should be obsessed with reducing costs rather than raising them.
B.A. can make key supply chains less resilient. Last spring, a bacteria outbreak at a Michigan plant that makes infant formula created a scary shortage. It also offered a lesson on the downsides of protectionism. The U.S. government makes the legal importation of otherwise-safe European formula almost impossible, going so far as to seize shipments at the border. The government also awards contracts to only a small number of approved formula makers, which means three companies account for practically all U.S. formula sales. These restrictions make us more vulnerable to emergencies, such as a bacteria-infested plant in Michigan. Compare this story with one about the COVID shots: When a Baltimore facility that made Johnson & Johnson vaccines reported a catastrophic failure, the company could rely on a global network of factories that picked up the slack. The U.S. should consider “friend-shoring” the production of certain materials—that is, working with our allies to create many nodes around the world so that if one fails, no catastrophe ensues.
B.A. policies can hurt innovation, even if just by accident. If your local transit authority takes federal money, odds are it’s historically been required to buy public buses from domestic bus makers. What’s wrong with that? A 2014 study from economists at Cornell University and UCLA found that these transit authorities tended to buy more expensive buses that were less fuel efficient because they cared more about securing a subsidy than about the bottom line or even performance. One lesson of this paper is that Buy American provisions might send a strong signal to buyers—whatever you do, just buy from one of these few domestic suppliers!—that overwhelms other signals, such as price and quality. As a result, domestic suppliers don’t have to keep up with any innovative wave, and Buy American policies lock parts of the economy into being less innovative.B.A. hurts global alliances that we should be nurturing. If the U.S. really is on the cusp of a second cold war with China, we should be focused on building alliances rather than frustrating our allies and trading partners. “In the first Cold War, we wisely realized that when allies like South Korea and Japan and France got rich, it made the U.S. and the world more secure,” said the economics writer Noah Smith. “We realized that every dollar of goods manufactured in South Korea and Japan and France represented a win for the free world. We should realize that again now.”
Protectionism pushes us in the other direction. When the U.S. imposes Buy American rules, other countries may copy us and impose their own restrictions on global trade. This is why too much protectionism can punish the very people it’s meant to help. Under President Trump, the U.S. imposed import tariffs to protect manufacturing workers who built washing machines and made steel and aluminum. These jobs happened to be disproportionately located in GOP counties. But the policy backfired, triggering retaliatory tariffs in other countries. Suddenly our washing machines weren’t priced competitively for foreign buyers, leading to a sharp decline in U.S. exports. A 2019 analysis by several economists found that the U.S. companies that lost the most business were heavily concentrated in the very same GOP-leaning counties that Trump was theoretically trying to assist.
I don’t want to suggest that any attempt to onshore production will doom America to runaway costs, supply-chain catastrophes, and frayed global alliances. In many cases, I’m sure there are brilliant reasons to bring back more advanced manufacturing, clean-energy construction, and resource production. But in this molten moment for economic policy, as we’re sliding from a neoliberal era into something else, we should be explicit about the trade-offs that come from explicitly protectionist policies. We already know the downsides of a laissez-faire, “build wherever it’s cheapest” regime. Twenty years from now, I don’t want to have to write that the U.S. overreacted to the China shocks by forcibly onshoring the production of goods in a way that made those goods less resilient and ample.
What do we actually want from our economic regime? What are the political and human outcomes that our policy makers should be trying to deliver? If, for example, we’re aiming for plentiful, cheap, low-emission electricity produced by more clean-energy infrastructure in an economy with full unemployment and rising real wages, we don’t need harsh rules against importing affordable solar-energy parts from a resilient network of trading partners who are also our political allies. On the contrary, we need a political message that welcomes our allies: To win an abundance of well-being, America needs abundant help.
Source: The Atlantic
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