Viewpoint: Buy American — by choice

The views expressed here are solely those of the author and do not necessarily represent the views of FreightWaves or its affiliates.

The Biden administration issued an executive order on Jan. 25 designed to seek out more “made in America” sources to fulfill its procurement needs. Happily, this is mostly symbolic. It should be no surprise that the current and previous two administrations have used executive orders to tinker with Buy American policies. The Office of Management and Budget will set up a Made in America Office, ostensibly to provide stricter oversight to applications for waivers. In other words, the government just added more red tape to the burden of proof to the proposition that free trade is a good thing. On the other hand, section 6 of the executive order requires that waiver requests and subsequent decisions be posted on the internet. The more transparency the better.

The Buy American Act (1933), passed during the depths of the Great Depression, is meant to favor domestic products over foreign ones. Federal government procurement of products (i.e., goods and supplies) in excess of $10,000, and meant for public use, are governed by the act. In general, the product is deemed “American” if it is manufactured in the U.S. with at least 50% of the cost accounted for by U.S. components. This is known as the “components test.” Waivers are possible if the cost of domestic products are deemed “unreasonable” compared to foreign sources and if domestic supplies are insufficient to meet demand. Of course, if the foreign items’ cost advantage were due to “dumping,” that would not meet the standard for a waiver.

While exceptions to the act are also made for free trade partners (e.g., Canada and Mexico) every free trade agreement the U.S. is a party to has its own unique “rules of origin” requirements that block foreign content to various degrees. Interestingly, section 8 of the executive order asks the Federal Acquisition Regulatory (FAR) Council to consider replacing the “components test” with a value-add test based on “U.S.-based production or U.S. job-supporting economic activity.” While some rules of origin provide options to demonstrate compliance based on either value or cost, giving the FAR Council the option to assess value based on domestic jobs is certainly novel. It is novel because it conflates trade protection with the old-fashioned labor theory of value, a cornerstone of Marxian economics.  

If the product is U.S.-manufactured and meant for public use, its transportation requirements will have to be provided by U.S.-based carriers. Foreign for-hire carriers could handle the import of components into the U.S. but nothing more after delivery (except for export haulage) because doing so would constitute cabotage. A narrow range of manufacturing for domestic purposes also narrows transportation options. In all cases, fewer options means less competition and less incentive to control costs.

Transportation infrastructure is also subject to unique domestic procurement requirements. For example, the Federal Highway Administration and Federal Railroad Administration require that iron and steel used in infrastructure under their regulatory purview be 100% U.S.-made. The Federal Aviation Administration’s threshold for iron and steel is 60%. The Berry Amendment (1941), though not under the purview of the Buy American Act, requires 100% U.S. content for acquisitions by the Department of Defense related to food, clothing, certain types of tools, etc. 

Trade protectionism is rarely a one-way street. Any retaliation that follows — as it did from European trade partners during the Great Depression — only serves to prolong the economic suffering. Trade retaliation in the 1930s, arguably, played a role in starting World War II. Still, there is the appearance of patriotism attached to the feeling that if the government is taxing Americans in order to finance procurement, the least it can do is use the revenue to procure American-made products. 

Even state and local governments can restrict public procurement to favored sources. Any and all laws that serve to restrain trade serve a political purpose which, of course, favors some constituents and not others. Some are happy and some are not; but it is government interference with otherwise efficient market signals, pure and simple. 

Buying American, given today’s global supply chains, is certainly much harder than it was in 1933. Furthermore, the post-WWII trade regime, exemplified by the World Trade Organization (WTO), takes a dim view on any member state discriminating based on purely domestic reasons. A compelling case against foreign sources must be made; otherwise the WTO can sanction retaliation by aggrieved countries in the form of countervailing duties. Protectionism, therefore, is never painless.

The Jones Act, also noted in the executive order, certainly props up U.S. shipyards since they are the only ones legally entitled to build vessels that can fly the U.S. flag and undertake cabotage. Leaving aside how much foreign content there may be in the materials used, domestic shipbuilding jobs are protected and this, of course, gets to the heart of why protectionism takes place. Protecting industries and employees provides benefits which are more concentrated relative to the costs dispersed downstream along the supply chain and borne by millions of final consumers. It may be good politics, but it is definitely bad economics.

Click here to see other commentaries by Darren Prokop on American Shipper and FreightWaves.