ISSUES OUTLOOK

by Royce Lowe

Is Free Trade Still Around?

Joe Biden told his audience during the State of the Union Address that when Americans work, when they do projects, they’re going to buy American: American lumber, glass, drywall and fiber-optic cables. He was talking about the 1933 Buy American Act. And he got a standing ovation for it.

In a recent New York Times Opinion article, Peter Coy, a long-time writer of opinion columns, reminded us that this act requires federal agencies to buy domestic products and materials except when such a purchase is not in the public interest, and when the cost is unreasonable. Biden told Congress that past administrations had found ways to get around the Buy American Act. But those days were over, he stressed.

A law this old comes with interpretations and exemptions. Over the years, the government has issued many waivers in tacit recognition that certain purchases continued in the U.S. would be prohibitively expensive. A new White House rule, dating from last October, states that to count as domestic, a product must have at least 60% domestic parts, up from the previous 55%, on its way to a 75% value. So why would the federal government buy products made domestically, even if they’re more expensive, even if they aren’t as good, and even if imported versions pose no national security concerns? If American-made parts were cheaper, better, or both, there would be no need to force their purchase since they’d be the obvious choice. So the requirement is either harmful to the government customers and hence the taxpayers, or it’s superfluous.

Some sometimes argue that imports aren’t safe, and sometimes this is true. Contaminated Chinese drywall, as used in the 2000s, caused a rotten egg smell and corroded metal in thousands of newly built homes, particularly in Florida. This is a case for testing and inspection; however, not a reason for blanket import restrictions.

Then there’s the question of jobs. Wouldn’t Buy American create more jobs in the U.S.? The unemployment rate in January was 3.4%, the lowest since 1969. In the short term, U.S. factories couldn’t handle the increased demand caused by suddenly ending waivers of the Buy American Act. There aren’t enough workers to spare. In the long run, people could be diverted into making products such as lumber and drywall, but these are not particularly attractive jobs. The Bureau of Labor Statistics says the median wage in production jobs in sawmills and wood preservation in 2021 was $17.76 per hour.

It doesn’t make sense for the U.S. to shelter relatively low-tech industries. America’s tariffs on apparel and footwear resulted in lower imports, and doubtless hurt the American consumer more than it hurt China. In any event, low-tech products were handed over to countries such as Vietnam and India.

On the other hand, the Biden Administration is also focused on high-wage, high-growth sectors that are vital to national security, reflected by the CHIPS and Science Act. Production of computing power depends upon tools, chemicals, and software that are often produced by a handful of companies and sometimes only one. This is from a new book by Chris Miller on the Chip War.

Miller notes that, for advanced manufacturing capabilities like chip making, components are normally sourced from many countries. Hence Buy American is often impossible. There is plenty of reason to question excessive reliance on trade with geopolitical rivals, but with allies such as Japan and Europe, where is the justification for Buy-American provisions? Good point!

In fact, there are no Buy American provisions in the CHIP and Science Act, due to the global nature of leading-edge semiconductor technology. The IRA (Inflation Reduction Act) relies on tax breaks rather than encouragement of domestic sourcing. The bipartisan infrastructure law has a waiver procedure that allows many foreign companies to supply U.S. customers. Trump’s tariffs on China are still in place, and now Biden is promising to be more aggressive in enforcing the 1933 law than were his predecessors.

Robert Atkinson is the president of the Information Technology and Innovation Foundation. A study by the organization concluded that insisting on American sourcing for technical products such as high-speed internet service to homes would raise prices by 20 to 25%.

Both Miller and Atkinson advocate friend-shoring of critical parts, i.e., switching to suppliers based in nations that are reliable allies. This goes back to Adam Smith, where everyone wins when countries specialize in what they do best rather than erecting protectionist barriers and trying to do everything alone.

Friend-shoring also helps countries along the diplomatic path, like USMAC. Mary Ng, Canada’s Minister of International Trade, Export Promotion, and Economic Development, recently said, in Mexico City, “We understand what the American president is trying to do on jobs. We have to keep doing the work to remind the Americans that we share values and that working together allows us to be more competitive versus others that may not share those values.” No new arguments there, but judging from the standing ovation Biden recently got, many people in Washington aren’t persuaded by them.

Douglas Irwin, an economist who wrote a book, “Free Trade Under Fire,” isn’t really hopeful for free trade. He says the old center has lost ground and that it will probably take evidence of substantial harm from protectionism to get people to change their minds about it.

Author profile: Royce Lowe, Manufacturing Talk Radio, UK and EU International Correspondent, Contributing Writer, Manufacturing Outlook. n

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