The American Recovery and Reinvestment Act of 2009, known as H.R. 1 or the $787 billion stimulus bill, was approved by Congress on February 13th and signed into law by President Obama on February 17th. Many aspects of the bill remain controversial. But the Buy American provision essentially provided the ingredients to start a trade war—until the Dorgan amendment was added. Although the provision has been rendered less effective, it still may become contentious once the dust settles.

Uncertainty Creates Confusion

The Buy American provision states that all iron, steel and manufactured goods purchased by stimulus money must be produced in the United States. Some exceptions exist. For example, foreign iron, steel and manufactured goods may be bought if they cost 25 percent less than domestic prices. But the most important exception was an amendment put forth by Sen. Byron Dorgan (D-ND) that stipulates the Buy American provision “must be applied in a manner consistent with the United States’ obligations under international agreements.”

Many analysts believe the amendment has effectively prevented the United States from starting a trade war. Others are not so sure.

The Dorgan amendment likely means that Canada and Mexico can bid on U.S. stimulus-supported projects based on agreements sealed under the North American Free Trade Agreement. And many other countries are probably protected by American obligations under the World Trade Organization (WTO). However, because the bill contains no definitions or rules of origin, and may be interpreted in various ways, the Canadian as well as European and Asian governments have expressed skepticism and, to some degree, fear that a protectionist agenda may be lurking in the 111th Congress.

Other problems remain. For example, China, Russia and other countries are not signatories to the WTO’s agreement on government procurement. Consequently, they may not be covered by the Dorgan amendment and therefore may be prevented from supplying iron, steel or manufactured goods on projects funded by H.R. 1.

If We Buy American, No One Else Will

According to a report published by the Peterson Institute for International Economics, the Senate version of the stimulus bill, which was adopted in the final bill, is expected to save or create 9,000 jobs. However, due to potential foreign retaliation, fewer exports could result, costing more jobs than gained.

The report estimates that if U.S. exports fulfilling foreign government procurement contracts are trimmed by just one percent, 6,500 jobs in the United States would be lost. If ten percent of these exports are cut, 65,000 U.S. jobs would be lost. And this does not include a decline in U.S. exports to non-government entities due to retaliation.

Restrict Steel and Reduce Jobs

If history provides any answers, President George W. Bush’s decision seven years ago to raise steel tariffs requires review. In December 2003, President Bush announced his decision to remove the steel tariffs he had imposed 21 months earlier. Nevertheless, the damage was done. U.S. steel users had incurred massive price increases as well as major supply disruptions, according to William Gaskin, President of the Precision Metaforming Association. The higher prices caused many steel-consuming industries to shrink. In the end, more jobs were lost than gained.

In rebuilding the San Francisco-Oakland Bay Bridge in the 1990s, Douglas Irwin from the Cato Institutes reminds us that the existing Buy American provision would have cost California taxpayers $400 million more if it had not been rescinded at the last minute. All in all, Buy American provisions that restrict foreign suppliers of steel or other products often have unintended consequences and cost more jobs than they create.

This article appeared in Impact Analysis, March-April 2009.
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella is a world-recognized author and speaker on global business, emerging risks, and the latest economic trends. He's also founder of both the ManzellaReport.com and Manzella Trade Communications, Inc. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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