Why 'Buy American'? : Planet Money Why many economists believe the "Buy American" provision in the stimulus bill is a bad thing.
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Why 'Buy American'?

Alan asks:

What's so bad about protectionism? As part of the infrastructure spending, the "Buy American" requirement has been added to steel purchases. Since I'm Canadian, this is bad! But beyond that, I've heard from lots of sources that this was a big problem during the depression. Does it just turn into a game where everyone puts up barriers? Could you delve into this further and see if we are starting to see the problem show up this time around?

Alan has pretty much hit the nail on the head. The steel industry got what it wanted in the stimulus bill.

The controversial passage reads:

None of the funds appropriated or otherwise made available by this Act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron, steel, and manufactured goods used in the project are produced in the United States.

This provision has inflamed one of the oldest divisions in political economy: whether such restrictions are beneficial. On the one hand, Vice President Joe Biden defended the provision on CNBC by claiming that the move preserved the focus on job creation, and the president of the United Steelworkers union hailed supporters as "economic patriots."

Squaring off against them are a number of economists and business leaders, led by the U.S. Chamber of Commerce. They argue that a Buy American measure constitutes protectionism, in which governments cap or restrict imports, and would prompt other governments to take similar measures. For example, France could require that their auto companies get more of their components from French plants.

What's the problem with forcing companies to buy local? Remember that every import is also an export for someone else -- the French decision would hurt American auto parts makers. Many economists argue that the negative consequences of other governments' reactions outweigh the increase in domestic production created by the Buy American provision. Their bogeyman (or bogeymen, in this case) is "Smoot-Hawley," or the 1930 Tariff Act. This bill increased duties on over 20,000 imports to stimulate the domestic economy. This didn't really happen, and it also led to an 8 percent decline in international trade. Economists warn that similar protectionist measures could deepen the recession by limiting American companies' ability to sell to the much larger pool of consumers located in other countries.