Petersen Institute of Buy American: Bad for jobs, worse for reputation

Gary Hufbauer and Jeffrey Schott of the Petersen Institute for International Economics analyze the Buy American provision in the U.S. stimulus bill. To my knowledge, Petersen is considered a centrist institution.

The authors state, as did Douglas Irwin in a personal conversation, that the steel industry is capital intensive. This means that of every $100 in the industry's costs, most of these account for machinery and fewer dollars account for labor. By their calculations, the Buy American provisions (which force US industries to buy American steel unless they could get foreign steel over 25% cheaper) would account for only an additional 0.5 million metric tons of steel purchased. In contrast, 2006 domestic production of steel was 98.6 million metric tons. The authors estimate that the Buy American provisions will only result in an additional 1,000 jobs. This is out of a labor force of 140 million.

The US exported 9 million tons of steel in 2007. The US also makes a lot of other exports. There is the risk that other governments could retaliate with tariffs of their own. If the US loses exports, it could also lose jobs. The authors estimate that if 12 major trading partners place their own restrictions on government purchases of US goods, and if this caused US exports to drop by 1%, 6,500 US jobs would be lost.

The authors also believe the Buy American provision would violate the US's WTO obligations. I'm unable to speak to the validity of their econometric methodology, since I'm not an economist, but the Petersen Institute is well regarded.

Even if not all the US's major trading partners retaliated, this still sets a bad example. I believe that free trade is generally good for all parties involved, assuming that they're equals. Christians believe in honoring their contractual obligations, like the US obligations to the WTO. Additionally, Christians don't believe in denying someone their livelihood - even if that someone is a foreigner. Although steel is capital intensive, some foreigners will be denied their livelihood if Americans refuse to buy foreign steel - possibly more will lose their jobs than American workers. It is disappointing that the Buy American provisions were not dropped from the final bill.