What Does 'Buy American' Really Mean Today?

Barack Obama is on a risky path toward further confrontation with America’s banker, the Chinese. As his economic stimulus package makes its way though Congress, Uncle Sam’s biggest trading partners are warning we face a spiral of protectionist policies. The House-approved version includes a "Buy American" provision that generally prohibits the purchase of foreign iron and steel for any infrastructure project in the bill.

While it may not hit the Chinese economy directly, this provision has the potential to stir up a nationalistic backlash among government officials in Beijing. Running big trade and budget deficits indefinitely is not possible for America, either economically or politically. The Chinese indirectly control Washington’s purse strings. China has become the biggest foreign holder of U.S. debt, second only to the U.S. government itself in overall holdings.

Obama is testing an already shaky bilateral relationship. The new president committed a gaffe last week by allowing his nominee for Treasury Secretary Timothy Geithnerto say the administration "believes that China is manipulating its currency."

This led Beijing to react forcefully, arguing Obama and his team were wrong. Kenneth G. Lieberthal, visiting fellow at the Brookings Institution, warns that the Obama administration may take a tougher line with China, according to the NY Times. "The Chinese are probably one of the few people in the world who were sorry to see President Bush go, and are nervous about his successor."

As a candidate, Obama criticized NAFTA and proposed a deal that would have lowered barriers with Colombia. "It is no surprise there is increasing talk that the incoming Obama administration will focus its trade spotlight on China,” wrote Derek Scissors of the Heritage Foundation in Washington. "As it is usually the president who restrains Congress when protectionist sentiment strengthens, the storm clouds are plainly thickening."

In our global economy, what does “buy American” actually mean? With supply chains spread the world over, it is not as simple as it was in the 1980’s when “Buy American, it could be your job” was the American industry’s response to Japanese imports. Today, the “Made in China” label means many American companies, and their stock investors, benefit as well.

In the middle of a painful economic downturn, sound policy choices often fall victim to emotional outbursts. If Obama and the protectionists in Congress are successful, US firms with operations in China face the risk of retaliation by Chinese trade officials. As many China observers have noted, a number of struggling US-based firms including Motorola (MOT), Dell (DELL), GM, along with countless other manufacturers, are successfully selling billions of dollars worth of mobile phones, computers, and Buicks manufactured in China to Chinese buyers. And according to traditional trade statistics, American branded products produced by American companies in China are not considered American, but Chinese.

Foreign companies are likely to face more roadblocks down the road. Cola-Cola’s (KO) attempt at buying Huiyuan Juice Group has drawn scrutiny under China’s new anti-monopoly law which came into force last August. We can look forward to more economic nationalism in China as the overall economy continues to decline. And research shows Chinese imports often help poor America’s poor make ends meet. In November, The American reported:

The Broda-Romalis paper, “Inequality and Prices: Does China Benefit the Poor in America?,” shows that from 1994 to 2005, much of the increase in U.S. income inequality was actually offset by a decline in the price index of the goods that poorer households consume. Inflation for the richest 10 percent of U.S. households, which tend to spend more on services, was 6 percent higher than inflation for the poorest 10 percent, which tend to spend more on nondurable goods, the type of goods often imported from China and sold at Wal-Mart (WMT).

Broda and Romalis found that in the sectors where Chinese imports have increased the most (especially nondurable goods such as canned food and clothing), prices have fallen dramatically. They estimate that about one-third of the price decline for the poor is directly associated with rising imports from China. “In the sectors where there is no Chinese presence,” Broda says, “inflation has been more than 20 percent.”

As the Smoot Hawley tariffs clearly showed in the 1930’s, protectionism is the wrong remedy for a global economic slump. With a large Democratic majority in Senate and Obama the new occupant in the White House, passage of the stimulus package, in some form, seems to be a near certainty. In the Year of the Ox, we are going relearn some history the whole world would rather forget.

Stock position: None.

Comments

[Bob Leneker:]

For "free trade" or Global trade to work, it needs to have an equality in labor, regulations. It was never meant to be a job creator like it was advertised, and Ross Perot knew it. The west, especially the United States has seen a 100 million people loose their jobs repeatedly, and each subsequent job paying 10-30% less. Their savings, standard of living, retirement, and health care are gone, so multi-national companies can go around the world for labor such as China, that pays 15 cents an hour, or technical labor that pays $2/hr in India. It is hitting the U.S. harder, because we do not have mechanisms, to slow it like Europe.

Soon, you will see, the dam break, and Americans will be in the streets demanding the out-sourcing, off-shoring stop...by then it will be radical, a time history shows, has caused democracies to fall. Not that we are a democracy, we are a Corporate Oligarchy, and you are owned by the Oligarchy, the Corporation that owns you company, and most media companies. You are in effect the advertising, marketing and propaganda arm of the these multi-national corporations. A slick, manipulative machine of propaganda, lies, that is much like the Soviet propaganda of old days, albeit more sophisticated.

Feb 01 01:46 PM

[donzelion:]

"In the middle of a painful economic downturn, sound policy choices often fall victim to emotional outbursts."

Well, it sort of depends: if you view the economic downturn as an Act of God, a storm that comes when it comes, regardless as to what human policies have done, then the previous policy choices may have been sound, while the new ones represent a potential deviation.

However, if economics are a matter of human choice, then the question is, "are we trading bad policies for worse policies"?

Grandstanding and bashing the nation of the moment does no good for anyone. Cheapshots and potshots may serve political ends but build jobs for no one (at least, no one outside the very worst sort of media). Let China do their thing, Japan do its thing, and Americans do our thing - and I suspect our thing amounts to more than pulling plastic out of wallets and turning it into debt.

Feb 01 04:40 PM

[n6532l:]

I have never doubted that American companies benefit from free trade. What Brian Schwarz and his fellow free traders can not bring themselves to understand is that it is a net harm to the citizens of the United States. The great wealth creation of the United States did not happen until we became a tariff protected economy in 1828 and lasted until we became a trade dependent economy in 1973. Since 1973 there has not been a single decade in which the Average Weekly Earnings of Americans rose. Before 1973, as far back as we have data, there was not a single decade in which real wages did not rise. Real wages increased during the 1930s in spite of the Depression. That is the impact of free trade. The declines all happened during free trade, the increases all happened with trade protections. Between 1828 and 1947 our tariffs seldom went below 30% and were as high as 62%. Behind that wall of protection America, and Americans, prospered. Tariffs will work again. If tariffs did not work the United States would still be supplying raw materials to Great Britain and paying what Washington said was top dollar (I mean pound) for shoddy British goods.

We became a trade dependent nation in 1973. I challenge Mr. Schwartz to find those goods and services making up the Consumer Price Index in 1973 that can be had by the average American for less man-hours worked today than then. That basket of goods and services cost about 12% more today than then.

Free trade works like this: American banks and insurance companies get to operate in India and India gets to H-1B come here to take jobs that should go to Americans. The DOL says "... H-1B workers may be hired even when a qualified U.S. worker wants the job, and a U.S. worker can be displaced from the job in favor of the foreign worker." While that may be good for banks and insurance companies American computer programmers lose programming jobs to cheap foreign labor. To use Mr. Schwarz's example what benefit come to the American people if Coca-Cola is able to buy Huiyuan Juice Group? Will they hire Americans to work there? Not likely.

But then what about the big bad Smoot-Hawley tarif boogieman that the free trader always try to scare you with. Look closey and this boogieman is not that scarry. Foreign trade was not that important in the 1920s or 1930s. Americans can ask their elders what foreign products they used. Coffee and tea for sure. But not much else. The general rule was we bought only what we could not make ourselves and sold to others only what they could not make themselves. Smoot-Hawley did not make trade go to zero. Imports were only 6 percent of the GNP before Smoot-Hawley and were 2 percent after. The Great Depression resulted in a 31 percent drop in GNP and 25 percent unemployment. Far too much to have been caused by a 4 percent of GNP drop in trade even if that 4 percent was 66 percent of the actual trade.

Feb 01 05:46 PM

[Mike Rogero:]

If one looks at the well written Wikipedia article "Causes of the Great Depression", it seems that they only nail in our current coffin is a rise in protectionism. I would have thought that it should be obvious to such a well educated group as the incoming government team that going back to "Buy American" which is just another refrain of the Smoot-Hawley bill which helped bring America into one of its most trying and miserable periods wouldn't be the right path. I do hope as Americans we learn from our history before we doom ourselves to repeat it again...

Feb 02 02:13 AM