'Buy American' Clause Both Helping and Hurting U.S. Companies

This post may be venturing off into “rant” territory, which is largely uncharted water for me. But an article in yesterday’s Wall Street Journal about the negative impacts that the Buy American Clause is having on some of the very businesses it’s supposed to help shows the fallacy of drafting government policy-by-marketing-slogan.

The Journal tells the story of Aquarius Technologies, a Wisconsin based company that makes sewage treatment equipment. Their industry has received billions of dollars in stimulus funds for projects around the country. Yet by their estimates, Aquarius may lose up to 25% of their total business if neighboring Ontario can no longer utilize them, due to Canadian retaliatory protectionist policies - a direct result of the Buy American Clause.

So in the end, a policy designed to help American workers may actually have the opposite impact on a subset of those workers, the companies that employ them and the towns they are from. The reason is that a complex issue, like global supply chains or interconnected commerce in border regions, isn’t easy to deal with using bumper sticker politics. “A strong dollar”, “buy American” or “tough on crime” slogans play well in short issue ads and intuitively make sense to the masses, but they miss the point when it comes to real policy.

Supply chains are longer and corporate “ownership” is muddier in the global economy. The auto industry is a perfect example, since in some cases, parts come from all over the world (especially when you consider the raw materials) to be assembled in the United States by American workers. And that’s before you even consider global “ownership” of public companies, the economic impact of the foreign auto dealership industry, or the fact that consumers are buying the cars they choose.

Bringing it back to the sewage treatment industry, it’s clear these marketing oriented policies also fail to capture the complexity and limitations in terms of capacity. For example, did policy makers realize that the Buy American Clause would slow supply chains due to raw material and production limitations when international trade is removed as an option? And did they account for the fact that this would also slow the rate at which stimulus funds enter the economy? Maybe, maybe not. But either way, it shows the complex issues surround capacity are not served well by marketing oriented policies.

Perhaps in the end, cooler heads will prevail. Oftentimes, politicians leave enough leeway in legislation to let the governing agencies interpret the regulations in a logical, efficient way. Maybe this WSJ story is timed to put more heat on the Obama administration before the G20 summit kicks off next week in Pittsburgh. Hopefully in the end we’ll get a policy that accounts for the complexity in our economy, labor markets and supply chains … even if it’s too verbose to fit on a bumper sticker.

Disclosure: No positions

Comments

[Mark Bern:]

Hopefully, in the end we won't cow-tow to trading partners like China which screamed bloody murder when the "Buy American" clause was first made public. Isn't it interesting that China requires all materials and labor for Chinese stimulus spending to be from Chinese companies? The EU isn't exactly an open market either, nor Japan. The rest of the world talks a good game, but very few countries have markets as open as the U.S.

Now, I am all for global open trade. But I really do wish the playing field were more level.

Sep 17 06:14 PM

[Mad Hedge F...:]

zca It’s all about the dollar, which I have hated all year (click here for my call ). The assured onslaught of federal debt issuance headed our way will be the overriding investment consideration for traders and portfolio managers for the next decade. That will knock the stuffing out of the greenback against every currency except the Zimbabwean dollar, and even that will rally when you get a regime change. There was once an argument that foreigners piled into these currencies to capture a huge yield pickup, but even that advantage is now gone. The soggy buck also explains a lot of what is going on in our stock market, with companies earning most of their from increasingly wealthy foreigners, like those in technology, energy, and commodities. As I write this, I am looking at new one year highs for my favorite picks of the former British crown colony currencies of the Canadian (up 14% YTD), Australian (up 26% YTD), and New Zealand (up 23% YTD) dollars (for my C$report click here ). There bounteous resources, Anglo-Saxon contract law, an almost common language, and vibrant ports make them the safe bet of choice. It’s just a matter of time before the loony hits parity, to be followed by the Aussie dollar, and then the kiwi.

Sep 17 11:29 PM