Buy American Once Again-Becker

Every recession, including those milder than the current recession, leads to pressure to reduce spending on foreign goods by raising tariffs and other import restrictions. The avowed goal is to help domestic workers and businesses that are going through difficult times. Hostility to imports when unemployment is high and rising is surely understandable. Nevertheless, it is unwise to engage in seriously restrictive international trade policies even during a serious recession. Unfortunately, in the recent stimulus bill passed by the Democratic members of the House of Representatives, the recession is used as an excuse to promote "buy American" policies. The bill would, among other similar restrictions, ban the use of non-American steel in the many construction projects that are part of the stimulus package. This provision was included even though it appears to violate US obligations under the rules of the World Trade Organization, and under the Nafta agreement with Canada and Mexico. This buy American provision in the stimulus bill has already led to retaliatory threats by several European and Asian countries since many other countries are also eager to place greater restrictions on imports. The economic case for higher tariffs and other trade restrictions during serious recessions is that the economic system does not function well during depressed times. This malfunctioning of the economy creates higher unemployment of both labor and capital. The protectionist argument is that under such abnormal conditions, various means of putting these resources to work, such as tariffs and buy American laws, may be desirable, even though during normal times these would clearly be inefficient and hurt consumers and the economy. The merit in this argument is overwhelmed by several more powerful arguments against increased trade restrictions, even during serious recessions and depressions. One obvious argument is that retaliation against American exports would surely follow if buy American restrictions remain in the version of the stimulus bill that will become law. The most famous example of such a tariff war occurred during the Great Depression. In 1930, during the early stages of that depression, Congress passed the Smoot-Hawley Tariff Act- named after the two Republican congressmen who promoted the bill. It raised the US tariff on over 20,000 imported goods to unusually high levels. Over 1000 economists of different political views signed a petition that urged President Herbert Hoover to veto the bill. He did not, even though he had favored lower rather than higher tariff rates. In addition to Smoot-Hawley, Congress and President Roosevelt in 1933 passed the first buy American law that required the federal government to prefer US products in its purchases. After Smoot-Hawley passed, many countries retaliated with increased tariffs on American goods. American-European trade crashed rather soon after these tariff increases, although the growing world depression may have been more important in this crash than the higher tariffs. The Smoot-Hawley tariff played an uncertain role in worsening the world-wide depression of the 1930s, but it surely does not appear to have helped the US moderate the depression that began a year earlier in 1929. By 1933, unemployment had climbed to 25% from only about 3% in 1929, and output had fallen by over 30%. Retaliation from other countries is not the only negative effect of raising trade restrictions during a recession. The primary determinant of which trade restrictions get imposed on foreign imports, such as the buy American steel clause of the House stimulus bill, is the level of political power different industries have in Congress. The dominance of politics over economic benefits is a general weakness of so-called stimulus packages. The House stimulus bill not only restricts imports of foreign steel, but its spending programs are only distantly related to any positive effects on unemployment. For example, broadband access and alternative sources of energy, such as windmills and solar panels, are both generously subsidized by the House bill. Spending on these and the many other programs in the bill may (or may not) be worthwhile, but such spending will have little effect on unemployment because it will mainly utilize high skilled workers and capital that would otherwise be employed at other activities. Recessions generally concentrate unemployment among lower skilled workers, along with workers in industries that are particularly hard hit, such as residential housing and banking in this recession. Trade restrictions can do only modest amounts to help either low skilled unemployed workers, or the unemployed in industries like banking and residential construction. However, the retaliation from other countries induced by more restrictive policies would reduce the demand for exports of American goods, such as products of the high-tech industry and agricultural goods, and reduce profits and employment in these sectors. One major reason why trade restrictions and other government "stimulus" programs may be politically attractive during a recession is that identifiable groups benefit, such as the steel industry, or the recipients of the government stimulus spending. By contrast, the harm to workers in export industries who suffer because of the indirect effects of trade restrictions on exports, or the harm to workers in industries that are crowded out by government spending, is remote and not so apparent.

Comments

[Anonymous]

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[Jack]

JustEcon: I hope you are studying econ and will continue to do so. Interestingly I've heard a lot of similar "stuff" from those "studying" econ in college these days and wonder what is going on there. Let's take a look at a few of my concerns:

The problem facing the auto companies and their unions isn't one about free trade. It's about bad management and bad bargaining.

......... Well that's a bit of over simplification as ALL auto companies are suffering today. A 50% pull back in your core biz will do that!

There is nothing inherently wrong with the American worker. In fact, the reason that the American worker is so expensive is because he or she is so much better trained than workers from developing countries. Our workers know math, English, history, etc, and have access to the internet and other infrastructure in the US.

.......... possibly you've been listening to too many of our politicians! or haven't traveled much. I was in Japan in the mid-60's and got quite an eye opening! While our guys (and robots) assemble Honda, Toyotas and giant Nissan trucks, who do you suppose designed them? Also one might reflect upon what Honda, Yamaha et al did to all of the motorcycle companies of earlier years, and all of the bicycle companies. As for your other claims I find many immigrants far better educated in history et al than those who grew up here.

The problem is the management of US auto companies have time and again chosen the wrong cars to build and the wrong technologies to develop. The proof is in the pudding. Japanese cars are more expensive, but still they sell better. I for one cannot wait until all the US auto companies go bankrupt and their managers fired.

........ More faddish mythology? Are you aware that the two most popular models sold here are F-150 and Silverado p/u's? And if "they" are building the wrong cars, why is it that they maintain 50% of the market share? Also, just looking around our roads clogged with SUV's but I'd venture that more dollars are spent on the "Big Three" products, and it appears that no one forced folks to buy the Expeditions and Suburbans, though it strikes me as a somewhat foolish purchase, but it is the owners making the payments.

Still...... perhaps management made errors. Should they or could they have taken the smaller car market? Sometimes they were clobbered by US policy (Chrysler K-cars built for the 70's oil "crisis") and we'd need to know a lot more than we do about what it was like competing with Toyota who builds the same cars for a world market.

Fear not for the US worker. Toyota and others already build a lot of their cars here in the US and will expand to pick up the slack. The only thing that will change is that we'll finally get cars we want to buy!

........... ah yes. Nirvana. In an industry that is increasingly mechanized and the more rapidly in the non-union shops we've the specter of our "smart" US worker assembling the products designed by Japan where the profits from our working folk will accrue. Should be great.

The UAW has also shot itself in the foot (or the head). Collective bargaining is fundamental to the competitive market, but the UAW made two critical errors that will lead to its dissolution.

1. All eggs in 3 baskets. By agreeing to pensions and health benefits paid for by the auto companies, the UAW tied its fortunes to the success of its employers. Recent negotations have tried to fix some of this, but it's getting late. When retirees lose their pensions, they only have their own leadership to blame.

......... "a mistake" eh? Upon trading their working lives for their pay and benefits who do you suppose they should have gone to for pensions? I'm guessing the Prof Becker is trusting that the U. that employs him will be there and good for his retirement pension. What "blame" do you see for the UAW leadership?

2. All employees paid on same scale regardless of skill level or performance.

.......... pretty much of a red herring in a crafts and assembly line setting.

The UAW maintained its bargaining model even though car manufacture has dramatically changed since it began. With robots doing a lot of the work, car manufacture is now a highly skilled (and sometimes dangerous) profession. With highly skilled workers on the same pay scale as receptionists, and with competant workers on the same pay scale as the incompetant, they've totally destroyed the incentive to think and contribute to the process.

........ Most of the above is hardly true. WERE your claims of incompetence true the UAW boys would not enjoy the admirable safety record they have posted. This looks like stuff gleaned from right wing blogs.

The same will apply for US airlines. Goodbye Delta, and hello Southwest.

........ Most of the airlines have made a lot of adjustments. Today over half of their costs are fuel and at $100 oil NONE of them will do well. Here's why, they need the low priced leisure travel business to help pay for the routes they MUST have to provide higher cost service to business class. It's simple econ to see high prices means dramatic drops in leisure travel followed by a contraction in flights and lost of the more lucrative biz class travel. A downward spiral. Southwest? they did well to have hedged properly on fuel, but that edge is gone now..... there is NO magic at SW.

Thank you recession!

......... You seem a tad too joyful to see the collapse of much of America, especially if you are as young as you seem and are hoping to enjoy a standard of living somewhat like us boomers enjoyed.

[Jack]

The Top 10 Best-Selling Cars of 2008

* Ford F-Series: 515,513
* Chevy Silverado: 465,065
* Toyota Camry: 436,617
* Honda Accord: 372,789
* Toyota Corolla: 351,007
* Honda Civic: 339,289
* Nissan Altima: 269,668
* Chevy Impala: 265,840
* Dodge Ram: 245,840
* Honda CR-V: 197,279

December 2008’s Top 10 Best-Selling Cars

* Ford F-Series: 41,580
* Chevy Silverado: 33,340
* Toyota Camry: 25,275
* Honda Accord: 22,348
* Toyota Corolla: 22,129
* Chevy Impala: 21,148
* Chevy Malibu: 17,355
* Nissan Altima: 17,311
* Honda Civic: 17,302
* Dodge Ram: 16,618

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[Anonymous]

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[Mick]

„ÄÄBut In the viewpoint of green technology,Buy American is not good politics. In other forign country ,especially Japan,the great effort of not only high strength steel development but even also tool steel which becomes tool that processes it is done.
Can we make new green car by only american way?

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[Wilford]

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[Ravi]

Response to Justeconomics comment,

One poster sumed this up saying that higher taxes and subsidies are the only thing keeping the free trade system in-tact due to the strenght of the us dollar and the wealthy corporations.

However, further research needs to be done, free trade is not all the time diserable and I don't think increasing taxes on the wealthy and paying unemployment benefits will do anything to attack the root or main cause of the problem.