Buy American Once Again

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.