TRADE AND INVESTMENT POLICY WATCH

"Buy American" Is Bad for

Taxpayers and Worse for Exports
Gary Clyde Hufbauer (PIIE) and Euijin Jung (PIIE)
September 5, 2017 8:30 AM

“B
uy American,” while not new, features prominently in President Donald
Trump’s array of trade policies. The practice of shutting out supplies
from abroad originated in the Great Depression, alongside the infamous Smoot-
Hawley Tariff. More recently Buy American requirements were inserted in
President Barack Obama’s 2009 stimulus act, as well as subsequent laws
authorizing water, sewer, highway, and rail projects.[1] Buy American provisions
are often enacted because politicians associate the patriotic slogan with the
creation of domestic jobs. In fact, these laws are counterproductive: They are
costly for taxpayers, they curtail exports, and they lose more jobs than they create.
“Buy American” was bad policy in 1930 and does even more harm today.

Buy American laws typically impose a high penalty on the purchase of foreign
materials or the participation of foreign companies in federal procurement. For
example, the American Recovery and Reinvestment Act of 2009 (the stimulus act)
required the purchase of American iron and steel unless the overall cost of the
project would be increased by 25 percent or more. Several states have enacted their
own Buy American laws for local procurement; a few invite competitive bids from
all qualified firms.

The United States has opened segments of federal procurement to its partners in
the World Trade Organization (WTO), the North American Free Trade Agreement
(NAFTA), and other free trade agreements. On a voluntary basis, some states have
likewise acceded to the WTO Government Procurement Agreement (GPA) and the
NAFTA procurement chapter.[2] However, the president’s broad advocacy of Buy
American, together with the US Trade Representative’s objectives for renegotiating
NAFTA,[3] suggest that international accords will be trimmed. Expansion of open
and competitive procurement seems out of reach—for the moment.

This is unfortunate, both for American taxpayers and US exports. Buy American
dulls competition for everything that federal, state, and local governments
purchase. Consequently, taxpayers pay inflated prices for new infrastructure, the
latest information technology, and routine maintenance of subways, bridges, and
airports. Imported goods and services amount to less than 5 percent of US public-
sector procurement,[4] compared with an overall import ratio of 17.3 percent for
the US economy.

Since US public procurement amounts to about $1.9 trillion annually (some 10

percent of GDP), the import content of public-sector purchases amounts to about
$95 billion annually. By comparison, $1.9 trillion of US private-sector purchases of
goods and services has an import content of around $323 billion. Quantification is
difficult, but the major federal Buy American laws probably equate to tariff
equivalent barriers of at least 25 percent on federal purchases. State laws vary in
scope and protective degree, but on average they probably entail at least 10 percent
tariff equivalent barriers. Barriers of this magnitude likely impose a cost of 5 to 10
percent on US taxpayers through inflated prices for public purchases. The elevated
cost—essentially government waste—could exceed $100 billion annually. The
domestic burden of Buy American extends beyond taxpayer dollars. Dixon,
Rimmer, and Waschik (2017) estimate that eliminating all Buy American
requirements would create 300,000 net new jobs over a three-year period, after a
period of restructuring and exchange rate adjustment.

Buy American weighs even more heavily on US exports. When Buy American
policies are championed at home they are emulated abroad—in the form of Buy
European, Buy Mexican, Buy Japanese, and other local content laws and policies.
Consequently, US goods and services face severe barriers in foreign procurement
markets. The combined GDP of OECD countries, excluding the United States, will
reach $27.5 trillion in 2017 (see IMF, World Economic Outlook database). Typically,
16 percent or more of GDP in OECD countries (apart from the United States) is
spent on government procurement, about $4.5 trillion in 2017. Potentially that’s a
huge market.

Moreover, a large share of government procurement entails goods, services, and

projects that are US specialties. Major construction firms like Bechtel, Fluor, and
Kellogg excel at port, power, and bridge construction. Outside the United States,
most hospitals are government-run, and US medical equipment firms like Philips
Healthcare, Carestream Health, and Hologic are prime suppliers of CAT and MRI
machines, dialysis equipment, and operating theaters. US pharmaceutical firms like
Merck, Pfizer, and Gilead are leading producers of medicines, widely purchased by
governments abroad. Like the private sector, the government relies heavily on
information technology—requiring all manner of computers and software—a
specialty of American firms like Dell, IBM, Cisco, Oracle, and Microsoft.

Table 1 reports estimated public-sector imports as a percentage of public

procurement (federal, state, local) for a range of countries. The table also reports
total imports of goods and services expressed as a percent of GDP. Just as in the
United States, in every foreign country the public sector imports a much smaller
share of its purchases than the overall economy (including the public sector). Local
content practices are widespread and have not been liberalized much by the WTO
GPA or bilateral free trade agreements.

Table 1 Imports as share of public procurement and as a share of GDP, selected countries,
2011

I I
mports for public mports of goods and
procurement (percent) services (percent of GDP)
Country

E 4. 4
uropean Union* 4 0.0

A 5. 2
ustralia* 2 0.1

B 2. 1
razil 4 2.2
C 3. 3
anada* 8 1.8

C 0. 2
hina 9 4.1

I 6. 3
ndia 5 1.1

I 7. 2
ndonesia 1 3.9

J 5. 1
apan* 2 5.5

S 1 5
outh Korea* 4.0 4.3

M 3. 3
exico* 8 2.5

R 4. 2
ussia 9 0.1

T 1 N.
aiwan 6.0 a.

T 4. 3
urkey* 4 0.4

U 4. 1
nited States* 4 7.3

O 5. 3
ECD countries 8 2.1
average (excluding
US)

W 5. 3
orld average 6 0.1

O
ECD = Organization for Economic Cooperation and Development
* = OECD member; n.a. = not available
Source: Table A.2 in Messerlin (2017) and World Bank's World Development Indicators
database.

US exports of goods and services are almost entirely sold to private firms, not
foreign governments. Conceivably, US exports could expand by $189 billion
annually if OECD countries all repealed their existing local content laws and
public-sector imports rose from 5.8 percent of procurement to 32.1 percent,
roughly the same percentage that characterizes private sector purchases.[5]

Of course, repeal of all OECD local content laws is not on the horizon. But if the
NAFTA ministers take a leaf from the recently ratified Canada-EU Comprehensive
Economic and Trade Agreement (CETA), great progress could be made. CETA
opened all procurement by Canada, its provinces, the European Union, its member
states, and their subfederal units to competition from supplies and firms
originating in the partner country. A similar open procurement regime would be a
worthy goal for the United States, Mexico, and Canada in the NAFTA 2.0 talks,
even if the phase-in period takes many years.

REFERENCES

Dixon, Peter B., Maureen T. Rimmer and Probert G. Waschik. 2017. Macro, Industry
and Regional Effects of Buy America(n) Program: USAGE Simulations. Center of
Policy Studies (CoPS) Working Paper No. G-271 (April). Victoria University.

Messerlin, Patrick. 2017. “How Open are Public Procurement Markets?” In The
Internationalization of Government Procurement Regulation, eds. Aris
Georgopoulos, Bernard Hoekman, and Petros C. Mavroidis. Oxford: Oxford
University Press.

United States Government Accountability Office. 2016. International Trade:

Government Procurement Agreements Contain Similar Provisions, but Market Access
Commitments Vary. Report to Congressional requesters (September). Washington.

USTR (United States Trade Representative). 2017. Summary of Objectives for the
NAFTA Renegotiation. Executive Office of the President (July 17). Washington.

Whiting, Tory. 2017. “Buy American” Laws: A Costly Policy Mistake That Hurts
Americans. Heritage Foundation (May 18). Washington.

NOTES
1 Whiting (2017) gives a comprehensive list and a strong critique of Buy American
laws.

2 California, New York, and Texas opened their procurement markets to the world
under the WTO GPA. See United States Government Accountability Office (2016).

3 USTR would like to exclude domestic preferential purchasing programs from

NAFTA, through the process of renegotiation. See Government Procurement in
Summary of Objectives for the NAFTA Renegotiation (2017).

4 See “Table A.2 Public procurement penetration ratios, selected countries” in

Messerlin (2017).

5 The arithmetic goes as follows. Public procurement in OECD countries (apart

from the United States) is about $4.5 trillion annually. Currently, imports account
for about 5.8 percent of procurement (table 1). Without local content laws and
practices, imports might rise to 32.1 percent of procurement, roughly the same
percentage as characterizes private purchases. Additional imports for public
procurement could exceed $1.2 trillion annually. A pro rata share for the United
States of this additional trade would be about 16 percent (the US share of total
OECD exports in goods and services). Hence, with the repeal of local content laws
abroad, additional US export might be $189 billion greater (16 percent times $1.2
trillion additional imports).