Peterson Institute for International Economics

Buy American: Bad for Jobs, Worse for Reputation

On January 28, 2009, the US House of Representatives passed its economic stimulus plan, the American Recovery and Reinvestment Act of 2009. Out of the bill’s 700 text pages, a small half-page section attracted enormous media attention: the section requiring that all public projects funded by the stimulus plan must use only iron and steel produced in the United States (box 1). Another provision, which drew less attention, extends the so-called Berry Amendment (an old Buy American provision) to uniforms purchased by the Department of Homeland Security.

The US Senate is currently debating its own version of the bill. The Senate draft includes a broad Buy American provision that goes further than the House bill, expanding the requirement to all manufacturing products (box 2).

Three sets of issues arise from the Buy American provisions of each bill: US jobs, US trade obligations, and US foreign policy. The first section of this policy brief estimates how Buy American provisions will add or subtract US jobs. The second section provides a legal analysis of the provisions and spells out violations of trading rules agreed in the World Trade Organization (WTO) and the North American Free Trade Agreement (NAFTA). The third section evaluates the foreign policy implications. The policy brief concludes with recommendations designed to ensure respect for US international obligations.


The House Bill

Steel is crucial to modern economies. Buildings, automobiles, pipelines, and bridges are all made of steel. However, steel manufacturing is highly capital intensive, so the labor force employed in the industry is deceptively small. About 150,000 workers are employed in the US steel industry (North American Industrial Classification System Codes 3311 and 3312).

The key selling point for Buy American legislation is job creation. Put bluntly, it is asserted that “not one dollar of the stimulus plan should be spent on foreign steel.” In a time of crisis, this is a powerful argument. Blue- and white-collar jobs alike are being shed at a terrifying pace. The steel industry is no exception. Even before the financial crisis, the Bureau of Labor Statistics predicted that employment in the steel industry would decrease by 25 percent between 2006 and 2016. With the crisis, the drop will come much sooner. US steel shipments plunged almost 40 percent in November 2008, year-on-year, and 25 percent of that decrease happened between October and November 2008. As the automobile sector collapsed, steel producers lost a large volume of sales. To compensate, the US steel industry hopes that strong Buy American provisions will lock in a stable customer, namely the US public sector.

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