There are relatively few products that are produced entirely in the United States. Food and services are two examples, but they constitute only a small percentage of U.S. gross domestic product (GDP).
Laws confining the purchase of goods and services to the national boundary contradict the basic tenet of a competitive free market economy that enables every firm, individual, or public agency to purchase goods and services offering the best combination of price and quality. More importantly, the free market arrangement enhances productivity.
The new executive order promises to affect the manner in which federal agencies purchase goods and services. The U.S. government spends nearly half a trillion dollars on contracted work each year. Firms place bids for construction, technology support and other services the government does not perform on its own.
Excluding sensitive defense-related work, both American and foreign firms are currently eligible to bid on these opportunities. Under the new order, only domestic firms will be eligible to win these contracts, potentially costing the taxpayer if revenues are channeled to firms/individuals that may not be the optimum choice.
The "Buy American" policy is a non-tariff trade restriction much like local content requirements (LCRs) designed to protect local industries and jobs. If America presses forward with this agenda, other countries can retaliate with LCRs that can range from requirements to purchase a certain percentage of domestic goods, use only local infrastructure to produce services and impose conditions on the way business is done. The U.S. could well be a net loser in this battle of barriers.
The Global Trade Alert group has identified that 343 LCRs have been implemented since the 2008 financial crisis. Research notes that LCRs largely have a net negative impact on trade flows and investment. The bottom line is that these protectionist measures are economically sub-optimal policies to shield jobs.
Furthermore, there is evidence that technology, not global sourcing, has contributed more to job losses in the United States over recent decades. The Buy American program will not diminish the march of automation.
"Buy American" has a certain ring to it, and will no doubt win over some of the electorate. But policymakers need to recognize this simple slogan obscures the more complicated realities of global sourcing, a system from which the United States benefits greatly. What might sound best on Twitter may not be the soundest approach.
Commentary by Carl Tannenbaum, the chief economist at Northern Trust, an investment-management firm. Prior to joining Northern Trust, Tannenbaum led a team at the Federal Reserve Bank of Chicago and served as the head of the entire Federal Reserve System's risk group in Washington for a year, working closely with Federal Reserve System governors and senior officials.
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