The following is a guest post by Brian Lombardozzi, Senior Policy Analyst for the BlueGreen Alliance and was originally posted on the Blue-Green Blog.

Throughout Jobs21!, the BlueGreen Alliance’s blueprint to solve the jobs crisis, we call for the revitalization of domestic manufacturing in clean energy, green technology, transportation, infrastructure, and other sectors of our economy. A policy key to revitalizing American manufacturing is Buy America. There are a number of myths based on bad data, faulty legal reasoning, and a general failure to comprehend the reality facing U.S. producers and workers that surround the concept of Buy America. Not only do we need to expose those myths, but we need to explain and provide some perspective on what Buy America is, the context in which it is applied, and what could be done to make it more effective. Mostly importantly, we conclude with observations on why it makes sense in economic and job creation terms.

What is Buy America?

Buy America provisions apply when tax payer money is being used for purchases. In policy speak, Buy America applies to public procurement. These policies exist in law to ensure that when the federal government provides U.S. taxpayer dollars to state and local authorities to fund projects, that those projects are produced using domestically sourced American-made products.

What are the benefits of Buy America?

Buy America policies create jobs in the U.S. manufacturing sector, serve to protect against unfair competition from foreign firms that result from foreign government subsidies and allow the U.S. to maintain national security interests through the continued use and development of certain industries within the U.S. economy, like the iron and steel industries.
The economic rationale underlying Buy America

Buy America boosts wages and employment in the U.S. In addition to these direct benefits, there are equally important indirect benefits. These include tax revenue on those wages, which can fund investments, including crucial infrastructure investments, and also the jobs created from the re-spending of the income from those directly employed as a result.
Economists have established that manufacturing jobs have among the highest indirect job creation benefits. On average, each manufacturing job supports 2.5 jobs in other sectors, and, at the upper end, each high-tech manufacturing job supports 16 jobs. These jobs pay 21 percent more in wages and benefits than the average for the entire economy, and they more often provide health, pension, and other benefits.

Does Buy America raise the cost of projects?

First, it is important to recognize that there are provisions in Buy America laws to protect American taxpayers. Further, there are quality benefits as well. American-made materials and products are the highest quality in the world. Finally, if there are any costs differences due to the policy, these are more than offset by the macroeconomic boost generated by the increase in American demand.

Supporting domestic manufacturing by purchasing American-made products has the benefit of boosting investment at home. The benefit of avoiding the in the “leakage” of U.S. funds overseas has been cited by such mainstream economists as BusinessWeek’s Michael Mandel. A concerted domestic buying program could actually increase U.S. manufacturing job creation by 33 percent  while ensuring that taxpayer dollars actually go directly to job creation.

Finally, there are innovation and productivity benefits to Buy America. Manufacturing is responsible for 70 percent of all private-sector research and development spending and 90 percent of all American patents. Manufacturing is also a productivity powerhouse and major driver of economic growth. Between 1997 and 2005, labor productivity in manufacturing grew 60 percent more than in the economy as a whole. Every dollar in final sales of manufactured products supports $1.37 in other sectors of the economy, compared to about 50 cents for every dollar of activity in the financial services sector. If we fail to restore our manufacturing base, our innovation edge and research and development capacity will also falter.

Why We Need Buy America

Buy America makes economic sense and will help create good jobs, plain and simple.

For nearly 60 years, the needs and interests of American manufacturers took a back seat to the country’s geopolitical interests and the interests of the U.S. financial sector. The book “Manufacturing a Better Future for America” argues the U.S. manufacturing sector can be rebuilt with the help of sustained and decisive public policies that promote innovation and encourage investments to flow into new productive capacities. Buy America is one of those public policies.

After World War II, the victors re-established financial order via the creation of the International Monetary Fund, which subsequently created a world dollar-gold standard. This now meant that in order for world trade to recover, there now had to be a steady supply of dollars. In this context the Marshall Plan created a strong U.S. government emphasis on buying abroad and opening the U.S. market in order to increase the supply of dollars circulating in the world.

In the post war era, with the evolution of the General Agreement on Trade and Tariffs (GATT), most favored nation status, and the concept of “national treatment”, U.S. policymakers assumed that the U.S. industrial and technological dominance would continue on into the future. The “trade not aid” mentality that dominated at the time did not see the “aid packages” going to Europe and Japan as part of trade agreements providing an unfair advantage, but as strategic consolidations of a post war that could stand up to the Communist bloc and help rebuild the war ravaged economies of Europe and Asia.
Unfortunately, these trade agreements made the economies of scale of the U.S. market available to overseas producers while the U.S. obtained no reciprocal market access. Essentially U.S. negotiators created a structure that increasingly put U.S. manufacturers at a disadvantage.

The United States saw a rapid increase in imports, and cheap foreign imports had an adverse effect on domestic industries. Meanwhile, our international competitors realized they could receive all the benefits of a trade agreement without paying any of the costs, and as a result, the U.S. remains exposed to a flood of inexpensive imported goods.

During this time the United States lacked any overarching economic strategy. Public policies designed to support U.S. industry were random in their application, ill-conceived and usually ineffective at helping domestic manufacturing become more competitive in the global market.  Policies designed to promote consumption-based growth combined with asymmetric trade relations led to massive imbalances in global trade. As a result the United States has accumulated a colossal trade deficit with nearly every major trade partner dating back to about 1970. Our trade deficit in manufactured goods rose to over $440 billion in 2009, a consequence of U.S. firms steadily switching from domestic to overseas production. This trend accounts for almost 60 percent of the reduction in manufacturing employment.

In the past 10 years, more than 56,000 U.S. factories have closed or moved overseas and an additional 90,000 manufacturing firms are now at risk of going out of business. There are currently more than 12 unemployed workers for every U.S. manufacturing job opening, an unemployment rate two times higher than the overall economy. Yet, despite its decline, manufacturing still represents nearly 8 percent of national employment and about 12 percent of the nation’s gross domestic product.

Buy America is one of the sustained and decisive public policies that can promote innovation, encourage investments to flow into new productive capacities, revitalize U.S.-based manufacturing, create jobs, additional wages and tax revenue — all of which would also address the trade deficit.

Do other countries have similar policies?

Many of the world’s largest economies, including China, Canada, and Europe, attach minimum domestic content standards to their investments to support local industry and leverage national investments into greater employment gains. In fact, annual reports by the United States Trade Representative reveal that trading partners currently use the flexibility they have under international agreements to maintain a variety of procurement restrictions that exclude American products and services. A number of Canadian provinces maintain “Buy Canada” and other policies that give preference to Canadian goods. In Europe goods with majority EU content receive preferences over U.S. goods in certain water, transportation, energy, and postal services contracts. China’s 2002 Government Procurement Law requires government entities at the central and sub-central level to give priority to local goods and services in contracting decisions, with some exceptions. China also uses technical procurement standards to favor domestic suppliers in certain sectors, such as high technology and electronics.
Is Buy America consistent with the United States’ obligations under international treaties?

Buy America policies are consistent with the US trade agreements.* The U.S. is party to a number of such agreements that contain procurement obligations, including the World Trade Organization Agreement on Government Procurement (the GPA, which covers 39 countries in addition to the United States), NAFTA, and various bilateral and regional free trade agreements. Parties to these agreements have negotiated over the extent of their obligations, including which government entities are subject to the agreement, what goods and services are covered, and monetary thresholds for covered contracts. The U.S., for example, did not subject any state level procurement actions to NAFTA, including state procurement financed with federal funds, and it has specifically excluded federal funds for mass transit and highway projects from all agreements to which it is a party.** Thus, the United States has already negotiated with trading partners to maintain the right to attach domestic sourcing restrictions to funds for many public projects.

Conclusion

The facts about Buy America reveal that targeting government spending to domestic production creates good jobs for American workers and ensures effective use of taxpayer dollars. Moreover, application of Buy American requirements is fully consistent with the international obligations of the U.S., and will not lead to retaliation or dangerous “trade wars.” At a time when jobs are hemorrhaging and industrial production is at historic lows, Buy America provides critical support for domestic and foreign-owned companies that manufacture products in the United States.

*Gary Clyde Hufbauer and Jeffrey J. Schott, “Buy American: Bad for Jobs, Worse for Reputation,” Peterson Institute for International Economics, Policy Brief No. PB09-2 (Feb. 2009) (available on-line at http://www.iie.com/publications/pb/pb09-2.pdf ) (hereinafter “Hufbauer and Schott”); Memorandum to Interested Parties, “The ‘Buy American’ Provisions in the Economic Recovery Package,” The Third Way Economic Program (Feb. 2, 2009) (available on-line at http://www.thirdway.org/products/190 ) (hereinafter “Third Way”); “IMF Goal for Global ‘Stimulus’: Two Percent of World GDP,” Progressive Policy Institute, Trade Fact of the Week (Feb. 4, 2009) (available on-line at http://www.ppionline.org/ndol/print.cfm?contentid=254895 ) (hereinafter “PPI”). Hufbauer and Schott incorrectly assert that NAFTA covers federal block grants to the states, even though the states themselves are not covered. The procurement chapter of NAFTA explicitly provides that the agreement does not cover “any form of government assistance, including cooperative agreements, grants, loans, equity infusions, guarantees, fiscal incentives, and government provision of goods and services to persons or state, provincial and regional governments.” NAFTA, art. 1001(5)(a).

**See U.S. Appendix to the GPA at Annex 2, note 5. The U.S. has also excluded federal funds for highway and transit projects from all other FTAs to which it is a party that would otherwise cover such funds. The U.S.-Jordan FTA does not contain any procurement commitments on behalf of the United States. In the U.S.-Israel FTA and U.S.-Singapore FTA, the U.S. made procurement commitments only to the extent already undertaken in the GPA, including the exception for highway and transit funding in Note 5 to Annex 2 of the U.S. Appendix to the GPA. In NAFTA and the U.S.-Bahrain FTA, the U.S. did not make specific commitments on behalf of states, thus state procurement of goods with federal funds is not. In all other FTAs signed on to by the U.S., the U.S. noted in its FTA procurement schedule the same exception with regard to transit and highway funds included in the GPA. See U.S.-Chile FTA, Annex 9.1, Section B, Schedule of the United States, Note 4; U.S.-Australia FTA, Annex 15-A, Section 2, Schedule of the United States, Note 5; U.S.-Morocco FTA, Annex 9-A-2, Schedule of the United States, Note 5; U.S.-Peru FTA, Annex 9, Section B, Schedule of the United States, Note 5; CAFTA-DR, Annex 9.1.2(b)(i), Section B, Schedule of the United States, Note 5.