Beggar Thy Neighbor

posted by
on February 25, 2009

Reams of newsprint, and considerable air-time on television news programs, have been devoted recently to the controversial Buy American stipulations that require the use of only American-made steel in federal infrastructure spending — highways, ports, airports, railways, and so forth — that Congress inserted in President Obama’s $787 billion economic stimulus package. But as often happens when hot political issues meet the usual flurries of press attention in 24-hour news cycles, the basic economic point as to whether Buy American makes sense, or doesn’t, has tended to be obscured. But it’s really pretty simple.

Richard Fisher got right to the nub of the matter in just two lines. “Protectionism is the crack cocaine of economics,” observed the witty president of the Federal Reserve Bank of Dallas in a recent speech. “It provides a temporary high but is instantly addictive and leads to certain economic death.”

For sure, that prospect of certain economic death extends even to the advocates of Buy American laws themselves. This is perhaps the strangest thing about the whole controversy: the most ardent Buy American proponents would quickly see their own businesses ruined, if those laws were applied to their own business practices.

President Obama, to his credit, has tried to limit the damage that has been done to America’s international economic prestige by saying that these are no times for Beggar Thy Neighbor policies. But Obama is the man who shares much of the blame for creating the confusion in the public’s mind in the first place, en route to the Oval Office as the candidate of economic nationalism. At one point during last year’s presidential campaign, Obama took the position that the government should be required to buy only American-made motorcycles, referring to that American icon, Harley-Davidson. Obama made fun of Republican rival John McCain for not going along with that idea. Nobody — especially McCain, an instinctive free trader who apparently didn’t know enough about basic global economic realities to respond effectively in terms that ordinary voters could easily understand — pointed out that if Obama’s economic prescription for Harley were to be taken, the dose of protectionism would kill the corporate patient.

Last week, on his first foreign trip as president, Obama had to back peddle the Buy American cause when he flew across the Canadian border to visit Ottawa, marking Obama’s first trip on foreign soil in his presidency. And he was subjected to a little lecture by his Canadian host, who (smartly) used terms that American presidents are not used to hearing from their trading partners.

It’s not hard to see why the Buy American subject has become an embarrassment in respected international economic circles. Let’s begin with a quick look at the estimable members of the American Iron and Steel Institute, whose lobbying with the congressional steel caucus drove the Buy American provisions in the stimulus bill. Try to imagine a world where the domestic steel manufacturers would themselves have to Buy American.

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If, for instance, AK Steel were forced to buy only iron ore or slabs of semi-finished steel from only domestic sources, instead of countries like Canada, Brazil, and Mexico, the West Chester, Ohio-based steelmaker would face ruin. And if Nucor, headquartered in Charlotte, N.C., would be forced to source its pig iron from purely domestic suppliers, its mini-mills in the U.S. wouldn’t be able to operate.

AK Steel and Nucor were among the prime moving forces that pushed the American Iron and Steel Institute’s Buy American lobby campaign when the stimulus package was considered on Capitol Hill. The domestic steel companies’ position was clear: they wanted to carve out special protections for contracts awarded in federal construction programs — as long as they remain free to source globally to run their own operations.

Asked if her association’s member companies would advocate a law requiring them to buy only domestic steel slabs, iron ore, and pig iron, and other key raw materials from which they make finished steel, AISI spokeswoman Nancy Gravatt declined to comment.

As for President Obama’s personal favorite Buy American candidate, take a quick look at that icon of American manufacturing, Harley-Davidson.

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Team Obama took out a radio ad in Milwaukee last August 11. Here’s the transcript:

Barrack Obama supports ‘Buy American’ provisions and believes that we must close loopholes and end incentives for corporations that ship our jobs overseas.

Narrator: Listen to John McCain speaking to motorcycle enthusiasts in Sturgis, South Dakota on Tuesday.

John McCain: “Not long ago a couple hundred thousand Berliners made a lot of noise for my opponent. I’ll take the roar of 50,000 Harleys any day!”

Narrator: But when it comes to his record, American-made motorcycles like Harleys don’t matter to John McCain.

Back in Washington, McCain opposed a requirement that the government buy American-made motorcycles.

And he said all Buy American provisions were quote “disgraceful.”

Surprised? You shouldn’t be.

This is the same John McCain who supported billions in tax breaks for companies who ship American jobs overseas.

It’s time to hear the roar of a strong American economy again…and stop John McCain from shipping our jobs overseas.

Barack Obama: I’m Barack Obama, candidate for President, and I approve this message.

Paid for by Obama for America.

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Obama’s message sounded great, as Harley-Davidson is in the business of promoting its image as an American-made motorcycle. Harley-Davidson’s Hogs are classic American icons. But ask just one question:

How far would anyone get on one of those iconic Fat Boys that was proudly made by American workers in Wisconsin (or Pennsylvania) without those Japanese carburetors to make it run? How far without foreign-sourced brakes, tires, wheels, electronics, and so on? Moreover, those famous biker leather jackets that Harley sells are made in, you guessed it, China. The unmistakable economic bottom line: Harley-Davidson’s success as a business enterprise turns upon its abilities to source components globally as well as domestically.

A Harley spokeswoman declined to comment when asked about how well her company would do if the Buy American laws applied to Harley-Davidson’s own sourcing plans. And even if they didn’t, consider the effect of Buy American laws that would force U.S. government entities to procure only “American-made” motorcycles, as candidate Obama advocated. Again, the bottom line is obvious. Harley-Davidson motorcycles are sold around the world, in major markets like Japan. It doesn’t take a doctorate in economics to imagine what would happen to Harley-Davidson’s international division’s profits if there were Buy Japanese, Buy Indian, and Buy Chinese laws — each protectionist measure modeled on America’s.

That’s why Buy American laws, at their heart, aren’t really about economics. True, the laws have economic consequences — but the basic code of conduct stems from the Golden Rule: treat others the way you would want to be treated yourself. And when it’s a Beggar- Thy-Neighbor world, your neighbor will Beggar You in return.

As famed economist Jagdish Bhagwati has recently observed, Americans who never learned their history of the devastating repercussions of the Smoot-Hawley tariff in the 1930s, will learn the same lesson firsthand soon enough, if the Obama administration fails to reign in the current Buy American impulses in Congress. That’s how serious this issue is.

President Obama got a taste of what it’s like to be on the other end of America’s customary self-righteousness last week when he flew into Ottawa.

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Swallowing his words to the contrary on the 2008 presidential campaign trail, President Obama made no threats to unilaterally abrogate Nafta when he met with Canadian Prime Minister Stephen Harper on Ottawa’s Parliament Hill on Feb. 19. The Obama administration does not want to do anything to restrict the volume of trade between the U.S. and Canada, America’s largest trading partner, the president said. “I want to grow trade and not contract it,” Obama declared.

Obama also again stressed in Ottawa that he had pledged not to issue regulations that would expand the existing Buy American provisions in his economic stimulus bill beyond what U.S. international legal obligations as a member of the World Trade Organization currently allow. Picking up on this, Harper made his point by using language, and striking a tone, that Americans frequently use on foreigners, but are not used to hearing directed their way: “We expect the United States to adhere to its international obligations,” Harper said. “I can’t emphasize how important it is that we do that.”