Buy American: Rethinking Smoot-Hawley

BuyAmerican.jpgAs debate on the stimulus package continues to rage, exactly the wrong sort of attention is being paid to one element of the proposal dealing with the “Buy American” clause. The usual list of suspects is lining up to tell us exactly how awful this is, including this New York Times piece by Gregory Mankiw. As usual, he invokes the ghost of Smoot-Hawley to frighten the unpatriotic peasants and also takes time out to instruct us on the virtues of so called “free trade.”

Like many economists, I cringe whenever I hear the term “fair trade.” It is not that I am against fairness — who is? — but the word “fair” is so amorphous in this context as to defy definition. Most often, the slogan “fair trade” is little more than a rallying cry for protectionism.

Protectionism! Hide the womenfolk and cover the children’s ears! Clearly, arguing for fair trade must be some sort of code talk for communism, if not satanism. We are constantly lectured about how all of this free trade will open up foreign markets for our goods, lower prices and encourage competition. This is looking more and more like a situation where if you repeat something often enough, no matter how much the facts may scream against you, it becomes accepted as truth. But I would ask Mr. Mankiw to take just a moment and examine the US Census Bureau’s numbers on exactly how well this free trade has worked out for us through the era of Clinton and George W. Bush while it’s been in effect. And oh, by the way, we now have a roughly 700 billion dollar Free Trade Deficit. But let us look at some of the specifics. (All figures adjusted for inflation.)

Let’s start with the real elephant in the room, China. This is a country which, as Steven Capozzola, spokesman for the American Alliance for Manufacturing, saidhas violated trade laws through subsidizing domestic industries, manipulating its currency, lacks strict environmental laws and has shipped defective goods to the United States.” And how is our Free Trade Balance with China trending in Free Trade Era? In 1990 we had a $10.4 Billion trade deficit with them. In 2008 it was $256.2 Billion. These aren’t my numbers, folks. They are from our own Census Bureau. How’s that free trade working out for ya?

How about India? Our free trade policies have consistently resulted in American high tech companies laying of tens of thousands of our best, high paying, high tech workers and shipping those jobs to India faster than they can train workers to fill them. But how is India doing on the raw trade numbers? In 1990 our trade deficit to India was 710 million. In 2008? Try $6.3 Billion. How’s that free trade working out for ya?

Let’s move closer to home and visit Mexico, one of our “free trading” partners in NAFTA. Everybody loves NAFTA, right? So what about that Free Trade Deficit south of the border? In 1990 it was a $1.8 Billion deficit. In 2008? Enjoy your $60.2 Billion deficit. How’s that free trade working out for ya?

For an example of real irony, let us take a quick look at Columbia. The calls are still going out far and wide about how we need an agreement with Columbia similar to NAFTA. What does the big trade deficit board have to say on the subject? In 1990 our deficit with Columbia was $1.1 Billion. In 2008 it was $1.6 Billion and, in fact, that’s actually down from the $2.5 Billion deficit we had with them in 2006! But oh my gosh, by all means let’s rush into a NAFTA type agreement with Columbia. We’re falling behind in our race to massive trade deficits there! We should be losing at least 50 billion per year to them by now!

So what of this talk regarding buying American iron, steel and other materials with U.S. tax dollars for stimulus projects? We are told by breathless “Free Trade” enthusiasts that this will “upset the French” and spawn a new trade war! (One wonders where their heartfelt concern for the French was during the whole “Freedom Fries” debacle.) As Capozzola further points out, “The European Union and China, for example, have said they will use multibillion dollar stimulus packages to buy products made in their countries.” They’re going to keep doing the same thing to us that they’ve already been doing since we fell for this in the 90′s, and we’re the ones being bent over the barrel here.

We hear the same hysterics about how we can’t possibly do it. It might be illegal! (George Will actually tried that one this morning on ABC’s chat festival and was promptly kicked to the Curb.) We already have similar clauses in U.S. government and military procurement rules. And with some new thinking, we don’t need any sort of sweeping mandates and blanket tariffs as we did with Smoot-Hawley. We could easily offer “incentives” for companies working on job creating, stimulus package projects. You’re free to buy your steel wherever you like, but if you buy from an American company, we’ll kick in another ten million or so from the tax dollars. Such proposals are easily within reach if we have the will to do it, and we’ll only be doing what the Europeans and Asians are already doing anyway.

It’s high time to stop treating “protectionism” like a dirty word when you’re talking about protecting American jobs and industry. Look at the real trade deficit numbers above. Look at the real numbers of Americans not just unemployed (rising by the week) but underemployed (the downsized worker from Sun Microsystems whose job went to India and is now working at Starbucks) and also those who have simply given up looking for work. Protectionism? Damned straight, Skippy. And high time for it, too.

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  • mikkel

    There are two economic myths that will be killed off by this economic crisis: the more liquidity there is the better, and free trade is always desirable. Actually the latter will have a caveat, which is that fair trade is almost always desirable, but that the primary thing to pay attention to is trade balance, and make sure that things don't get too out of hand. Ironically both those things have been known for hundreds of years, and it was only modern economics that has had blind faith in inaccurate models that forgot about it…models that were created to try and explain prior crises but missed the boat entirely.

  • pdx632

    I would be curious to know how many of the free trade zealots have ever had their jobs outsourced?

  • ljm

    So you're saying we shouldn't borrow from the Chinese in order to buy their goods? What a Communo-Satanist thing to say.

  • Seaneiboy

    You have to look at the oil imports and how high they have gone up since we peaked oil in the sixties.. oil imports make up 50% of our trade deficit.. Its a major cause for the low supply of money today. We spend 38 billion dollars a month on oil.. Thats four times as much as the war leaving the hands of our country.