“Buy American” Rules Hurt More Than They Help

International trade has made the world wealthier and freer, but its popularity is waning in some circles. Supply chain disruptions due to the Covid-19 pandemic and Russia’s invasion of Ukraine have caused many Americans to look inward, arguing for new policies to incentivize domestic production. A proposed bill in Florida, HB 619, would require government entities in Florida to use U.S.-produced steel and iron in all government construction, maintenance, and remodeling projects. While this may seem like the patriotic thing to do, it and similar bills will raise costs for taxpayers, slow American innovation, and reduce America’s influence on the international stage.

The Covid-19 pandemic caused governments and businesses to reassess international trade. Pundits and politicians blamed years of offshoring for the shortages of drugs, masks, and other personal protective equipment in the early days of the pandemic. This diagnosis is dubious at best, but the idea that more domestic production is needed in the post-Covid world is popular, at least in surveys.

Russia’s illicit invasion of Ukraine has only amplified calls from populists and nationalists for less globalization. Prior to Russia’s invasion, China was the primary target of anti-trade rhetoric and actions: It was the focus of tariffs levied by former President Trump and continued by President Biden. Now Russia has replaced China, at least momentarily.

The Biden administration recently banned imports of Russian oil, and it was able to do this in part because Russia is not a major source of oil for America. Other European countries are unable to follow America’s lead because they depend on Russian oil and natural gas for their energy and currently lack good alternatives. Germany is especially reliant on Russian oil and natural gas, which has impeded its ability to respond to Russia’s belligerent behavior.

Long-term, however, the United States should not use war in Europe as a reason for going it alone. State and federal bills that prioritize American manufacturers, like the one in Florida, will make America and the world less productive, less innovative, and less safe.

A direct effect of “Buy American” rules is to insulate domestic companies from international competition. This results in higher prices now and lower quality products in the future due to less innovation.

The companies themselves know this. In the 1970s, the U.S. steel and auto industries were protected from international competition by quotas and tariffs. Both industries floundered rather than thrived: Product quality suffered, brands were harmed, and consumers shunned their products.

U.S. companies were ultimately forced to adapt to compete with higher quality foreign producers. The quote below from the 1980 annual report of the American Iron and Steel Institute—which represented many of the steel companies—sums up the cause of their failure:

“Inadequate capital formation in any industry produces meager gains in productivity, upward pressure on prices, sluggish job creation, and faltering economic growth. These effects have been magnified in the steel industry. Inadequate capital formation … has prevented adequate replacement and modernization of steelmaking facilities, thus hobbling the industry’s productivity and efficiency.”

History will repeat itself if we once again try to prop up U.S. companies. They will become complacent since there will be no need to compete for captive domestic consumers. The interests of large, complacent companies will become intertwined with those of the government that protects them. This will make too-big-to-fail the norm and stifle the creation of new businesses. Economic growth and innovation will both slow, harming the entire country. States with major ports, such as California, New Jersey, Georgia, Washington, and Virginia, will suffer the most.

The alternative is robust competition among domestic and foreign producers via international trade. Trade enhances individual liberty, increases economic growth, stimulates innovation, and helps spread support for free markets and representative government. There is also evidence that free trade—meaning trade free of tariffs, quotas, and other government-imposed restrictions—reduces military conflict between nations. As economist Scott Sumner recently wrote:

“Our best hope for world peace is to enmesh every country so deeply in a web of interdependence with its neighbors that even our…leaders will be able to see the negative sum nature of war. Globalization may not prevent war, but it makes war less likely at the margin. And if war does break out, economic interdependence gives us a weapon to use in place of violence.”

And because international trade makes countries richer, they have more to lose from the disruption and destruction war causes.

While the benefits of globalization were oversold in some respects, it remains true that stronger economic relationships among countries make the world safer and less violent.

Rather than retreat from the global economy, now is the time for America to lead by fostering relationships with other free countries. The Economic Freedom of the World Index ranks 165 countries by the degree to which their policies and institutions support voluntary exchange, property rights, personal choice, and the ability to enter and compete in markets.

There are 82 countries in the first two quartiles of the index, and these are the countries America should prioritize trade with. Five of America’s top six trade partners are already in the first two quartiles. Only China is outside looking in. Other relatively free countries among America’s top 15 trade partners include Taiwan, the United Kingdom, and Ireland.

The United States also has an opportunity to pursue more economic integration with Ukraine and similar countries once the current violence subsides. Many of the cities, factories, and businesses in Ukraine will need to be rebuilt. More trade and private investment with Ukraine will allow American companies and investors to contribute to Ukraine’s future economic success. Investments in businesses, supply chains, and infrastructure will help Ukraine’s workers and consumers, while more trade will provide a larger market for the goods and services produced by Ukrainians.

We are currently helping Ukraine by providing weapons and supplies for its defense. But in the long run, an economic relationship with Ukraine that is built on trade will provide far more benefits to both of us.

Winding down trade with authoritarian countries like China and Russia and increasing trade with freer countries like Indonesia, Mexico, or Peru will not happen overnight. It will take time to reorient supply chains, find trading partners with the right comparative advantages, and reduce the tariffs, regulations, and other government barriers that currently impede trade with various countries. But with the right policies and private sector investments, America can strengthen trade relationships with countries that share our values.

It is important to remember that reducing trade with totalitarian countries like China and Russia does not mean we have to isolate ourselves. There are dozens of other countries that share America’s values and would welcome the opportunity to strengthen their economic relationships with us. Political leadership that recognizes the many benefits of free trade and a private sector that recognizes the uncertainty and dangers inherent in supply chains located in authoritarian countries can work together to set us on a more prosperous path: Not one of independence and isolation, but one of cooperation and community.

Source: Forbes