The U.S. is exporting unemployment with ‘Buy America’

Everyone should be concerned about the increasing tone of trade friction in the global economy.  While Chinese Premier Wen and U.K. Prime Minister Gordon Brown are setting a positive tone in London today regarding bilateral trade agreements, the U.S. is doing its best to put off trading partners.  In fact, in Canada, there seems to be a lot of rancor regarding the ‘Buy America’ provision now being attached to the U.S. stimulus package.

Comment: ‘Buy America’ policy a veiled attempt to export unemployment

Free trade afforded by goodwill in times of economic expansion is ending rapidly with the lurch of the world economies into recession.

Plans by U.S. Congress and President Barack Obama to put a fence around its US$825-billion stimulus package by implementing a “Buy America” policy is a veiled attempt to export unemployment to the rest of the world. The result could be slower growth and a higher cost of credit for the U.S. economy, two good reasons for investors to “Sell America” now.

Attaching a “Buy America” policy to the US Stimulus Package is a futile and dangerous attempt to protect American jobs. America’s best export right now is unemployment. U.S imports are falling and the trade deficit is improving due to the fall in U.S demand. U.S imports fell 12% in November taking the trade deficit to its lowest level since 2003.

China’s export sector is reeling from the sharp fall in U.S demand. Exports in China fell the most in a decade in December and are likely to continue falling over the next six months as demand from the U.S, Europe and Japan dries up. Manufacturing in China has contracted for the past six months and has made roughly 10-million migrant workers jobless.

President Obama should tread very softly when it comes to trade policy. Firstly, it is widely acknowledged that free trade contributed to global economic prosperity. Free trade with China brought an era of low inflation to the United States and to the rest of the developed world. Trade in general leads to higher productivity and potentially higher levels of global growth.

On the flipside, rising trade barriers that protect industries lead to the misallocation of resources, lower productivity, higher prices and lower levels of economic growth. They are especially dangerous in times of recession. They are tantamount to suicide for the U.S administration given the high level of savings that China has shipped abroad.

The U.S Treasury Department is justified in pointing the finger at China for practicing mercantilist-style trade policies: China’s massive trade surplus and multi-trillion dollar store of foreign exchange reserves provides strong evidence that trade policy in China is designed to keep its currency weak. But the timing is all wrong.

Agitating for a revaluation of the Yuan and a “Buy America” policy could backfire in a big way. The U.S is like a junky with a US$2-billion a day borrowing habit, so getting on the bad side of its best dealer could be a big mistake.

China has been a major source of cheap credit to the U.S over the past few years. The People’s Bank of China has parked roughly US$680-billion in U.S Treasury securities making it the single biggest source of credit to the U.S Treasury from abroad. This “savings glut” as it has been referred to allows the U.S Treasury to borrow money at very low rates of interest, and China could end that by easily converting those reserves to Euros or Yen. U.S Treasury Secretary Tim Geithner might get the revaluation of the Yuan he is looking for in the form of a dollar rout.

Access to cheap credit has never been more critical to the U.S economy at this juncture. The U.S Federal Reserve Bank has been buying mortgage securities to reduce the cost of credit to U.S homeowners, to slow the rate of foreclosures, and to support the price of mortgage securities held by U.S banks.

Moreover, the U.S Treasury will need to borrow heavily to support its multi-trillion dollar fix to the U.S economy. President Obama’s attempt to keep every dollar of his stimulus package from leaving the U.S by issuing a “Buy America” policy could cause the unintended consequence of foreign capital flight.

This is an editorial comment in today’s National Post, a leading newspaper in Canada. One should note how strong the language is in this editorial.  While the quote concentrates on trade between China and the U.S., Canada itself is quite worried about the increase in protectionism in the United States.  The National Post is angry that the United States is looking to foist its own unemployment problem off on its trade partners.

The long and short here is this:  China, the EU, and Canada have now all warned the U.S. about “Buy America.’ Any protectionist measures implemented by the United States WILL be met in kind by retaliatory measures.

The tone in the U.K. is very different where Gordon Brown announced in a press conference with Chinese Premier Wen that he is looking to double trade in the next eighteen months. Wen may be using the U.K. as a foil to the United States, in effect saying, “Look America, we have other options.” Nevertheless, Brown and Wen are demonstrating that global trade does not have to collapse due to the economic downturn despite protests because of job losses.

When I find a video or quote from the press conference, I will post it.  Also, you should note that the National Post editorial begins with a picture of Obama and Biden, linking the Obama Administration with Canada’s perception of protectionism.

Comment: ‘Buy America’ policy a veiled attempt to export unemployment – National Post
Wen Says China to Begin European Procurement Missions – Bloomberg

  1. Ranger Turtle says

    Since the U.S. exports very little compared to China, any protectionism would hurt China worse than the U.S.

    Besides, my belief is that the intension was to keep the Stimulus Plan money in the U.S. I for one, would not like to go into debt to give stimulus money to China or even Canada.

  2. John Creighton says

    I suppose in the interest of being fair that the best allocation of resources would mean producing things in the most cost efficient manner possible. However, countries look to benefit their country first and the world second. What is optimal in a global sense may not be optimal in a regional sense.

    Because taxation and social services are regional and not global the cost the government sees for procurement depends upon how much value was added within the country. When the United States is forced to accept the lowest bidder in a contract regardless of where the work is done then it can end up subsidizing foreign workers at the expense of local tax payers.

    The opportunity cost from lost tax revenue due to foreign content is given by:


    P=Cost of procurement
    Pf=The fraction of the procurement cost spent overseas
    T=Average Tax rate per dollar transaction (includes income plus sales tax)
    r=The Money Multiplier

    It is clear that the cost the government sees when procuring bids exceeds the value of the bid if there is value added outside of America.

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