packaged

Mandates To Buy American Should Be More Carefully Considered

For this Insight Community case, we're looking for insights on questions concerning "Buy American" policies. Read below for details.

We all know that the economy is in tough shape these days, and (as always happens in such situations) there's often a misguided push to put up trade barriers to try to force people to "Buy American." Of course, time and time again, such trade barriers have proven to actually do tremendous harm to Americans, rather than help them. We're already seeing this with friendly trading partners like Canada threatening to retaliate. That retaliation harms American jobs much more than any jobs "gained" from such protectionist barriers (as pointed out by the non-partisan and highly respected Peterson Institute). On top of that, by adding barriers on goods that Americans want, the end result is only that Americans end up paying *more* for their goods -- not exactly an outcome consumers are likely to appreciate during an economic downturn.

Granted, it's quite easy to understand the patriotic feeling behind a "Buy American" clause -- and we all want to support our country. But the problem is that in not paying attention to the actual impact, and pretending that there are no "unintended consequences," a Buy American clause can be detrimental to America in the long run. That doesn't seem particularly patriotic.

The Innovation Movement is an effort by the Consumer Electronics Association to make more people aware of important policy issues, and to make sure that Congress actually takes relevant data into account, rather than just focusing on the patriotic headline while ignoring the unpatriotic results.

In this Insight Community Conversation, we're looking for thoughtful and well-written discussions on the pros and cons of a "Buy American" clause for US policies. The best results will be used as posts on the Innovation Movement website.

12 Insights

 


Buy American is an absurd idea. There are no positives.

I think that this is the case because of the highly focused nature of the legislation. It concerns itself with the end result of the economic chain of events: the American consumer. The American consumer will do exactly what any economic model would predict the consumer to do, acquire what they want or need for the lowest possible price. Protectionist policies are, even though they are rarely worded as such, specifically against that. They are designed to keep prices high so American firms can compete. Instead of government meddling to make alternatives to American goods less attractive, it makes much more sense to work towards better American goods.

Instead of concentrating on the final part of the system, government actions should be concerned with the beginning. Policies should be enacted that encourage business development and the acquisition of talented people from other countries. By simply making America more attractive to foreign talent, we rely on, instead of fight against, the drivers of individual economic agents. We can be the recipient of brain drains from other countries, increasing our competetiveness and decreasing theirs. Policies for education and for investment in business and manufacturing can all help this cause.

That isn't to say that Buy American is a bad advertising campaign, it's not. Heck, it's a great advertising campaign. But even there, it should be recognized as a supplement to, and not a replacement for, otherwise competetive prices and products. If Americo makes a T-shirt, and Chinaco makes a comparable shirt, the Americo shirt must still be comparable in price and quality if it hopes to compete. The "Buy American" sticker will only push people over when they're already standing there, trying to make a decision.

For example, the debate over the usage of US-only steel for stimulus spending; this is only an issue because it would be ideal for some people to use non-US steel. Why is that the case? Why are American companies not the most highly-desired steel in the market? It is that question with which legislators should be concerning themselves.

But lawmakers should be cautioned to not go too far in the opposite direction. Instituting subsidies or tax breaks can have the opposite effect, whereby allowing American firms to compete and still be lazy, simply because they're either getting taxed less or are receiving actual revenue from the government. Then, when foreign firms figure out how to compete around this, the effect is devastating and fast-acting.

Key points

  • Focus on the beginning of economic activity.
  • Lure skilled workers from other countries.
  • Question the state of American business, not the American consumer.
  • Buy American is a good advertising campaign.
  • Subsidies and tax breaks for business can also be bad.
I've been working in the technology and web development world for eight years, and in that time have worked extensively on design and e-commerce implementation. I have since moved into a economic career and own a small investment firm.
icon
Matt Reingold
Wed Sep 16 7:52pm
I have to agree. The fact that business is global nowadays reflects on the fact that "buying american" is directly exploiting the patriotic nature of society, especially in low IQ individuals or those lacking common sense.

Nothing is exclusively American in any sense anymore, as an easy example being cars.

Cars, since their inception, were never exclusively and in whole made in a single location. Yet people think buying certain brands of cars are "domestic", even if some percentage of the car is being built elsewhere. Likewise people protest overseas companies creating manufacturing facilities in the united states and try to request a boycott, stating that said companies are stealing our jobs. Yet they are employing people domestically.

Thus, buy american is a concept that needs to be outright banned. "Buy Earth" is a concept that would be more accurate.

Really, "buying american" is purely exploitive and an insult to both the american community and everyone else who is victimized by it.
icon
Ben Fuller
Mon Dec 6 7:58am
Some really good points made here. It is actually quite a simple debate. The problem is that true free trade requires an economic correction, i.e. a loss of jobs in certain industries where the US can't compete (mainly low-skilled industries) and growth in jobs in skilled industries. The problem is that jobs can be shed very quickly but take time to build. This causes short-term pain for long-term gain, which requires a very brave White House!

This is a difficult subject.  I buy local.  Not nationalist.  Nationalism (which I don't generally like) is being exploited by Globalism (which I don't generally dislike).  Most of the people who beat the drums of nationalism are being paid to do so by the money behind global companies.  The only thing new about this is the scale.

It seems to me that one of the points of "protectionist" legislation is to normalise the goods coming across your boundaries to alleviate unfair advantages that imported goods may have. You have to balance that by not allowing *more* than that adjustment or you punish good foreign companies for more efficient manufacturing and reward weak local companies for inefficient manufacturing.The proper starting point would be to normalise the labor rate in the cost of the good.

Example: a thing costs $10 to make in China but $20 in America.  The labor component is $2 in China which translates to 1 hour at their cost of labor.  The US thing has a labor component of $10 which translates to 30 minutes at the US cost of labor.  In this comparison, the US company is actually using *less* labor.  But their version costs more.


The "tax" I'd set would be this: adjust the labor rate and multiply by the labor content. In this case, they'd be taxed $18.  That is the difference in labor rate times the amount of labor.  (20$/hr US - $2/hr CN) * 1hr labor content.


That would make the china import cost $28, which is higher.  Why should this be?  Because the main reason the chinese thing is a lot cheaper is not because they are using a better manufacturing process.  It's because they are using a cheap labor pool.


If they dropped the labor component down to the same 30 minutes as the Americans, their tax would be half that $18; it'd be $9.  So theirs would cost $19 to the American's $20.  You can see now that they have a better process, but only by a small bit.  Add the cost of shipping and you see that the locally produced thing is as cheap, based on it's labor rate-independent cost.
The companies can still compete on features and quality.  Maybe the Chinese thing is better quality.  Once the Chinese have their labor component just as efficient as the American's, their superior quality should make their product more attractive, even at the same cost.  So quality will still be important.  Even without making their labor more efficient, maybe people will pay that higher price for the better quality.


So where should that "tax" money go?  Since the purpose of it is to equalise the labor market.  It should go to the critical basic societal consumables of your national labourers: Social Security (retirement), healthcare (labour pool quality), unemployment (labor market adjustment cushion), education (labor pool quality).


Why focus on the labor part?  As long as nationalist boundaries prevent a free movement of labor while manufacturers can easily move the jobs, the system can't reach equilibrium on its own.


Bottom line:
A company should not be able to exploit workers inability to move to where jobs are.  Labor *rates* need to be removed as a tactical advantage in corporate competition.  This also keeps consumers from short term foreign worker exploitation that will eventually lead to long term local worker disadvantage.


The basic underlying principle is tuning the feedback loop.  With nationalist borders restricting movement of labor while globalised companies are unrestricted in their movement of jobs, you end up with a feedback loop that reacts too slowly and poorly, when it does.  Eventually, the system has to fail and when it does, the over-reaction sets up for another failure.  Classic control systems design.

Anyway, just some thoughts.  Probably very hard to actually do, and subject to all the cheating that this species is so good at.

 

Engineer, Executive, Manager, Artist, Entrepreneur
icon
Greg Fenton
Thu Sep 17 7:34am
In this taxation scheme, you appear to focus on "improving" the efficiency of the foreign labor force's processes. But where is the emphasis on improving the local processes. As long as the foreign entities don't improve, or only improve 50% (a HUGE increase), the local labor force has no incentive whatsoever to improve.

So now the consumer base suffers and the local labor force is stagnant.

I'd also be VERY wary of such a system as it involves government officials making analysis and judgement calls on the manufacturing processes of local and foreign components. There would be major pressure to never fully award progress in foreign processes (which would lower tariffs and government incomes).
icon
Unreal Blue
Fri Sep 18 4:13pm
It's the not the government's job to force companies to improve their efficiencies. That's what market forces are for. The company can improve their margins by being more efficient. Why would the government need to force that?

Two of the major costs of the goods that are not global in nature are labor and regulatory costs.

Leveling those will allow market forces to force improved efficiencies and quality on both sides of the tax.

In fact, right now this type of cost leveling already happens. Companies are forced to stay competitive so they have to move to where they can get the same (or lower) labor rates.

The purpose of this movement is to encourage a consumer spending focus on where their dollars are going.  If I buy a Chinese product, my money goes more or less to China.  If I and my fellow Americans buy American, then our money collectively should stay in America longer, thus helping America to prosper economically (in theory).

There are several concerns with the "buy American" slogan as an approach.  First, there's a big difference between buying "American" and buying a product made in America. 

For example, there is a big Honda plant local to me.  They make a few specific models there, and if I buy from a local Honda dealer, I can be assured that with certain vehicles, I am buying a product made in America.  However, Honda is not an American brand, and while my purchase does support local workers, at least some of the profits are going overseas. 

Conversely, many Americans may consider buying a GM car, but GM cars may have a lot of foreign-sourced parts.  Again, as some of those dollars stay in America, there are definitely dollars from a GM car purchase going overseas as well.

However, "Made in the USA" equates to US-based jobs no matter where the money goes, so I conclude as part 1, we are really trying to buy "made in the USA" more than we are trying to "buy American".  This means laws exposing where products are actually made vs. where the company's brand is headquartered. 

Furthermore, factories that straddle the border should be exposed, because this allows for a grey area where workers are probably getting underpaid and quality is sacrificed for making a product that as of now can legally be stamped "Made in USA".

Paying more for locally-made products also may seem like the ideal 'buy made in the USA' option, but as large corporations drive down the prices on certain staples, the overhead of some locally-made products is exposed.  When you get what you pay for, the more expensive local product is the better option.  However, for identically-valued or unmeasurable-valued products, it will be hard to convince consumers to spend more on a local version. 

As part 2, I conclude we need more measurable value from corporate farms and other products.  As an independently verifiable measure of value emerges, consumers can make the right purchase, regardless of where the product comes from.  Even buying "made in the USA" is not the best option if these products are of low value.  High value products last longer and thus reduce waste, and since most waste in the USA goes to US-based landfills, we are doing ourselves a disservice to make cheap stuff to buy & sell here (expecting no consequences).

Finally, I think that product labelling is to blame for a lot of consumer confusion when any of these laws come up.  Foreign countries try to sneak in products that are mis-labeled as having benefits that they don't have, and the unregulated food supplement market is causing an unknown number of national health issues.  Labelling should be embarassingly simple and obvious, and an increased effort should be made to publish and expose all the different common measures and labels that appear on today's products.  Exposing the government-mandated meanings of these labels will allow consumers more visibility into the value assertions that companies are or aren't allowed to make. For instance, the difference between "light" and "low fat" may be negligible to consumers until it is spelled out that "light" is very ambiguous vs. "low fat" which sets a specific allowable fat content percentage.

In conclusion, the Innovation Movement has its heart in the right place, but there are common-sense regulations that can allow consumers to make the best purchasing decisions. 

1. expose where products are really made, and expose whether these locations are bound by us-style consumer and manufacturing protections that we all assume are present when "buying made in the USA".

2. produce independently-verifiable measures of value on groups of products. Make these measures of value obvious.  For example, how long do certain light bulbs last, what is the exact unit price of each one in the package, and therefore what is the value per cost-hour of light from each package.  I need to be able to tell without the brand-marketing jargon (i.e. "our brighest, longest lasting bulbs ever!") which is really the better value.

3. specify clearly the meaning of different food and other product labels in a conspicuous location.  For example, a kid going into a convenience store should be able to make an informed decision about what snack food in that convenience store might be the healthiest without having to read the labels on every product in the store, without having to understand food chemistry, and without having to do a bunch of math in their head.

I am a Sr. Systems Engineer for a major telecommunications company. I have a long family history in the Computer Science field.

As with all legislation, but perhaps even moreso when discussing planned government intervention on our economy, one must always bare in mind the dreaded unintended consequence. 

The "buy American" policy idea isn't new.  In fact, the 2nd statuette ever instituted by the United States government was a tariff, the Hamilton Tariff.  One must note that the original impetus for this tariff was revenue for the state first, and the protection of domestic production second, not the other way around.  Also, as shall be discussed in a moment, this tariff began a longstanding tradition of tariffs enacted by Washington DC that harmed the Southern economy and led directly to the civil war.  It is a practice for those that fear competition, change and progress.  More importantly it is a practice steeped in protectionism and nationalism, those xenophobic progress-hinderers. 

After 1850, the southern states were in a losing political battle with the North.  There were several reasons for this, notably the disparity in population coupled with the ability to control production in manufacturing rather than a reliance on traditional farming methods and the ecosystem in the South.  Despite this loss of power, Southern policiticans managed to get the Walker Tariff passed, basically a repeal of the much higher tariff on imported goods relied upon by the Southern economy and passed by northern Whig Party politicians.  This angered the North, which, with the help of the robber barons and international bankers, had been pushing for federal funding of the railroad system and expansion.  The next elections introduced more stuanch supporters of the North, in particular the election of Abraham Lincoln, a man who though not particuarly concerned for the freedom of African slaves, certainly was concerned and committed to the preservation of the Union.  These Northern politicians immediately unleashed a plethora of tariffs against the South, even moreso after the representatives of several seceeding states walked out of Washington DC in protest.

Thus we have our unintended consequence.  When you hand the reins of power over the economy, or portions of it, to polticians as opposed to consumers, you practically beg for that power to be used as a weapon.  Whether that weapon is used against fellow states, as in the pre-Civil War, or other countries, or is simply used as a threat against either, the potential for misuse abounds.  Better that the government return to its original role within the economy: a referee.  Referees do not interfere in the game.  They do not give one side points because they're weaker, nor do they play favorites.  They simply make certain that the game is fair and well-played.

Novelist, Network Security Specialist, and History Buff. That be me.

When I read a recent news article online, I was perplexed when I saw the statement to "Buy American". I asked myself, "Why?"

As a consumer who has options, I will generally pay for a product having a less cost and equal, if not better, quality than the local product. I'm confident I am not alone in my purchase habits.

Additionally, it seems this message is specifically targeted at consumers, but the more important question is why it's not targeted to American manufacturers.

It's not going to surprise anyone to know many American businesses buy their supplies from foriegn companies. It's the primary way these businesses can save money. If forced to buy locally, this will increase operating costs, and worse, these costs will be passed to consumers.

If this should happen, this will make it more difficult for consumers to buy American.

Patriotism shouldn't dictate how consumers spend. It's playing on the heartstrings in order to "restart" the economy and help American businesses. However, these businesses can not survive if they were to adapt the same patriotic principles. The salaries of workers in the United States simply won't allow it, and not too many employees will take it well should their salaries be cut to compensate for the increased local supply purchase costs.

It's a double-edged sword to "Buy American". On the face, it just seems like a good idea, but the damaging effects down the road are just too costly to support the idea.

We need the global market in order to remain competitive. We need the global market in order to sustain investments in which millions of 401k plans adapt. If we, as a nation, suddenly cut out foreign suppliers, this would have a devestating affect on the stock market.

This chain of events would come back and affect American businesses who invest in foreign markets, and would force this country back into another recession. This country has a significant impact in the global market and it would be foolish for anyone to think buying American wouldn't have an affect to these investments.

There's also another element to which American businesses need to focus, and that's changing the viewpoints of consumers. Many consumers find the import product to be better in quality, even if it's an inaccurate perception. This comes with the fact many foreign products cost less and offer more for the consumer.

As an example, I am not fond of our U.S. automotive industry. This comes from being told our cars are purposely built to be disposable, forcing consumers to buy a new vehicle every 3-5 years as maintenance gets too costly to maintain it.

True or not, this notion is supported when family and friends begin to experience issues at this time, even while maintaining scheduled maintenance. If I'm to buy American, I expect this notion to be removed, and that's difficult to achieve. This will not occur until the American public agrees our vehicles are on par with foreign, competitive products.

Consumers are not to be treated as ignorant. If the recession is truly ending, it shouldn't be a suprise to see consumers' spending habits change. We've seen this in action when the price of oil increased and despite its drop, consumers aren't out rushing to repurchase SUVs (yet the industry still produces them).

I'll gladly buy American if my money buys me a great quality, low cost product when compared to its foreign counterpart. 

Patriotism will have nothing to do with this purchase as much as "more bang for the buck" will.

Buy American is not really an option. We owe so much money to other countries that causing them to insist on repayment would throw the whole world into a deep depression. Even as a gimmick to get votes, it is really bad. Let's face it, today politicians, and more specifically Republicans, are totally dependent on the wealthy (that is why we see so little individual thinking; they are organized behind the people that "own" them). Telling their owners that we will start cutting off other countries would be financial and political suicide; they aren't going to do it.

Gene Cavanaugh (Marion Eugene Cavanaugh on the USPTO web site) specializes in small entity patenting (what the founding fathers intended in the US Constitution).

Let's play the "Extrapolation Game" where I take the concept of Buy American to its limits, and examine the results.

1) Imbalance Of Trade

If we buy NOTHING BUT American products, then we have no imports. Other countries will, naturally, retaliate. With few imports, the balance of trade will shift a great deal, the value of the currency will go up. That sounds good, but there's no point to a strong currency if you're not importing. Meanwhile, the price of our exports will be astronomical, so we won't sell any. There go all the export-based jobs! We will be a closed economy. Anyone see any great examples of wealthy closed economies? USSR? China pre-90s? Cuba? Anyone? Closed economies experience shortages of products that can only be produced elsewhere, like oil or bananas. Less choice is bad. Closed economies limit career opportunities - wanna be a banana executive in the USSR? Closed economies seal themselves off from the bounty of the earth, and limit themselves to what resources and skills exist locally. The net social wealth is diminished.

2) Dig Your Own Grave...And Save!

Do you do all your own plumbing? Your own taxes? Your own car repairs, lawn mowing, food growing, etc? No, you pay a specialist who can do it better or cheaper than you. If that makes sense for you, then it could also make sense as a nation.

Extrapolating the notion of nationalism, let's take it further. Why not just "Buy your state? Buy your town? Buy your neighborhood? Buy from yourself?" Each step you take just makes the net economic outcome worse. But it gets quite obvious when you get down to the neighborhood level. You are losing the big-market benefits of "comparative advantage" and "specialization". Now, to get a banana, I will need to pay my neighbor to plant a tree, water it and put a greenhouse around it. To build a car, he will need to pay me for the five years it takes me to do the job, since I'm just not very good at it. The car, by the way, will be of terrible design and quality. The amount of products...of wealth...that can be produced by our uber-protectionism diminishes at every step we take to reduce our market. By "protecting", we are choosing to introduce economic inefficiencies in every sector. We are choosing regulation over free markets, and we'll be punished for our fear-based choices.

Now, some people may discard this argument, and say "It's ridiculous to propose that I buy a car made by my next-door neighbor. That's a bad analogy, so you can't be serious." But it isn't a bad analogy. Yes, it's ridiculous, but it's an excellent illustration of how ridiculous it is to buy an inferior product from anyone when a better option is available at a fair price. Your neighbor probably can't build a good car at all. Well, newsflash, neither can Chrysler. How different is it buying a car from your neighbor versus buying a Chrysler Sebring, the worst-rated car of 2009 by Consumer Reports, simply because Detroit is closer than Tokyo.

The market is designed to work when consumers make good, informed, self-interested decisions. Philanthropy should be done through charity, not via commerce and the free market. Patriotism should be done through leadership, effort, a willingness to self-evaluate and criticize, and a tolerance of criticism. Patriotism is most certainly not encouraging "good enough" production in the marketplace. If you're satisfied when your country is "good enough" you're not my kind of patriot.

3) Comparative Advantages (CA)

The completely accepted economic concept of Comparative Advantage (CA) occurs where some resource, skill, or input is relatively cheaper in one region than another. If so, that region has a CA, and will focus on selling that resource. This focus may harm another region's ability to sell high volumes of that resource. But while this may hurt some less efficient suppliers of that resource, it is a boon to the overall good. If India has comparative advantage in labor, the world SHOULD be sending labor-intensive production to India to lower "total global costs" of production. The price of labor will increase in that region to a new equilibrium, as we have seen with low-level IT in India. If the US has comparative advantage in technology innovation, people SHOULD be buying their technology from the US...as they do now. In so doing, the world increases productivity, progresses technology, lowers costs of production, and as a world, we can produce more for less. The world then has more to share among the people living on it. Net social gain.

4) More To Share

More for less, or greater global production is really a worthwhile goal. Humanity is wealthier, we have more to share, we will be more productive, which means less wasteful even as it means more output.

When foreigners are wealthier, they are able to enter the global markets as buyers. Thus in being willing to share a little of the earth's bounty, we can radically raise the wealth level of those living at the bottom of the pyramid. In fact, the positive of a little bit of well-placed capital with a poor, but enterprising person can pay far greater dividends to global production than the same capital employed by the average American. The success of Grameen Bank and micro capital illustrate this point convincingly. Then, those successful entrepreneurs abroad will be able to afford the next iPhone from a US company. The global economy is NOT a zero-sum game, where one man's growth represents another man's loss. History has shown that we can all steadily grow together, and that the larger the economic and information community is, the faster it can grow.

5) Peace Dividend

Also, people engaged in gainful commerce seldom try and bomb you or kill you. There is a comfort benefit to this, but also a real economic benefit to having fewer enemies. People with nothing to lose might suicide bomb you. The best antidote for inklings to be a suicide bomber is a job. Let's try to reduce the number of people in the world with nothing to lose, and see if the peace dividend doesn't jump up a notch or two. I'm not saying charity...I'm just saying that if the resource they have to offer is cheap labor, that we should let them sell it to us.

6) What is The Patriotic Thing To Do?

I'll tell you what is patriotic. It's not blindly buying American. It's not how you SHOP at all. It's how you work! It's PRODUCING something that foreigners will buy. Driving exports, that's patriotic. It offers better products to Americans AND foreigners...to all people. It brings dollars INTO America. From there, economic multiplier effects let that trade revenue ripple through the economy with an almost 10x factor on Gross National Product. That creates jobs, creates tax revenues, and funds schools for the next generation of winners. Damn, that's powerful patriotism in action!

Get training in an area that is productive and useful. Get good. Work hard, produce lots of output, make that output high quality, strive for continuous improvement in that product AND in your skills. Be willing to change to adapt to new eras, upgrade your skills. Maybe YOU could be the one to drive the change to a new era, and not just react. Now you're firing on all cylinders. Now you're producing well for yourself, AND for America, AND for all humans. That's patriotic - without taking anything away from people abroad!

Ironically, the very industries that are campaigning for "Buy American" are usually the same ones who don't do the above, and probably aren't interested in starting. If you're a carmaker, get started. Make a car that not only is good enough for Americans to buy instead of a Honda, but that JAPANESE PEOPLE WILL BUY instead of a Honda.

Even though my industry is a bit unusual and only represents a tiny blip on the US economic radar, I think it has some traits that illustrate why American protectionism is not necessarily good for business. The industry of which I speak is Fireworks, particularly Outdoor Fireworks Displays.

For the first two-thirds of the 20th century, this industry of manufacturing and producing the products to entertain audiences around the country was limited mainly to a small group of family businesses. These individuals worked throughout the winter months building all the spectacular effects, and then spent their summers producing fantastic shows throughout the country. Given the nature of the work—mixing chemical components together to make explosive compositions—mass production has never quite worked and displays remained rather expensive endeavors, accessible only to municipalities and the ultra-rich.

That all started to change in the early 70's as the US relationship with China softened. As the trade barriers were removed, and modern shipping technology took hold, inexpensive Chinese-made fireworks began to flood the market en masse. Now at the time the small family outfits cried foul as they saw their manufacturing businesses dry up. But (not) surprisingly, as the dust settled, a series of amazing events took place. First, the fireworks companies that produced superior products continued to flourish as their skills could not be matched by the cheaply made imported products (the inferior US companies quickly withered away and died). Second, the cost of producing a fireworks display reduced to a point where it became attainable by a whole new market. As this occurred, of course, a plethora of new companies sprouted up to take advantage of the market opportunities. And with them they brought innovation, new technology and increased competition that revolutionized the industry.

Now of course this is an oversimplification of the industry's history, but the basic facts speak volumes about the benefits of free trade. Sure, some of the profits make their way back to China. Sure, workers were displaced as the industry transformed. But, the makers of high quality products quickly established their niche and found their market had expanded exponentially. And the size of the newly created market created far greater economic opportunity than what existed before. And almost all of it was based upon the lifting of trade restrictions.

In closing, a couple of quick footnotes: The industry has indeed benefited (read exploited) largely from access to the cheap labor pool. However, as the Chinese manufacturers (and their workers) have gained access to foreign markets, they have utilized their newfound wealth to improve their social class and there is actually now a shortage of skilled labor in the industry. Also, new regulations due to safety, security and trade imbalances are all applying upward pressure to the cost of production. In the short term, this is going to benefit the small boutique US manufacturers as we "Buy American", but in the long run it willhurt the industry on both sides of the Pacific.

I am the operations manager of a small fireworks display business that has benefited greatly from US-China trade.

Immediately after world war twice, Dr. W. Edwards Deming (who made significant contributions to the US war effort) developed a methodology that became known as "just in time" manufacturing.

While there has been considerable "rewriting of history" by embarrassed American leaders, but the truth is that his methodology was ignored in America due to the arrogance that followed victory (and the resistance to change in the industries).

The Japanese embraced it enthusiastically, eventually awarding Dr. Deming their highest civilian medal, and creating a "Deming medal" for excellence.

Now all American industry (especially automotive) has "bought in", with significant improvements in both quality and cost resulting (it was the main reason the Japanese dominated the automotive industry for so many years).

None of this would have happened if the "Buy American" foolishness (which started then, by the way) had prevailed - it would have been a case of "who killed the low-cost, high-quality car?"

Gene Cavanaugh (Marion Eugene Cavanaugh on the USPTO web site) specializes in small entity patenting (what the founding fathers intended in the US Constitution).

Since I'm employed by Floor64, I'm participating because this is an interesting topic, not as a part of the contest.


Protectionism vs. free trade is a debate that's gone on for centuries.  And while logic should win the day, emotion often takes over.  A recent episode of the Planet Money podcast reported that an astounding 97% of economists believe that tariffs are bad.  They tend to harm the country employing them just as much, if not more than, the countries they are targeted against.  There is no real academic debate here.  The consensus and the data are both clear and strong: tariffs do more harm than good.  By a lot.  So why do politicians still push for them?

The answer is that it's pure politics and pure emotion.  It's much easier to talk about the jobs that are going to be lost due to foreign competition, rather than imagining the newer, better jobs that are gained from from mroe efficient global trade.  It's easier to fret a "foreign threat" than to look at how specialization and comparative advantage help to drive prices of goods down for consumers across the board, leading to much greater benefit and buying power.

In short: it's an informational problem, not a problem of ideas.  From a politician's perspective, there's a clear and immediate payoff in pushing for a protectionist "Buy American" type policy.  It gets them press coverage and shows them as being "patriotic" and "protecting jobs."  The reverse is a lot harder to turn into a quick soundbite and a front-page photo.

To get around this informational problem, the best thing is to spend more time highlighting the downsides of protectionism, and how it unfairly and pointlessly decreases competition and increases prices of everything around you.

It doesn't require looking very far to discover the problems with protectionist policies.  Harvard economist Greg Mankiw recently highlighted an example of the net societal loss from such trade barrier bickering, that's last well beyond a reasonable time frame.  It talks about how a trade dispute in the early 1960s makes Ford vans more expensive to Americans.  Apparently, the Europeans put a tariff on American chickens.  So the US retaliated by taxing the import of commercial vans and trucks.  And over 40 years later, these same tariffs are still in place -- and they still apply even to American companies.  Ford makes vans in Turkey, and then ships them to the US.  But since it doesn't want to pay a huge 25% tariff, it pretends that the vans are passenger vans, rather than commercial vans.  It installs extra rows of seating and back side windows.

This gets the vans classified differently, with a significantly lower tariff -- about 2.5%.  This saves Ford thousands of dollars.  However, it also spends a lot extra putting in those needless seats and windows, which simply get ripped out and destroyed or recycled once safely through customs.  This is a massive and totally unnecessary waste.  A trade dispute that made no sense half a century ago is still in place, and rather than help Americans, it's just made things more wasteful and expensive, even for American companies.

Only through repeating such stories will people finally begin to recognize that protectionist "Buy American" policies don't help Americans, but lead them down a similar path: less competitive industries, more expensive goods and significantly more waste.  This is good for no one -- not even the politicians looking for the quick headline and cover photo.

Michael Masnick is the founder and CEO of Floor 64, Inc., and the editor of the Techdirt blog. He frequently writes and speaks on various topics related to innovation.

The discussion so far on the topic has been great, but I think it's clear that certain ideas around the problem are more pervasive than others. I think it's most interesting in the title of the question, "Mandates" to buy American as opposed to encouraging, and we all jump to the thought of tariffs. These are obvious things that come into our head though, and as mentioned in other insights, specifically Michael Masnick's post, it's largely an ideological decision rather than a sound business one, but sometimes it seems that so is the reason why buying American is bad. That sounds odd, redundant, or even confusing, but allow me to explain...


Value
It is all a question of value for the consumer. Robert Miles, whose insight is above, said it best in the beginning of his post, which in a nutshell states that people are going to buy what provides the most value for them. In the case of cars, someone may consider a Kia better value due to the money savings despite the potential loss of reliability and features; others would find more value in a Lexus which will cost more, but the reliability and luxury are more important to them than the cost savings. Sometimes this value is affected by false perceptions, personal bias, or any number of factors, but the same motivation is in place. Every consumer will try to maximize their value as they see fit, and the government should be trying to allow the consumer to maximize that value the best they can.


The Argument for Being a Protectionist.

The argument for certain protectionist policies, specifically the ones that try to lower the value of foreign goods by increasing cost, such as tariffs, are simple in their goal: By making the value of competing products lower, the domestic option will be a more attractive choice. Though many believe it is shortsighted, including myself, the argument's premise and conclusion are correct; if you lower one product's value, the other option will inherently be more attractive than it was before. Those supporting these policies are actually trying to increase personal wealth in the nation (a form of value); they believe that this will get more money to Americans, create more American jobs, and overall create a better standard of living for the American people.

There has actually been evidence that this has worked before in specific situations. I tried for hours to find a certain case I studied, but I suppose I have lost it, so here is the quick version. In summary, a country was trying to build its IT infrastructure and services to a scale which would compete with the services in other countries. By increasing the tax on using foreign IT services by 100%, the domestic services had the chance to get the ball rolling on their developing infrastructure, which they would not have been able to do without the increase in work due to the tax. But the big difference here from most other American situations is that for the nation in the case, the IT services industry was in its infancy and needed that boost to get off the ground; once it did, the tax was either greatly reduced or removed. In America, we are still putting up tariffs on industries that are very mature.


Why the Protectionist Argument is Short Sighted.

Though the argument is technically sound, if you lower the value of a foreign product the domestic option is inherently more attractive, it ignores a range of other factors and, frankly, is looking short term and ignoring the big picture. Without inundating you, and this insight, with numbers and countless examples, the bottom line is that it has been shown that the saving and value increase from removing the tariff on a superior, competing, product that provides more value would allow the consumer to spend more on other things. In most examples personal wealth goes up, options increase and therefore value obtained is also higher. Decreasing the value of other options will not benefit the consumers as a whole (domestic and foreign) in almost every scenario. There is debate about the effect on the workforce; some say it will reduce the number of jobs despite personal wealth going up, others think it will create more jobs overall in other industries where domestic products are providing more value. In both scenarios though, the American people will be better without the Protectionist policies.


So What Should We Do? 

Buying domestic isn't bad. Naturally if a product is bought by an American, built by an American, and be taxes go to the American government, it is better for America in general than the same product being bought by an American, built by (for example) a German, and the taxes go to Germany. Is that the case if the German product provides more value? No, in that case it is better for the American consumer to buy the German product. The protectionist response to this was to decrease the value of, for this example, the German products. Wouldn't it be great if instead of a Protectionist policy, we had an "Incentivist" (best term I could think of) policy? Instead of decreasing the value of foreign products through legislation, we should be thinking of ways to increase the value of domestic ones. Sadly it's not as simple as giving money to build a better product; there are too many factors to that which money can't fix. But perhaps some sort of tax break for buying domestic, or incentives on complimentary products, such as a government rebate when you buy American made tires for an American made car. This will increase sales in the tire and car industries, increasing jobs, tax revenue, and the American people will have a higher level of value available to them. Though that was just an example off the top of my head, and it will obviously take finesse to find the right "incentives" to "value increase" ratio to make this profitable, but the potential gains would be enormous.

The bottom line is that we should be thinking of ways to create value for the American people. Reducing the value offered on foreign options is not the answer. I would really like to see our government institute an Incentivist policy where people are encouraged to buy American because of the new, creative, methods in which it provides value, not reduce the value of the other options enough to make the American option attractive.

 

Ben Matthews works for a marketing agency in Atlanta, and is currently working on a masters in business.
icon
Derek Kerton
Wed Sep 23 12:23pm
Ben,

No! That's wrong.

You spend most of your piece arguing against tariffs and blocking imports, and that was sound economics. You note that altering the relative value of domestic and foreign goods is an interference in the market that limits choice and increases costs. But then you suggested that the government should, instead, offer incentives to shop American. That is basically the same thing, the same market distortion as a tariff, but with the added negative of government spending.

Where does that incentive money come from? Taxes. So your plan requires a higher level of taxation of all Americans, thus spent on incentivizing people to make inferior product choices because of the distorted relative value. This has much the same effect as a tariff, in that it socializes the costs of "buy American" policies on everyone. We end up with inferior products.

One of the reasons "buy American" can resonate so well for politicians is that it DOES specifically benefit some workers (say auto workers), while the very real costs are transferred to the entire population. Thus dissolved, the population doesn't feel as much pain as the auto worker feels benefit. But it's like a pyramid scheme of joy.

So what you are proposing is essentially subsidies, which are out of the scope of this comment, but if I sum them up as "they basically suck", then I won't be far from the mark.

The bottom line is our support of American industry should not about subsidy or tariff market interference on the consumer side. As consumers, our JOB is to buy the best products and services we can, which offer us the most value (as you wrote). In so doing, we send the correct signals to the producers to enable (to force if under competition) them to make appropriate production decisions, and globally competitive products. The patiotic consumer is expected to act in their own interest, nothing more.

"Buy American" should forever be trashed, and replaced with "Produce, America!". Americans need to stop "thinking" they are the best, and start working incessantly to be the best. It's never-ending work, though, so it might be a harder sell.
icon
Ben Matthews
Wed Sep 23 1:15pm
Thank you for the feedback, Derek, I appreciate all I can get! Unfortunately, I think some things got poorly explained or misunderstood though.

I want to reiterate that I think it boils down to value. You seem to be arguing about the perception of quality in a product being distorted, when I am focusing more on the value of a product.

You stated, and I think it sums up you concerns with my approach:
"So your plan requires a higher level of taxation of all Americans, thus spent on incentivizing people to make inferior product choices because of the distorted relative value"

First, in my idea of how it would be implemented, taxes would not increase. I will speak on that in a bit. Secondly, when you say "inferior" I assume you are again talking about the quality of the product, and not the value. As stated, the quality could potentially be higher in the American product, but in some cases the disproportionately high cost could cause it to have lower value. We must focus on value, not quality! And last, you mention the "distorted relative value." I am not sure what you mean by distorted, you would potentially be saving money on a product of unchanged quality. The relative value to the competing product would be a real change in that case, not distorted; Joe Schmoe would see a tangible benefit.

To use the car example again, lets say we have an American car and a Japanese one. To make the numbers simple, lets say the American car costs $500, while the Japanese one would cost $450 on the open market, tariff free. All other factors about the car are even. With the current system, lets say the Japanese car has to raise it's cost to $525 to stay profitable with tariffs in place. Joe Schmoe comes along, and buys the American car because it is cheaper, and therefore provides more value with the same level of quality. Without the tariff system in place, the Japanese car would have provided more value since he would have had a similar car for less money.

Now with my idea of an incentivist approach, we would remove tariffs, which I believe we both agree is a good thing, and to continue with my example in the original insight, lets say that you get half off tires in the form of a rebate from the government if you buy the American car. Joe does some math and figures that the net present value of the American car is now $425 since he will save on tires for the life of the car, as will anyone who buys it from him later increasing resale value. Now the market hasn't been distorted, the associated value of a product has gone up, while the perceived quality of the product (it's ability to do the tasks assigned to it) has not changed. From this, American car makers and tire shops would see increased sales, which in turn potentially create more jobs, and thats more revenue and wage taxes the government would collect on. Thats what I would see funding the project, not a sustained increase in taxes due to subsidization. This would ideally create more business domestically and increase wealth all around without removing value from foreign options, only increase the value of domestic ones.

Some companies would be too far gone that such an incentivist approach wouldn't matter, and the revenues gained would not compensate for the cost. In those cases, an incentivist approach would not be the way to go and we would let the free market kill off those companies all by themselves.

Once again I appreciate the feedback, please let me know if you have any more thoughts!
icon
Ben Matthews
Wed Sep 23 10:13pm
To critique my own thought...

I had my semi-yearly meeting with my old business professor just to catch up. I mentioned this case and he brought up an interesting downside which we both agreed may or may not outweigh the benefits, but it gave a good bit for both of us to think about. He thinks the idea of incentives as opposed to deterrents (or protectionism) when trying to encourage buying is definitely the way to go, but what if it works too well?

The example we used was Ford and Toyota. Lets say tariffs are dropped and Ford goes to the government with numbers and says

"Listen, Toyota is beating us by a only few hundred bucks per similiar car in price. If we use this newfangled incentivism with say Firestone, we will make a whole lot more money, and what you pay out in incentives will be earned via taxes on increased revenues 3 times over! Everybody wins!"

The government likes the idea and goes forward with the incentivism program for Ford. And it works, people start buying more Fords, more tires, more jobs are created, more money is to be had by all, and the tax revenue even puts under privileged kids through college; it's practically a miracle. But...

Lets say Ford starts doing so well that Toyota sales drop off completely, hell they are hurting now. Sure their sales in other countries are okay, but the loss of revenue puts them in a hard spot. Their profit falls, they have to do cutbacks, their product actually begins to decline in quality. Would this be considered stifling innovation? A product, which has superior quality, but less value due to excellent cooperation via government sponsored programs, could fail.

Normally, especially on Techdirt, when we think of stifling innovation, it's from preventing a product coming to market via legal means or collusion. But what if we are raising the value of one product to a degree that it overshadows another of superior quality? Now technically this does happen all the time everyday, someone may have built the best mousetrap in the world but it wasn't cost effective, marketed correctly, timed wrong, or any other hundred reasons why a product fails and one that isn't as good but has more value succeeds. Whats different in this idea is that it will be a factor for any company wanting to come into the American market in an industry that has the incentivism program running. In my car/tire example, it would be government sponsored cooperation. Sure a foreign company could work out some sort of rebate program with a domestic tire company, but the transition would probably be more difficult.

Just some food for thought. I usually hate when the government gets involved with the free market, but I still think the spirit of the idea will be beneficial to the American people as a whole.
icon
Derek Kerton
Mon Apr 5 10:45am
"lets say that you get half off tires in the form of a rebate from the government if you buy the American car. Joe does some math and figures that the net present value of the American car is now $425 since he will save on tires for the life of the car, as will anyone who buys it from him later increasing resale value. Now the market hasn't been distorted, the associated value of a product has gone up"

"The relative value to the competing product would be a real change in that case, not distorted;"

But that's a dictionary definition of 'distorting the market'. A party that shouldn't be involved in the transaction (the gov), steps in and lowers the price of a specific product. Lower price means higher demand, with the result that consumers act differently. Market = distorted.

When you distort the market, there may be some upside. But surely there will be unintended consequences:
- Toyota workers in Kentucky might be laid off.
- We will have more tires sent to landfill earlier.
- Tire makers and tire shops will raise their prices so as to benefit from greater subsidy. The free market has a lesser effect on their actions, since half of their money comes from the gov't.
- Non Ford drivers will pay more for tires at these shops.
- People will figure out how to 'game' the subsidy, swapping tires in some weird, nonsensical fashion. They will figure a way to get at the subsidy money without earning it. They always do (see Mike Masnick's case of Ford installing, then removing seats in Vans just to game the rules.)
- But the biggest, and most important distortion you've introduced into the market, is that the US carmaker doesn't get the correct signal from the market, i.e. "Your cars suck." They continue to produce crap, and the GLOBAL marketplace, unaffected by US government interference, buys fewer and fewer US cars.

My alternative suggestion would be simple NOT to do what you say. Ford sells fewer cars. Their shareholders get angry, they fire the CEO, they get some better designs, and they finally compete with the Japanese on equal footing...kinda like what has happened in the real world with Ford...notsomuch with Chrysler. In the case of Ford, we have a US car company whose quality has risen to compete well with the best in the world. As a result, Ford not only sells to the US market, but can compete in any country. Now, Americans really benefit.

You gotta look past our borders, and realize it's a global market. Subsidies that protect US carmakers in America just ensure that US car makers sell less and less abroad. And the global market is bigger than domestic.

Let's ask Barack Obama. Three years ago he criticized the "Buy American" philosophy in his
2006 book "The Audacity of Hope" -- and he provided the perfect example. "It's tough to 'buy American' when a video
game sold by a U.S. company has been developed by Japanese software engineers and packaged in Mexico."

In fact, American companies have already been hurt by policies which were supposed to favor them.
Technology companies often need specific technical components that can only be procured using non-American parts or labor.
In the ultimate irony, the "Buy American" movement has blocked American companies from bidding on jobs offered under
American's own stimulus plan. In a chapter called "Opportunity," Obama's book proposes instead a better idea. "We should be guided by what works."

So what's his long-term solution? Better long-term education programs to beef up the American workforce.
(Think of it as an "America First" plan for our schools.) Lowering tuition costs could get more students
into higher education -- and at the next level, there's also tremendous potential in government funding for more scientific research. 
"If we want an innovation economy, one that generates more Googles each year, then we have to invest in our future innovators..."
Obama writes, noting that of the fastest growing jobs this decade, eight out of nine  require scientific or technological knowledge.
"[J]ust as our government instituted free and mandatory public high schools at the dawn fo the twentieth century to provide
workers the skills needed for the industrial age, our government has to help today's workforace adjust to 21st-century realities."

icon
David Cassel
Thu Sep 24 12:15am
[Sorry about the formatting. Here's what I was trying to post...]
========================================================

Let's ask Barack Obama. Three years ago he criticized the "Buy American" philosophy in his 2006 book "The Audacity of Hope" -- and he provided the perfect example. "It's tough to 'buy American' when a video game sold by a U.S. company has been developed by Japanese software engineers and packaged in Mexico."

In fact, American companies have already been HURT by policies which were supposed to favor them. Technology companies often need specific technical components that can only be procured using non-American parts or labor. In the ultimate irony, the "Buy American" movement has blocked American companies from bidding on jobs offered under American's own stimulus plan. In a chapter called "Opportunity," Obama's book proposes instead a better idea. "We should be guided by what works."

And historically, America has competed by building cutting-edge technology and world-class innovations. (A better strategy might be called: "Sell American".) For example, the Apple Computer and products like the iPhone have created huge worldwide demand, but they've also spawned entire new industries along the way. Technology always advances, and as it does it creates new markets -- and new jobs. As the world's economies recover from a global recession, they'll welcome new green technologies which can lower energy costs, and there will always be a demand for new breakthroughs in medicine and biotechnology.

So which policy leads us in that direction? How about better long-term education programs improving the American workforce. (Think of it as an "America First" plan for our schools.) Lowering tuition costs could get more students into higher education, Barack Obama suggests -- and at the next level, there's also tremendous potential in government funding for more scientific research. "If we want an innovation economy, one that generates more Googles each year, then we have to invest in our future innovators...just as our government instituted free and mandatory public high schools at the dawn of the twentieth century to provide workers the skills needed for the industrial age, our government has to help today's workforce adjust to 21st-century realities."

And he also notes that of the fastest growing jobs this decade, eight out of nine require scientific or technological knowledge...

The "Buy American" campaign is politics, pure and simple. A narrower argument might be more persuasive -- maybe "Hire American". (Obama also proposes eliminating tax breaks for companies who shift operations overseas.) But he also acknowledges a pesky financial reality. Global trade actually helps fight inflation, by spreading out demand for a country's dollars to multiple countries. And there's another positive outcome: global trade reduces poverty in countries like India and China, which over the long-term, this makes the world a more stable place.

"For those like Larry Page and Sergey Brin...the potential rewards of a global marketplace have never been greater," Obama writes. "What's preventing us from shaping that future isn't the absence of good ideas.. It's the absence of a national commitment to take the tough steps necessary to make America more competitive..."

And he concludes that America can't compete by erecting trade barriers, "Unless we're willing to confiscate all the world's computers."
Follow Techdirt
What is the Insight Community?

From time to time, we post cases like this from the Insight Community right here on Techdirt.

In these cases, companies are looking to directly engage YOU, the insightful readers of Techdirt, in meaningful conversations.

So, please take some time and look through this case and contribute your insights.

To sign up to contribute, go here.

A word from our sponsors...
Essential Reading
Techdirt Reading List
Techdirt Insider Chat
A word from our sponsors...
Recent Stories
A word from our sponsors...

Close

Email This