President Joe Biden’s first two trade moves signaled that domestic political imperatives and the next presidential election will exert powerful influence on the administration’s international economic policy. This is certainly the message from Biden’s decision to continue and even tighten the Buy America rules inherited from the Trump administration — and to pledge continuing stronger enforcement of the notoriously protectionist Jones Act.
Both actions will be applauded by labor unions and capitalists in the maritime, steel, and other uncompetitive sectors while universally condemned by economists. (It will be interesting to watch how Biden economists react after watching Trump economists squirm with embarrassment at many of the economic fallacies regularly mouthed by Trump and the likes of Peter Navarro.)
Much has already been written by commentators over the past several days, so here are brief signal points.
The Jones Act
As with many US protectionist acts, the hundred-year-old Jones Act was passed as emergency legislation to aid the maritime industry after the government-induced glut of ships from World War I demand. But in what became the most powerful lobbying operation in US history, despite the baleful economic results, a bogus national security rationale has operated to sustain the act right down to 2021. The terms of the act are simple: All cargo between US ports must be carried by US-built, owned, and flagged ships.
Over the years, numerous economic studies have demonstrated that the result has been increased shipping costs leading to a shift in demand, fewer US ships being built over the years, and movement of internal goods by trucking, rail, and airways. US national security has thus been steadily vitiated by the lack of a vital, vibrant shipping industry. (In the Gulf War, for instance, the US relied overwhelmingly on foreign vessels to meet its sealift needs.)
It should be added that some decades ago, an AEI study of maritime transportation services discredited the Jones Act’s national security claims, and more recently, my AEI colleague Vincent Smith has wielded his economic cudgels in the same cause, abetted by trenchant analysis from Cato Institute scholars.
Though they date back “only” to 1933, Yahoo Finance’s Rick Newman asserts that Buy America regulations have an equally dismal record in achieving their alleged goals of creating more American jobs. Biden claims his plan is different from Trump’s, and he is right; it contains stricter and more damaging rules that will exclude foreign competition from US government contracts. For instance, it tightens rules for granting exceptions, it increases the percentage of US components that must be included for a good to qualify as an “American product,” and it creates a disciplinary czar in the White House to ride herd over potential recalcitrant agencies. All federal agency waivers must be reviewed by the czar, and US firms will be favored even with foreign price differentials of up to 20 percent.
As with the Jones Act, the economic case against Buy America restrictions is longstanding and straightforward. As the Peterson Institute’s Gary Hufbauer succinctly stated:
You kill downstream jobs in one of two ways. Either you make it more expensive, so less of the downstream product is purchased, or if you have a given amount of budget money you’re spending on this Buy America package, it’s not available for other things to spend on. You just can’t build as many miles of road when the price is higher.
Particularly with high-tech sectors where supply chains encompass a number of countries, the disruptions are likely to be substantial.
Beyond the deleterious economic consequences, tightened Buy America policies fly in the face of the president’s much-proclaimed goal to move away from America First and move to shore up economic relations with US allies. These are still the early days, and the new administration has ample time to introduce new efforts to rebuild America’s frayed relations with key countries and multilateral institutions. But President Biden’s proud proclamation that his top priority is to “ensure that the future is made in America” despite excluding the products of US allies is ultimately at odds with his promise to “Build Back Better.”