Buy American Trade Plan Could Backfire On U.S. Businesses

In his recent State of the Union speech address, President Joe Biden showcased “Buy American” trade policies that he said would be good for U.S. workers and the economy. Many economists, trade analysts and members of the business community counter that the case for Buy American policies is much weaker than the president has stated and warn such policies could backfire on U.S businesses.

To examine the Biden administration’s approach to trade, I interviewed John Murphy, who responded in writing. Murphy is the senior vice president for international policy at the U.S. Chamber of Commerce.

Stuart Anderson: What is a “Buy American” policy?

John Murphy: “Buy American” rules have been a feature of U.S. law for nearly a century. The Buy American Act of 1933 applies to direct purchases by the federal government, and it mandates in many cases, the purchase of U.S.-made goods, which it defined as 100% manufactured in the U.S. with at least 50% domestic content.

On the latter point, the Trump and Biden administrations have been ratcheting up that domestic content requirement and making it harder for agencies to issue waivers. Separately, the Buy America Act of 1982 requires the use of U.S.-made iron, steel, and manufactured goods in the construction of transportation infrastructure—highways, railways, or transit systems, and it extends beyond direct purchases by the government to contractors. Finally, the Infrastructure Investment and Jobs Act (IIJA)—the recent, bipartisan infrastructure bill signed into law in 2021—has a title dubbed the Build America, Buy America Act, which extends these mandates to new industry sectors such as broadband, water and energy.

Anderson: Can Buy American policies create supply chain problems?

Murphy: Yes, the law of diminishing returns eventually kicks in. Already, 97% of the federal government’s procurements by value go to U.S. firms. Problems arise when you’re dealing with goods where U.S. production is limited or cost-prohibitive. As the reach of these mandates has extended to new products and spending programs, we’re seeing U.S. companies that employ thousands of Americans struggle just because some products are made with global supply chains. For example, equipment used in broadband—a major focus of the IIJA—tends to be made with parts and components from lots of different countries, and that’s true of many other manufactured goods sectors.

Anderson: Can Buy American rules play a useful role in onshoring manufacturing?

Murphy: It’s tempting to think so, but generally no: Federal procurements total hundreds of billions of dollars, but they generally represent a small fraction of the total U.S. market. They just aren’t a meaningful incentive for onshoring.

Take generic pharmaceuticals and the active pharmaceutical ingredients used to make them. U.S. government procurement is just 3% to 4% of the total U.S. market for these products. Meanwhile, constructing a plant to produce, say, acetaminophen in the United States may cost as much as $1 billion and take five to seven years to build. No company will take on all that expense for such a modest return. Past administrations and congresses understood this, which is why waivers and exceptions for “commercial off the shelf” (COTS) goods have been widely accepted in the past.

Anderson: What are the potential unintended consequences of a Buy American policy?

Murphy: The 2009 Recovery Act shows some of the pitfalls. It forced states and local governments receiving federal dollars to apply “Buy American” rules for the first time, resulting in major delays for projects as local officials basically lawyered up. “Buy American” rules were also interpreted in a way that barred many U.S.-based manufacturers from bidding on projects because many firms find it impossible to avoid sourcing at least a portion of their content from abroad.

Take the $100 billion water and wastewater infrastructure sector: The vast majority of its inputs are already American-made, including pipe and structural steel. This market, however, also depends on incorporating specialized pieces of equipment produced through global supply chains. So many of those “shovel ready” projects the Recovery Act was supposed to fund were frozen for more than a year. Ironically, some U.S. firms survived the recession on the strength of their strong business in Canada.

Anderson: What has been the reaction in other countries to the Biden administration’s Buy American approach?

Murphy: Concern. And some are also embracing more “Buy Local” mandates of their own. The good news is the U.S. and most of our close allies are parties to the WTO Government Procurement Agreement, which means that for a specified range of covered agencies we’ve agreed to extend national treatment to firms from Europe, Japan, Canada and some other countries in our government procurement. In exchange, U.S. firms get the same access to lucrative government procurement opportunities in those countries. In his State of the Union address earlier this month, President Biden ad-libbed an addition to his speech, saying his administration will apply “Buy American” rules in a manner “totally consistent with international trade rules.” I hope officials across the administration got the president’s message.

Anderson: Has the Biden administration emphasized this policy more than previous administrations?

Murphy: There’s a great deal of Trump-Biden continuity here. The Trump administration issued executive orders in 2017 to limit waivers to “Buy American” rules and in 2019 to ensure the rules apply to loans, grants, and other federal domestic assistance programs (which they mostly already did).

On its last day in office, the Trump administration issued a final rule to increase the percentage of U.S.-made content that an end product must contain to qualify under “Buy American” rules. The Trump team also increased the price evaluation preference—the premium allowed a U.S. supplier to win a contract over cheaper non-U.S. competitors. The Biden administration is ratcheting up these rules further.

Anderson: What do you think is the most sensible trade policy?

Murphy: No country ever protected its way to prosperity. No country ever saw its industry become more competitive by raising walls against international competition. From my perspective at the country’s largest business organization, I can tell you that American companies are confident they can compete successfully in world markets, but they need a forward-leaning trade policy to help them do so.

Today, we have free-trade agreements with 20 countries, but it’s been 10 years since we added a single new partner to that list. In that time, other countries have inked 100 new trade deals without us. We need to get back in the game: Our standard of living and standing in the world are at stake.