"Buy American" May Not Be American

by HERBERT LONDON June 8, 2017

President Trump asserts with patriotic fervor that his administration stands for America First, a commendable but somewhat ambiguous concept. What gives it meaning is the idea that Americans "buy American." Presumably when facing consumer choices Americans should look for a label that keeps them at home.

The problem with the concept is that it defies an American commitment to the free market - an argument at least as patriotic as America First. Comparative advantage has been a hallmark of trade, notwithstanding many abuses and currency manipulation. Trade is never entirely fair since each of the trading partners seeks an advantage. Yet the market has a mechanism for addressing excesses, such as "dumping."

If there is confusion in the market, it is over production provenance. The Ford, manufactured (or should I say assembled) in the United States has parts from at least 14 nations. Globalization, for better or worse, has changed the nature of trade and the method of manufacturing. We may choose to call a Ford an American car but it is no more American than a Volkswagen assembled in Mississippi. Even when one says I want to buy American because it is good for the country I love, you cannot be sure the product in question doesn't have parts from abroad.

"Buy American" invariably requires an undesirable economic choice. Americans may be willing to pay a premium for a product manufactured here, but that is a choice rarely considered as Walmart's gross sales suggests. Walmart, the nation's largest retailer, accounts for eleven percent of the unfavorable trade balance with a reliance on electronic products manufactured elsewhere. Unless a tariff is imposed on these products, it is unlikely U.S. counterparts can compete on economic terms. That is a reality the Trump position seemingly overlooks.

Ultimately what is good for the nation is not easy to determine. Job loss is a real problem when U.S. companies are unable to compete. Free market economics often overlook the plight of a steel worker - to cite one example - whose company cannot compete against foreign rivals. This individual may be less interested in efficiency than job protection. On the other hand, an unfavorable balance of trade may have a salutary effect on the economy. The allocation of resources based on products from abroad allows the U.S. economy to concentrate on sectors likely to be most productive. Were it not for this internal market allocation, most Americans would be farmers today.

Clearly the free market is imperfect. Many are left behind in the process of rewards and penalties or what Schumpeter described as creative destruction. As I see it, mature economies must put an emphasis on retraining. The idea that an employee will hold the same position throughout his working life is anachronistic. In fact, while trade has resulted in some job loss, the real culprit in this matter is technological advancement. Yet most Americans are not Luddites and any referendum on the matter would favor advancement.

Hence "Buy American" has a nationalistic appeal but is limited as a policy prescription. President Trump is right to reach out to Americans left behind on the pathway to success. Unfortunately, what this headline ignores is the hidden tax that one group in America pays another. Surely taxes are never equitable, but in trade policy, it is often a matter of the poor subsidizing the poor.

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Herbert London is a Senior Fellow at the Manhattan Institute and the President of the London Center for Policy Research. He is the author of the book The Transformational Decade (University Press of America). 

 


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