As part of the stimulus package, The House has written rules that only U.S Steel manufactured in the U.S can be used in any of the construction projects. The Senate has gone even further with rules that any machinery used in constructing anything that receives stimulus money has to be American made (I don't even know if you can buy American machinery for a lot of that).
While I can see that many Americans may think this sounds good, it has two major problems.
1.It could spark off a worldwide trade war (Hence the title of this diary Smoot-Hawley II).
2.It raises the costs of the projects meaning that less can be constructed.
1.I'm a forth year economics student and no doubt some here will say that I've caught the 'free trade disease' (support for free trade is nearly universal among economists). Fine, but comparative advantage is pretty well an established 'law' in economics as there is going to be:
http://en.wikipedia.org/...
Leaving aside the theoretical arguments though, let's look at the bottom line. While nobody is suggesting all trade will dissapear, (although trade fell sharply during the Great Depression), regulations like this can spark a world wide trade war, as other countries go protectionist to 'protect' their local industries. That's great for those who benefit, but terrible for those whose jobs rely on trade. The numbers I've heard are that there are 7 million Americans whose jobs are tied to trade with Canada alone. (Canada is the U.S' largest trading partner).
If you try and protect you're industries, we'll probably try and do the same, and this could wind up with massive layoffs and dislocation.
So, you might be thinking, "we don't need trade, we can have all our jobs at home". That's known as autarky. http://en.wikipedia.org/...
While I've not seen any recent studies, I've read of a couple studies of Spain in the early 1950s when Franco engaged in such a policy that showed that Spanish GDP was 40% lower than it would have been with open trade.
The reason gets back to comparative advantage.
2.This leads to the second point, insisting on 'buy American' can raise the costs of the projects. First, the Canadian and American steel industries are completely entangled, and having the American manufacturers use only American produced inputs for the steel would likely mean they would have to develop new purchasing software, there might be delays in hiring and training people to manufacture the steel and so on...
Secondly, as I said, the U.S Senate plan gets even more ridiculous, with demands that only U.S machinery can be used in any production. I don't even know if all of the machinery is manufactured in the U.S. If not, I can't imagine any company starting up to get into very expensive machinery manufacturing just to take part in this one stimulus package. And if they did, again the delays would be very lengthy.
There was a report on the CBC that a bridge in California ultimately cost $400 million more than it would have otherwise because of a 'buy American' policy. Again, I don't know how accurate that is in reality, because government construction projects often go overbudget, and blaming a 'buy American' policy seems like a convenient scapegoat, but I have no doubt it did add to the cost, and probably significantly.
I can understand the emotional appeal of 'buy American' but it is shortsighted in terms of the benefits, and potentially very damaging in the long term costs (Smoot-Hawley). Remember also that Lou Dobbs is a big fan of 'buy American' and consider how sickening it is to be on his side.