Current Events Economics - General

The shortsightedness of the “Buy American” clause

Many politicians are proposing that a “Buy American” clause be included in the stimulus package.  This is bad idea.  Protecting American jobs from foreign may seem like a good idea to save jobs.  However, if  “Buy American” bill is passed other countries will institute their own protectionist provisions.  In fact, Brazil may challenge the “Buy America” provision at the WTO.

The Washington Post reports, “Nations including China and many in Europe are preparing to spend billions of dollars of taxpayer money on stimulus projects. American companies are angling for a piece of those pies, and retaliatory measures against U.S. companies, executives argue, could significantly complicate those efforts.”

The Wilson Quarterly reviews a paper  by Erik Lindberg (2008) which seeks to answer the following question: why today is Hamburg an economic powerhouse of over 2 million whereas the smaller city of Lübeck only plays a much less significant role in the German economy .  In the 15th century, Hamburg and Lübeck were both prosperous German port cities of a similar size.  “Lübeck connected to the Baltic Sea via the Trave River and Hamburg to the North Sea via the Elbe.  Their divergent fates illustrate the perils of extreme protectionism…In the face of increasing Baltic Sea competition from upstart traders from London and Amsterdam, Lübeck chose to protect its powerful landowners and leading merchant guild …Hamburg, by contrast, encourage trade with Dutch, Flemish, and English merchanges, and even a score of Portuguese Jews were invited to movie in.”

History reveals the perils of protectionism.  Further, even if the “Buy American” clause is intended to be temporary, political interest groups will have an incentive to lobby to make this protectionist philosophy stick in the long term.

Let us call on our politicians to reject the “Buy American” clause in order turn American cities and towns into Hamburgs, and not Lübecks.

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