In recent years, there has been a noticeable shift in academic and policy circles with respect to the government’s role in the economy. Neoliberalism, which argues for minimal government intervention in the marketplace, is under attack due to its inability to address acute societal problems including rising inequality, climate change, and financial crises.
In the United States, there is renewed interest in industrial policy from both political parties to complement the private sector and foster sustainable development. The economics literature has shown that targeted policies can create dynamic public-private partnerships and increase economic vitality. As one key component within a set of industrial policies proven to work, a properly designed public procurement policy can further both economic and national security objectives.
Unfortunately, President Joe Biden's “Made in America” executive order is an overreach that will prove costly to the U.S. and its trading partners. Though the policy will benefit certain groups and is politically efficacious, we contend it is a fundamentally flawed piece of legislation: The government is wielding an ax when a scalpel is needed.
On Jan. 25, Biden issued an executive order seeking to expand and increase enforcement of the Buy American Act of 1933. The Buy American Act and the related 1983 Buy America legislation that focuses on interstate infrastructure projects require that federal public procurement give preference to American products and suppliers. The purported goal of the legislation is to fulfill government purchasing requirements with domestic production, thereby supporting U.S. businesses and workers. Former President Donald Trump also supported this form of protectionism, but Biden’s executive order contains new government regulation and oversight.
The executive order is extensive, but there are several sections worth highlighting. The policy will increase the bid price preference for domestic suppliers. The original Buy American Act states that federal procurement waivers can be considered when the foreign product price is at least 25% lower than the American competitor (of same quality and quantity), the product is not sourced in the U.S., or it is in the public interest. The executive order does not specify how much higher the price differential shall be, although there is a vague allusion to replacing the previous cost estimation procedure with a new value-added method (as yet unexplained).
Such lack of specificity coupled with high levels of bureaucrat discretion increase the likelihood of corruption and rent-seeking behavior. Moreover, the policy will adopt an across-the-board “increase [in] the numerical threshold of the domestic content requirements for end products and construction materials.” Local content requirements, such as other forms of protectionism, are suitable for strategic industries such as defense, communications, and energy but inefficient and counterproductive when used indiscriminately by an advanced economy such as the U.S. These regulations will be overseen by the director of a new Made in America office (within the Office of Management and Budget). Any government agency seeking a waiver from the procurement requirement must submit a detailed justification to the Made in America office.
At a glance, it is easy to see the policy’s appeal through the lens of political economy. Increased government purchases from domestic companies should intuitively lead to more jobs and higher economic growth. And it’s one of the few policies that enjoy broad political support from both Democrats and Republicans. So, what’s not to like in this executive order? Plenty, actually.
In Economics 101, students learn that all forms of protection — these public procurement requirements certainly qualify — result in hidden costs to taxpayers, increased rent-seeking, less innovation from shielded domestic firms, and likely retaliatory actions from foreign governments. A simple analysis of the world public procurement market sheds light on why “Made in America” is short-sighted. U.S. federal procurement contracts totaled $586 billion in 2019. While significant, it is only a fraction of the massive $11 trillion world public procurement market.
The increased trade barriers imposed by the policy will predictably induce foreign governments to ratchet up various forms of protection in their public procurement markets. The forecasted long-term net effect for most U.S. firms is reduced export opportunities abroad, less competition in the domestic market, and higher input costs. American consumers will receive less value per tax dollar. These unintended consequences of the policy are nontrivial but largely neglected by its proponents.
The nonpartisan Government Accountability Office analyzed the federal government’s purchasing data of end-user products and concluded that less than 5% of contracts were awarded to foreign firms. Using a broader measure of procurement that includes intermediate goods, the fraction of sales awarded to foreign firms is a mere 2%. To increase the threshold value of domestic preference further, as the Biden policy aims to do, will offer little marginal benefit but high opportunity costs. American firms will incur significant transaction costs due to the need to restructure supply chains, spend additional resources on administration and program compliance, and engage in ex post monitoring.
The theoretical case against an across-the-board local content policy is corroborated by modeling simulations. An economic impact study from 2017, for example, estimates that removing the federal government’s Buy American mandate would create a net 363,000 jobs due to cost savings and ensuant tax reductions and indirect spending. Moreover, this type of study likely understates the benefits to workers and consumers because international procurement policy is not unilateral and independent. In the spirit of the World Trade Organization’s Agreement on Government Procurement, if the U.S. were to reduce its public procurement protection, foreign governments will tend to lower trade barriers as well. This virtuous cycle of international policy coordination enlarges procurement markets, thereby opening new and larger sales opportunities for U.S. firms.
“Made in America” signals an abdication of America’s leadership to promote free markets and nondiscriminatory commerce. The reputation of the U.S. as a beacon for free trade was already tarnished due to its recent use of tariffs; the executive order will likely set off a cascade of beggar-thy-neighbor policies that could derail decadeslong progress from the General Agreement on Tariffs and Trade and WTO. The U.S., like all countries, can benefit from well-crafted industrial policies to support the private sector and generate sustainable growth. Public procurement policy, when properly targeted and implemented, can serve this function. “Made in America,” however, is too broad and blunt to achieve its ambitious goals.
Travis Taylor ([email protected]) is professor of economics at Christopher Newport University. Murat Yulek (@myulek) is rector of Ostim Technical University and former economist at the IMF and Georgetown University. They are co-editors of the book Designing Public Procurement Policy in Developing Countries and serve on the editorial board of Industrial Policy.
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