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November 1, 2009

BUY AMERICAN AND THE STIMULUS FOLLIES

Buy American sounds great, like apple pie. But in the real world, we're learning all over again that it doesn't work very well.

Illustration by Brian Stauffer

At first blush, it seems downright patriotic and commonsensical; a thing with immediate public appeal like mom and apple pie. A Harris Poll at the beginning of the year found that some 84% of Americans supported the idea, perhaps one reason it has proven all but irresistible for politicians. Which is why the much-heralded, or much-hyped—take your pick—$787-billion U.S. stimulus program requires that all those receiving its funding buy American-made materials and parts for their projects.

“The whole purpose of your stimulus package—and it’s the right purpose—is to stop the bleeding of jobs and to create new jobs here in America, not overseas, not in China, not in Europe,” as Dan DiMicco, the chairman, president and CEO of Nucor, puts it. “What we’re saying is, ‘Listen, yes, Buy American benefits the steel industry in the United States. Absolutely.’ But what we’re saying also is: might that concept not also benefit the U.S. economic engine; get it started again?”

You will get no argument from Senator Sherrod Brown, the Democrat from Ohio: “As Congress debated the economy recovery package, it became clear that the American people have been willing to reach deep into their pockets and spend tens of billions of dollars to build roads, repair bridges and construct water and sewer systems,” he has written. “And all that they want is that the work be done by Americans and that the materials they use are made in America. The purpose of buy-America laws is to promote United States manufacturing and encourage new industry—both of which come in handy when a country is trying to put its economy on the right track, maintain global economic leadership and create jobs for the millions of Americans standing in unemployment lines.”

“Who could be against that?” he asks. “Well, some Ivy League economists don’t like it. And the corporate executives of some of America’s largest corporations tell us it will cause a trade war, as they collect million-dollar bonuses while laying off American workers and outsourcing jobs to China and India. These are not people who are about to lose their jobs to bad trade policy. Other than this small, shall we say elite group, you could search far and wide and find almost no one who thinks [it’s] a bad idea.”

Well not exactly Senator. It’s not as easy as that.

A Stifling Idea?

“‘Buy American’ may sound good, but in fact it creates red tape, slows projects, and stifles job creation,” said Thomas J. Donohue, president and CEO of the U.S. Chamber of Commerce, in a September speech. The Chamber is especially anxious to broaden trade with other countries, instead of restricting it at home. “Ninety-five percent of the world’s consumers live outside the United States, and, as the world’s [third] largest exporter, we need to be able to ‘Sell American,’ too,” he said.

In fact, plenty of folks who have been entirely supportive of the stimulus package have turned in the last few months from less than supportive to highly critical of the Buy American restrictions in it. They may support the idea of jump-starting the economy, spending tens of billions of dollars on decrepit infrastructure, energy-efficient retrofitting of public buildings, the creation of new jobs of all kinds and using gobs of steel and aluminum in the process. But they are no longer convinced, and for good reason, that the Buy American restrictions will have any but a negative impact on stimulus spending and the economy.

Buy American, instead of pouring U.S.-made materials into the stimulus program, creating new jobs and opening new, home-grown manufacturing facilities, has mainly just brought the construction stage of the stimulus program to a stumbling stagger. “Nearly seven months after the stimulus plan was passed, only about 12% of the spending portion of the $787 billion package—$ 288 billion is tax cuts—has been given out,” said American Iron and Steel Institute CEO Thomas J. Gibson in an article for a metals trade journal. “Even while stimulus funds were targeted toward infrastructure, little of that money has made its way into the economy.”

Estimates vary widely because the government has, to say the least, not developed much of a tracking system yet. But even the Obama administration’s Council of Economic Advisers, while saying the stimulus is working, also concedes that most of the money spent so far has gone to tax breaks and education in the various states. A bit more than $100 billion, about 13%, of the stimulus package is intended for infrastructure projects. Little of this has been spent yet, in part because contractors and state and local governments were waiting for the Office of Management and Budget to clarify what exactly Buy American means for government and agencies below the federal level.

Commitments, Not Contracts

First off the blocks was to be a variety of so-called “shovel ready” wastewater and clean water programs, to be approved by the Environmental Protection Agency. The EPA has nearly $7 billion to spend on such things. The agency said it had committed maybe $77 million at the end of September. But commitments are not the same as contracts, and the Associated General Contractors, whose members actually build the projects, say it was more like $30 million. In either case, this is not the sort of money that kick-starts an economy.

It is, however, the real world speaking. And the real world of global manufacturing could not so simply accommodate the notion that a single country, even one as vast and productive as the United States, could manufacture all its essentials within its borders. Contractors and governments quickly realized that the manhole covers, pipes, valves and other parts of the standard water treatment project are mostly not now made in the United States. General Electric, to take one prominent example, is a leading manufacturer of water treatment filters, and they are used in projects all over the country. The filters, though, are made in Canada, and at least five water projects are hung up as the local agencies building them apply to the EPA for waivers to the Buy American restriction. The same is true for manhole covers, and pipes and bolts and other parts in other projects from West Virginia to Maine. The EPA, in the middle of September, had received at least 45 waiver requests affecting 50 different parts or projects. It had approved just 14 waivers and denied one. The rest were suspended, dropped, referred to other agencies, or dancing in the bureaucracy.

That bureaucracy had approved waivers for those water treatment plant filters, made only in Canada, resin beads used in a specific type of water treatment filter for Ocean Shores, Washington, and made only in Australia and even coconut fiber mats for a river restoration project in Utah. The Utah Division of Wildlife Resources told the EPA it had surveyed coconut fiber mat makers and could only find the all-natural fiber mats it needed from sources in Sri Lanka and India. They were, however, imported by an outfit in Ogden, Utah, which at least kept a few jobs in Ogden.

Waivers of Great Specificity

Each waiver is product-, project- and site-specific. Meaning if some other Wildlife Resources Department wants to use Sri Lankan fiber mats, it will have to apply to the EPA all over again. This is bureaucratic dancing at its worst.

And it now covers certain cast iron valves, made only in Canada, for the Kennebec Water District in Waterville, Maine. It applies to something called a six-channel rotary sludge press (don’t ask) for the Plymouth Village Sewage District in New Hampshire. That one is only made in Quebec; score another for the Canadians. And finally, there are those iron manhole covers. Twenty-four inches in diameter, spring loaded, and hinged manhole covers for the Auburn Maine Sewage District. These babies are only made by Saint Gobain in France.

Buy American requires stimulus projects to use U.S.-made materials with three exceptions: when there isn’t enough available for the project, when using such materials would increase the total cost of the project by 25% or more, or when the project is covered under existing trade agreements. President Obama has tried to reassure local water districts and public works administrators that there is no real problem since most of the countries that supply the metals and manhole covers we need are covered by World Trade Organization agreements, the North American Free Trade Agreement or some other trade treaty.

But those treaties and agreements are all federal. Local governments have not signed them and are not bound by them. This has had one salutary impact on job creation. It has produced full employment for lawyers who know something about trade laws and construction. Office of Management and Budget is supposed to have clarified all this for localities by the time this article appears.

Even if it does, the impact on the nation’s economy will be hardly dramatic. Last year, the United States spent $100 billion on water treatment projects of all kinds, says Perry Fowler, director, Municipal and Utility Division, Associated General Contractors (AGC). He emphasizes that the stimulus’ $6 billion is important because it creates seed money to finance projects through bonds and other non-federal sources. But for the industry as a whole, it is not earth shaking. The Chamber of Commerce likewise estimates that of the $101 billion in stimulus infrastructure money available, maybe a third, or $37 billion, will be spent on manufactured goods. And of that, no more than 10%, or maybe $3.2 billion, may fall under the Buy American restrictions. Not nothing, but again not really the kind of money that jump starts an economy.

“Buy America has delayed projects and added to their cost to some extent,” says Jim Haughey, chief economist at Reed Construction Data in Norcross, Georgia. “And that is not negligible, but in the grand scheme of things it’s relatively small.”

“[The] EPA has estimated the need [for water projects nationally] at maybe $600 billion over 20 years, just in federal money,” says the AGC’s Fowler. “There have never been regulations like this before, so no one knows how to deal with it. And they add a whole new element of risk to the business. These treatment systems depend on an international, global supply chain. We are hoping people will start to understand the unintended consequences of all this, that Buy American sounds good, but it just isn’t workable.”

And we are not just talking manhole covers.

Northern Exclusions

“As we try to bid on projects, we are being excluded,” says Jayson Myers, president of the Canadian Manufacturers and Exporters. “Structural steel is affected and of course public works, waste water and energy companies as well, along with heating and ventilation. More than 250 companies in Canada tell us they have lost business so far. Waste water and water treatment is a $4 billion market for us and it puts some $6 billion from the U.S. into Canada.

“It is such an integrated market that if you try to exclude materials and products it becomes very difficult,” he says. “Parts and products move back and forth across the border. You really can’t draw a distinction.” Myers could be speaking for the Chinese, the EU and every other major player in the global economy.

The first eye-opening indication that Buy American might get nasty came from the broadband industry and the makers of the bewildering array of electronic products needed to hook the country to the Internet. Motorola, Cisco and Alcatel Lucent, among others, make lots of these components overseas. More than $7 billion in stimulus grants through 2011 were thought to be on the line, so contractors rushed to apply for waivers, this time from the National Telecommunications and Information Administration—which granted a general waiver for equipment. And then the industry sort of said, “oh never mind, too much trouble.”

Comcast, Verizon and AT&T, the biggest network operators, announced they didn’t want the federal money after all. Buy American and other federal rules were just too restrictive, they moaned. And oh, by the way, stringing Internet service to rural communities as anticipated by the Obama administration wouldn’t make them enough money to be worth the bother.

The closer and longer we look at Buy American, the more it seems like one of those nice ideas that has simply been overtaken by events and a global economy that certainly will thrive once again. After all, Buy American requirements have been law since 1933 for federal procurement, were strengthened in the early 1980s and still managed to keep out of the way of economic expansion. The public is all for it in polls. But when they pull out their credit cards they either forget about it or just can’t find the U.S.-made products so easily. More importantly, American consumers often find better value in imports, from Canadian water filters to Japanese automobiles.

Clunkers Prove a Point

This was clear once the final tallies were in for one of the better publicized stimulus programs, the $3 billion cash-for-clunkers effort. It was deemed “wildly successful” by Transportation Secretary Ray LaHood. But of the top 10 new models sold, eight were Toyotas, Hondas, Hyundais and Nissans. Two were Fords. And why not? Besides getting a good car for their money, when Americans buy a Toyota or Nissan, they are still supporting our economy in often hidden ways.

“If you look at the suppliers who make parts and components for the Big Three, well, many of them are also making parts for Hondas and Nissans and other foreign carmakers. So when you buy one of those imports, you’re also supporting those American-based suppliers,” says Mike Stanton, president and CEO of the Association of International Auto Manufacturers, a trade association representing 13 foreign car manufacturers. “And our members have 69 manufacturing facilities, component plants and R&D centers in the U.S., employing around 90,000 American workers, with a payroll of $6.6 billion.”

Buy American has, however, resulted in full employment, not just for lawyers, but also for dueling economists trying to figure out its true impact. Those working for advocates insist it will create jobs; those working for the dubious are sure it will endanger them.

In the real world, the outcome is fairly predictable. The administration will find a way, however slowly, to issue a sufficient number of waivers to respond to angry Canadian neighbors and others. The construction and infrastructure slugs of the stimulus will be spent. The administration will hail it as a boon to the economy and a wild success. Others will remain less wide-eyed.

“The stimulus plan, while helpful in the long run, will probably not provide the bump that many people anticipated for steel construction,” said Gibson at AISI. “Since the stimulus was more of a jobs bill, it will more likely be 2010 when we see contracts for long-span bridges and more sizable building projects get underway with a resulting impact on steel construction. The stimulus was helpful, but it isn’t a panacea for U.S. infrastructure needs or the steel industry.”

“I continue to be fairly positive about the stimulus,” says economist Haughey at Reed Construction Data, “but you know a lot of it is not really stimulus in the sense that it will create something and be sustainable over time. Ten years from now we’ll look back on this and say, ‘Well we spent a lot of money but it didn’t generate anything sustainable.’ Replacing windows and making buildings more efficient is all worthy, but it’s a one-time deal.”