“Buy American” and the Death of Competition

[X5rolls]

Via the Motley Fool -

The title can throw you off but it's not about being patriotic - it's about avoiding protectionism and allowing centralized government to have too much control.

http://www.fool.com/investing/value/...mpetition.aspx

“Buy American” and the Death of Competition



Alyce Lomax
February 4, 2009
Awesome -- here are some more ways we can screw up our economy.
When I heard about the “buy American” provisions in the stimulus package that is moving through Congress, my immediate thought was, “Oh no.”
It’s just one more example of the increasing trend of government trying to plan and control our economic destiny, and the danger of badly botching things looms.

Proud to be an American
Of course the “buy American” ethos seems quite pleasant and solidly patriotic. Trust that many companies have known that for ages, and it’s not too hard to summon your inner cynic when you think of some companies’ marketing campaigns.

Remember the old days of Sam Walton’s Wal-Mart (NYSE: WMT) -- the “Made in the USA” focus was one reason many people shopped there. Our own auto industry knows this, too, and I get particularly cynical there. General Motors (NYSE: GM), Ford (NYSE: F), and Chrysler surely love the fact that many people believe they prove their love for their country by raging all over the highways in giant American monster trucks, and have been known to use related marketing tactics. (Never mind that Toyota (NYSE: TM) and Honda (NYSE: HMC) actually do employ plenty of Americans right here in the U.S., of course.)

I have no problem with “buying American” as a voluntary choice. On the consumer side, if you want to support American-made products, by all means, please do (although admittedly, it gets harder all the time). I often try to do it myself. You will probably pay more, but paying more to support industry in your own country is one of those interesting, even arguably a bit “irrational,” economic decisions consumers make all the time.
What we do with our money might not be as cut-and-dry as simply wanting to pay the cheapest price possible, which certainly makes the study of economics a lot more interesting and complex. I suppose that’s why behavioral economics is fascinating.

Many of our industries have gone overseas for cheap labor and materials, but if consumers direct their dollars in a “buy American” way, these industries may have to rethink their strategies.

For example, ever since scandals regarding Chinese production of things like toys and pet food hit, some consumers started to think twice about country-of-origin labels. Industries must adjust. Look at what Mattel went through last year as it had to issue recall after recall of toys with unacceptable lead content. American parents surely weren’t pleased.

Here come the zombies
Clearly I am no fan of central planning or coercion. That’s why “buy American” as official economic policy strikes me as dangerous. When I wrote about the possibility of a coming economic zombie apocalypse, this sort of thing was on the table as yet another example of artificially propping up noncompetitive companies.

The steel industry was already among those reportedly hoping for a shot in the arm from government stimulus programs as business has plummeted; U.S. Steel apparently lobbied accordingly. The stimulus package that is currently working its way through Congress has a provision that prohibits the purchase of foreign steel or iron for any infrastructure spending that gets government funding through the program. A Senate version adds that any stimulus-funded projects use all American-made materials.

Interestingly, General Electric (NYSE: GE) and Caterpillar (NYSE: CAT) have taken a stand against any such provisions.

Of course this brings to mind protectionism, and also the idea that foreign governments may retaliate by not playing nice with us. As it is, the EU is already reacting with discomfort. And when it comes to China, regardless of how you feel about our trade with that country, we also must remember it is a major U.S. creditor and the fact is, our government has been borrowing heavily.

Meanwhile, many people are bringing up what may be a very salient point since we’ve all been thinking a lot about the Great Depression lately, and that is that protectionism during that time frame helped make the Great Depression so great (in a bad way).

Also note that President Obama acknowledged the dangers of any signals of protectionism, and that he is aware of the possibility of damaging trade wars. We can take some measure of relief that he seems aware of the possible damaging consequences, despite the fact that his own party is pushing for the provisions.

When losers win
Any kind of required favoritism or preferential treatment for some companies or entities over others is far from a free-market policy, and the economic ramifications over the long haul are frightening when you think of how out of whack everything could get when business decision-making is so skewed by random variables.

In keeping with our ill-conceived bailouts of financial institutions, the “buy American” provisions would mean government is once again picking winners and losers and further firing up moral hazard issues. On a very elementary level, I feel this is simply anticompetitive; it could also be another con game in the making. After all, corporate lobbying badly mucks up competition, too.

When it comes to our economic health, a planned economy that picks winners while ignoring economic reality and true competition probably means we’ll all be losers in the end. It’s kind of hard to be patriotic if there is little left to be patriotic about.

[Eric5273]

While I don't agree with the "buy American" idea, I do believe we should protest by not buying products made in countries that have slave labor, child labor, or substandard working conditions.

As an example, I will not buy anything made in Burma.

[JCL]

Many of us in the Great White North have been watching that provision with interest as it makes its way through the legislative process.

I am not sure that everybody really understands what it would mean in practice. It would mean the start of a trade war, at least in some quarters. Nobody would win.

The good news is that Obama has sent several signals that he does not support the provision, so we will see what the final package looks like.

Out of interest:

• 25% of US exports are purchased by Canada
• Canada shipped $6 billion in steel to the US last year. Meanwhile, Canada imported $7.3 billion in steel from the US.
• Trade with Canada is tied to 5.2 million US jobs, from a 2003 study.
• Integrated Canadian-US industries include the automobile industry, the industrial machinery industry, the food industry, and the telecom equipment industry.
• Violation of the North American Free Trade Act would be bad for both countries. NAFTA provisions include guaranteeing that Canadian crude and hydro power flow south.

It will be interesting to watch how it plays out. It is the one of the top stories on our news every day now.