On February 17, with the American economy seemingly in free fall, President Barack Obama signed into law the American Recovery and Reinvestment Act (ARRA), an economic stimulus package worth $787 billion. Buried on page 189 is a short paragraph labeled Section 1605 — “Buy American.” Short though it may be, it is shaping up to be one of the most controversial provisions in the bill.

In principle, the justification for the “Buy American” provision is easy to understand. As the federal government outlays hundreds of billions of dollars to help stimulate the American economy, it would appear to be counterproductive to allow those funds to be used to buy goods manufactured in other countries.

The controversy arises, however, when one considers not only the complications involved in actually implementing Section 1605, but also threats of a global trade war from countries anticipating a negative impact on their economies as a result of a “Buy American” policy.

The concept of “buying American” is not a new one. Laws passed as early as 1875 gave “preferential treatment” to American-made goods — a sentiment manifested in the Buy American Act of 1933, which required that, with some exceptions, any manufactured or unmanufactured good used for public use must have originated in the United States. Since then, free trade agreements like the General Agreement on Tariff and Trade (GATT) and the U.S.-Canada Free Trade Agreement have reduced the scope of the 1933 law and liberalized global trade.

Similar to the 1933 bill, the ARRA “Buy American” provision (Sec. 1605) stipulates the following: “None of the funds appropriated or otherwise made available by this Act may be used for a project or the construction, alteration, maintenance or repair of a public building or public work unless all of the iron, steel and manufactured goods used in the project are produced in the United States.” Like the 1933 bill, the language also allows for some discretion in applying the provision. The head of the federal department or agency involved can waive the provision if applying the provision would not be in the public interest, the materials in question aren’t produced in the United States in reasonably available or sufficient quantities and/or applying the provision would increase the cost of the overall project by more than 25 percent.

Although the provision itself appears to be straightforward, the discretion granted to each federal agency to issue its own guidance on how the law will be applied muddies the waters considerably, thereby making it more difficult for contractors to comply. A quick look at three federal agencies illustrates the point.

Application, Agency by Agency

As of May 22, the Environmental Protection Agency (EPA) waived the “Buy American” clause for de minimis items, defined as “components [that] comprise no more than 5 percent of the total cost of the materials used in and incorporated into a project.”

Issued after meeting with several industry groups, the waiver applies to any EPA projects funded with ARRA money, including projects funded through the Clean Water State Revolving Fund and the Drinking Water State Revolving Fund. This decision frees contractors from the impossible task of having to monitor the country of origin for the thousands of incidental manufactured goods used in a typical project. Other federal agencies have not been as quick to act.

The Federal Highway Administration (FHWA), for example, has the distinction of maintaining the most restrictive and most complicated “Buy American” policies. The FHWA stipulates that all iron, steel and manufactured products must be completely produced in the U.S., from “initial melting and mixing” to coating, and, unlike other agencies, the FHWA does not grant waivers if buying domestic products severely delays or increases the cost of the project. It is difficult to see how these policies support the two fundamental purposes of the stimulus package — namely, efficient use of taxpayer money to improve the nation’s infrastructure and expedient spending to stimulate the economy quickly.

Finally, the Rural Utility Service (RUS) has yet to issue any firm guidelines for the provision, preferring to approve products on a case-by-case basis. As might be expected, gaining certification can be a time-consuming and therefore costly process.

Proponents

Despite its problems, “Buy American” has its merits and supporters. The basic idea is that if American taxpayers are financing the $787 billion stimulus, they should be the ones reaping the benefits. According to a recent survey, this sentiment is shared by 86 percent of the population. Proponents also argue that such protection for American manufacturers is necessary to counter similar protections provided to their European counterparts. Economist Robert Scott, for example, notes that another foreign competitor, China, spent more than $15 billion on energy subsidies in 2007. “When domestic industries have been injured by unfair trade practices, protecting them is good policy,” says Scott. Put simply, free trade must be accompanied by fair trade; otherwise domestic companies will continue to outsource labor, while the American worker ends up footing the bill.

Opponents

Although the “Buy American” provision was intended to maximize the amount of stimulus money that would support American businesses and workers, thousands of U.S. firms have already been negatively impacted. A June 2009 New York Times article noted that a Pennsylvania company, Duferco Farrel, was forced to cut 600 jobs in that state because some of its products are partially manufactured in Canada, and as a result, it could not supply any of the ARRA-funded projects. This result is, unfortunately, being repeated nationwide.

The cost of the “Buy American” provision can also be reckoned in terms of the time and resources contractors must expend either deciphering agency-by-agency guidance on the terms of the provision to determine if they are in compliance or operating in the vacuum of no guidance at all. On June 10, the executive director of the Texas Rural Water Association testified before a House committee hearing that “some type of guidance from the Department [of Agriculture] is desperately needed.” In either situation, projects are delayed or abandoned, preventing the stimulus package from being fully effective.

A Historical Perspective

As the economy soured in the fall of 2008, politicians on Capitol Hill and pundits at news desks across the nation could not help but compare this financial meltdown to the most infamous of financial meltdowns, the Great Depression. The 1930s economic collapse inspired a wave of economic nationalism, giving rise to the Smoot-Hawley Tariff, which in 1930 increased tariffs to unprecedented levels. Similar tariffs from American trading partners soon followed.

Subsequently, by 1932 American exports had fallen to $390 million from a high of $1.3 billion in 1929; global trade fell by 66 percent.

Although the economic situations are not perfectly analogous, the growing international criticism of the “Buy American” provision of ARRA should serve as a reminder of the negative effects of 1930s protectionism. Canada, the United States’ largest trading partner, has already passed legislation (June 5) that “limit[s] government procurement from abroad to countries that themselves do not bar Canadian companies from such competition.” The European Union and the United Kingdom have threatened similar policies. It is this aspect of the “Buy American” controversy that is perhaps the most disturbing.

If a new wave of protectionist global trade takes hold, the effect could cost American businesses billions in lost trade.
While discordant voices continue to debate the pros and cons of “Buy American,” a definitive solution remains elusive. Until one is found, NUCA will make every effort to support its members with as many resources as it can to help them navigate the uncharted waters surrounding the provision’s implementation on utility construction projects.

PJ Tabit is a NUCA Government Relations Intern and a senior at the University of Scranton in Scranton, Pa., double-majoring in Political Science and Philosophy.