Trade Cases

Leibowitz: Buy American’s Untold Complications

Written by Lewis Leibowitz

President Biden devoted a significant portion of his State of the Union address earlier this month on Buy American issues. As on most issues, “the devil is in the details,” but his general sentiment is clear. America, he believes, has sent jobs and wealth overseas by allowing Americans to buy imported products. This is a debatable proposition, but its current popularity is undeniable.

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So, the issue of Buy American has untold complications, which is why we have in this country, and around the world, lawyers and policymakers that practice “government contracts” law. They will certainly prosper. Unfortunately, time and space do not permit a full dive into the complexities. But, trust me—they are present.

I want to focus on one issue in particular that is driving much of the debate on Buy American. In forcing customers to buy domestically produced products, which should come first: increasing supply of domestically produced articles, or increasing demand? This is a classic chicken-and-egg dilemma. Clearly, there are gradations, and it’s important to do both. 

President Biden specifically named lumber, glass, drywall, and fiber-optic cable as “construction materials” that would be covered by enhanced Buy American requirements. These requirements already include iron, steel, and certain other products. However, many products that were once made in America are no longer available here. And many other products never were made here. The Buy American rules permit procuring agencies to grant waivers to the rules if products are not available at all, or if they cost more than import competition. Those waiver standards have been made more difficult to meet during the Biden administration, and procedural rules have been put in place to make it harder, and more public, for government agencies to grant waivers.

It is ironic that among the first Federal Register notices concerning Buy American rules was a “blanket waiver,” issued last week, for construction materials in electric vehicle (EV) charging equipment, effective until July 1, 2024. The waiver means that the Buy American requirements do not apply to all construction materials for EV chargers manufactured in the US on or before mid-2024. The waiver continues after July 1, 2024, for EV chargers where domestic content is at least 55%. There is no end date for this waiver, although the Federal Highway Administration has committed to review the waiver after five years.

This waiver was explained by the need to hurry up and install EV chargers. The notice published on Feb. 21 goes into great detail regarding the numerous issues involved in making Buy American policy. The notice responds to extensive public comments about iron and steel content and other products incorporated in EV chargers. And the final waiver is narrower in several respects than the proposed waiver published last year.

The broad policy issue is whether the beefed-up Buy American requirements do more harm than good. Designing a waiver with a phase-out period before the 55% domestic content requirement become effective with production after July 1, 2024, suggests a degree of confidence that American industry will adjust its manufacturing processes to comply, when the initial rush to buy charging stations may already be on the wane. The private market will create demand for products far more significant than government purchases of charging stations. 

A number of recent articles for and against the enhanced requirements make predictable arguments about the pros and cons of the tightened Buy American provisions. Those approving of the increased requirements argue that American industry and workers have been victims of increased foreign procurement by federal and state governments, and that the inconvenience of the stricter requirements is payback for the years in which globalization led to outsourcing of American jobs.

Those who oppose the requirements argue that governments should, like all savvy consumers, be able to buy the best product at the best price. Tightening Buy American requirements will increase costs and delay projects, further increasing the risks of climate change and other external costs. 

These are perpetual debates that change very few minds. The Biden administration has come out in favor of increased Buy American requirements, as the Trump administration did. They play up the fairness to workers of Buy American requirements, but, to be fair, the government has always known that the issue has two sides. For most Buy American requirements (iron and steel being a notable exception), the usual consequence of failing to meet the requirements is not a prohibition on buying the product, but a price penalty—usually 6%, but that is likely to increase. So the administration even now implicitly admits that the opponents have a point. The EV charger waiver shows that, where there is a documented need for speed in developing infrastructure, the formal rules should and will bend a bit. 

As economists Gary Hufbauer and Megan Hogan of the Peterson Institute for International Economics wrote recently, a survey of the cost increases from Buy American requirements during the Great Recession of 2008-09 shows that steel costs for water and highway projects increased 40% as a result of Buy American requirements. That may be too much to deal with in the much larger infrastructure bill passed in 2021, which so far has not resulted in many finished projects. New Buy American requirements play a role in both cost increases and delays. 

Clearly, Buy American requirements and other protectionist policies, including China Section 301 tariffs and Section 232 import restrictions on steel and aluminum, are popular now. They are incentives to foreign companies to build or expand US projects. But that has limits too—the world market is much larger than the United States, and free trade agreements (and the WTO Government Procurement Agreement), which are already on the books, will make it easier for companies to participate in US projects from foreign locations. 

If domestic requirements cause substantial delays in important projects because American producers are not yet ready to supply every product, and drive costs through the roof due to decreased competition, their popularity may be short-lived. The administration is watching this carefully, and their rhetoric, such as the State of the Union address, does not always match what they do on a case by case basis. A politically sensitive administration will certainly pay close attention to this phenomenon. It is important to pay close attention to what it does as well as what it says.

Lewis Leibowitz 

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Lewis Leibowitz, SMU Contributor

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