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The Pitfalls of Protectionism: Why Biden Should Abandon “Buy American”

In the lead-up to his inauguration, President Biden pledged to reverse course on many of his predecessor’s unwelcome policies. To some extent, he has already done so, having signed a slew of executive orders in just his first month in office. However, when it comes to trade policy, Biden has not as readily corrected the errors of the Trump administration. His adherence to Trump’s misguided trade agenda is reflected in the recent White House “Executive Order on Ensuring the Future Is Made in All of America by All of America’s Workers,” which strengthened the laws requiring the federal government to buy products from U.S.-based companies. Simply put, Biden’s consolidated “Buy American” laws will further ingrain the dangerous protectionism that Trump spearheaded, promoting unsustainable trade barriers over long-term economic gains.

The “Buy American” agenda dates back to 1933, when President Hoover’s Buy American Act first mandated that the federal government prefer the purchase of goods produced at home over those produced abroad. Biden’s executive order, enacted on January 25, goes even further than Trump’s “Buy American” adjustments, which had limited imports and government procurement. Among other aims, Biden’s order seeks to close loopholes by raising the “domestic content threshold” – in other words, the amount of a good that must be produced domestically to meet “Buy American” standards. The order includes stronger enforcement mechanisms for these standards, updating the protocols the federal government must follow to determine whether a product meets the domestic content threshold. It also expands oversight of the waiver system in order to reduce “Buy American” exemptions and, in turn, to minimize the government’s foreign purchases. Additionally, the order increases the price difference, or “price preferences,” above which the federal government is permitted to purchase a foreign product over a U.S.-made one. Under Trump, foreign products constituted under five percent of federal procurements in 2017. President Biden’s executive order attempts to further lower that figure.

These changes are certainly politically expedient. A 2020 poll found that three in four Americans support the “Buy American” platform, and almost half strongly support it. Yet, as well-intentioned or politically savvy as these changes may be, they are not backed by the best available macroeconomic evidence. Rather, they advance the type of protectionism that economists have universally rebuked for decades. As former British Prime Minister Edward Heath put it, “Protectionism is the institutionalization of economic failure.” To his point, the installation of major trade barriers – such as Biden’s toughened “Buy American” policies – has no empirical basis. Indeed, protectionism has historically slowed economic growth by shutting foreign vendors out of domestic markets.

The trade war President Trump waged against China in 2018 is a salient case study of the dangers of protectionism: U.S. import tariffs caused a substantial decline in imports, while retaliatory tariffs on the part of China caused a sharp decline in exports, spelling trouble for the greater American economy. By the end of 2019, the trade war had already cost the U.S. a staggering $134 billion in GDP. Worst of all, Trump’s tariffs failed miserably in their efforts to preserve U.S. jobs, especially in the manufacturing sector. In fact, the tariffs resulted in a loss of up to 245,000 American jobs. Contrary to the claims of its supporters, who insist that protectionism creates jobs by prioritizing domestic producers, it actually hurts economic growth and employment. As economist Thomas Sowell describes, because tariffs raise the prices at which domestic firms sell their products, these firms’ international sales plummet, ultimately costing the domestic economy jobs due to lower profits. While electoral politics were not the sole impetus behind the trade war (particularly in light of U.S. deficit concerns as well as China’s inequitable trade practices and intellectual property theft), it is abundantly clear that Trump’s tariffs backfired.

Even as far back as 1930, protectionism proved economically catastrophic. The notorious Smoot-Hawley tariff – which the original Buy American Act deliberately reinforced three years later – increased tariffs on imported goods to as much as 40 percent, and it is viewed by many as a significant contributor to the Great Depression. In the words of Dartmouth economist Douglas Irwin, while protectionism may not have directly caused the Depression, it certainly made the slump “longer and more painful,” since it caused U.S. trade partners to impose severe retaliatory tariffs. Unsurprisingly, domestic exports suffered due to this retaliation, compounding the economic ramifications of the 1929 stock market crash.

President Biden’s stricter “Buy American” laws function similarly to tariffs in that they largely preclude foreign companies from competing for U.S. procurement sales, yielding the kind of negative economic outcomes that Sowell and Irwin reference. By “locking firms out of global supply chains and shielding them from competition,” these inefficient trade rules kill jobs. Indeed, even the conservative Heritage Foundation criticized President Trump when he tightened “Buy American” policies in 2017, arguing that if the U.S. were to do away with these requirements, the country would gain over 300,000 net jobs.

The United States’ most prominent trading partners, including Canada and Mexico, have legitimate cause for concern over Biden’s executive order. As many observers see it, the order will likely challenge the robust trade relationship that exists between the three USMCA countries. The nations’ supply chains are so deeply intertwined that, in a plea for the Biden administration to rethink its impending order, Canadian Manufacturers & Exporters President Dennis Darby stated, “Excluding each other from our respective government procurement markets could seriously hurt our precarious economic recovery.” The Canadian government lobbied hard – and successfully – to negotiate “Buy American” exemptions with President Obama in 2010, and Biden’s new changes will all but undo these exemptions, straining relations in the process.

Furthermore, Biden’s alleviation of foreign competition allows domestic contractors to hike prices well above global standards, increasing government expenditures and potentially decreasing the quality of government purchases. Taxpayers will end up footing the bill for the higher-cost domestic products that the government must purchase under Biden’s stricter “Buy American” rules. Indeed, with an estimated 5.6 percent markup on domestic procurement goods in 2017, the Peterson Institute for International Economics projected that the Trump administration’s “Buy American” policies cost taxpayers $94 billion. Starting this month, U.S.-based suppliers will be able to charge the federal government as much as 20 percent more than international prices, presaging even higher taxpayer costs in the near future.

Policies that ostensibly seek to protect American jobs will always be popular among voters, so it is no wonder that President Biden has expanded “Buy American.” This is especially true in the midst of a pandemic that has fueled unprecedented job loss and has left millions of Americans desperate for economic relief. Unfortunately, while they may seem prudent on the surface, protectionist “Buy American” regulations will continue to be highly counterproductive in the era of COVID-19. Time and time again, these types of laws have failed to improve economic productivity and save jobs, and they have weakened the United States’ global commercial standing. The president’s renewed emphasis on “Buy American” may also be an attempt to prevent COVID-19 stimulus funds from leaking abroad. But, as The Economist points out, Biden’s planned stimulus package (amounting to $1.9 trillion) is so large that the administration need not worry about the minimal foreign leakage that a reversal of “Buy American” might entail.

If the Biden administration seeks to learn from the failures of its predecessor, it must loosen – not tighten – its protectionist “Buy American” policies. President Biden should reassert the laissez-faire mindset that has long characterized the United States’ internationalist trade policy, particularly on the heels of such disastrous economic decisions as Trump’s trade war with China. In the interests of economic growth, employment, and efficiency, a scaling-back of “Buy American” laws is in order.

Graphic: Mehek Vohra

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