“Buy American”: Path to an Economic Train Wreck

Commuters on Washington, D.C.’s Metro system may finally have something to look forward to on their commutes other than broken escalators and single-tracking. By 2014, Metro plans on introducing state-of-the-art new rail cars that include LCD screens and ergonomic designs.

While these new features may sound exciting, the cost is not. At over $2 million per car, Metro’s order comes to around $886 million. Why the big bucks? In part it is because of “buy American” clauses that Metro activated when it tapped into a $300 million federal matching grant for mass transit.

Because of these protectionist provisions, Kawasaki (the maker of the new 7000-series cars) is now required to produce 60 percent of the cars in the United States. This means that Kawasaki will ship the components from Japan to a factory in Nebraska for assembly—all at the expense of taxpayers in Virginia, D.C., and Maryland.

These provisions require states or localities that tap into this federal spending to purchase a certain percentage of their equipment from American companies. While they ostensibly help American business, in reality they subsidize specific industries by reducing competitiveness and raising costs. “Buy American” clauses are more effective at pandering to domestic special interests, such as manufacturing and trade unions, than they are at spurring economic growth.

Ultimately, these provisions end up hurting U.S. exporters, because they damage trade relations with our biggest trading partners. Canadian municipalities infamously began passing “do not buy American” legislation to shut out U.S. imports. Europe also threatened to raise tariffs on U.S. imports in response to protectionist clauses in the Obama Administration’s 2009 stimulus package.

Consumers and taxpayers are the ones who lose out the most in all this tit-for-tat. In the end, “Buy American” clauses are an economic train wreck, and policymakers should know that protectionism will not get the economy out of neutral.