Who Benefits From Made in America?

When legislation emphasizes Made in America, the goal is more jobs.

But it’s not so easy.

Made in America

The Mandate

Whether looking at the 1933 Buy American Act (BAA), or the 2022 Inflation Reduction Act, or all that came in between, we find a Made in America mandate. Although the laws vary, each encourages U.S. manufacturing. Similarly, for its Made in the USA label, the FTC (Federal Trade Commission) has an “all or virtually all” standard. Slightly different, the rule for clothing and textiles says the fabric needs to be cut, sewn, and created in the U.S.  But the yarn could come from somewhere else. Meanwhile, BAA has a dual mandate:

1. U.S. government agencies have to buy U.S. made goods.
2. At least 50% of the cost of a government purchase should have come from U.S. made inputs.

The Spending

Researchers recently estimated the government’s procurement spending:

The Impact

Trying to quantify the impact of the Made in America requirement for this procurement, they concluded that 50,000 to 100,000 jobs were created. However, our government had to spend somewhere between $111,500 and $137,700 extra per job. A second study concluded that, in 2017, taxpayers spent an extra $94 billion because of government’s Made in America requisites.

In a 2020 Peterson Institute report, researchers told us that Buy American means overpaying. They calculated that for $236 billion of purchases, imports would have saved $68 billion. Taking the next step, they concluded that the annual cost to the U.S. taxpayer could be more than $250,000 for each job that was saved. Their conclusions included the inefficiencies created by purchasing constraints and the price hikes from domestic firms that had less competition.

The Opinions

Adding to the negative sentiment, a majority of 40 eminent economists leaned against Buy American in a Chicago Booth survey. The following graphs summarized their response to this statement:

Federal mandates that government purchases should be “buy American” unless there are exceptional circumstances, such as in the American Recovery and Reinvestment Act of 2009, have a significant positive impact on U.S. manufacturing employment.

:

Our Bottom Line: Comparative Advantage

The economist who first explained comparative advantage, David Ricardo (1772-1823), said each nation should make the goods and services for which it has the lower opportunity cost and import what it does not produce. Because of those imports, consumers would enjoy lower prices and more variety. Benefitting also, exporters have larger markets that supported the efficiencies of economies of scale and ultimately, the entire world becomes more productive.

Although Buy American negates comparative advantage, its downside is tough to see. As economist Milton Friedman has explained, the jobs we save are easy to see. But the sacrifice is invisible.

My sources and more: The NBER has a new paper on Made in America. As the only research I could find that did not entirely slam government’s Buy American requisites, it is worth a look. Meanwhile, other analyses of Made in America were here, here, and here. And finally, surprisingly interesting, this FTC document has examples of its Made in the USA label criteria.