The Congressional Research Service recently issued a paper considering the trade policy implications of President Trump’s “Buy American and Hire American” executive order purporting “to defend our workers, protect our jobs and finally put America first.”
The executive order requires federal agencies to “monitor, enforce, and comply with Buy American Laws, to the extent they apply, and minimize the use of waivers, consistent with applicable law.”
Among other things, the order instructs the Secretary of the Commerce Department and the U.S. Trade Representative to assess the impacts of all free trade agreements and the World Trade Organization’s Government Procurement Agreement (GPA) on the operation of existing “Buy American” legislation and to provide recommendations designed to strengthen the implementation of those laws.
The CRS outlines four possible issues for Congress to consider in this regard:
Open up or restrict government procurement markets?
Opening up procurement to foreign firms allows for greater international competition, providing a government agency with greater choice and often lower-cost or more-efficient options. However, the CRS warns that while restricting procurement to domestic sources supports U.S. firms and workers, it would also have the consequence of reducing competition, which could raise costs for public entities and unintentionally displace jobs in other sectors.
Change U.S. content requirements?
The proportion of U.S. content required in a product in order to qualify as a U.S. good may come under scrutiny, the CRS says. For manufactured goods, “Buy American” regulations set domestic content requirements at 50% U.S. inputs, while policy under other domestic content laws varies, including a 100% U.S.-made requirement for iron, steel, and manufactured goods under Buy America laws. The CRS notes that although some lawmakers have introduced legislation to increase the domestic content requirements, owing to the integrated nature of modern industrial supply chains, especially in North America as a result of NAFTA, determining the domestic content of goods can be a complex undertaking.
Foreign market access for U.S. companies?
By participating in the WTO’s GPA, U.S. companies gain access to the government procurement markets of other participating countries, the CRS states, before cautioning that violating the agreement would subject the U.S. to WTO dispute settlement procedures, and warning that pulling out of the GPA altogether would likely cause harm to many U.S. exporters. In weighing the merits of such a course, the CRS suggests Congress obtain a more complete statistical picture of the economic effects of the GPA and FTA-wide government procurement market to evaluate their costs and benefits to the U.S. economy at large.
As a result of this executive order, the United States may seek to renegotiate its commitments in the GPA or government procurement agreements contained in free trade deals. This could take the form of terminating or reducing some U.S. commitments or seeking further access from trading partners for U.S. suppliers. Either way, the CRS warns that America’s trading partners may well seek concessions of their own in return.
In a separate but related paper published last week, the CRS examined the meaning of “Made in the USA” in the context of trade legislation, pointing out the increasingly problematic nature of the term given that “changes in the structure of manufacturing make it difficult to design government policies that support manufacturing-related value added and employment in the United States.”
By and large, federal supports targeted specifically at manufacturing rest on two implicit premises that have been rendered questionable as a result of developments in the private sector.
- Each manufactured product is assumed to have a single country of origin. The determination of whether a product is American-made is binary; either it was made in the United States or it is an import. This assumption fits uneasily with the global value chains now widely used by manufacturers to combine raw materials, components, services, and intellectual property from multiple countries into a single, finished manufactured good.
- Physical transformation is assumed to be the means by which manufacturing creates economic benefits. Under a variety of statutes, the fact that other activities related to making a product are conducted in the United States is not relevant to the determination of whether the product is made in the United States. This is generally the case even if those activities account for a large proportion of the value of the finished good or of the employment related to the good’s production. Conversely, a good may be treated as U.S.-made if significant parts are of U.S. origin and if the good was transformed in the United States, even if all research, design, software development, and other nonphysical activities related to its production occurred in other countries.
The physical transformation of manufactured goods increasingly is performed by workers not classified as manufacturing workers. Moreover, it appears that a growing share of workers whose jobs are related to manufacturing are employed in economic sectors not directly involved in physical transformation, including business services, software development, and after-sales service. These changes have made it more difficult to identify workers whose jobs are related to manufacturing. Linkages between nonphysical inputs and factory production may not be evident in government statistics, as the software and services may be produced within the manufacturing firm itself or may be purchased from other firms and may be produced by workers in any number of domestic and foreign locations.
The CRS concludes by saying that many federal laws adopted with the goal of supporting manufacturing don’t take into account the increasingly “blurred lines” between manufacturing and other types of economic activity. To the extent policymakers are concerned with maximizing domestic employment or domestic value added, it is becoming increasingly challenging, the CRS says, “to design and enforce effective government policies, as emphasis on the location of physical transformation addresses an aspect of the manufacturing process that is likely to become less important over time.”