“Buy American” Laws: A Costly Policy Mistake That Hurts Americans

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“Buy American” Laws: A Costly Policy Mistake That Hurts Americans

May 18, 2017 21 min read Download Report
Tori K. Whiting
Research Associate
Tori helps to write, edit, and promote Heritage’s premier annual publication, the Index of Economic Freedom, as a research associate.

Summary

Proponents of domestic content requirements for goods procured by federal, state, or local governments, commonly referred to as “Buy American” laws, argue that these laws promote economic growth and national security and create jobs in sectors like the steel industry. Contrary to these claims, domestic content requirements create additional, costly regulatory burdens for producers, increase costs for American taxpayers, and are unlikely to yield job growth in target industries. Rather than strengthening domestic content requirements, Congress and the Administration should eliminate all such laws currently on the books. Such a move would result in more than 300,000 additional private-sector jobs (net) and contribute $22 billion to U.S. GDP.

Key Takeaways

In his “Buy American, Hire American” executive order, President Trump directed federal agencies to enforce domestic content requirements as strictly as possible.

In addition to the 1933 Buy American Act, there is a host of newer, highly complex, and confusing “Buy America” provisions that burden industry and cost U.S. jobs.

Congress should repeal or amend all domestic content requirements—which would create more than 300,000 additional jobs and increase U.S. GDP by $22 billion.

The Trump Administration has made it clear that the slogan “Buy American, Hire American” will be a cornerstone of its policy agenda. This sentiment was exemplified when the President signed an executive order to that effect in April. The order not only directs federal agencies to comply with and enforce current laws on domestic content requirements, it makes several restrictive changes to current practices regarding government procurement.

The order directs federal agencies to ensure that contractors are not utilizing allegedly dumped products, thereby increasing the difficulty of obtaining domestic content waivers: For iron and steel goods, the order defines “produced in the United States” as the initial melting, as well as coating processes, having taken place in the U.S. This process-based definition, found mostly in more recent “Buy America” laws and provisions (confusingly given the same name, save the absence of the “n”), is much more stringent than the definition found in the Buy American Act of 1933.

For an Administration that claims to support economic growth and job-growth policies, this order has completely missed the mark. Domestic content requirements, like those found in the Buy American Act, the Berry Amendment, and various other laws, result in additional regulatory burdens for producers, and increase costs for American taxpayers. All for little or no gain: The policies are unlikely to stimulate job growth in target industries.

Congress and the Trump Administration should work together to eliminate all existing domestic content requirements. Doing so would create hundreds of thousands of American jobs across the country and contribute billions of dollars to U.S. gross domestic product (GDP).

Overlapping Regulatory Mandates

U.S. law is filled with a myriad of highly complex and confusing domestic content requirements, and the situation is further complicated by varied interpretations of the laws by different government agencies. The regulatory landscape that American businesses must navigate to fulfill their Buy American obligations raises their costs, hurts their profits, holds back employment of American citizens, and reduces the value that taxpayers receive for the dollars invested by the government in infrastructure and other projects.

The various laws and provisions are separated into two categories, those that regulate direct federal government spending, and those that regulate indirect federal government spending, such as federal grant funds to state and local governments. The former, commonly called “Buy American” include: The Buy American Act of 1933, the Trade Agreements Act, and the Berry Amendment. The latter are commonly referred to as “Buy America,” and include a host of laws and provisions related to the Department of Transportation and other agencies. Many of the laws or provisions define “produced or manufactured in America” in a different way, making it extremely cumbersome and expensive for businesses to bid on government contracts while remaining competitive in the world economy.

The Buy American Act

The Buy American Act of 1933[REF] is the best-known of the pieces of legislation that impose domestic content requirements on federal government acquisition. While this specific piece of legislation has been amended a handful of times since its original passage, the act today still establishes a price preference system for domestically manufactured products.

A Nightmare of Complexity

A Nightmare of Complexity

The Trade Agreements Act

The Trade Agreements Act (TAA), passed in 1979, created a method for the U.S. to approve and implement trade agreements negotiated under the Trade Act of 1974. The TAA gives the President the authority to waive the Buy American Act and other domestic content requirements through international agreements.[REF] “[T]he Office of the United States Trade Representative (USTR) has waived the Buy American Act for eligible products from designated countries, making these products in a sense ‘subject to’ the TAA rather than the Buy American Act.”[REF]

The Berry Amendment

The Berry Amendment has existed for Department of Defense procurement for decades, but was codified into law as a result of the 2002 National Defense Authorization Act. This law requires all food, clothing, and tents, as well as certain textiles and hand or measuring tools to be 100 percent grown, reprocessed, reused, or produced in the United States. There are 10 exemptions for this law, including exemptions for procurement that falls below the micro-purchase threshold, items procured outside the U.S. for combat or contingency operations, and in cases when the goods are needed urgently.[REF]

The 2007 National Defense Authorization Act codified into law a requirement for specialty metals that has been around since the beginning of World War II. The specialty-metals restriction prevents the Defense Department from procuring certain end goods or components thereof containing foreign specialty metals. There are seven exemptions to the specialty-metals restriction, including when a noncompliant good is needed for national security reasons, and when noncompliant specialty metals equal less than 2 percent of the total weight of the good.[REF]

Despite these exemptions, when Defense Department procurement for one of these goods is exempt from the Berry Amendment, it could still be subject to the price preference system established under the Buy American Act.

Decreased Choice. Tucked into the 2017 National Defense Authorization Act is a provision that requires the Department of Defense to buy athletic shoes for all incoming service members from domestic sources.[REF] The United States makes less than 1 percent of the 24.3 billion shoes produced worldwide. Previously, the Defense Department provided a stipend to service members so that they could choose the athletic shoes that best met their needs. Athletic shoes vary greatly, and different shoe brands are better for different people. This example of “buying American” robs U.S. service members of the ability to make the best choice for their needs.

Other “Buy America” Laws and Provisions

Before the 1980s, domestic content requirements only applied to procurement conducted specifically by federal agencies. The Surface Transportation Assistance Act of 1982 changed that, as it included provisions that placed domestic content requirements on federal grant funds. The act required state and local governments to use steel, cement, and manufactured products that are “produced in the United States” when using federal funds for transportation infrastructure projects.[REF]

Today, these requirements primarily affect five administrations within the Department of Transportation, but due to the vague definition of “produced in the United States,” each administration interprets the law differently. These variations are incredibly complex and it is difficult for potential contractors to have multiple sets of rules on top of the existing requirements for direct federal procurement under the Buy American Act of 1933. Each of the variations includes waivers if complying with the requirements is inconsistent with the public interest or if the necessary iron, steel, or manufactured products are not available in the United States. The Department of Transportation requirements for five individual administrations are as follows:

  • Federal Highway Administration (FHWA). The FHWA considers an end product “produced in the United States” if domestic content represents 100 percent of the overall cost, but allows minimal use of foreign iron and steel components “if the cost of such materials used does not exceed one-tenth of one percent (0.1 percent) of the total contract cost or $2,500, whichever is greater.”[REF] A waiver to these requirements exists in cases where compliance increases the overall cost of the contract by more than 25 percent. The FHWA also waives the “Buy America” requirement for raw materials used to create basic steel products, allowing primary metal manufacturers to use imported iron ore and other such raw materials. The FHWA uses a process-based definition for iron and steel making with the requirement that the inputs must be “melted and poured” using specific types of furnaces located in the U.S.[REF]
  • Federal Aviation Administration (FAA). The FAA considers an end product “produced in the United States” if domestic content represents 60 percent of the overall cost or if final assembly takes place in the United States. A waiver exists in cases where compliance increases the overall cost of the contract by more than 25 percent.[REF]
  • Federal Transit Administration (FTA). The FTA requires construction materials to be made primarily of U.S. steel or iron but does not define the term further. The FTA defines “produced in the United States” to mean that all manufacturing processes take place in the U.S with all components being of domestic origin, though the subcomponents are not required to be U.S.-made. A waiver exists in cases where compliance increases the overall cost of the contract by more than 25 percent. A waiver also exists for rolling stock, which allows a percentage of the end product to not be U.S.-made so long as the final assembly takes place in the U.S. The percentage of domestic content for rolling stock is set to increase each fiscal year (FY) until 2020, when the requirement will reach 70 percent domestic content. The requirement for FY 2017 is 60 percent.[REF]
  • Federal Railroad Administration (FRA). The FRA requires end products to be 100 percent U.S.-made for contracts that exceed $100,000 and defines “produced in the United States” as end products that are manufactured domestically with all components of U.S. origin. A waiver exists for rolling stock or equipment that cannot be delivered in time or if compliance increases the overall cost of the contract by more than 25 percent.[REF]
  • Amtrak. Amtrak must purchase end products manufactured “substantially” in the U.S. for procurement projects exceeding $1 million. An end product is considered substantially “manufactured in the United States” for Amtrak if the value of domestic content represents more than 50 percent of the total cost.[REF]

Water, Too. As part of the Consolidated Appropriations Act of 2014, Congress included Buy America provisions on federal funds dispersed to states through the Clean Water State Revolving Fund (CWSRF) and the Drinking Water State Revolving Fund (DWSRF).[REF] These requirements were only in place for FY 2014, but Congress also passed the Water Resources Reform and Development Act of 2014, which made the requirements for CWSRF permanent.[REF] While “Buy America” requirements have not been made permanent for DWSRF, provisions have been included in legislation regarding the use of these funds for the past two fiscal years.

Last year, Congress passed the Water Infrastructure Improvements for the Nation (WIIN) Act, which expanded the federal government’s role in funding state and local water infrastructure. The WIIN Act contained a costly provision requiring the use of American-made iron and steel for water infrastructure projects. The provision cannot be waived unless the cost of buying U.S. products raises the overall cost of a project by more than 25 percent, or if the product is not available from U.S. manufacturers.[REF]

The Negative Effects of Domestic Content Requirements

Existing laws and provisions regarding domestic content requirements, as exhibited above, are extremely onerous and complicated burdens. They have three main effects: (1) creating additional regulatory hurdles for producers; (2) costing American taxpayers more than they would otherwise pay for government projects; and (3) they are unlikely to yield job growth in target industries like the steel sector.

Regulatory Burden for Producers. In 2013, Congress was considering a wave of water infrastructure bills that included Buy America provisions. During the debate, 15 trade associations submitted a letter to Congress opposing legislation with such provisions, citing two reasons for their dissent. The first was regarding international supply chains, as many of their member companies produced final goods containing components from around the world. The provisions would prevent these companies from competing for contracts with their current supply chains. The second was a concern about other countries following America’s lead on this issue, which would hinder the ability of domestic companies to bid on foreign government contracts.

Since then, scores of businesses have expressed how the Buy American Act and Buy America provisions affect their ability to compete. A study published by Trade Partnership Worldwide shares the stories of just a few of these businesses.

Canam Group, a Canadian company that supplies custom-made products for the construction industry, has two facilities in the United States supporting 2,100 jobs. Due to the custom nature of the parts that Canam produces, each product requires special machinery, which is expensive. This makes it necessary for each of the company’s four facilities (the remaining two are located in Canada) to specialize in different products. As Trade Partnership Worldwide explains:[REF]

For projects subject to requirements related to using American iron and steel, Canam may choose not to bid at all, since it would require investing in expensive equipment for U.S. facilities when it already has the equipment in Canada.… In these cases, U.S. domestic content rules hurt Canam’s employees in New Hampshire and Maryland as well as American suppliers that provide key components to Canam such as ArcellorMittal, St. Louis Fasteners in Missouri, and Birmingham Fasteners in Alabama.

JCM Industries is a family-owned pipe-fitting manufacturer located in Nash, Texas, employing approximately 140 people in the small town of 3,000. JCM imports partially manufactured products like steel couplings from Robar Industries, a Canadian company. These intermediate goods are then manufactured further to create larger pipe fittings, which are used in the U.S. and exported around the world.[REF] Ron Collins, president of JCM Industries, says that

I consider Canada an extension of the U.S. market and vice versa. We do cross-border business seamlessly, except when governments make business more difficult. The burden of the [American Iron and Steel] paperwork chain is both slowing and reducing the number of project starts.[REF]

Because the company does a great deal of work in the water and sewer sector, it has to deal with the burden of regulations put in place by the Clean Water Act. The American Iron and Steel (AIS) requirements in this act require “complete traceability for products that end up in projects paid for with either Clean Water or Drinking Water State Revolving Funds.” Due to JCM’s complex supply chain, tracking the origin of product components can be incredibly difficult.

NLMK USA is a steel manufacturing company that uses steel slab to make hot-rolled and cold-rolled coil. The company also produces some galvanized steel products, employing approximately 1,100 Americans in Pennsylvania and Indiana. NLMK imports most of its steel slab because the limited amount produced in America does not meet their need.[REF]

Unfortunately, “Buy America provisions can disqualify steel products manufactured from imported slab for U.S. highways, transit, and water projects.”[REF] This has become an even greater problem for companies like NLMK because of expanded domestic content requirements in laws like the WIIN Act. The WIIN Act prohibits federal funds from being “used for a project for the construction, alteration or repair of a public water system unless all of the iron and steel products used in the project are produced in the United States.”[REF]

According to Trade Partnership Worldwide, “If domestic content rules were removed, NLMK could add 25 new jobs in Indiana alone.” The average wage for NLMK jobs is more than $100,000 a year—making these 25 jobs a major boon for residents of the small town of Portage, Indiana.[REF]

Even federal, state, and local governments express concerns about the regulatory burden of domestic content laws. A Government Accountability Office study published in 2010 found that five of 27 federal agencies surveyed reported that Buy American requirements tied to the America Recovery and Reinvestment Act of 2009 caused delays in implementing new projects. Three other agencies reported that Buy American laws could cause delays for the agency. The same study also surveyed various state and local government agencies. Two states and one local agency reported that Buy American requirements caused delays in implementing projects. Three states reported that the regulations could cause delays.[REF]

Increased Costs for Taxpayers. In February 2017, a coalition of 30 business groups submitted a letter to the governor of New York and the state’s legislature expressing serious concerns about potential legislation that would increase domestic content requirements in the state. The proposed measure did not pass, but the coalition’s remarks on the cost of domestic content requirements rings true at the federal level as well.

[Domestic content] requirements undermine manufacturing in the state and limit the ability of New York-based companies to succeed and compete in the global economy. Localization requirements would increase costs for taxpayers and affect hundreds of thousands of New York workers whose jobs rely on the global economy.[REF]

The cost-related effects of the many domestic content requirements currently on the books vary, but there is no doubt that these laws do force American taxpayers to pay more than they would otherwise pay for federal, state, and local projects.

The Buy American Act’s preference system could cost taxpayers between 6 percent and 50 percent more, depending on the agency and type of business bidding on the contract. For example, a contract for $50 million could cost taxpayers between $53 million and $75 million before a foreign bid could be considered.

The cost of the Berry Amendment is a bit more difficult to nail down, but when these goods must be 100 percent grown, reprocessed, reused, or produced in the United States, foreign competitors, and even U.S. companies with facilities located abroad, are not able to compete.

For the many Buy America provisions, the extra cost is fairly consistent at up to 25 percent higher than a lower foreign bid. This means that the same $50 million contract could cost taxpayers as much as $62.5 million before a foreign bid could be considered.

Does Little to Help Job Growth in Target Industries. One of the main arguments in support of domestic content requirements is that these laws help create American jobs. Furthermore, proponents of these laws say that showing preference for American goods is more patriotic because it supports U.S. jobs.

After President Barack Obama signed the American Recovery and Reinvestment Act in 2009, the Economic Policy Institute had this to say about the benefits of Buy American laws:[REF]

The federal government needs to embrace wholeheartedly the goal of creating good jobs in the United States. Including domestic sourcing requirements, like those reflected in the Buy American Act, strengthening enforcement of such requirements, and creating transparency in all aspects of the program will go a long way towards achieving that goal and strengthening the role of government as an engine of economic growth.

Contrary to these claims, there is no positive correlation between increased domestic content requirements and job growth in the industries these policies are meant to help. The U.S. steel-producing industry, often the target industry for domestic content requirements, is an example: In 1980, more than 500,000 Americans were directly employed in the domestic steel industry. Since then, employment has consistently decreased despite the government’s efforts to protect the industry from foreign competition. Approximately 136,000 Americans are directly employed in the steel industry today.[REF]

As detailed above, Congress has enacted many laws in the past four decades that contained domestic content requirements. Chart 1 shows employment in the U.S. steel-producing sector from 1980 to 2016. Employment in the sector has not had an uptick during that entire time, despite the vast array of domestic content requirements and other protectionist measures meant to create steel jobs.

Effects of "Buy American" on Steel-Manufacturing Employment

Meanwhile, 12.8 million Americans owe their jobs to industries that use domestic and foreign steel as a means of production. On top of that, 27.6 million American jobs depend on industries that sell and move American and foreign-made goods.[REF]

More than 40 percent of goods imported into the U.S. are intermediate goods used to produce finished products. The inclusion of capital goods like equipment and machinery boost that percentage to just over 62 percent of all U.S. imports.[REF] This means that more than half of what the U.S. imports, including foreign steel products that complement or compete with domestic steel products, support millions of American jobs like the ones previously mentioned.

The U.S. economy is a job-creating machine, adding between 200,000 and 300,000 new jobs each month. It is not the government’s role to create those jobs directly. The government’s role in job creation is to create a tax, trade, and regulatory environment where private businesses are able to grow and flourish. Domestic content requirements achieve the opposite of this mission and hinder a business’s ability to create jobs.

U.S. Government Should Eliminate All Domestic Content Requirements

A new report found that eliminating all existing domestic content requirements would provide immense benefits to U.S. producers and taxpayers, as well as contribute to significant job growth across the economy.[REF]

Removing domestic content requirements would let businesses spend less money on supplies and compliance, allowing the private sector to increase employment. The move would also increase efficiency, reduce costs, and allow the federal government to complete more projects without increasing funding. All of these things would result in American taxpayers getting more out of their tax dollars and ensure that the government is spending their money wisely.[REF]

Finally, eliminating all domestic content requirements would increase U.S. GDP by $22 billion and create thousands of jobs across the country.[REF] An estimated 363,000 additional jobs would be created as a result of this change, while approximately 57,000 jobs would be lost. Fifty of 51 states (including the District of Columbia) and 430 of 436 congressional districts would experience job increases. For a comprehensive list of employment gains and losses by congressional district, see Appendix Table 1.[REF]

Scrapping “Buy American” Requirements Would Create American Jobs

With that in mind, Congress should start by repealing or amending the following laws:

  • Buy American Act of 1933: Repeal 41 U.S. Code §§ 8301–8305.
  • Berry Amendment (food, clothing, tents, some textiles, and hand or measuring tools): Repeal 10 U.S. Code § 2533(a).
  • Berry Amendment (specialty metals): Repeal 10 U.S. Code § 2533(b).
  • Federal Highway Administration: Repeal 23 U.S. Code § 313.
  • Federal Aviation Administration: Repeal 49 U.S. Code §§ 50101 and 50103.
  • Federal Transit Administration: Repeal 49 U.S. Code § 5323(j).
  • Federal Railroad Administration: Repeal 49 U.S. Code § 24405.
  • Amtrak: Repeal 49 U.S. Code § 24305.
  • WRRDA of 2014: Repeal Public Law 113–121 § 608.
  • WIIN Act: Repeal Public Law 114–322 § 2113.

These laws are just a sampling of the existing laws with domestic content requirements. There are dozens of other requirements codified in law; for a comprehensive list see Appendix Table 2.[REF] (The Appendix list does not include requirements that are not codified in law, like those found in the WIIN Act.)

Domestic content requirements create costly regulatory hurdles for producers, costing American taxpayers more than they would otherwise pay for government projects, and are unlikely to result in job growth in target industries. Rather than strengthening these laws, Congress and the Administration should eliminate all domestic content laws and create an economic environment in which private business can grow and flourish.

Tori K. Whiting is Research Associate in the Center for Free Markets and Regulatory Reform, of the Institute for Economic Freedom, at The Heritage Foundation. Kyle Ferrebee, Kelly Cousoulis, and Michael Marn, members of the Heritage Young Leaders Program, made valuable contributions to this Backgrounder.

Domestic Content Requirements in U.S. Law (Page 1 of 4)

Domestic Content Requirements in U.S. Law (Page 2 of 4)

Domestic Content Requirements in U.S. Law (Page 3 of 4)

Domestic Content Requirements in U.S. Law (Page 4 of 4)

Change in Jobs Due to Scrapping “Buy American” Regulations (Page 1 of 2)

Change in Jobs Due to Scrapping “Buy American” Regulations (Page 2 of 2)

Authors

Tori K. Whiting
Tori Whiting

Research Associate

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