In response to protectionist populism, the recently passed US economic stimulus bill included a controversial “Buy American” Clause. The rule, which was watered down from its original language, requires that all Steel, Iron, and “Manufactured Goods” used for stimulus backed “public works” projects be produced in America unless:

• Quality or quantity from US suppliers is insufficient
• Cost of US-produced goods make the total project cost (not just the raw material costs) more than 25% above the cost if foreign goods are used
• Previously existing trade agreements require interpretation

There is considerable amount of uncertainty in a number of areas, including the definition of ‘manufactured goods’, the classification of goods produced in the US from foreign raw materials, and the definition of a ‘public works’ projects. For example, let’s say Metals USA supplies steel plates used in bridge construction, but the steel is supplied by Oregon Steel, which is owned by Russian Company Evraz. How do they know if plate was produced in the US or Russia?

Obviously, the potential global repercussions here are tremendous. We’re already hearing numerous complaints by global trading partners and threats of Trade Wars with the US, as my colleague Justin Fogarty highlighted earlier this week. The tit-for-tat retaliatory policies are gaining momentum leading up to the April 2nd G-20 meeting, where protectionism is certain to be a hot topic of contention. Will the G-20 cool or stoke the protectionist fires burning in their homelands? Will the Buy American clause be a chip on the bargaining table along with the 47 recently enacted “trade restricting measures”?

In an interesting move, many US companies that typically export their goods are now publicly fighting against the Buy American Clause for fear that they will ultimately be hurt by the very legislature that was designed to create more jobs in the US. Companies/groups fighting the clause include Caterpillar (75% of their new equipment and motors go overseas), GE, UTC, and the US Chamber of Commerce. So it’s not exactly an anti-globalization, anarchist movement fighting the clause. These are massive US based companies that feel the blowback from protectionist policies in their supply chains and consumer markets.

It’s important to note that the Buy American Clause is still evolving, and doing so in the broader context of a global recession and the resulting increase in protectionist policies. In other words, it will likely change before the new provisions begin to go into effect later this year.

In the mean time, Part 2 of my post will go into strategies for coping with the Buy American Clause so you can minimize the impact OR capitalize on opportunities in the coming months. We are also planning a roundtable discussion with raw materials category managers from EMEA, APAC and myself representing North America, in order for us to dig deeper into the impacts of this policy.

For those of you in direct materials who have enjoyed the relative quiet and low prices of the last few months…get ready. Things are about to get interesting again as we cope with the changing global trade landscape.

Mike Petro is the Senior Category Manager for Metals in Ariba’s Global Services Organization. Previously, Mike analyzed supply chain options and competitive pricing for US Steel and Timken Latrobe Steel.