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As we’ve discussed before, the recently enacted ‘Buy American’ clause was expected to have global ramifications if the proposed measures to supply public sector stimulus projects using domestically produced steel came to fruition. As we expected, the Buy American clause has been modified as the US was pounded by pushback from other nations. But, even after scaling back the restrictions somewhat, they have alienated several key trading partners and kicked off a small, but potentially growing, trade war on multiple fronts.
Japan. Last week, Japan officially objected to a pending appropriations bill, which would mandate that only fleet vehicles made by The Big Three be purchased with the funds. As the Japanese rightly point out, “if it limits it to just the three, this violates the World Trade Organization’s fundamental principle of non-discrimination.” (And of course, this ‘Buy American’ requirement ignores the complex web of automotive OEMs and their suppliers, since many “foreign” cars are made on US soil with American parts and labor. But, that’s an argument for another post.)
China. In an unlikely turn of events, China recently launched a formal investigation into possible dumping of U.S. produced electrical steel products into China. The announced investigation by China’s Ministry of Commerce appears to be a direct retaliation of a recent decision by the US International Trade Commission (ITC) in favor of siding with US producers of oil country tubular goods against imports from China. The Chinese accusations of dumping of US produced steel into China will not likely be considered seriously since an estimated 18 of China’s top 20 steelmakers are at least partially government-owned and receive partial subsidies by the Chinese government. But the move still signals a resistance by the Chinese to US protectionist policies.
Canada. Finally, on a far more positive note for free trade, Canada is considering opening up their government procurement contracts to American firms. The move is a conciliatory measure, aimed at bringing Canadian companies back into the fold on ‘Buy American’ clause stimulus funds. While the ends (free trade) may be positive, do they justify the means (tit-for-tat trade war)? And will all of the Canadian Provinces go along with Ottawa’s plans?
The take away is that all buyers, even those that do not purchase public sector goods directly impacted by the Buy American clause, should keep an eye on these developments and the potential ramifications on the costs of international trade. It’s an ever shifting balance, but these multi-lateral fights can introduce price volatility and risk in the supply chain.
Mike Petro is the Lead Category Manager for North America in Ariba’s Global Services Organization. Previously, Mike analyzed supply chain options and competitive pricing for US Steel and Timken Latrobe Steel.
7 responses so far ↓
1 JeffH // Jul 29, 2009 at 9:16 am
Many foreign cars may be made on American soil with American labor, but the profits still go back to foreign countries and the taxes those compnaies pay are paid to a foreign government. If my tax dollars are being spent by my government, I want the profits to go to companies headquartered in my country and the taxes on the profits to be paid back to my government.
2 Kevin Cornish // Jul 30, 2009 at 12:38 am
Really interesting article, we should connect as I’ve just started a new blog focused on risk in the supply chain (www.atrisk.net). Please let me know what you think.
3 Robert Gotsch // Jul 30, 2009 at 8:59 am
I support the de-globalization economic business model. The ideal results of this model are: produce locally, sell nationally, export globally to customers that don’t produce your product locally.
Henry Ford gave us the business model which launced the industrial revolution in the USA. Establish regional manufacturing plants supported by local suppliers, fabricators, and component assemblers in the region. Canada has applied this model concerning US product. For example, Chrysler operated the 5th Ave plant in Windsor, Ont and sold the product in Canada and imported the product to the US. Proctor & Gamble operated a plant outside of Toronto employing Canadians and selling to the Canadian market. Woolco operated retail stores in Canada as a Canadian Corporation local employing Canadians and selling to the local Canadian market.
Japan is complaining about US not buying Japanese steel. Where were the complaints from US businesses and unions when it was less expensive 30 years ago to buy steel from the “new” Japan Inc plants then the US Steel plants which were 30+ years old then. It appears that US manufacturers in the steel and textile businesses operated with a “harvest mentality”. Run the plant until it breaks down, fix it and run it again and continue fixing it until you are faced with the decision that the business does not support facility replacement because business is down due to customers looking to foreign imports, and it is time to “close shop”.
If Sony wishes to sell home electronics to the US market, then Sony should have regional manufacturing plants in the US market employing US citizens with a company supported health plan. These employed US citizens are consumers and taxpayers which should make the politicians “happy”.
Toyota, Mercedes, Kia, Michelon, and others which you can name have adopted this business practice.
UK has recently opened a battery plant to supply Japan Inc vehicles assembled locally. The cost justified it was less expensive to have a local manufacturing facility for the plant than to import from Japan and have capital tied up in long lead time orders and cash turnaround.
If each country adopted the De-globalization Model, they would provide increase the employment to their citizens while enabling them to become product consumers and taxpayers.
An additional thought from the Green point of
view concerned with carbon footprints: The fuel consumed by the world container ship fleet is equivalent to the fuel consumed by the 8th largest country in the world. Add to that the fuel consumed by the truckers hauling cross country from the Ports to the local market.
The De-globalization Economic Model needs to be rethought by our corporate and political leaders and stimulus packages should be offered by the US Government to the Economic Development Agencies of their states and local government to recruit off shore manufacturers wishing to sell their product in the US. The “offer they can’t refuse” hook in the package is, the eco-stimulus Fed Funds will be used to build the manufacturing/assembly plants on local US soil to the manufacturers specs, and then contracted to the offshore manufacturer on a sale/lease back program.
The best of all worlds for the offshore supplier, the US citizen/employee/taxpayer/voter, and the US Government for reducing the unemployment rate, providing an opportunity for US jobs, and providing the means to allow offshore companies access to the US market.
What say you?
4 Kevin McHenry // Jul 30, 2009 at 10:53 am
Robert,
I like your ideas.
What percentage do you give that any of them will be fully implemented and thus have a meaningful effect.
Thanks,
Kevin
5 Dick Locke // Aug 2, 2009 at 11:25 pm
JeffH, the companies making cars in the US are incorporated in the US, even if their stock is owned by a company in another country. They are taxed on their US profits just as any other corporation operating in the US is. The IRS is pretty diligent about these things.
6 Supply Excellence — Obama Defends the ‘Buy American Clause’ // Aug 11, 2009 at 12:34 am
[...] the Buy American Clause was necessary (but was not worth going to the mat over) and that there are potential avenues around it for Canadian Provinces signals that this protectionist measure is still up for [...]
7 James H. Murphy // Aug 18, 2009 at 3:05 pm
Dire predictions about “Buy American” are inconsistent with both our current trade deficit and more than a hundred years of experience with real trade protection. The United States is currently a trade deficit nation. We import more than we export. We lose more jobs to imports than we gain from exports. Moreover, the jobs we lose pay better than the jobs we gain. Japan, China, and Canada are against “Buy American” because they have staked their economic well being on exports to the United States and therefore risk getting slaughtered if the US turns to real trade protection. But that would be a good thing for most US citizens because after a short term pain due to the transition of production back here incomes would grow faster than prices would rise. Likewise our economic history suggests a “Buy American” expanded to full tariff protection would be a good thing.
In the mythical world of free traders the US was a free trade country until diverted to protection by the Smoot-Hawley tariffs in 1931. That view is inconsistent with history. The fact is that during a long period of trade protection the US ascended to the economic high from which it has descended during a short period of free trade. Before Smoot-Hawley raised tariffs to just under 60 percent they were already 40 percent. Depression protectionism was much less dramatic than claimed. At the time America had been the most protectionist country in the world for more than a hundred very prosperous years. After Smoot-Hawley, trade declined from 6 percent of GDP to 2 percent. Too small a decline to justify the boogieman status free traders have given it. Smoot-Hawley did what it was intended to do. It kept us a net exporter throughout the Great Depression and protected jobs from the dumping of foreign goods. US trade protection began in 1828 with the “Tariff of Abomination” that was the highest tariffs we have ever had. Higher even, than the Smoot-Hawley tariffs of a hundred years latter. We only began moving to free trade after World War II and did not really become a free trade country until 1973 when US real incomes peaked and are down since.
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