This post may be venturing off into “rant” territory, which is largely uncharted water for me. But an article in yesterday’s Wall Street Journal about the negative impacts that the Buy American Clause is having on some of the very businesses it’s supposed to help shows the fallacy of drafting government policy-by-marketing-slogan.
The Journal tells the story of Aquarius Technologies, a Wisconsin based company that makes sewage treatment equipment. Their industry has received billions of dollars in stimulus funds for projects around the country. Yet by their estimates, Aquarius may lose up to 25% of their total business if neighboring Ontario can no longer utilize them, due to Canadian retaliatory protectionist policies - a direct result of the Buy American Clause.
So in the end, a policy designed to help American workers may actually have the opposite impact on a subset of those workers, the companies that employ them and the towns they are from. The reason is that a complex issue, like global supply chains or interconnected commerce in border regions, isn’t easy to deal with using bumper sticker politics. “A strong dollar”, “buy American” or “tough on crime” slogans play well in short issue ads and
President Obama defended the US stimulus package’s ‘Buy American Clause’ yesterday at the Three Amigos Summit in Mexico. The President stressed the limited reach of the clause, the possibility for states and provinces to circumvent the provisions in some cases, and the administration’s interpretation that the policy is legal under WTO rules:
Frankly, it struck me as a rather lackluster endorsement of this controversial provision. Stating openly that he didn’t feel 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 negotiation.
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
As The Atlantic reported earlier this month, the latest import to nearly fall victim to a trade war was Roquefort cheese. In January, the Bush administration “imposed a 300 percent import tax on France’s famous Roquefort cheese, among other luxury food imports from Europe.” This move was a tit-for-tat retaliation for the EU’s ban on US beef containing hormones. Apparently in recent weeks, foodies around the nation were savoring their last servings of Roquefort (as the article describes in strenuous detail that’ll make any reader hungry).
I know this seems like a rather small example of retaliatory protectionist policies. But the script is largely the same whether you are talking about commodities or culinary delights. In fact, the WTO has reported a jump in protectionist policies in recent months, likely as a result of the recession and weak job market’s on politicians’ home soil, which has long been a launching pad for tariffs and trade wars.
As the G-20 Summit officially kicks off today under a typical layer of London fog (comprised of economic storm clouds and tear gas), the topic of protectionist policies are certain to dominate trade discussions. Although I suspect many of the assembled leaders are truly “free traders” caught up in populist political pressure to protect jobs at home, they’ll spend the next few days discussing the recession and how they’ll cope with it on the national and global scale - including through tariffs, subsidies and restrictions.
Like I mentioned in my previous post, details of the Buy American Clause are likely to be another bargaining chip on the table, along with the other 47 recently enacted trade-restricting measures. And although complying with the “Buy American” rules is a still somewhat of a moving target right now, there are some strategies that can help buyers and suppliers minimize the risk and maximize potential opportunities.
What strategies should be implemented in response to Stimulus Package and Buy American provisions?
Test the International Waters: If bidding on any public works projects, it will be very important to solicit quotes from foreign suppliers in an effort to identify US suppliers that are using advantageous pricing and to get around the 25% savings from foreign supplier exception.
Set Expectations & Specifications: The use of specialized materials will either benefit or limit the involvement of US companies, so be sure to carefully set specifications that match your optimal supply base.
Anticipate Capacity Problems: Proactively identify suppliers that may be active in public works packages so that you are not scrambling if their capacity for non-public works projects diminishes.
Once we’ve had time to digest the news coming out of the G-20 Summit, I’ll be sitting down for a round table session on the Buy American Clause with my category manager colleagues in EMEA and APAC. The regulations obviously impact regions, industries and companies in different ways, so the session (which we’ll podcast and blog about here) will attempt to bring together the various perspectives and concerns with an eye on providing actionable advice. Stay tuned…
Mike Petro is the Lead Category Manager for Direct Materials in Ariba’s Global Services Organization. Previously, Mike analyzed supply chain options and competitive pricing for US Steel and Timken Latrobe Steel.
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