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posted on 01 May 2017

Buy American And Lose America - Unintended Consequences

Written by , Difference Group

Recently, President Trump signed his “Buy American, Hire American" executive order. Ironically, while the stated goal is to put “America First", the White House may actually subsidize old industries and undermine innovation.

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Recently, President Trump traveled to Wisconsin to sign the “Buy American, Hire American" executive order, which seeks to crack down on fraud and abuse of the skilled worker (H-1B) visa program.

Then, he traveled to Kenosha, Wisconsin, to sign the second part of the order, which calls for US government agencies to give preference to domestically produced products and for a 220-day study of US trade agreements that grant foreign companies the right to be treated as domestic companies.

The ceremony took place at the headquarters of Snap-on, a tool company. With applause from its employees, Trump said that his executive order would “minimize the use of waivers and maximize made-in-America content in all federal projects. In particular, the administration would crack down on “companies that used dumped steel to take work away from workers like you".

But the order was also about domestic politics and the White House’s internal strife. And questions lingers about its economic implications.

The politics of “Buy American, Hire American"

When Trump arrived in the White House, some 45 percent of Americans approved the way he was handling his job as president, and another 45 percent disapproved. Today, almost 55 percent disapprove his performance, according to Gallup.

Moreover, some polls in the swing states, such as Wisconsin, indicated his approval ratings were under water. Clearly, it was high time for Trump to be seen as delivering his campaign pledges to American people.

There is also an internal White House angle to the story. Kenosha is a swing county that just happens to be the hometown of Trump’s chief of staff Reince Priebus, former chair of the Republican National Committee (RNC). Through the spring, the Trump loyalists have been dismayed by Priebus’s influence and alleged that his loyalties are to the RNC, and not to the president.

Trump could have picked many locations to showcase his executive order. Yet, the fact that he signed it in Kenosha, Wisconsin, suggests that he needs the RNC and a unified Republican Party to eventually undermine the ObamaCare (Patient Protection and Affordable Care Act), to launch the impending “massive tax cuts" and several other stated reforms.

The economics of “Buy American, Hire American"

Soon as Trump signed his executive order, it was criticized by Silicon Valley behemoths whose global success is predicated on high-skill foreign employees in America.

It also divided the US Chamber of Commerce and other business lobbyists, who believe that the H-1B needs changes, but should not be scrapped. The US should not “close the door on high-skilled workers from around the world who can contribute to American businesses’ growth and expansion", they argue.

In economic terms, the “Buy American, Hire American" executive order is very much in line with the interests of the US steel industry, which has been a great beneficiary of “Buy American" legislation for decades.

It was also much supported by Trump’s trade adviser Dan DiMicco, former CEO of US steel giant Nucor, and Director of his National Trade Council Peter Navarro, a longtime supporter of US steel interests.

Indeed, the executive order can be seen as an effort to subsidize US steel industry as Chinese imports account for 25 percent of the US market. In this view, Trump’s proposed $1 trillion infrastructure initiative will boost steel and iron - which the White House would like to benefit mainly US interests, even against international agreements.

Jobs and value matter

According to US government data, in 2014, the iron and steel industry employed some 150,000 people generating some $113 billion in value. In turn, US high-tech industries employed some 17 million workers (12% of total employment) but contributed $7.1 trillion in terms of output (23% of total).

In modern history, advanced economies specialize in value-added industries, which require greater knowledge and productivity, while less-advanced countries seek catch-up growth through low-margin, low-value industries. The US is no exception, as evidenced by data from steel and knowledge industries.

Ironically, government policies that promote less-advanced sectors in the US economy may rally US steel stocks but risk harming America’s advanced industries, while alienating major US trade partners. Despite “America First" pledges, they may leave America second across attractive industries over time.

This article was adapted from a slightly shorter commentary released by China Daily 26 April 2017.

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