In recent years the U.S. government has become more protectionist (protecting its domestic firms from foreign competition). Last year it even provided billions of dollars to subsidize chip production and other designated products in the U.S., an example of industrial policy (state directed development). The CHIPS Act passed last year will shell out over $200 billion over the next five years to subsidize domestic chip production.
To add insult to injury, the so called “Inflation Reduction Act” may violate World Trade Organization rules: “We have concerns about a number of discriminatory elements in this Inflation Reduction Act which puts requirement for local content, for local production,” Dombrovskis, who also is a European Commission vice president, told Bloomberg in Prague.” EU Is Assessing If US Inflation Act in Breach of WTO Rules – Bloomberg Did we really think that we could cheat and Europe and the rest of the world would just roll over and play dead.
President Biden has proclaimed that these expensive policies are needed to create jobs in American. This is bazar given that we are currently suffering from a labor shortage. Manufacturing output in the U.S. is at an all-time high. U.S. employment in manufacturing has gradually declined in recent decades because our workers have become more productive. But that is surely a good thing, resulting in an increase in our standard of living. President Biden has taken steps to lower our standard of living in order to create American job. Take a deep breath. If we don’t significantly increase legal immigration, you can count on the continuation of long waits on the phone to talk to a real service person.
Where does the “Buy American” impulse come from? It seems that some people see American nationalism as keeping everything at home whatever the cost, while I see it as enjoying the fruits of our largely free society to work and innovate and flourish as we each see fit for the benefit of all.
Several years ago, Ito and I celebrated the 4th of July at the American Embassy in Roma at the invitation of our friend David Zimov, at that time Counselor for Economic Affairs at the U.S. Embassy in Rome. It was really a fun event overflowing with hot dogs and hamburgers. While listening to the Marine Band and waving the little American flags we were all given, I noticed that the flag had been Made in China (clearly tagged). I am guessing that the American nationalists I referred to above were appalled. I, on the other hand, was grateful that my tax dollars were being spent as carefully and wisely as possible—on this occasion at least. https://wcoats.blog/2023/01/22/trade-once-again/
When politicians and pundit refer to trade or supply chains, they invariable mean cross border trade or supply chains. This is a mistake. President Trump recently provided a particularly nonsensical example:
“In Washington, President Trump lambasted corporate America for “these stupid supply chains” and said the pandemic had proven him right on the need to bring factories home.
“We have a supply chain where they’re made in all different parts of the world. And one little piece of the world goes bad and the whole thing is messed up,” he told Fox Business in May. “I said we shouldn’t have supply chains. We should have them all in the United States.” “Coronavirus-globalization-manufacturing”
Trade occurs whenever you sell your labor or whatever you produce and buy what you need from others. Trade starts at your doorstep and without it you would starve to death. Supply chains exist whenever you purchase inputs to whatever you (or the firm you work for) are making from someone else rather than making every component yourself. If you are a carpenter, you buy your tools from someone else.
You might think that you should confine trade and/or associated supply chains to your family or your village for some reason, but you would give up the efficiencies of greater specialization when trading more widely (maybe even across national borders). And such restrictions would lower–potentially significantly lower–your income and standard of living as well as the incomes of your trading partners.
This does not mean that there are no risks in relying on others to produce some of what you want. If there is only one source of what you buy, you risk going without if that source stops producing. But that is rarely the case. I briefly thought it might be for toilet paper in March when the supermarket t-paper shelves were empty for a few weeks. But I bought some on line from China and it was delivered to my door.
Manufacturers whose supply chains have only one source are taking a risk for whatever efficiency they enjoy. Having multiple suppliers or supply options is a form of insurance and is generally wise. But it makes little sense for a Southern California manufacturer who buys some of its inputs from across the border in Mexico to be forced to shift its supply chain to Pennsylvania in order to have it “in the United States.” Transportation costs would be higher and with greater risk of weather or other transportation disruption. On the other hand, relying on the much closer source across a national border has the risk of an unpredictable President imposing a tax (tariff) on imports from Mexico. Our wise constitution prevents him from doing so on interstate commerce.
The uncertainty of today’s world is causing firms to reevaluate the risks of long supply chains. That is prudent, but insisting that everything be produced and purchased within the United States is nonsensical and harmful for everyone involved.