"Buy American" - Really?

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I'm watching the 60 minutes episode regarding the "Buy American" aspects of the stimulus package and cannot help but post a comment on the policy. This is a shortsighted policy and it exemplifies the general public's lack of understanding about economics and trade.

By forcing firms to buy American made steel, prices for US steel will rise. The policy eliminates some of the world's largest producers of steel from our markets and removes some of the competitive pressure keeping our steel producers productive and efficient - the same competitive pressure that has led to a resurgence of the US steel industry in the last decade.*

Any microeconomics student will tell you that both of these factors will lead to higher domestic prices. Higher domestic steel prices will decrease the supply of steel intensive products and this will in turn increase the prices of many durable goods. So although this policy may have short run positive effects specific to the domestic steel industry, it has the potential to have much larger and longer lasting costs to the entire economy. On net, the economy, the taxpayer, and the consumer lose.

Many like to argue that one reason to protect domestic industries is that free trade really isn't free - that other countries are playing by a different set of rules and we need to support our domestic industries. But I would ask, why do we care? If China is using its wealth or its citizens' tax dollars to subsidize its steel industry, then what they are basically doing is transferring their wealth to us. We can buy cheap subsidized steel (or cheaper steel from other parts of the world who are trying to compete with China). Caterpillar can build cheaper earth moving equipment. Harley-Davidson can produce cheaper bikes. As the economy turns, builders can use cheaper steel in their buildings. Consumers will buy cheaper washers, dryers, and cars. The money US corporations and consumers save on cheaper steel can go to shareholders, new technologies, and new products. Will the US steel industry be hurt? Yes, but the argument from above is now reversed. The US economy, taxpayer, and consumer stand to benefit by more than what the steel industry loses. On net, this is a win for the US economy.

It is certainly hard to think about the big picture when it’s your husband, wife, or friend who is laid off. But there may be better ways to deal with the problem then protectionist trade policies. “Buy American” will, on net, reduce our GDP and make consumers worse off. So instead, let’s try to conservatively estimate the cost we will likely incur from a “Buy American” policy and use that money to instead create an “Educate Americans” policy where workers who lose their job can receive education and training in other industries and professions or we can invest into new research and development. This way, we are investing into human capital and R&D that have the potential to increase the economic pie and we are not incurring a cost that basically only benefits one industry. Think about this too… what does “Buy American” get us in the long run when the economy recovers... higher steel prices and less efficient steel producers who were protected from their competition?

What will be the reason for government assistance then... bad government policy?

* What's funny about this is that the American steel industry and Nucor are praised during the episode for their resurgence over the last decade. It can be argued that the lack of a bailout of the steel industry over a decade ago and the subsequent bankruptcies of many inefficient steel companies is one of the main reasons for industry's new competitive outlook. Although painful for the people and families associated with the industry at that time, the survival, health, and productivity of the US steel industry today is a direct result.