Campaign for New Restrictions

Georgia, Tennessee and Colorado provide the most recent examples of the application of restrictions on imports. In each case, the state highway department has imposed within the last year either a flat prohibition on the procurement of foreign goods or has saddled importers with extra and unreasonable administrative burdens. Some observers maintain that this latest flurry of Buy American activity can be traced to a decision last year by the Federal Highway Administration to withdraw an earlier unimplemented directive to the states not to adopt Buy American policies beyond the Federal government's own restriction (which as a general rule allows domestic suppliers a six percent cost differential). Since the FHA action, Georgia and Tennessee have put Buy American policies into force administratively, and similar moves are reportedly under active consideration in Oklahoma and Arkansas. Colorado has adopted a sweeping restriction, which specifies that all materials incorporated in highway projects must be produced or manufactured in the United States.

In addition to this administrative activity, an unprecedented number of Buy American bills have been introduced in the state legislatures. While no action has been taken on the vast majority of these proposals, the protectionist campaign to undermine the beneficial effects of an open bidding system continues in many states with considerable support from domestic industries and labor unions.

Objections to Buy American Laws

It is the consensus of opinion among trade policy-makers that state Buy American policies are 1) contrary to the objectives of U.S. foreign economic policy, 2) unconstitutional, and 3) costly to taxpayers and inimical to the economic interests of the United States and the states involved.

Contrary to U.S. Trade Policy

Like his predecessors dating back to Franklin Roosevelt, President Nixon supports reduction of tariff and nontariff barriers, promotion of trade on an equitable basis, and strengthening the U.S. competitive position in the world. marketplace.

The policy objections to restrictive state policies were well

summarized by Edwin M. Cronk, then Deputy Assistant Secretary of State for International Trade Policy, in a telegram on March 31, 1971, to the Connecticut League of Women Voters:

Buy American policies have a direct impact on our overall national trade policies and interest, and affect the conduct of foreign affairs. Such policies are of direct concern to the U.S. Department of State.

As you know, the Supreme Court of the United States has frequently held that the grant by the Commerce Clause of Congressional power over interstate and foreign commerce prevents the states from interfering with that commerce by placing more onerous burdens or restrictions on the products of other states or foreign countries than they place on their own products. The Department of State is of the opinion that this bill [a proposal to prohibit state and local procurement of foreign steel and iron products], if enacted, would so burden foreign commerce as to be invalid under the Commerce Clause of the U.S. Constitution (Article 1, Section 8) and under the so-called Import-Export Clause (Article 1, Section 10) which generally precludes states from taking restrictive action in the field of foreign trade, whether by duty or otherwise.

The adoption of a Buy American law by any state government, furthermore, would establish a barrier to international trade by unilateral action. The reaction of foreign countries might be expected to include imposition of restrictions on United States exports. This would run directly counter to the efforts of the U.S. government to support a beneficial expansion of world trade, including the further opening of markets for U.S. exports. The U.S. Government is endeavoring, for example, to improve access for American goods in foreign official procurement markets. State action to impose a Buy-American preference in order to limit the access of foreign goods to our markets would be cited as a protectionist device imposed by the United States at a time when we are seeking reduced protectionist policies by other nations in this area of activity.

With a new round of multilateral trade talks scheduled to begin in September 1973, American negotiators will be pressing U.S. trading partners to dismantle their tariff and nontariff barriers, including in some cases their discriminatory procurement practices. State Buy American statutes and regulations thus contradict this country's objectives in the upcoming negotiations and threaten to undermine its efforts to obtain meaningful concessions at the conference table. Foreign governments can be expected to defend their own

"Buy National" restrictions by citing the network of trade barriers in many American states. In sum, whether it takes the form of retaliation or a refusal to reduce foreign barriers, the inevitable result of state restrictions on imports is to endanger the American export effort at a time when-given the growing U.S. trade deficit-export expansion must be viewed as a high-priority goal of U.S. trade policy.

Unconstitutional

State laws and regulations limiting public purchases to domestic sources can clearly affect "commerce with foreign nations, and among the several States" and therefore infringe upon the express and exclusive power of Congress to regulate foreign commerce (Article 1, Section 8 of the Constitution). Every court in recent years to consider state Buy American measures has declared them invalid.

In Balwin-Lima-Hamilton Corp. v. Superior Court, 208 Cal. App. 2nd 803 (1962), a California court ruled that the General Agreement on Tariffs and Trade (GATT) and the Treaty of Friendship, Commerce and Navigation with Japan superseded the California Buy American Act.

Perhaps the most important decision dealing with the constitutionality of state Buy American legislation is the decision in the case of Bethlehem Steel Corp. v. Board of Commissioners, 276 A.C.A. 266 (1969), by the Court of Appeal of California. The case involved a clear-cut and direct challenge to California's Buy American Act, and was resolved in a clear-cut and direct determination that the statute was incompatible with the Federal Constitution.

In 1966 the Department of Water and Power of the City of Los Angeles awarded contracts for structural steel beams and steel components for electrical transmission towers to the two companies submitting the lowest bids, both of which were going to use Japanese steel. Two unsuccessful bidders for the order, Triangle Steel and Supply Company and the Bethlehem Steel Corporation, sued to enjoin the Water and Power Department from awarding the contracts to the suppliers of foreign steel, arguing that the California Buy American Act required the Department to buy American-made steel for the construction in question. The Los Angeles Superior Court declined to prevent performance of the contract, and at a later hearing declared the California Buy American Act unconstitutional.

Bethlehem appealed to the Court of Appeal of the State of

California, which issued a decision in 1969 confirming the decision of the Superior Court that the California statute was unconstitutional. After reviewing the revelant Supreme Court decisions and even the Federalist Papers for guidance on what was admittedly a novel issue for it to determine, the Court concluded that the power of the Federal Government in the field of foreign affairs is "inherent, exclusive and plenary." The California Buy American Act usurped and interfered with the Federal government's authority, and, consequently, was impermissible.

The Court's opinion included the following passage:

Only the federal government can fix the rules of fair competition when such competition is on an international basis. Foreign trade is properly a subject of national concern, not state regulation. State regulation can only impede, not foster, national trade policies. The problems of trade expansion or non-expansion are national in scope, and properly should be national in scope of their resolution. . . . These are delicate matters. If state action could defeat or alter our foreign policy, serious consequences might ensue. The nation as a whole would be held to answer if a state created difficulties with a foreign power.

The California Supreme Court subsequently declined to review the Court of Appeal's decision, which remains as the law in the State of California.

Costly and Inefficient

It is a basic economic principle that competition reduces prices, spurs innovation, and benefits the consumer. When a state government limits itself to domestic or in-state suppliers, its procurement costs increase correspondingly. By discouraging open and vigorous competition among bidders, a state in effect subsidizes certain special interests and passes on the increased costs to the taxpayer. Economists are in virtually unanimous agreement that Buy Americanism is inflationary, trade-restrictive, and generally contrary to a state or nation's best interests.

Professor Paul Samuelson of the Massachusetts Institute of Technology, for example, told the National Journal (August 8, 1970) that he regards these policies as "inefficient", and went on to recommend that they be phased out "even though it would have as its first consequence a worsening of the balance of payments." Lawrence Krause, a senior fellow at the Brookings Institution, has labeled Buy American policies "very bad from the standpoint of world trade," and

has warned that they would likely work to the disadvantage of the United States. A Canadian economist, Professor M. S. Noorzoy of the University of Alberta, has written that:

To the extent that the (Buy American) policy is effective, it misallocates domestic resources. It leads to higher domestic prices and oligopolistic firms. Theoretically, it is quite feasible for such firms to raise their bidding prices to the limits of the Buy American price differentials without fear of losing government contracts. The policy is also an instrument of subsidizing inefficiency in small domestic firms. It undoubtedly raises government procurement costs and leads to higher taxes. Moreover, to the extent that dutiable imports are restricted, the government loses tariff

revenues.

In a June 1972 study prepared for the Joint Economic Committee, Professor J. David Richardson of the University of Wisconsin summarized his objections to Buy American as follows:

The central conclusion of the analysis of this study is that the policy is always in part self-defeating and may under some circumstances be perverse in its effects. The reason is that "Buy American" policy is not applied across all sectors of the economy, but is directed only to the government sector. When domestically produced and foreign commodities are at all competitive (substitutable in consumption or use), the same policy which discriminates against foreign suppliers in the government sector discriminates in favor of foreign suppliers in the private sector. The mechanism underlying this conclusion is that decreased purchases of imports and increased purchases of domestic goods by the government sector tends to lower import prices and raise domestic prices, leading the private sector to substitute away from domestic suppliers and toward imports. The upshot is that economywide imports are discouraged less than government imports alone, and if incomes of domestic producers are subsidized at all, the extent of subsidization is less than would be indicated by focusing on government purchases alone. In fact, the possibility that a "Buy American" policy actually reduces the incomes of domestic producers is shown to exist.

Conclusion

Despite the persuasive legal, economic, and foreign policy arguments against Buy American policies, the politics of the problem make it extremely difficult for state legislators and other state officials to resist industry-labor pleas for protection against foreign competition. A record U.S. trade defi