By John F. Di Leo -
Reflections on government procurement and the Buy American Act
President Donald Trump traveled to southeast Wisconsin to make a speech and issue a proclamation: that he would require that – on the big government spending projects of his administration – everything had better be Made in America.
Hopefully, no one will quarrel with the intent.
A country should be proud of its manufacturing sector, and if tax dollars are to be spent at all, the preference ought to be that they be spent giving business to their own companies, employing their own people, utilizing their own local resources. It's important not only for the economy, but for national security as well. Such an intention is good and honorable.
But we all know what the road to Hell is paved with, don’t we?
The Residency Rule
Before we analyze this rule, let’s spend a moment contemplating a rule with which we’re all familiar: the residency rule that many cities have in place for their employees.
Lots of cities decree that if you want to be a policeman, fireman, school teacher, or other city employee, you have to live in the city that issues your paycheck. The theory is, this keeps fine, upstanding citizens in the neighborhoods (especially important if the city is suffering a loss of fleeing taxpayers), and it keeps rents and home values up for everyone. Granted, it limits the hiring pool a bit, but the bigger the city, the more manageable that should be. In theory.
So it is that many cities have specific neighborhoods, like Chicago’s northwest side and Milwaukee’s southwest side, for example, that become well-known for being particularly safe because they’re chock full of policemen. Fine, as far as it goes, right?
Until the property taxes, or crime levels, or school system collapses of such a city reach the point at which it becomes unwise to raise children there, or even becomes unaffordable or unsafe to remain at all. A city may lose good employees when this rule drives them out, to search for other jobs that allow freedom of residency. But perhaps, sometimes, the cities decide it’s worth the tradeoff. It’s their choice, after all; that’s what home rule is all about.
And so the cities write rules to manage their residency rule, to deal with a grace period upon time of hiring, or to deal with marriages between city employees and suburbanites, or to deal with employees who own multiple properties, like a couple of small apartment buildings in different towns as their chosen investment method.
The questions get thorny: what if a new employee can’t sell his suburban house within the 30, or 60, or 90 days of his grace period? Surely we can’t make him sell at a loss just because it’s a slow housing market. Or what if his child is a junior in a suburban high school; surely we won’t make our new teacher, policeman, or fireman move his kid to a new school at a time like that, just to satisfy this rule, will we?
There are dozens of such questions, and each city writes their rules, and builds in provisions for exceptions. Every city may handle it differently, and that’s their right.
We all recognize the value in the original goal of a local residency requirement, but we also see the complexity that it causes. The devil is in the details.
The Buy American Act
Now, in this context, we can address the national issue of a "Buy American" rule.
For the exact same reasons – all good reasons – that cities have residency requirements, nations may want a rule that tax dollars are spent on their own taxpayers.
We want a thriving economy. We want a strong business sector, full employment, profitable manufacturers.
Because of the scale involved in the national government’s purchases, federal spending can be a huge portion of the GDP. It shouldn’t be, of course – government is much too big already – but to the extent that we’re stuck with it, it makes sense to at least direct those purchases of asphalt and concrete, steel beams and armaments, toward businesses that keep the most Americans employed.
This is the goal that President Trump reinforced this week, and it’s nothing new; the first major Buy American Act dates all the way back to 1933, and was signed by outgoing President Hoover for the incoming Roosevelt Administration to enforce. There have been plenty of permutations of this well-intentioned concept since.
The Complexity of Manufacturing
As we’ve seen, even a rule as simple as a local residency rule can become complicated in application, as different cities have different levels of affordable real estate for renters, homeowners, parents, and investors. Cities need to carve out both permanent exceptions and individual waivers all the time, or risk missing out on desirable employees, while mindful of the fact that too many exceptions will infuriate their existing employees who live with the same rule.
By the same token, when the national government attempts a Buy American provision, therefore, it encounters plenty of problems that it likely never anticipated, because so few people in government know anything about the world of manufacturing.
Let’s start by assuming that we do manufacture this kind of product in the United States, so domestic sourcing is at least an option. What is that product made of? Is it a single item, such as an injection-molded article of plastic or a cast iron product poured in a foundry?
Or is it a complex manufactured product, like a huge water pump to keep a highway underpass clear during rainstorms, or a whole electrical power station for an airport or army base? Such products have Bills of Material – a manufactured product’s “recipe,” if you will – listing hundreds, or even thousands, of materials. Cast or molded parts, wire and cable, nuts and bolts, sheet steel and brass rods, dials and controls.
No single company manufactures all those parts, so a manufacturer sources them from vendors all over the world. Perhaps wire and cable made in the USA, nuts and bolts made in South Korea, dials made in Germany, cast steel parts made in the USA, molded plastic parts made in Mexico, gaskets made in China… the possibilities are endless.
If we require the finished product to be made here, that’s an accomplishment. That does indeed satisfy the first goal of spending money on American companies that put Americans to work. But then there is always an effort to go further, to the next tier of production, and manage those purchased raw materials and components as well.
When the government implements a Buy American rule, it first has to decide how far down to go in this supply chain. In recent years, the choices have run the gamut from final manufacture all the way to requirements of 100% American content, right down to the rawest of raw materials.
Imagine requiring, for example, that a steel part be not only formed here, but made of steel that was alloyed here, of iron, chromium and carbon that were pulled out of the earth and processed here too. Sound easy? Well, not so much. We have plenty of iron in the USA, but chromium just can’t be practically sourced here; most of it comes from South Africa, Turkey, India or FSU sources like Russia and Kazakhstan. So at a certain point, it becomes impossible to mandate domestic sourcing… and that “certain point” varies by product, by material, by industry.
So at some spot in the sourcing process, we have to stop trying to control it. We just have to. We don’t make lots of nuts and bolts in the USA anymore; we’d like to, but we just don’t. And we make lots of wire and cable here, but maybe not the exact kind that the power station contractor or the pump manufacturer needs for this particular finished product. So we have to allow them some flexibility in sourcing, if we want our finished product to work.
But all these industries – yes, all of them – have lobbyists in Washington, lobbyists (and unions and reporters and donors and businessmen) who will point out that making the bridge or power station or water pump here is nice, but we really need to create jobs for the American steel industry too, and the American fastener industry, and the American wire and cable industry, and the American electrical controller industry…
Every administration, and even more so, every individual agency issuing government contracts, has to make this decision: Where to draw the line? Where to give up and realize that the goal of making every single government dollar create an American job is just impossible?
Complexity and Practicality
These rules add complexity to the government contracting process, and also often-unmanageable complexity for the contractors and their subcontractors. The myriad vendors on these government projects have different skill levels, and the farther back you go from the primary contractor, the less the others upstream may understand just what their commitment actually is.
In addition to making a great product at the right price, delivering it on time at the right place, they now have to meet rules of content origin that vary from contract to contract, but that always bear the exact same title: a “Buy American clause.”
What good is a commitment that means something different in every bid, especially when the contractor offering the project for bidding probably doesn’t understand the commitment himself?
If the vendor can’t meet a requirement because the part isn’t made here at all, he can seek a waiver, of course… but seeking, proving, and obtaining such waivers are an added cost, adding to the cost of the project… and if a vendor knows he’ll need such waivers, he may drop out entirely, costing the bid some potentially good vendors.
In most of the government projects authorized in the 2009 ARRA, for example, simple US origin was required – meaning that the product had to be manufactured here, but they didn’t dig deeper into the materials therein. The following year, the government revised it, and most 2010 contracts from the 2009 ARRA had an almost impossible 100% US content requirement, extending right into raw materials.
This made compliance difficult for many products, and accomplishment often impossible, which meant more products having the total waiver: when it becomes impossible to meet a Buy American clause, you just give up and fill the order with a foreign product.
Foreign products have no requirement for US content at all, so once you have a waiver on the origin of the “master” finished product, it gets made in Canada or Mexico or Europe instead, and no Americans are hired at all. This overly-ambitious version of a Buy American clause is truly the textbook example of the old saying, “The perfect is the enemy of the good.”
So, here is our quandary: Should the government impose a Buy American clause, if it’s so difficult?
Of course we should. But it’s time to standardize it, and make it reasonable. If the Trump administration wants to ensure that its projects employ lots of Americans, it needs to abandon the overly-ambitious clauses of the past, and apply a reasonable requirement, based on those used by the Ex-Im Bank or NAFTA in determining US origin.
We can require US manufacture, and set a percentage of minimum US spend on the manufacturer’s purchased materials, such as “50% or 75% must be US-manufactured parts as well. “ Something along those lines.
But we need to put an end to these promises that “Every product will be made of US steel!” that the lobbyists and unionists insist upon. Such pie-in-the-sky promises create more work for lawyers, bean-counters and foreigners than they do for American workers.
Copyright 2017 John F. Di Leo
John F. Di Leo is a Chicagoland-based Customs broker, writer, and actor. A former county chairman of the Milwaukee County Republican Party, he has been a recovering politician for twenty years.
Permission is hereby granted to forward freely, provided it is uncut and the IR URL and byline are included.