"Buy American": economic concept or political slogan?

Business Horizons, May-June, 1993 by Michael G. Harvey

Japan bashing by government officials, businesspeople, and consumers has become commonplace in the recent popular press. "Buy American" has become the rallying cry for domestic manufacturers of automobiles, computer chips, televisions, toys, and a myriad of other consumer and industrial products. What has brought about this overt resentment toward imported products, particularly products originating in Japan? Will the "Buy American" focus of these critics resolve the complex web of issues related to the present economic problems in the United States? If it remains unchecked, what are the potential outcomes of the movement to purchase domestically produced products? This article examines these issues and analyzes the potential fallout from the "Buy American" movement.

The media have recently popularized the growing sentiment of many Americans who feel that the domestic economy has been eroded by excessive imports, and that if unchecked these imports will retard future economic prosperity in the United States. But why has this movement been so widely accepted by such diverse populations in the United States? It is possible to speculate on why the environment is fertile for this coalescence of opinion against importers. First, the extended recession that began in 1990 has created hardships for employers as well as employees. The solution to the recession is not readily apparent; therefore, consumer groups, labor unions, and government agencies have been looking for a common enemy or scapegoat. Second, long-term displacement of domestic employees and plant closings have resulted from the banking/savings and loan collapse. Many companies have closed, filed for bankruptcy, or been consolidated, leaving workers without jobs or prospects for future employment. Moreover, it has become apparent that many employees who lost their jobs will require extensive retraining over an extended period. In many cases, these negative events have been attributed to the influx of imported products and acquisition of domestic companies by foreigners--particularly the Japanese.

An additional problem revolves around the imbalance of trade between the United States and many of its trading partners. The rate of growth and the proportion of the negative trade balance has centered on seven trading partners, heightening the fervor to "Buy American" (see Table 1). Pacific Rim countries, including Japan, represent more than 60 percent of total trade deficit on an annual basis; the rate of growth of the trade imbalance has been greater with these countries than any other United States trading partner. Conversely, the U.S. has a $12 billion trade surplus with the European Community. Therefore, the focus of negative comments concerning imports has been directed toward Japan and other Pacific Rim countries.

U.S.-based competitors are also concerned about the profits made by foreign competitors that were used to acquire American companies during the accelerated acquisition boom of the 1980s. The press and labor unions have expressed the opinion that profits from such "domestic companies" will be (1) used to purchase additional companies in the United States or (2) repatriated to the foreign country, reducing the available pool of capital for investments in plant and equipment domestically.

Concurrent with the acquisition of domestic companies by Japanese firms, consumer advocate groups have questioned the aggregate level of direct foreign investment in the United States. The concern centers on the control of key industries by foreign companies and on the growing dependency on foreign producers and owners of these critical industrial products (see Table 2). The nearly 3,000 percent increase in direct foreign investment in the United States in the period 1970-1990 has alarmed activist groups. Japan has increased direct investment more than 100 percent from 1988-1990 in domestic companies that have been becoming dominant competitors in highly visible markets (broadcasting, motion pictures, agriculture). This is particularly alarming when at the same time domestic companies are investing substantially less in foreign markets (see Table 3), accounting for the fear that the U.S. will not be able to compete effectively in the global marketplace or against more powerful world competitors.

The final reason for the negative attitude toward importers is the perception that foreign companies produce offshore whereas U.S.-based companies produce domestically. The commonly held viewpoint is that foreign competitors import into the domestic market and therefore do not employ American workers or invest in the domestic market. Though there may be additional arguments for the rapid acceleration to explain the economic bashing of foreign competitors and governments, these five assertions are recurring and common to most of the arguments in favor of "Buy American."

The causes of the backlash to foreign products and producers can be debated, but it would be difficult to deny that there is a growing resentment in the United States toward foreign products. Yet what does it mean to "Buy American"? While this may seem obvious after examining the issues more carefully, the obvious becomes a complex composite of perceptions and expectations of consumers, domestic producers, government officials, environmentalists, consumer advocates, and labor unions.