“Buy American” drives up cost of transit

We have the same problem in Canada: http://www.northernontariobusiness.com/Industry-News/transportation/TTC-selects-Bombardier-for-new-streetcars.aspx

Buy America is Not Necessarily Going to Add Costs: You Could Be in Worse Cases Without It

By Jonathan Feldman, PhD, Department of Economic History, Stockholm University

Economists like to think that protectionism will always raise costs. By oppoing Buy America they are throwing the baby out with
the bath water.

First, Buy America does not in of itself guarantee competition, but does provide an equal playing field for even foreign firms.
It enticed Rotem, the South Korean firm, to enter the subway market, creating a new lower cost supplier. So this is direct argument one against the claims that Buy America hurts competition, i.e. it seems more based on supposition than fact.

Second, economists often don’t understand (or have the most superficial understanding of) industrial engineering and the organization of cost
reduction via corporate organization, productivity enhancing practices, and the like. Companies in Japan and South Korea, highly protected, had a set of corporate, industrial relations and internal factory organization practices that radically reduced costs and helped them beat the pants off of the open, competitive U.S. producers. The result: Budd, St. Louis Car Co., and Pullman died, reducing competition because of open markets in terms of U.S. firms promoting competition. Thus, here we have a case where protectionism reduced U.S. competitors and increased foreign competitors, an even wash for the arguments proposed above. Moreover, if you can reduce costs even under a protectionist regime, the argument that Buy America is bad for competition makes little sense.

Third, Oregon Iron Works entered as a new supplier for street cars, with one key part of their entry tied to the Buy America protections.
By creating a new market, they created a basis for competiting in it, i.e. having a market to compete in is the sine qua non of such competition.

Fourth, New York City uses multiple sourcing to increase competition on key subway buys. It maintains competition despite Buy America, i.e. having protectionism does not eliminate competition if you know how to competently organize a procurement.

Finally, there are foreign competitors who can make things more inexpensively and Buy America may fairly or unfairly reward them. Yet, if you have a total open economy, reduce domestic wealth creation, then you start losing tax revenues and budgets to buy things, i.e. to organize the market. The open economy of the U.S. has hurt it against foreign nations that don’t buy into globalization propaganda and nonsense. They win and we lose. How can you have a competition if you lack the wealth/budgets/domestic industrial base to organize a competition? The myopic anti-protectionists have a very balkanized and false vision of what a real economy even looks like.

Note: The author has been intensely studying the mass transit economy in the US for four years and has published work on this topic in books and articles. He is working on a book on the mass transit supplier base in the US.

So, at the root, you are arguing that you have found ways that by preventing Americans from doing business with foreigners, Americans actually get more choice in who they do business with?

And, even though Americans have less options with whom they may buy from, prices can be lower?

What am I missing?

The “Buy American” provision appears to be governed by the FTA, and given the amount of leeway that the law allows, it seems that Obama’s FTA could have opted to not force Metro to redo the bid. But given that LaHood is pushing for an even stronger interpretation and the Obama administration at least dabbled with the idea of a Buy American provision in the stimulus, I don’t see why it’s unfair to say that this is now Obama’s policy as well.

I think portraying the Obama administration as “just following the rules” is misleading – somehow the President of the United States is helpless fighting against these bad laws? Has Obama said anything like, “It’s time we rethink the ‘Buy America’ provisions that are harming America’s ability to rehabilitate its transit infrastructure.” ? No. Didn’t he support many of the “Buy American” portions of the stimulus bill? In the article Stephen linked to, Obama’s Transportation Secretary is quoted:

the trains that are ridden in the U.S. should be built in the U.S., federal Transportation Secretary Ray LaHood said

Obama’s campaign ran ads in some states saying, “Buy American, Vote Obama”.I don’t think Stephen is portraying the Obama Administration incorrectly.But, I’ve been wrong before. Maybe you can provide examples of Obama taking a stand against these laws.

REPLY TO MR. LEVY
Mr. Levy you make some interesting points, but I think that you are largely wrong. More accurately, we are talking past one another. Part of the problem here is that the post I replied to is really asking the wrong question. It asks us to analyze Buy America, which was only partially effective in helping support U.S. production. I collapsed some points in ways that were misleading, so now I will clarify.
I might agree to some of the limits to Buy America legislation, but even the AFL-CIO argues that we need to go beyond the original formulation. Like the unions, I think we have to supplement existing provisions with something else. South Korea entered the scene long after the erstwhile dominant U.S. supplier firms departed and even the Japanese were brought in after these dominant U.S. firms had failed. But, this detail must be balanced by remaining incumbent U.S. suppliers that could have competed with both companies, but could not. Why couldn’t the remaining U.S. firms compete or even enter the still lucrative U.S. subway market? The answer to that question explains why smaller firm Oregon Iron Works can now enter new streetcar markets. The answer is the non-existence or existence of an industrial policy (in conjunction with other numerous factors).
When I wrote that protectionism helped defeat U.S. producers, what I meant was the limits to Buy America, i.e. it did not go far enough, as I explain below. When I said that laissez-faire helped the foreign producers, I meant these limits to Buy America—limits which have partially been created by adherents to a free market type of argument. The political process (backed by those who did not go far enough) partially created a self-fulfilling prophecy. The core idea was that the Buy America policy did nothing about: (a) internal factory and industrial organization (and/or a more sophisticated R&D policy) and (b) the size of the market, two key factors I link to a comprehensive industrial policy. Countries like Bombardier and Kawasaki having companies with superior factory and industrial organization and more comprehensive mass transit markets did better. There is nothing about free markets in isolation that would have helped the U.S. producers.
First, at one point Budd underbid and won a contract to Boeing Vertol. Budd’s failure to competently organize production (complicated by this fact) helped kill them off according to persons I interviewed who actually worked at the company. Boeing Vertol exited because (in part) Budd underbid them and because the very non-free market and highly profitable defense industry was more lucrative. The shrinking of the market complicated matters for Budd, Pullman, etc., but by the time the Canadians and Japanese came along there were no competitive/viable U.S. challengers who could win a contract (even if they were around to bid for one). The New York City subway contract was pivotal to building up Bombardier’s capacities and even helped them diversify into aerospace, that’s how significant that contract was. The mismanagement at U.S. producers prevented them from having diversified markets that might have helped them even during downturns, but see my comments in the next paragraph. The failure of industrial policy partially explains why the foreigners won because even with a contracted domestic market, there are other ways to sustain an engineering workforce, e.g. via exports (but see below). Foreigners have succeeded in part because of industrial policies, not just “free markets” (I’ll soon publish something on that question).
The failure to sustain mass transit markets on the demand side is certainly a key weakness in U.S. policies, I would never deny that and if you got that impression from my posting (which I tried to keep brief) I am mistaken. You can look at my article in American Prospect for a more detailed analysis. If anything, the weakness of demand side stimulants highlights the need for an industrial policy (or associated budget policies) and not a laissez-faire analysis. A laissez-faire, free market, policy if anything reduces (or partially reduced) the domestic market for U.S. manufacturers (but see my qualifying comment above).
Mr. Levy I think that you are also wrong about CAF, they just won an order from AMTRAK. They previously won an order from WMATA (Washington Metro). I interviewed that firm also and learned about various competent ways in which they organize a production system that earlier US firms lacked. On the AMTRAK order, go here: http://www.railwaygazette.com/nc/news/single-view/view/caf-wins-first-coach-order-from-amtrak.html
Please note that they beat the FAR LARGER firm ALSTOM. So size did not really matter in this case.
CAF is also a newcomer, like the Chinese. That is a competing explanation for the size of their markets. All large firms were smaller once.
Mr. Levy you are partially wrong about Skoda. They originally supplied streetcars to one US city. They did so in a way that was not judged sufficiently useful to the local transit agency (for future orders) and led planners to turn to a local firm to make their own car. Their ability to do so was aided by a modest industrial policy, not by free markets. Skoda was not completely shut out of the US market. I think you are confusing correlation (being largely shut out), with causation (having a medium size). I still need to do further research on this point, so until I complete my research I will leave this as an open question.
Mr. Levy should let the reader know that Japanese firms other than Kawasaki are not being shut out of the US market. Mitsubishi supplies systems used by the US. Kinki Sharyo has supplied LRVs to Boston, see here: http://www.kinkisharyo.co.jp/eng/e_sharyo/e_sh_seihin/e_sh_boston.htm Mr. Levy argues smaller firms were let in sometimes, but I don’t know any quantitative studies on this, but maybe other (bigger) foreign firms make a better product.
As for medium sized firms being shut out, note that it takes resources to market internationally that a smaller firm lacks. To attribute the marketing weakness to lobbying clout alone is an interesting hypothesis, but does not explain all factors. Would Mr. Levy or others like industrial policies to help smaller firms or sanctions on corporate lobbying? (That is not a rhetorical question). I was confused as to where he was going there.
Rotem told me that Buy America leveled the playing field for them. They are now succeeding.
In any case, the largest train makers that are foreign regularly compete with one another, so the idea that the Buy America system prevents price or quality competition is just plain wrong which was the wrong point I was responding to.

GM’s mismanagement is the core issue of why they failed, read Profits without Production, by Seymour Melman.

I honestly don’t know why you did not engage my original arguments, but simply brought up new questions.

I’m not so interested in engaging the nitty-gritty of protectionism in a blog about urbanism. But, I did want to address protectionism, and cut to the chase and address the possibility that the concept you are defending is self-contradictory.

Buy America does not necessarily prevent Americans from doing business with foreigners. Where did you get that idea?

Huh? That is exactly what protectionism does, and what it was intended to do. Forget the retaliation, etc. With this type of protectionism, if a transit agency wanted to use a product that happened to contain steel that is from 1 mile from a US border, the government can step in and prevent the deal or withhold funding. (I’m not arguing that the government should fund transit)I don’t see how you anyone could argue that protectionism does not advocate preventing individuals from doing business with individuals who just happen to be from outside the government borders. That’s what it is – whether you advocate tarrifs, quotas, fines, subsidies, whatever… Do you have something against people who do not share the same taxing authority?

The argument about lower prices is the key fall back argument of free traders. It can be argued against in any number of ways.

You are right. Price isn’t the only metric. Let me rephrase, and bolster the question:“And, even though Americans have less options with whom they may buy from, prices can be lower / quality could be better / reliability could be higher / quantity could be higher?” I suggest reading a basic economics textbook. Or just start at the wikipedia entry for “comparative advantage”. http://en.wikipedia.org/wiki/Comparative_advantageI don’t see much value in addressing the details of protectionism (especially in a site about urban economics) if you can’t accept the fundamentals of what you advocate. In addition, I’m having a hard time not reading your comments as highly-intellectualized nationalist bigotry, so I think I’ll stick to the fundamentals.

Please note any industrial policy might cost more in the short-term.  The question is long-term benefits.