The ‘Make in America to Sell in America Act’ undermines US competitiveness
Sen. Josh Hawley (R-Mo.) has introduced new legislation that seeks to ease the current supply chain crisis and support domestic manufacturing — popular themes in Washington these days. The core of the legislation is a requirement that designated goods sold in the United States have the majority of their components sourced from the United States. In trade policy lingo, this is referred to as a local content requirement.
While Hawley’s proposal may have appeal in the current political climate, it undercuts decades of U.S. work to fight the local content policies of other countries that harm U.S. global competitiveness.
Simply put, when foreign governments impose local content requirements, it hurts the ability of U.S. companies to compete in those markets. Local content requirements can force U.S. companies to use substandard inputs, rather than the inputs that meet the quality and price requirements that work best for their business. It also hurts the ability of U.S. firms to export inputs into foreign markets, hamstringing their global growth potential.
For example, a U.S. auto manufacturer exporting to Japan wants to have the freedom to choose where its aluminum frame comes from. It is a much better outcome for both the U.S. auto industry and the U.S. aluminum industry if U.S. car companies can use U.S. aluminum rather than being forced to use Japanese aluminum in order to be able to sell cars in the Japanese market.
In difficult markets such as Russia and China, local content requirements can have more pernicious consequences. In 2019, Russia adopted a law that required the pre-installation of Russian software on mobile phones and other personal electronic devices sold in Russia. Not only does this undermine the ability of U.S. software companies to compete in Russia, it also presents obvious cyber security concerns. In China, local content requirements are one of a myriad of tactics used by the Chinese government to favor local industry and induce the transfer of U.S. technology to China. That is exactly why broad prohibitions on these practices were included in the phase one agreement signed with China under the Trump administration.
These concerns are at the core of why U.S. trade policy has historically put a strong emphasis on rules to discipline or prohibit local content requirements in our trade agreements. In fact, the trade rules against local content requirements have gotten stronger over the years, including under the Trump administration. In the United States-Mexico-Canada Agreement (USMCA), U.S. negotiators secured the most expansive set of disciplines related to local content, including those related to technology preferences that were developed with Chinese practices in mind. It is worth recalling that USMCA passed with a large amount of bipartisan support — and that includes a yes vote from Hawley.
When the United States negotiates these local content rules, it typically does so on a reciprocal basis, meaning that the United States agrees to follow the same rules that it asks of its trading partners. Consequently, the United States is bound by its obligations under the World Trade Organization, USMCA and other agreements to not use local content requirements, except in limited circumstances that were agreed to at the time of the negotiation, such as the use of Buy America provisions in the government procurement context.
That is a deal the United States has always been willing to make, as the generally open nature of the U.S. market is an advantage rather than a burden for U.S. producers. Consumers also benefit from this openness. By some estimates, an iPhone might be $200 more expensive if all its components were made domestically — and that is assuming that all the components would be available domestically, along with the supporting supply chain ecosystem, which is unlikely.
Rather than fixing problems in the supply chain, the proposed legislation is more likely to cause further disruption, all while putting the United States in the sorry company of Russia and China when it comes to market-distorting trade policy. Hawley’s proposal would run afoul of America’s trade commitments to its partners, likely inviting a rash of trade agreement litigation lodged against the United States. This should give us pause.
At a time when the United States needs every ally in its corner to create a new trade rulebook to deal with the China challenge, it cannot afford to create new tension in the trade space.
Emily Kilcrease is a senior fellow and director of the Energy, Economics, and Security Program at the Center for a New American Security.