Apart from free trade, there can be few issues on which public opinion and the views of economists differ more than on forcing companies and the public sector to buy locally and hire locally.
The last time the US government embarked on a big fiscal stimulus with an investment component, Barack Obama’s 2009 American Recovery and Reinvestment Act, the decision to include so-called Buy American provisions to direct contracts to US companies was a hard-fought battle. Similarly, US work permits and particularly the H-1B visa for skilled workers have proved to be highly controversial among US workers in the tech sector, where their use is concentrated, and in Congress.
Predictably, given its appeal to economic nationalists, Donald Trump has waded into this issue by launching a review of buying and hiring American, accompanied by fiery rhetoric about keeping jobs at home. In theory, an overhaul of both policies, particularly the short-term H-1B work visa, could yield some efficiency-enhancing improvements. In practice, given Mr Trump’s record to date, the outcome is likely to be more restrictive laws or little substantial change at all.
Of the two issues, Buy American is the more clear-cut. Such procurement rules have been part of federal law since 1933, but can be applied in more or less restrictive ways. They are constrained by the US’s membership of the government procurement agreement in the World Trade Organization, which has 19 signatories including the EU, Japan and South Korea, though not China. Separately, Canada and Mexico have access via the North American Free Trade Agreement.
Attempts to restrict procurement to domestic companies tend to backfire. They induce retaliation from trading partners, harming US businesses trying to sell abroad. They raise input costs, ensuring less infrastructure is built and fewer construction workers are hired for each dollar of public spending. And they increase paperwork and delays as companies struggle to cope with onerous reporting requirements.
The H-1B issue is more complex. The visa programme was designed to bring in high-skilled workers, particularly in the tech sector, who would be complementary to US workers. They would also help with start-ups and other fast-growing companies that would in turn increase local hiring. Often it has meant consultancy companies substituting lower-skilled employees with temporary workers and then offshoring production.
The high demand for H-1Bs, with the annual 65,000 quota often rapidly filled, has led to their distribution by lottery rather than on merit. Reform to address that issue would be politically astute — and, assuming that some kind of quota is required at all — more likely to increase US productivity.
Handing out the visas on the basis of offered salary would be a simple market-based solution, though it would mean more workers going to established tech companies and fewer going to start-ups. More complex but potentially more productive would be to give visas to companies that allowed workers to apply for permanent residency, showing they were interested in more than churning short-term employees.
What emerges from Mr Trump’s review remains to be seen. The unpredictability of his administration could throw up something disastrous, something productive or something ineffectual. But the principle should remain to keep the US economy as open as possible to the inflow of good products and good workers from abroad. Slamming down the drawbridge is only likely to impoverish the residents of the citadel.
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