Mar 08 2009
“Buy American” is Un-American (The U.S. Stimulus Package)
Published by Steve Latter at 3:13 am under
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WikipediaOne of the greatest “ah-ha” moments in all of economics is when an economics’ student or citizen learns for the first time that every time a domestic buyer purchases a foreign product or import that those same U.S. dollars spent on the foreign product go to a U.S.-based company, not a foreign company. Yes, I am telling you that when you (or Wal-Mart) buy Chinese shirts, your same U.S. dollars spent quickly end up in the hands of, say, Apple, Microsoft, Garmin, or General Electric to increase U.S. employment, profits, and U.S. stock prices!
I decided to write this particular blog because of the fact that the recently passed $800 Billion U.S. stimulus bill has some “buy American” provisions within it. Based on an intuitive hunch, I believe that over 99% of adult Americans believe that these “protectionist” clauses somehow help our economy. Yes, the vast majority of U.S. adults believe that it is clearly more advantageous to “buy American” in order to keep the money or wealth within America in order to increase U.S. employment, profits, and U.S. stock prices. In true economic fact, however, if U.S. citizens “buy American” solely out of patriotism (and not because they think it is a superior product) they actually HURT America because the U.S. dollars spent out of patriotism on that American company are, therefore, unintentionally withheld from another more efficient and deserving American country via the “trade loop”.
Let me try to explain this “trade loop” in more detail so that I may actually be able to convince you of this amazing “180 degree” revelation: “Buy American” is Un-American
Let’s say that the United States (we’ll say Wal-Mart) decides to buy many shirts costing $400 from a Chinese shirt manufacturer, in lieu of buying those same shirts from, say, a shirt manufacturer in Elon, North Carolina (USA). The first key point is that when Wal-Mart buys the shirts from China for $400 it can only pay China with US dollars. Why? Because Wal-Mart has only US dollars! It has no Chinese currency (Yuan). It literally drains its bank account of US dollars that are transferred/paid to China! The second key point is that when China receives that same $400 US dollars for the shirts, China cannot, unfortunately, spend any of the $400 in its own economy since only the Yuan is accepted as a medium of exchange in China! China is now forced to either throw the U.S. currency away (not advised!), or immediately spend the money back to the USA (advised!).
In summary, China has initially traded a product (shirts!) for paper (US dollars!), and those US dollars cannot be spent in China. For China to receive any value at all for the shirts it sent to America, China must now spend the $400 back into the US economy for, say, a global positioning system (GPS) from FleetMatics out of Waverly, Massachusetts (USA). Cutting through to simplicity, in essence, it’s almost as if Wal-Mart (USA) just paid FleetMatics (USA) $400 directly!
Yes, the economic “punch line” is that all spending by the domestic nation on foreign products (imports), in turn, are spent immediately back to the domestic nation increasing the domestic nation’s employment, income, and standard of living. (Note; this is also shown and reported in a nation’s balance of payments schedule if you are skeptical about what you are reading!)
And, yes, let’s not forget about that Elon, North Carolina shirt maker that did not get the original $400 from Wal-Mart in our above example! Any good economy promotes competition and I am excited to see if that North Carolina shirt manufacturer can “raise their game” (increase productivity and/or quality), and hopefully get the next shirt contract from Wal-Mart! If not, well, that North Carolina firm may just have to close down. But remember, the key point, the $400 spent for the shirts went to Fleetmatics in Waverly, Massachusetts, in lieu of the Elon, North Carolina shirt manufacturer. If you would have “bought American” even though the Chinese shirts were preferable, you would have prevented the more effective U.S. business in Waverly from getting your U.S. dollars by giving them to the less efficient Elon manufacturer. In short, you would have contributed to American inefficiency and slowing productivity, hurting our country! And that is un-American!
Now, you may be thinking the following if you have a little economics’ background: “But the US has a growing trade deficit with China, so China may not immediately buy that GPS system from FleetMatics for $400. And, you are correct, but that is also not a problem for either the United States or China. What China is really doing right now is deciding to temporarily save or invest a minority percentage of their US dollars received form U.S. import purchases. Said another way, China is not buying as many GPS’ as the US is buying shirts and, of course, we call that phenomenon the US trade deficit which immediately seems to speak “problem”. But it is really not as big a problem as most people think! China is still spending their “saved” US dollars back into the US economy, but in different ways. China is saving and investing some of those US dollars directly into the United States economy by building plants in America, buying US stock to fund American companies’ expansions, and temporarily saving some of their dollars, for future US purchases, by buying US bonds to help the US government pay for other US government initiatives necessitating borrowing. Eventually, China will sell these US bonds and be forced to use those U.S. dollars to buy that GPS system or build more plants to employ more Americans!
In summary, when citizens of any country in the world buy the product that is best for them based on a combination of quality and price, they will be taking the most patriotic action possible to help their own country they love so much! If a domestic citizen sees the foreign product as a better alternative to the domestic product, buy it! Your money spent will immediately find its way back through the “trade loop” to another business within your country!
Of course, this is why all economists from around the world know that international trade, and not protectionism, helps a country’s standard of living and promotes efficiency and rising standard of livings!
About the author: Mr. Latter teaches various business courses at Paul VI Catholic High School in Fairfax, Virginia (USA) including AP Economics,
Accounting, Marketing, and Personal Finance.
Mr. Latter is a Certified Public Accountant (CPA) and former Chief Financial Officer with 10 years of high school business teaching experience. Prior to his career change to teaching in 2000, Mr. Latter spent 21 years in various auditing, accounting, and financial positions with Price Waterhouse, Sprint, and Teleglobe. Related posts:
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Submit your Econ questions here. Replies will be posted to the blog
This topic is always an interesting one to read and hear about. It goes to show that just buying products will help your country’s economy. This message could not come at a better time due to the United States current recession. As Mr. Latter said there are some protectionism clauses in the stimulus bill, which will ultimately hurt the economy. This protectionism would not be a good plan to move the economy out of the recession.
I believe I understand this topic, but I do have a question. Lets say the United States purchases shirts from China. I understand that China will have to put that money back into the United States economy in some way, but what are the benefits for China in this trade? Also, are do all countries trade in this way equally, or are more countries prone to trade products while some are more prone to buy products?
Wow. I guess I just do not understand your logic. This is the second article of yours that I have read, and this one makes no sense either.
The first mistake in your analysis above is that Fleetmatics is an Irish company with headquarters in Dublin. http://www.fleetmatics.com/pages/287/default.aspx They have salesmen and service departments in this country. The software is made in the UK. The hardware is Chinese. So the profit on that $400 that China spent at Fleetmatics was largely diverted to Ireland or went back to China.
And although you are correct in concluding that the folks in Elon North Carolina are going to have to close their shirt factory, that won’t necessarily happen because they are less competitive or efficient. It will probably happen because their shirt factory has to comply with laws regarding minimum wages and hours, as well as laws that regulate working conditions, the environment and safety. They also have to comply with laws that require contributions to retirement and social security.
The end result of your economic model is that our money goes to Ireland or stays in China, while a 13 year old Chinese kid works 60 hours a week in hazardous conditions with little or no benefits and a Chinese shirt company pollutes a local river with its waste and sends us shirts with lead buttons.
Meanwhile, we have a bunch of folks in Elon North Carolina that are unemployed or on welfare.
Yup – we need to buy more Chinese stuff. That’s the answer.
I feel that it is true that if you just buy american that you are un-american. This philosiphy is held by many people in our country who do not understand economics. By just buying american goods you will hurt the economy. This will in turn not only hurt our economy but other economies as well. This would have the same effect that embargos have had on our country in previous years. These embargos tremendously hurt the countries the United States were boycotting as well as the United States.
By merely buying only american you are in turn hurting the economy. To help the economy, you must buy the best product on the market whether it is foreign or local. This will cause our economy to flourish because if we do not have the best products we are not competitive and to sell our products we must up the goodness of our products. This in turn will boost the economy of the United States as well as foreign economies. Buying american is okay if it is the best product but not because it is american.
Hi Stephen,
You asked what the benefits to China would be of trading with the United States? China would have access to the many products made in the United States. The Chinese government would only sign a trade agreement with the United States if it knew that its citizens would have access to improving their standard of living.
Trading and buying/selling are two terms for the exact same things! The reason they call it “trade” is that once you understand what is really happening you will realize that it truly is “trade” like the early settlers did. Since each economy (country) cannot use the other economy’s currency, the transaction is really a “swap” or “trade” for products.
It is true that the majority of Americans believe that buying American-manufactured products benefits the U.S. economy more than purchasing imported goods. I must admit that before I took this class, I too believed this fallacy. However, now it is quite clear that buying American simply to buy American is in fact UN-American. As the blog says, when we purchase Chinese-made clothes for example, the money a company like Target or Wal-Mart pays them is ultimately put back into the American economy. Target and Wal-Mart do not pay the Chinese in Yuan, but in dollars. In China, the dollar is not the accepted medium of exchange; therefore, they must buy something from the United States, which of course accepts the dollar.
Another significant reason why buying American for the so-called sake of ‘patriotism’ is un-American is because of the competitive nature of the economy. If Joe Smith goes to Target and sees a shirt he likes; but then sees that it is made in China, he should not exchange this shirt for one that is not as nice-but made in America. He would be wasting his dollar votes on a product he is not particularly fond of. However, the U.S. shirt manufacturer would get the money, even though they are not as effiecient. Therefore, Joe Smith would be supporting ineffiecency in the economy. His action was detrimental not just to China-but another American company from which China would have purchased something else with the American dollars they got from Target, which was selling their shirts. In conclusion, consumers should not merely concern themselves with the country in which a product was manufactured, but with the product’s quality.
Protectionism is another one of those “180 degree” concepts in economics. Everyone who does not have an economic background thinks that buying American is good. On the surface it seems like the common sense thing to do. People say, “I’d never buy a Japanese car. Why would I wanna give those Japense money?” The theory sounds right because whenever you buy something, the money goes to who ever is selling it. What most people fail to understand is that when we buy something with Dollars, foreigners can’t use them in their own economy so they will just throw however much that new Honda costs back into the American economy. Political figures cannot openly say buy the superior product even if its foreign because 99% of the population would think that person is an idiot. Political figures do know that protectionism is bad, they just can’t say it.
Our economy is built on competetion and buying something for any reason other than the fact that its the best product erodes this principal. People would be being the most patriotic when they buy the best product for the best price. My question is does comparitive advantage fit in anywhere ad if it does how so ? Comparitive advantage assumes 2 countries excahange goods directly so would this in anyway effect the protectionism topic?
Ever since I learned that trading with foreign countries is the best way to help our own economy, I have wished that the 99% of U.S. adults who think “buying American” is the way to go would realize this also. Buying American products would only help the economy if the American product was the best possible choice, but for the most part it hurts the economy. Companies should be forced to compete not just domestically but internationally, especially during this technologically advancing age where everyone around the world is more easily connected.
Buying the best product available is the best way to encourage innovation, and prevent greedy and risky businesses. When someone buys an American product over a better foreign product, they are rewarding mediocrity. It is like if an American company made a product but the quality was not as good as it could be because the company was trying to save some money, but you bought it anyway over a foreign product with better quality and price because the product was from an American company. That would be like giving your money to the American company because it gave you less quality than it could have. We should buy what we think is the best product because that will inspire innovation, and if that product is foreign, the money will come back into the US economy. US companies will also feel the need to improve which will help our economy grow.
Although I know better, I can relate with the 99% of Americans that believe buying American is better. Many Americans view Chinese and foreign produced goods to be inferior to their American counterparts. I will admit that when I am shopping for clothes, I sometimes look at the tag to see where it was produced and take into into account when I look at the price. Many times people look at something and view it was cheap and breakable merely because it was produced in China. The important question when shopping is not where it was produced but rather if it is the best quality for your budget. Many consumers fall into the trap that buying a foreign product does nothing for our economy. The recalls of Chinese produced toys and the outcry of politicians for outsourced jobs to India worsens American’s perception of trade.
Especially in the current economic state, trade is more important than ever. Americans need to remember that we have to work with other countries through trade to lessen the burden. Although limiting trade will supple more Americans with jobs in the short run, it will only worsen the wound in the long run.
I think that being patriotic by buying american is probly one of the most misunderstood topics. The people I talk to about this topic do have a hard time believing it, but after a while of explaning they start to see it in the economic way and not theit f mistrude political way. I think that it is important for people to realize that buying the best product, is the best thing, because it forces the companies to make the best product they can in order to survive.
The bail out’s buy american clauses, I think, will actually hurt the economy a little bit because the companies will not be selling the best product they can make and it hurts the other companies that trade with other countries. When people buy the best product available, countries then can specialize in what they are best at and can trade more and sell more overall.
I never understood how buying foreign helped our economy until I took this class. I completely understand how the majority of Americans don’t understand how this works. My grandfather has always been pro-American. We don’t really even have to buy foreign. We just ended to buy the best product at the best price. If that product is American buy it, if its from China buy it, if it’s from Japan buy it. This makes great competition among nations so each nation will try to make the best quality product the cheapest way possible.It doesn’t matter cause those $ get spent back into our economy by them buying our goods and services. In our current situation we need to trade. If we just buy American it will only worsen our recession.
I understand the concept and the logic behind the idea that the money used in foreign trade gets pumped back into the United States economy, thus making foreign trade a healthier way of strengthening the economy and being more patriotic than merely “buying American.” If I can grasp this concept, why is it that the rest of Americans and media are seemingly oblivious to the idea? Sure, it politically looks good to announce that it is merely patriotic to buy American but why is it that neither party admits vocally that foreign trade is a vital component to expanding a country’s economy? Is it really so imperative to political power to announce such a lie and let the media eat it up? I believe that this illusion of being patriotic as opposed to being practical and helpful is actually hurting the economy.
I also think it would be healthy if Americans were better educated in economics. Since the idea of feeding spent trading money back into our economy is widely recognized by most economists, there should be a more vocal approach to informing the public about the truth. Perhaps if the leader of the FED were to broadcast a knowledgeable speech alongside President Obama people would understand the issues at hand more clearly instead of consuming merely what politicians want the average uninformed citizen to take in. The mainstream view on economics, being the most widely accepted perspective should be preached about in televised speeches with our country’s leader. This, I believe is imperative considering the economic recession the entire world is facing right now.
It’s easy to understand why 99% of adults believe that buying American is the American thing to do. To an uninformed person, it would seem obvois that buying american would help the american economy. It would help the little “Ma and Pa” shops and keep other countries from getting ahead.
However, from the viewpoint of someone who is educated in economics, such as President Obama, it is known that trade with other countries actually boosts our own economy. I am somewhat dissapointed in the “buy american” provisions in the Stimulus Bill becasue as a public leader both congress and the President are supposed to do whats best for the country not their approval rating. I would hope that in the future our public leaders will work to do whats best for our economy the smart way.
The concept of buying foreign products is completely logical. Yes, the money will have to be spent back into our economy and the same benefits apply to China. If we have a trade deficit however, would it be helping China’s economy more than ours? Because China is purchasing less of our products, I would assume there would be a decrease in demand. Also, I am confused about currency exchange companies. When America spends money in China, can’t China just trade their American dollars that they’ve recieved from trade to the United States’ Yaun (from the American purchases of Chinese products?) Obviously there is no need currently to stop trade with China, but it just seems like that is a way to get their own money back into their country.
The Stimulis Bill appears to have the clause about buying American just for political gain and public approval. It is understandable because people don’t understand the concept of trade being good, but instead of putting an unnecessary statement in the bill, the issue should have been left out altogether because the end result will just be confusing for the public. It is contradicting to say that we want to buy American but continue trading with other markets. There is a balance that needs to be created between trade and American products
I do absolutely agree that a shocking percentage of people in our country believe in buying american and have an outright hate for trade with foreign nations. These americans try to uphold their values of “patriotism” through actions that are in actuality hurting the economy of their beloved nation. These buy american provisions only hold weight because of their name, while good legislation should have merit determinant on its content. These same people would be outraged if the bill claimed, “we the government will eliminate your options to vote on products and shall henceforth decrease the quality of American goods…”. However when they “buy American” for the sole sake of purchasing an American good rather than a better priced foreign competitor’s good they are doing just that. The American people should bear two things in mind: 1) they are part of a capitalist economy that as a world trade power gains benefits by interacting with foreign economies and 2) that US dollars are used for the purchase of US goods even by our “horrible foreign competitor nations”. The American people have the right to the buy products at the lowest prices and that every time they spend a dollar they are voting for a company. When they spend money on products from a foreigner that are better or cheaper than the similar US product, they force the US company to step up their game and either make goods better or cheaper. Lastly each proud American should realize that this whole economy of ours has a system to it, a system that seems to thrive and progress under competition and has done so for a long time, this devious and secretive “system” behind our economy is called capitalism.
This article is similar to a previous article that stresses the importance of buying from other countries–trade. We have learned over and over again that it is actually beneficial to American consumers for us to trade with other countries. The article estimates that 99% of American adults do not understand this concept. It’s impossible for them to acknowledge the fact that trade is good. They claim that it’s “un-American.” In fact trade is good because it forces other countries to invest in our products. The example we have used numerous times is that of Shirts and GPS systems. If we buy our shirts from China, where they have more unskilled laborers and more raw materials, they get American dollars. They now have to spend those American dollars back in the United States economy. In the example, they turn arond and spend that money on GPS systems. They benefit from our specialties and we from theirs. Trade is good becasue it forces nations to specialize and it also makes domestic companies more competitive. Because buying foriegn is cheaper they have to try harder to make a better product that we would want to buy. Trade is good becasue it helps the economy. So, next time your out buy the product you want don’t worry whether its made in America, China, or the Phillipines, if you like it, get it!
This blog was a very interesting and informative read. As you said, most adult Americans (99%!!) believe that purchasing only American products helps our economy. They feel that this concept of “protectionism” is more advantageous because it helps to keep money and wealth within America and therefore, will help increase U.S. employment, profits, and stock prices. I admit that prior to taking an economic course, I probably considered myself as part of the 99% that did not know any better than the “buy American” concept. Now, however, I am glad to know that doing so actually hurts our economy, contributing to inefficiency and slowing productivity.
I was surprised to learn that the $800 Billion United States stimulus package contains some “buy American” provisions within it. I would think that such an important bill that affects so many Americans would contain more economically fundamental proposals. To most Americans, however, this is probably seems like a good idea.
I think it is very important that America educates its citizens on the concepts of trade. Doing so would help our citizens become not only more knowledgeable consumers, but more informative Americans as well.
Unfortunately, many Americans do not understand this concept that buying American actually hinders our economy. I feel that many Americans, as well as many people in the world, make quick judgements without having much economic knowledge. Sadly, many people are up in arms about the stimulus bill when they do not fully understand what is happening behind the fancy political rhetoric such as “Buying American” and “appreciating the dollar.” The politicians do their constitutional duty, or maybe just do what they need to do in order to get re-eclected, by listening and acting upon the what the American people want. However, Americans do not really understand economics and consequently, voice the inaccurate economic beliefs that they would like to see happen.
Sadly, not many Americans are upset with this piece of protectionism, as they are with most of the stimulus bill. In fact, many people would support this “Buy American” because it is the patriotic thing to do. Ironically, this would hurt our fragile economy more, since not only are the Americans eliminating healthy competition which is beneficial to the nation, but it also not allowing American money to return to American companies. Fortunately, the bill was passed with a small remark about “Buying American”, which hopefully not many other countries will take offense to and if they do take offense, then they probably will not buy our products. This potential loss of trade would lower our standard of living and would obviously not be a wise choice in this economic recession.