Employment Effects of the Buy American Act
The Buy American Act (BAA) was enacted in 1933 to support US industries and their workers. It specifies that federal agencies and contractors working for these agencies must purchase domestically produced products rather than similar imports, and that at least 50 percent of the total cost of components for the product must have been sourced to US suppliers. Changes enacted by Presidents Trump and Biden are scheduled to raise the domestic component to 75 percent of the total cost by 2029.
The central tension in the BAA, as in related domestic-content provisions in other legislation such as the 2021 Bipartisan Infrastructure Investment and Jobs Act, is between the protection of American jobs and higher prices for the government and ultimately taxpayers. In The Increasing Cost of Buying American (NBER Working Paper 32953), Matilde Bombardini, Andres Gonzalez-Lira, Bingjing Li, and Chiara Motta analyze data from the Federal Procurement Data System, which includes information on all federal contracts, to estimate how much the BAA inflates the cost of federal purchases and how it contributes to employment. Federal agencies can request waivers of BAA provisions under some circumstances, for example, when domestic suppliers are unable to meet federal demands or when prices charged by domestic producers appear to be unreasonably high, and they may also purchase from foreign suppliers when products will not be used in the US.
The Buy American Act raised US manufacturing employment by about 100,000 workers at a cost of more than $110,000 per job.
The researchers focus on the manufacturing sector over the period 2001–19, for which their dataset includes more than 32 million contract-year observations and more than 600,000 vendors. Aircraft manufacturing, shipbuilding and repairing, and guided missile/space vehicle manufacturing top the list of detailed industries that receive federal procurement dollars.
Within narrowly defined industries, the researchers compare the share of imports in purchases by the federal government and the rest of the economy. They interpret this difference as a measure of the constraint the BAA imposes on federal purchases. In more than 80 percent of industries, the import penetration ratio is one-tenth as large for government purchases as for private sector purchases.
The researchers estimate that removing current BAA provisions would result in a loss of about 100,000 American jobs with a cost saving on federal purchases resulting in aggregate welfare gains of between $112,000 and $138,000 per job. They also estimate that the tightening of domestic content provisions scheduled to take effect by 2029 will raise domestic employment by about 41,000 jobs, but at a cost of $154,000 to $238,000 per job. The higher per-job cost resulting from the incremental tightening of domestic content rules reflects the lower labor intensity of industries that will be affected by tightening relative to those that have already been affected, and an increase in the price of other federal purchases from industries not directly affected by the tightening.
— Greta Gaffin
