Protectionism and Buying American

I have recently been reading Economics in One Lesson by Henry Hazlitt, and in Chapter 11, Section 2, I found an interesting analysis of tariffs and how they actually hurt everyone except the special interest producer. In his hypothetical example, the consumers pay more for the products, there is less export of American currency to foreign countries, and therefore less export from America, and he even goes on in the following sections about wages decreasing as an effect of tariffs.

This has made me rethink “buying American,” which seems to be a big movement in today’s society. If it is more expensive for me to buy from an American company, and I do it anyway, along with tens of thousands of other consumers, what are the actual effects? That company doesn’t go out of business, yet some foreign company with cheaper equivalent products may, or at least it will lose profits, resulting in the increased unemployment in that country and a decrease in buying power of that country, affecting American exports. If the option to buy the alternative is lost, the cost of the product to consumers increases, hurting working families in America. The employees of the American company will keep their jobs instead of moving to other industries, which is seen as the motivation behind the choice to buy American. But, the unseen result is that there is less American money in the pockets of the foreigners, money that has no purpose other than to be spent in America. Therefore, by buying American, you are helping that single company at the expense of the minuscule loss to every American company that exports its products outside the country. In reality, it doesn’t really matter if you buy American or not, since that money will probably not spend long in foreign circulation before it is re-used to buy American out of necessity. The power of electronic circulation of currency these days is incredible.

Hypothetically, if I buy my Honda Civic instead of a Chevy Volt, what’s the difference? When I purchase the Honda new, I am putting a few thousand dollars in the pockets of a Japanese company. Dollars don’t work over there, so they need to change them into something else. They have a few options:

• They can convert it into Japanese Yen, whose exchange rate today is 1 yen per 0.009101 U.S. dollars by selling the currency to an American entity. This simply decreases the American holdings of the foreign currency, and injects the money right back into America.
• They can convert it into Japanese Yen by selling it to another foreign country on a currency exchange, or by selling it domestically to a currency trader. This probably happens to some extent, but it just represents one more extremely fast electronic hop through the global investing ether.
• They can convert it into holdings in a US company, bonds, commodities, homes, or other US-based securities. This helps our economy, allowing our companies to function, maintaining American employment directly.
• They can loan it back to US entities and collect interest in dollars, which have to go through this process again (yes, I realize that bonds fit here, but I feel they fit better in the previous bullet). Eventually, these all have to end up back in the pockets of Americans, and even lift the burden of risk from all American lenders. If these loans are defaulted upon, it was simply a bad investment by the foreign investor, whose product and money we have now!
• Finally, they can simply buy American. Our exporters will benefit greatly by the increased spending, and will buy products being produced in America for lower prices than they can be found in Japan, necessarily adding to the efficiency of operation of the world market (otherwise, the exporters would go out of business).

Note also that investing in foreign currency is a gamble. It is definitely possible that a foreigner may sell us a Honda Civic today for $10,000, and 6 months from now inflation of the money supply (the M3 that the Fed doesn’t publish anymore, not the CPI, which is open to interpretation) will drive the purchasing power of those dollars lower, meaning by buying that car, we actually cheated the manufacturer out of some amount of buying power. Therefore, if the car company wants to continue being profitable, it cannot keep its holdings in American currency for more than the short term, meaning it has to offload it, the most logical place being back to America, or to a Japanese currency trader, who will do the same.

All in all, I would almost encourage buying foreign to get rid of these worthless pieces of paper as quickly as possible. Let the foreigners deal with our ruined currency.