RANDY KULL, a businessman based in Illinois, sells traffic signs. His products have international appeal, with signs for anglophones (STOP), Spanish-speakers (ALTO) and horses (WHOA). But for some customers, he must stay local. When America’s Department of Transportation is involved, he must use American-made sign-mounting brackets, and fill in a form confirming their source. Mr Kull’s supplier in Arkansas is happy, but he himself is dubious. “We live in a global economy,” he scoffs. The weight of the evidence backs his instinctive scepticism.
To many, buying local seems sensible—wholesome, even. Keeping money close to home is supposed to foster thriving communities and generate jobs. To the administration of President Donald Trump, it is a source of national strength. Around the world, such sentiments are gaining ground. Global Trade Alert, a watchdog, has picked up 343 examples of new local-content requirements imposed since November 2008. In America, it estimates that the share of imports potentially snared by localisation restrictions has risen fivefold since 2009. Proposals for a tightening of existing restrictions on government procurement are due on Mr Trump’s desk by November 24th.
That may be because a soft approach—encouraging but not mandating buying local—does not work. Offering more information, for example, can backfire. In Britain in 1887, a new legal requirement that goods “Made in Germany” were so labelled was meant to protect local producers. It became a badge of quality. Labels might sway some patriots. But for government agencies, hard-nosed investors and cash-strapped shoppers, information is not enough. “Everyone gravitates towards price,” says Mr Kull.
Governments justify intervention in different ways. In Argentina, where 30% of the music broadcast on local radio must be made locally, it is seen as championing local culture. In China data-localisation laws are justified on national-security grounds. Rules on locally produced sources of clean energy, coupled with subsidies, are often defended as environmental protection.
More often, localisation measures are a straightforward grab for jobs and business. In theory, local-content requirements could fix market failures. Companies may not take into account the benefits of being part of a cluster and so may be overly eager to outsource or to use their distant supply chains. By overcoming a failure of co-ordination, content regulations could force local learning-by-doing and foster innovation.
In practice, these policies are protectionist (and banned by the World Trade Organisation). They lock out foreigners, shelter local providers from competition and prevent them from taking advantage of global value chains. A review by Gary Hufbauer, Jeffrey Schott, Cathleen Cimino, Martin Vieiro and Erika Wada for the Peterson Institute for International Economics (PIIE) in 2013 estimated that they lowered global trade by $93bn annually.
Rather than nurturing the strong, such policies appear to coddle the weak. Reviews by the PIIE, the OECD and the UN found no evidence that they stimulate innovation. In supposed success stories such as China’s solar-cell industry, it is unclear whether local-content requirements drove success, or whether innovation was hampered as foreign firms fled. In Brazil’s health-care sector, the PIIE’s analysis suggests that local-content requirements make it slow to adopt new devices and drugs. Protectionism has caused America’s once proud shipbuilding industry to wither.
Local-content restrictions generate hassle. American government agencies can appeal to a list of exceptions for items that are impossible to source locally (it includes capers, goat- and kidskins, cobra venom and quinine). Those American companies that want to sell vehicles to their government must wade through an 83-page rule-book. The biggest costs, however, are in cash. Between 2009 and 2011 the PIIE authors estimate that the Obama administration’s buy-local requirements for steel cost the government about $5.7bn. Canadian restrictions on wind turbines meant utilities in Ontario and Quebec spent $500m more than if they had bought American ones.
Proponents of “buy local” policies tend to think too narrowly. Pricier locally produced inputs mean less cash to spend on other things. A new paper by Peter Dixon, Maureen Rimmer and Robert Waschik of Victoria University puts the short-run benefit to the American economy of ditching its local-content requirements at around 300,000 jobs. They find that the steel sector would not lose out by much—the government represents a tiny fraction of overall demand. But the savings from cheaper inputs would allow the government to cut taxes.
Localisation measures are often considered in isolation. But if they lead to retaliation, everyone loses. To make the point, Mexican trade negotiators have reportedly responded to American threats of limited access for their exporters to public-procurement markets by suggesting Mexico would reciprocate with similar restrictions. Even within an economy local-content requirements create hidden victims. They favour particular sectors, with effects that ripple through the rest of the economy. Surveying a range of restrictions around the world, the OECD finds that they lower exports in sectors not themselves the target of rules by a little over 0.5% in America, and by even more in Brazil and India.
Snappy “buy local” sound bites do not make sensible economic policy. By directing money at one group, another is shut out. By picking a winner in one place, a loser wilts elsewhere—and perhaps closer to home than you might think. They also have a nasty political undercurrent. Calls to buy local inevitably act to exclude outsiders, fostering a sense of “them” and “us”. What seems wholesome has a darker side.