“Where goods cross borders, armies don’t”

By Dawn Christof Champney, WWEMA

Bastiat came of age during the Napoleonic wars, during a time of extensive government intervention in economic affairs. The central theme of his ideology was that all economic decisions should be made with the consumer in mind, and that tariffs serve no purpose but to negate the gains provided to society by technology, labor, ingenuity, determination and progress.

“What little one-time gain in US jobs may occur from the $6 billion injection in stimulus funds could be lost year-after-year from retaliatory measures taken by our most favorable trading partners”
-Dawn Christof Champney

So what does Bastiat’s thinking have to do with today’s US water and wastewater infrastructure and, more specifically, the stimulus plan put into place to jump start the economy? Well, everything!

When President Obama signed in the American Recovery and Reinvestment Act (ARRA), there was renewed expectation that the US would finally take serious steps to reinvest in its water and wastewater infrastructure and re-energize its manufacturing base, which has been the engine that has driven the US economy while giving its citizens access to the world’s safest water supplies and most effective wastewater treatment systems. What wasn’t understood by most when this legislation was enacted was that it contained two words, which while on face value sounded reasonable, in fact could ultimately undermine the gains to be achieved by this historic $787 billion plan. Those being, ‘Buy American’.

Before waving your American flag in patriotic protest, as is the typical reaction when one suggests that “Buy American” is anything short of motherhood and apple pie, take a moment to reflect on its implications – not only to our industry sector, but to America’s standing as a world leader. No one would argue that creating American jobs is not an imperative during these times of rising unemployment, but in the haste to speedily enact legislation to stop the hemorrhaging of an economy in free fall, we have chosen a short-sighted path of protectionism that could actually cost more US jobs in the long run and put our nation’s infrastructure at further at risk.

Let’s first look at the current situation. ARRA provided $6 billion to the US Environmental Protection Agency for the Clean Water and Drinking Water State Revolving Fund (SRF) programs to finance municipal water supply and wastewater treatment projects. Another $1.38 billion was given to the US Department of Agriculture for its rural development water and waste loan and grant program. Projects receiving stimulus funds through these programs must comply with ‘Buy American’ requirements, meaning that all steel, iron and manufactured goods used for these projects must be produced in the US, the exception being if the item can’t be found in the US or if it is inconsistent with the ‘public interest’ (as in the case of national security).

A common misconception is that the international trade agreement provision contained in the ARRA will allow municipalities to continue doing business with suppliers based in countries that are signatories to our international trade agreements, such as Canada and Mexico in the case of the NAFTA. That is not the case. Since municipalities are not party to these agreements, they are not bound by their terms. Therefore, they can only buy US-produced manufactured goods for projects receiving stimulus funds through the above-mentioned programs. Though the components and subcomponents of these US-produced manufactured goods can come from any country (China, for example), the final product must be ‘produced in the US’.

Here is the rub. First, the definition of ‘produced in the US’ remains extremely vague. The Office of Management and Budget is defines it as having been ‘processed into a specific form or shape; or combined with other raw material to create a material that has different properties than the properties of the individual raw materials’. But exactly what does that mean? 

Secondly, US companies are being shut out of their own domestic market, unable to bid on US municipal water and wastewater projects if they own companies located outside the US that sell and ship directly to municipalities. A majority of US companies that sell products to municipal water and wastewater utilities have some degree of offshore sourcing in keeping with providing its customers with the best products that improve performance and reduce life-cycle costs. It’s a global economy, and their municipal customers have benefited from the global supply chain that has brought both innovation and savings to their facilities. Now these companies are being asked to sign certificates when bidding on stimulus-funded projects stating that their products are ‘produced in the US’, even though they don’t know for certain what that means. They bear enormous liability if found to be in non-compliance due to a misinterpretation of these vague rules.  Do they take the risk or remove themselves from this market? After all, we are talking about some of the most well known and respected US suppliers in the business. 

Finally, municipalities have the option of seeking waivers from this requirement in hopes of getting the products best suited for the job, but the test for getting a waiver is rigorous, time-consuming and potentially costly if rejected, not to mention subject to public scrutiny when published in the Federal Register, as is required by this new law. Municipalities face a small window of opportunity to use or lose their funding, thus limiting their options and reducing their access to preferred suppliers. This provision has had a stifling – not stimulating – affect on the US municipal water and wastewater market as the lawyers work through the interpretation of this complex rule.

Some would argue this is a short-term fix for the US economy and will work itself out in time.  It brings to mind a quote by the 17th century English poet Robert Herrick: “None pities him in the snare, who warned before, would not beware.”

The ‘Buy American’ rule is starting to appear in a number of legislative proposals on Capitol Hill. One of particular concern is the Water Quality Investment Act of 2009, recently passed by the US House of Representatives that would impose ‘Buy American’ on all future water and wastewater projects receiving assistance through the SRF programs. This is not a short-term fix. It is intended to be a standing practice on all future projects receiving assistance from the federal government.

This is bad public policy. Our nation has worked too hard and too long to break down barriers to trade and open new markets for US goods and services to resort now to such protectionist practices. Instead of protecting domestic jobs or industries, it destroys them by eliminating export potential to other geographic markets and cutting off imports of products our municipalities have come to rely upon.

Exports of US water and wastewater equipment has grown dramatically during the past two decades as a result of fair trade policies, with 30 percent of US production be exported. US worldwide exports of water and wastewater equipment almost doubled from $13.26 billion in 1998 to $24.85 billion in 2008. This tremendous accomplishment, which has contributed to a positive US trade balance in this sector and increased US employment significantly, may be short lived when retaliatory forces come into play.   

In fact, it has already begun. The Region of Halton in Ontario, Canada, encompassing the towns of Oakville, Burlington, Milton and Halton Hills – total population 470,000 – passed a ‘fair trade’ resolution stating it will trade with any country that does not discriminate against Canada (namely, ‘Don’t Buy American’). This same resolution is going before the Canadian Federation of Municipalities this month. If passed, it will cut off export trade access for US companies to 1700 municipalities across Canada covering 90 percent of its total population. 

But why is this important to US jobs? Well, because Canada is our largest trading partner, with the US having exported $6.18 billion in water and wastewater equipment to Canada in 2008 alone. What little one-time gain in US jobs may occur from the $6 billion injection in stimulus funds for water and wastewater projects could be lost year-after-year from retaliatory measures taken by our most favorable trading partners.

The European Union may not be far behind in taking similar action. John Bruton, European Union’s Ambassador to the US, wrote a scathing editorial in Politico titled ‘Protectionism Doesn’t Protect Anyone’ where he noted that “this Buy American provision is considerably more severe than previous versions” and that “the US stands to lose 6500 jobs for every percentage of exports decreased.” 

Let us hope sounder minds prevail before this train to protectionism derails the US water and wastewater equipment industry. Or we could follow the advice of Frederic Bastiat’s that society would be best served if it were to regress to a cave-man state where supply of goods was at a maximum scarcity. Then people would have to work as hard as possible for as little as possible and never have to fear outside competition. The choice is ours. 

Dawn Christof Champney is President of the Waste Water Equipment Manufacturer’s Association.