‘Buy American’ would delay the U.S.’s decarbonization progress 

The Biden administration set ambitious goals of cutting the U.S. greenhouse gas emissions by around half by 2030 compared to the 2005 levels. In the sweeping Inflation Reduction Act (IRA) passed last year, $369 billion is dedicated to climate and energy incentives, including $270 billion in tax breaks. Although an inefficient climate policy, the massive subsidies would accelerate the deployment of clean technologies and reduce greenhouse gas emissions. And while well-intentioned, the IRA’s climate provisions contain a critical flaw that could undermine its many benefits: the Buy American requirements, which basically amount to protectionist tariffs, would ultimately delay the U.S.’s decarbonization progress. 

President Biden is determined to boost U.S. manufacturing through the Buy American agenda. In both the Infrastructure Investment and Jobs Act and the IRA, there are various rules that dictate how federally-funded projects should use domestically manufactured products. However, as the Washington Post recently reported,  the Buy American agenda runs into a big problem: there are simply not enough U.S.-made products to buy. 

In the IRA, Buy American is required in numerous tax incentives, including the clean energy production and investment tax credits, the advanced manufacturing production credit, and the clean vehicle credit. For example, for buyers to utilize the EV credit of up to $7500, the EVs must be assembled in North America. To receive half of the credit, certain threshold amounts of critical minerals must be sourced or processed in the U.S., or in a country with which the U.S. has a free trade agreement. To receive the other half of the credit, certain threshold amounts of the EVs’ battery components must be produced or assembled in North America. The IRS is expected to issue guidance in March 2023 on additional requirements for critical minerals and battery components.

Implementing Buy American rules would have similar effects as levying import tariffs on imported goods. They may protect certain domestic industries’ competitiveness and jobs but at the cost of harming U.S. consumers and other non-protected U.S. industries. 

Buy American requirements could harm the U.S. economy and delay its decarbonization efforts in two ways. 

First, it would cause delays and increase the costs of clean energy projects. Subsidizing the purchases of more expensive U.S.-made materials and products in federally-funded projects wastes tax dollars and stifles economic efficiency. According to researchers at the Peterson Institute for International Economics (PIIE), the Buy American requirement in the 2020 U.S. public procurement of $1.7 trillion resulted in an annual cost of $94 billion. PIIE also estimated that Buy American rules cost taxpayers on average more than $250,000 to keep one job in the protected U.S. industries. A Congressional Research Service report indicates that Buy American requirements may delay public projects due to compliance and sourcing issues, leading to higher project costs. 

Second, Buy American would cause friction between the U.S. and its trading partners. Its requirements, viewed as protectionist measures, have received significant criticism from U.S. allies, including the European Union (EU). EU policymakers are worried the massive subsidies would give U.S. producers a competitive advantage over EU producers, and that EU producers would relocate to the U.S. to utilize the tax incentives. Perceived as discriminatory and noncompliant with the WTO rules, IRA’s Buy American provisions caused EU officials to consider potential retaliatory measures and subsidizing its domestic industries, which might lead to a “harmful global subsidy race to the bottom.” Creating tensions with U.S. allies and trading partners at a time when global climate mitigation cooperation is especially critical will only undermine these efforts.

That the U.S. is investing in decarbonization to help meet its climate goals is certainly promising. Still, including Buy American requirements would delay clean energy projects and slow the U.S.’s decarbonization progress–especially troubling given the urgent need to mitigate climate change. In turn, it will alienate U.S. allies and make accessing affordable and critical clean energy products unnecessarily difficult. Investing in decarbonization is important, but if the route we take towards it is protectionist, inefficient, and antithetical to global trade liberalization, then we need to pause and map out a new plan.