Hearing President Biden’s State of the Union address touting Buy American requirements for federally funded infrastructure projects, I recalled a law review article I coauthored 45 years ago, “American Antitrust Liability of Foreign State Instrumentalities: A New Application of the Parker Doctrine.”[1] My research in 1978 identified 23 states that already had Buy American laws on the books. Given what has transpired since then, how helpful are such requirements and are there better tools to address our trade deficit?

Professor Donald Baker proposed the article’s topic to my law school classmate Kevin MacKenzie and me. Baker had just returned to teaching, after heading the U.S. Justice Department’s Antitrust Division during Gerald Ford’s presidency.

There, Baker observed the opening moves of Asian nations’ bid to supplant America’s manufacturing sector. At the heart of the matter were subsidies Japanese and, later, Chinese governments paid their state-sponsored manufacturing companies. Professor Baker suggested MacKenzie and I explore whether U.S. antitrust policy could be an effective antidote.

We prepared our article as antitrust law experts placed growing emphasis on econometric modeling of commercial behavior. In 1975, Harvard Law professors Areeda and Turner “published a landmark article ‘attempt[ing] to formulate meaningful and workable tests for distinguishing between predatory and competitive pricing by examining the relationship between a firm's costs and its prices.’ Their proposal was that, for a firm with monopoly power, ‘[a] price at or above reasonably anticipated average variable cost should be conclusively presumed lawful,’ and a price below that cost ‘should be conclusively presumed unlawful.’ The rationale was that prices at or above average variable cost exclude less efficient firms while minimizing the likelihood of excluding equally efficient firms.”[2]

The Areeda and Turner standard embodied two changes to existing legal precedents. First was use of variable cost as the determiner of legal or illegal behavior. Second was adoption of a “per se” rule (“conclusively presumed” lawful or unlawful), rather than requiring a plaintiff to prove monopolistic “intent” of a competitor. Proving intent in an antitrust case is nearly impossible.

In a series of decisions from 1986 to 1993, the U.S. Supreme Court bowed to the Areeda and Turner view, then undercut it. In its definitive 1993 Brooke Group decision,[3] “the Court held there are ‘two prerequisites to recovery’ where the claim alleges predatory pricing under section 2 [of the Sherman Act]. Plaintiff must prove that (1) the prices were ‘below an appropriate measure’ of defendant's costs in the short term, and (2) defendant had ‘a dangerous probability of recouping its investment in below-cost prices.’ The Court elaborated on the recoupment prerequisite, concluding that ‘plaintiff must demonstrate that there is a likelihood that the predatory scheme alleged would cause a rise in prices above a competitive level that would be sufficient to compensate for the amounts expended on the predation, including the time value of the money invested in it.’”[4]

The unstated premise of the Court’s holding and the academic papers on which it was based was that companies behave as rational economic actors. That premise is sound when competitors share the same incentives. It is suspect and often false when foreign states and their state-controlled economic enterprises are market competitors. For they have a political interest to achieve dominance and the government financial support to engage in otherwise irrational economic behavior. From 1890 through WW II, the United States government subsidized U.S. industries, especially steel, to displace British producers whose output in 1880 exceeded ours by tenfold.[5] Asian producers, supported by their governments, have done the same to us in the last half century.

The opportunity to use antitrust law as a policy lever to address our trade imbalance is long gone. Antidumping laws and tariffs were the tools chosen instead and have not been effective. Today, only direct economic action will do. Economists say Buy American laws are good political theater, but economically inconsequential.[6] Only concerted action by both the private sector and the federal government can turn the tide. Whether and when that will occur remains the question of the day.

[1] Bauerle, James F. and MacKenzie, Kevin I. (1978) "American Antitrust Liability of Foreign State Instrumentalities: A New Application of the Parker Doctrine," Cornell International Law Journal: Vol. 11 : No. 2 , Article 7. Available at: https://scholarship.law.cornell.edu/cilj/vol11/issue 7.

[2] .U.S. Dep't of Justice, Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act , Chapter 4: Price Predation (2008)(“DOJ Section 2 Report”). Available at: www.usdoj.gov/atr/public/reports/236681.htm. In the first year of the Obama Administration, the Antitrust Division withdrew the DOJ Section 2 Report on the basis that it was too timid in the enforcement policy it articulated. The DOJ Section 2 Report, however, remains a useful historical record of the evolution of antitrust policy. https://www.justice.gov/opa/pr/justice-department-withdraws-report-antitrust-monopoly-law

[3] Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993).

[4] DOJ Section 2 Report.

[5] W. Serrin, Homestead: The Glory and Tragedy of an American Steel Town (1993).

[6] “Biden’s ‘Buy America’ Bid Runs Into Manufacturing Woes It Aims to Fix: Infrastructure Officials Complain they Can’t find U.S. Suppliers for Items They Need to Buy American by Law. Available at:

https://www.washingtonpost.com/us-policy/2023/02/18/biden-buy-america-roads-bridges.