Dear Senators and Representatives:

On behalf of National Taxpayers Union (NTU), the nation’s oldest taxpayer advocacy organization, I write urging you to avoid adding burdensome “Buy American” mandates to the Fiscal Year (FY) 2021 National Defense Authorization Act (NDAA). “Buy American” requirements for prescription drugs, in particular, could lead to shortages, higher costs, and less access for the patients and providers who need these treatments the most.

One bill that some lawmakers have expressed interest in including in the FY 2021 NDAA is the Pharmaceutical Independence Long-Term Readiness Reform Act (H.R. 4710).^[1] This bill, which has attracted support from both Republican and Democratic Representatives, would require the Departments of Defense and Veteran Affairs to “only acquire and purchase American-made and Federal Drug Administration approved raw materials, medicines, and vaccines for the Department of Defense.” The legislation defines “American-made” materials, medicines, and vaccines as ones “supplied from, created, or supplied by the United States, including any territory or possession of the United States.” While the bill includes an exception allowing the Departments to obtain such materials “from a trusted foreign supplier” if such a scenario is “unavoidable,” the bill’s authors do not define who is a “trusted foreign supplier” nor what constitutes an “unavoidable scenario.”

NTU Foundation warned lawmakers last year about the many pitfalls of protectionism in U.S. defense spending, with Bryan Hickman writing:

“At least in recent years, this debate has focused more on parochial interests and populist rhetoric, neither of which really serves the needs of the military or the DIB. Some may also argue that defense spending is too important to subject to the same thrift and scrutiny applied elsewhere. However, in reality, the opposite is true. With ever-expanding debts and deficits, the United States should never settle for spending blindly with no accountability, regardless of any national security implications. Moreover, with a growing list of increasingly complex threats to America’s security, military spending should be efficient and provide the best possible resources and equipment to the men and women in uniform. Policies that needlessly restrict competition in order to protect U.S. companies and contractors undermine these objectives by increasing long-term costs and reducing the quality of products purchased and placed into military service. Worst of all, they often do so to serve political ends.”^[2]

These concerns are particularly pertinent as the national debt soars in the wake of the COVID-19 pandemic and recession.

Besides glaring issues with the legislation’s lack of specificity on key terminology, and with protectionism in U.S. defense spending already writ large, any “Buy American” requirements for the Department of Defense will only backfire on military leaders and American troops. Recently, more than 250 economists sent a letter to President Trump, Speaker Pelosi, and Leader McConnell warning them about “Buy American” requirements for medical supplies and pharmaceutical products. They wrote:

“Current shortages of critical medical goods in the Covid-19 pandemic have revealed to all the desirability of diversifying sources of supply and increasing inventory of storable medical goods. Diversifying supply sources and increasing inventories will be costly, but a broad Buy America regime will be more costly. The variety, supply, and price of goods available to Americans will suffer under a broad Buy America regime. Taxpayers and patients will pay more for drugs and medical supplies. Smart policies such as federal government stockpiling look more promising.”^[3]

Some recent “Buy American” requirements appear aimed at China, given misperceptions about China’s role in America’s medical supply chain. While the federal government can and should hold China accountable for alleged abuses and misconduct, a “Buy American” requirement for medical goods – applied to the Departments of Defense and Veteran Affairs as proposed in H.R. 4710, or to every federal agency as proposed by some in the Trump administration – would harm America and its trade and security allies first and foremost, not China.

NTU Foundation has noted that a plurality of U.S. pharmaceutical imports come from Ireland, a close ally. Germany, another ally, is next on the list, followed by three more allies: Switzerland, Italy, and India. China is 17th on the list, supplying only 1.2 percent of U.S. pharmaceutical imports in 2019.^[4] Even when accounting for active pharmaceutical ingredients (APIs), a narrower category, only 13 percent of API manufacturers supplying the U.S. market are in China, while 28 percent are here in the U.S. and 59 percent are located around the rest of the world.^[5]

Many policymakers pushing “Buy American” requirements want to shore up domestic manufacturing of medical goods and supplies. While a global supply chain for medical goods remains critical for American providers and patients, boosting domestic manufacturing for some of these products remains a legitimate aim. NTU has outlined a number of policies Congress can pursue to make it easier for medical goods and supplies manufacturers to invest in America, while still retaining a robust global supply chain. Our options include:

• Suspending tariffs on medical products that help the U.S. fight the pandemic;
• Enacting broad-based changes to the tax code that make it less expensive for pharmaceutical innovators to onshore their production to the U.S., such as full and immediate expensing;
• Correcting the Tax Cuts and Jobs Act’s mistreatment of research and development (R&D) costs, and;
• Relaxing or repealing outdated regulations that inhibit pharmaceutical R&D and approval in the U.S.^[6]

Any of the above would be far more productive and less destructive for patients and taxpayers than “Buy American” mandates, and we stand ready to work with Congress to implement them in a future COVID-19 relief or stimulus package. Thank you for your consideration, and should you have any questions I am at your service.

Sincerely,

Andrew Lautz

Policy and Government Affairs Manager

Citations

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This paper uses an intertemporal general equilibrium model to explore what would likely happen if the President’s wish was granted. Using the G-Cubed (G20) model, it shows that the general equilibrium effects of a depreciated real effective exchange rate brought about by lower U.S. interest rates can result in a wide variety of unintended consequences, many of which contradict the stated aims of President Trump and his administration.

Such a policy would likely result in a larger U.S. trade deficit, would only temporarily devalue the real effective exchange rate and would only temporarily support the U.S. economy. The policy would boost the trade balances of most U.S. trading partners, depreciate China’s exchange rate and boost China’s GDP. Given the policy would make the overvalued exchange rates of many economies even more overvalued, the paper explores what would happen if U.S. trading partners were to retaliate by devaluing their currencies.

It shows that this makes it harder for the U.S. to achieve its objectives and forces a more severe adjustment for economies that presently have undervalued exchange rates.

Read the full report here

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The pillars of the CFA franc

Like other colonial empires – the UK, with its sterling zone; or Portugal, with its escudo zone, France had its franc zone. The CFA franc – orginally the French African Colonial franc – was officially created on 26 December 1945 by a decree of General de Gaulle. It is a colonial currency, born of France’s need to foster economic integration among the colonies under its administration, and thus control their resources, economic structures and political systems.

Post-independence the CFA franc was redesignated: for the eight members of the West African Economic and Monetary Union (WAEMU) – Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo – it became the African Financial Community franc; for the six members of the Central African Economic and Monetary Community (CAEMC) – Cameroon, Central African Republic, Republic of the Congo, Gabon, Equatorial Guinea and Chad – the Central African Financial Cooperation franc. The two zones possess economies of equal size (each representing 11% of GDP in sub-Saharan Africa). The two currencies, however, are not inter-convertible.

As established by the monetary accords between African nations and France, the CFA franc has four main pillars:

Firstly, a fixed rate of exchange with the euro (and previously the French franc) set at 1 euro = 655.957 CFA francs. Secondly, a French guarantee of the unlimited convertibility of CFA francs into euros. Thirdly, a centralisation of foreign exchange reserves. Since 2005, the two central banks – the Central Bank of West African States (BCEAO) and the Bank of Central African States (BEAC) – have been required to deposit 50% of their foreign exchange reserves in a special French Treasury ‘operating account’. Immediately following independence, this figure stood at 100% (and from 1973 to 2005, at 65%).   

This arrangement is a quid pro quo for the French ‘guarantee’ of convertibility. The accords stipulate that foreign exchange reserves must exceed money in circulation by a margin of 20%. Before the fall in oil prices, the money supply coverage rate (the ratio of foreign exchange reserves to money in circulation) consistently approached 100%, implying in theory that Africans could dispense with the French ‘guarantee’. The final pillar of the CFA franc, is the principle of free capital transfer within the franc zone.

The CFA franc: for and against

Despite its exceptional longevity, the CFA franc by no means enjoys unanimous support among African economists and intellectuals. Its critics base their analysis on three separate arguments. Firstly, they condemn the absence of monetary sovereignty. France holds a de facto veto on the boards of the two central banks within the CFA franc zone. Since the reform of the BCEAO in 2010, the conduct of monetary policy has been assigned to a monetary policy committee. The French representative is a voting member of this committee, while the president of the WAEMU Commission attends only in an advisory capacity. Given the fixed rate of exchange between the CFA franc and the euro, the monetary and exchange rate policies of the franc zone nations are also dictated by the European Central Bank, whose monetary orthodoxy entails an anti-inflation bias detrimental to growth.

Secondly, they focus on the economic impact of the CFA franc, construed as a neocolonial device that continues to destroy any prospect of economic development in user nations. According to this perspective, the CFA franc is a barrier to industrialisation and structural transformation, serving neither to stimulate trade integration between user nations, nor boost bank lending to their economies. The credit-to-GDP ratio stands around 25% for the WAEMU zone, and 13% for the CAEMC zone, but averages 60%+ for sub-Saharan Africa, and 100%+ for South Africa etc. The CFA franc also encourages massive capital outflows. In brief, membership of the franc zone is synonymous with poverty and under-employment, as evidenced by the fact that 11 of its 15 adherents are classed as Least Developed Countries (LDCs), while the remainder (Côte d’Ivoire, Cameroon, Congo, Gabon) have all experienced real-term economic decline.

Finally, they maintain that membership of the franc zone is inimical to the advance of democracy. To uphold the CFA franc, it is argued, France has never hesitated to jettison heads of state tempted to withdraw from the system. Most were removed from office or killed in favour of more compliant leaders who cling to power come hell or high water, as shown by the CAEMC nations and Togo. Economic development is impossible in such circumstances, as is the creation of a political system that meets the preoccupations of the majority of citizens.

For its partisans, in contrast, the underlying logic of the CFA franc lies not in neocolonialism, but in monetary cooperation. The under-development of the franc zone nations is attributed to factors independent of their monetary and exchange policies, in particular to their political instability and the poor economic policies of their leaders.

The CFA franc is characterised as a credible and stable currency, a significant virtue given the experience of most currency-issuing African nations. This counter-argument is, however, flawed: experience shows that nations like Morocco, Tunisia and Algeria, which post independence withdrew from the franc zone and mint their own currency, are stronger economically than any user of the CFA franc.

It is also claimed that the CFA franc has allowed inflation to be pegged at a rate considerably lower than the African average. For its critics, however, the counterpart of this low inflation rate is weak economic growth and the creation of fewer jobs. Not to mention that this low average inflation rate does not prevent cities like Dakar from ranking among the most ‘expensive’ in the world.

In fact, the terms of the debate are quite simple. The CFA franc is a good currency for those who benefit from it: the major French and overseas corporations, the executives of the zone’s central banks, the elites wishing to repatriate wealth acquired legally or otherwise, heads of state unwilling to upset France etc. But for those hoping to export competitive products, obtain affordable credit, find work, work for the integration of continental trade, or fight for an Africa free from colonial relics, the CFA franc is an anachronism demanding orderly and methodical elimination.

From forbidden topic to emerging social movement

In October 2016, a group of African and European economists published a book entitled [in translation] Liberate Africa from Monetary Slavery: Who Profits from the CFA Franc? The date was not selected at random; it coincided with a meeting of the franc zone’s finance ministers, central bank governors and regional institutions. In the wake of the public debate sparked by the book, people are beginning to speak out.

France maintains the position that the CFA franc is an ‘African currency’, existing only as a support to Africans, who retain their ‘sovereignty’. Some heads of state, like Alassane Ouattara in Côte d’Ivoire et Macky Sall in Senegal take the same line. Unlike Idriss Déby, Macky Sall describes the CFA franc as ‘a currency worth keeping’. Ouattara goes further, insisting that the currency is a matter for experts and thus not a subject for democratic debate. From this standpoint, any critic of the CFA franc must by definition know nothing about it.

Yet, alongside radical economists and intellectuals, the critics of the CFA franc also include former international officials like Togo’s Kako Nubukpo (ex-BCEAO), Senegal’s Sanou Mbaye (ex-African Development Bank, and Guinea-Bissau’s Carlos Lopez (ex-UN Economic Commission for Africa), as well as African bankers like Henri-Claude Oyima (President-Director General of BGFI Bank).

From a taboo subject raised only by a handful of African intellectuals and politicians, the CFA franc debate is starting to enter day-to-day conversation and to attract the attention of activists. A social movement is developing to demand the joint withdrawal of African nations from the CFA franc. On 7 January 2017, on the initiative of ‘SOS Pan-Africa’ (‘Urgences Panafricanistes’), an NGO set up and run by the activist Kemi Séba, anti-CFA demonstrations were organised in several African and European cities, and in Haïti. The mobilisations varied in size according to country, bringing together intellectuals, pan-Africanist and anti-globalisation activists and others. SOS Pan-Africa has since issued a symbolic appeal for Africans to boycott French products.

The current alternative to the CFA franc in West Africa is the joint currency planned for members of the Economic Community of West African States (ECOWAS). The new currency was due to enter circulation in 2015, but this has since been deferred until 2020. The new deadline may or may not be met, but one thing seems increasingly clear: the CFA franc no longer has a future.

Ndongo Samba Sylla is  Research and Programme Manager for the Rosa Luxemburg Foundation. He is the editor and author of a number of books including The Fair Trade Scandal. 

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The paper analyses different aspects of the role that the euro is currently playing in sub-Saharan Africa (SSA) and in the CFA franc zone of West and Central Africa. As similar contributions on the role of the euro in other global regions, the paper served as background information for the analysis in European Commission (2008) on the international role of the euro for the assessment of 10 years of European Economic and Monetary Union (“EMU@10”). Chapter 1 of this paper examines the role of the euro as an international currency in Sub-Saharan Africa. Chapter 2 assesses the effects that the CFA franc’s peg to the euro had on macroeconomic stability, trade integration and international competitiveness of the CFA franc zone. Chapter 3 looks at how the EU’s multilateral surveillance framework served as a blueprint for multilateral surveillance in the CFA franc zone. Chapter 4 summarises and concludes.

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