Archive for the ‘Economy’ Category

Tariffs Benefit the American Manufacturing Industry

Wednesday, February 13th, 2019

Most people are unaware that for over 150 years, the American government protected the development and growth of its manufacturing industry with high tariffs, ranging from a low of 5% to as high as 50% in some cases. The first tariffs were imposed by the Tariff Act of 1789, whose purpose was to raise money for the new federal government, slash Revolutionary War debt and protect early-stage American industries from foreign imports.

Prior to achieving its independence, Americans were dependent on goods imported from England, France, and Holland, so it was critical to develop their own manufacturing base to maintain independence as a country in the event of future wars.

These protectionist policies enabled its fledgling manufacturing industries to grow until the United States became the preeminent industrial nation in the 20th century.  American manufacturing dominated the globe for over 70 years.

After World War II, the U.S. switched from protectionism to free trade in order to rebuild the economies of Europe and Japan through the Marshall Plan and bind the economies of the non-Communist world to the United States for geopolitical reasons.

To accomplish these objectives, the General Agreement on Tariffs and Trade (GATT) was negotiated during the UN Conference on Trade and Employment, reflecting the failure of negotiating governments to create a proposed International Trade Organization. Originally signed by 23 countries at Geneva in 1947, GATT became the most effective instrument in the massive expansion of world trade in the second half of the 20th Century.

GATT’s most important principle was trade without discrimination, in which member nations opened their markets equally to one another. Once a country and one of its trading partners agreed to reduce a tariff, that tariff cut was automatically extended to all GATT members. GATT also established uniform customs regulations and sought to eliminate import quotas.

By the 1970s, Japan’s economy was flourishing to the point that Japan became a major exporter to the U. S. for consumer electronic goods such as cameras, stereos, radios, and TVs. During the 1980s, Japan further expanded its U. S. market share with automobiles and machine tools for the manufacturing industry, such as mills, lathes, and turret presses.

Germany focused on high-end products in all of the same markets as the Japanese, so that American products faced stiff competition at the low end and high end.

Manufacturing employment in the U. S. reached a peak of 19.5 million in 1979, and slid down to 17.3 million by 1993 from the effects of job losses from increased imports from Japan, Germany, and other countries because of free trade policies and lower tariffs.

By 1995, when the World Trade Organization replaced GATT, 125 nations had signed its agreements, governing 90 percent of world trade.

Another major blow to the American manufacturing industry took place when the North American Free Trade Agreement (NAFTA) was negotiated under President Bill Clinton and went into effect in January 1994. The agreement was supposed to reduce market barriers to trade between the United States, Canada, and Mexico to reduce the cost of goods, increase our surplus trade balance with Mexico, reduce our trade deficit with Canada, and create 170,000 jobs a year. Twenty years later, the fallacy of these supposed benefits is well documented.

According to the report “NAFTA at 20” released in 2014 by Public Citizen’s Global Trade Watch, “More than 845,000 specific U.S. workers have been certified for Trade Adjustment Assistance (TAA) as having lost their jobs due to imports from Canada and Mexico or the relocation of factories to those countries.”

In 1994, GATT was updated to include new obligations upon its signatories. One of the most significant changes was the creation of the World Trade Organization (WTO.) The 75 existing GATT members and the European Community became the founding members of the WTO on January 1, 1995. The other 52 GATT members rejoined the WTO in the following two years, the last being Congo in 1997. Since the founding of the WTO, a number of non-GATT members have joined, and there are now 157 members.

The loss of jobs accelerated after President Clinton granted Most Favored Nation status to China in the year 2000, and China was able to join the WTO. As a result, the U. S. lost 5.9 million manufacturing jobs from 2000 to 2010, and manufacturing employment dropped from 17.3 million down to 11.4 million in depth of recession in February 2010. In addition, an estimated 57,000 manufacturing firms closed.

On January 31, 2017, the Economic Policy Institute released a report, “Growth in U.S.–China trade deficit between 2001 and 2015 cost 3.4 million jobs,” written by Robert Scott.

Scott stated, “Due to the trade deficit with China, 3.4 million jobs were lost between 2001 and 2015, including 1.3 million jobs lost since the first year of the Great Recession in 2008. Nearly three-fourths (74.3 percent) of the jobs lost between 2001 and 2015 were in manufacturing (2.6 million manufacturing jobs displaced).”

Why were so many jobs lost? A large percentage of the people who lost jobs were in industries decimated by Chinese product dumping and below market pricing; i.e., textiles, furniture, tires, sporting goods, and garments. In addition, American manufacturers chose to outsource manufacturing offshore as the U.S. Department of Commerce data shows that “U.S. multinational corporations… cut their work forces in the U.S. by 2.9 million during the 2000s while increasing employment overseas by 2.4 million.”

Thankfully, manufacturing employment increased to 12.8 million by December 2018 as shown by the chart below. This was the result of a very slowly improving economy, reshoring (returning manufacturing to America), and increased Foreign Direct Investment (foreign manufacturers setting up plants in the U.S.) Notice that it took six years to increase by 904,000 under the Obama Administration, and it’s only taken two years to increase by another 441,000 jobs under the Trump Administration. While an increase of 1.4 million jobs is good news, at this rate, it would take about 30 years to recoup the 5.8 million jobs we lost from 2000 to 2010.

 

We need to accelerate the growth of manufacturing jobs, and that is what the tariffs imposed by President Trump are designed to do.  In the only few short months since the tariffs went into effect, I’ve seen the following headlines about job growth in the past week:

“U.S. Steel Corp. Restarts Texas Plant That Closed in 2016,”  IndustryWeek, February 5, 2019

“Tariffs Helping US Manufacturers Add Jobs, Says Group,” IndustryWeek, February 7, 2019

“US Steel Resumes Construction on Idled Facility,” IEN, February 11, 2019

On December 04, 2018, the article “Contrary to popular belief, Trump’s tariffs are working” by Jeff Ferry, Research Director for the Coalition for a Prosperous America (CPA), stated,  “The tariffs have contributed to this growth directly and indirectly. Directly, we’ve catalogued some 11,000 US jobs that are being created by companies in the four tariffed industries, and that’s not including any of the Section 301 industries. Since that 11,000 tally in August, more investments and jobs have been announced, like the massive $1.5 billion steel plant to be built by Steel Dynamics, which will create some 600 new jobs in the southwest. Solar Power World lists a dozen solar companies now investing in US production of solar modules.”

“At CPA, we built an economic model looking at the effects of the tariffs on the US economy from 2018 through 2021. We found that the tariffs boosted US economic growth, adding $9 billion to GDP this year. Further, our growing economy leads to growing US imports each year. In other words, by boosting our own economic growth, we buy more goods from our trading partners, not less.”

If we want to protect our national security and maintain our national leadership in the 21st Century, we cannot continue down the path of increasing trade deficits and increasing national debt by allowing countries with predatory trade policies to destroy the American manufacturing industry.  I support the new path the Trump Administration is forging by developing and implementing a national strategy to win the international competition for good jobs, sustained economic growth, and strong domestic supply chains.

 

Upcoming Southern California Events

Wednesday, January 16th, 2019

We have a busy first few months of trade shows and conferences for 2019. I will be attending the following shows for at least one day to keep up with the latest technologies and industry news for writing future articles.

I’m also beginning the year with several webinars in January – March.  I am giving two webinars on “How to Return Manufacturing to the U.S. Using Total Cost of Ownership Analysis” on two dates, Tuesday, January 22nd (Register here) and Wednesday, January 30th (Register here).

Then, I’m giving one Tuesday, February 12th, on “How We Can Solve the Skill Shortage and Attract the Next Generation of Manufacturing Workers.” Register here.

On February 5-7, 2019, the UBM Advanced Manufacturing Expo & Conference

will be held at the Anaheim Convention Center, Anaheim, CA

This conference will be part of the five shows being held concurrently at the Center.

Register Here

 Register Here

Expo Hours for all shows:

 February 5, 10:00 a.m. – 5:00 p.m.

February 6, 10:00 a.m. – 5:00 p.m.

February 7, 10:00 a.m. – 4:00 p.m.

 

AFCEA/USNI WEST Conference
Registration Center

11208 Waples Mill Road, Suite 112
Fairfax, VA 22030
(888) 273-5706 / (703) 449-6418
Register

Why Attend AFCEA:

Attend three days of open discussions with defense and maritime leaders. Gain a better understanding of the impacts and implications of the new National Security Strategy. Hear about the current set of challenges facing the Navy, Marine Corps and Coast Guard, and be a part of the dialogue on the opportunities and solutions to address these concerns.

CONNECT

Spend time with military, government and industry ‘out of the office’ and ‘outside of the beltway.’ Engage with speakers, attendees and exhibitors and discuss ideas and insights. Afternoon happy hours on the exhibit floor provide an opportunity to network with thought leaders.

INNOVATE

Explore and experience the latest platforms, leading edge technologies and state-of-the-art networking capabilities that support the Sea Services operations. Visit over 300 maritime exhibits.

 

IPC APEX EXPO 2019 is a five-day event like no other in the printed circuit board and electronics manufacturing industry. Professionals from around the world come together to participate in the Technical Conference, Exhibition, and Professional Development, Standards Development and Certification programs. These activities offer seemingly endless education and networking opportunities that impact your career and company by providing you the knowledge, technical skills and best practices to address any challenge you face.

Exhibition Hours

Tuesday, January 29           10:00 am–6:00 pm

Wednesday, January 30     9:00 am–6:00 pm

Thursday, January 31         9:00 am–2:00 pm

About IPC

IPC is a global trade association dedicated to furthering the competitive excellence and financial success of its members, who are participants in the electronics industry. In pursuit of these objectives, IPC will devote resources to management improvement and technology enhancement programs, the creation of relevant standards, protection of the environment, and pertinent government relations.

Register Here

Conference: April 29 – May 2, 2019 | Exhibits: April 30 – May 1

Long Beach Convention Center, 300 East Ocean Blvd, Long Beach, California

Conference Hours:

Tuesday, April 30, 2019 | 10:30 AM – 4:00 PM

Wednesday, May 1, 2019 | 10:30 AM – 4:00 PM

Thursday, May 2, 2019 | 9:00 AM – 12:00 PM

Exposition:

Tuesday, April 30, 2019 | 10:00 AM – 5:30 PM

Wednesday, May 1, 2019 | 10:00 AM – 5:30 PM

Dates and times for workshops, tours, and networking receptions are being determined. Check back for updates.

Register Now

 

For those of you in San Diego County, you may also want to attend the free Economic Roundtable on Thursday, January 17, 2019.

What does the San Diego County economy look like for 2019 and beyond? Join  the lively discussion with a panel of experts covering the future of the economy, housing/homelessness, military, and diversity and inclusion. Experts will provide predictions and their perspective on what may be in store for San Diego County.

Session One:

Ray Major, Chief Economist, SANDAG

Ryan Ratcliff, Associate Professor of Economics, USD School of Business

Sarah Burns, Director of Research and Evaluation, San Diego Workforce Partnership

Session Two:

Housing/Homelessness: Stephen Maduli-Williams, Community Development Program Manager, City of San Diego

Military: Jesse Gipe, Senior Manager, Economic Development, San Diego Regional Development Corporation

Diversity and Inclusion: Dwayne Crenshaw, CEO and Co-Founder, RISE San Diego

Date: Thursday, January 17, 2019

Time:

Networking: 8–8:30 a.m.

Program: 8:30 a.m.–noon

Location:

University of San Diego—Joan B. Kroc Institute for Peace & Justice

5998 Alcala Park, San Diego, CA 92110

Cost: Free

Save Your Seat

 

 

Navarro Warns of Fragility of U.S. Manufacturing and Defense Industrial Base

Tuesday, December 4th, 2018

If you don’t watch CSpan, you missed an important speech by Dr. Peter Navarro, White House National Trade Council and Office of Trade and Manufacturing Policy Director, on November 9th at the Center for Strategic and International Studies in Washington, D. C.

Dr. Navarro spoke about the manufacturing and defense industrial base and how U.S. economic strength is an element of national security and how it fits with the Trump strategy in dealing with the broader economic and defense issues. Dr. Navarro said that in December 2017, as part of formulating a national security strategy, President Trump introduced the maxim that “economic security is national security.”

He explained that everything that the Trump administration has done is part of this strategy, such as tax cuts, deregulation to reduce the onerous regulations put in place by the Obama Administration, ending the war on coal, and the steel and aluminum tariffs. These are all part of supply side economics to help companies be more competitive and grow in a non-inflationary way.

He commented that instead of the “doom and gloom” of economists, there has been “a flood of new investment and capital expenditures” by steel and aluminum companies, and “the waivers granted by the Department of Transportation have gone down from a flood to a trickle.”

He said, “In my estimation, we have the finest U. S. Trade Representative in U. S. history.  Doing the Section 301 investigation was a power that lay dormant for decades. This is the way we are able to now protect our technology from Chinese predation.  It has been tremendously successful in doing that.”

He outlined how Trump’s tough trade policy, backed up by tough action, has led to the renegotiation of two out of the three main trade deals – NAFTA, the Korea deal, and the WTO.  With regard to NAFTA, now called the USMCA, he said, “The whole essence is a provision to bring domestic content back onshore and share the fruits of the assembly and supply chain with our neighbors to the south and to the north. This is a deal which will strengthen all three countries and strengthen the defense industrial base.”

He commented that President Trump is a man who thinks every day about how to put more American men and women back to work, particularly those who work with their hands. He discussed how during his time on President Trump’s campaign trail, a report came out stating that one out of four people were out of the workforce, the so-called “discouraged workers” – men and women who had given up looking for work. He said, “We were told that the jobs for people who work with their hands were never coming back. Now, we have historically low unemployment., and rising employment among Blacks, Hispanics, and woman. Over a million people are back in the workforce through a fundamental restructuring of the manufacturing and industrial base.  It isn’t just the quantity of jobs; it’s the quality of jobs.”

He said, “I was blessed to be part of a large team that restructured the sale of arms to our allies and partners.  From an economic security point of view, it means more jobs here, good jobs with higher wages.  When you reactivate a supply chain, you activate 400 suppliers in that supply chain in 41 states. It helps expand production lines. If you are able to sell arms to allies and partners, it makes that country stronger.”

He then turned his attention to the findings of the “Assessing and Strengthening the Manufacturing and Defense Industrial Base and Supply Chain Resiliency of the United States Report” that was prepared by the Interagency Task Force in Fulfillment of President Trump’s Executive Order 13806.

He said that an Interagency Task Force, led by DoD, created sixteen working groups with over 300 subject matter experts from across the federal government. Nine working groups focused on traditional industrial sectors, and seven working groups assessed enabling cross-cutting capabilities, such as machine tools. The report revealed that there are almost 300 gaps and vulnerabilities in America’s manufacturing and defense industrial base.  The Executive Summary states, “Currently, the industrial base faces an unprecedented set of challenges: sequestration and uncertainty of government spending; the decline of critical markets and suppliers; unintended consequences of U.S. Government acquisition behavior; aggressive industrial policies of competitor nations; and the loss of vital skills in the domestic workforce.”

Dr. Navarro asked the rhetorical questions, “How did we get to the place where the greatest military power in the world faces serious gaps, close to 300 gaps, in the defense industrial base?…What happens when you randomly cut off dollars from the defense department?

He explained, “There are five macro forces that bear down on the defense industrial base:

  1. Budgets and sequestration
  2. Decline of American manufacturing capability and capacity
  3. S. government procurement practices
  4. Industrial policies of competitor nations
  5. Decline of U.S. STEM and trade skills

He commented that the decline of the manufacturing base itself was due to the forces of globalization as well as the industrial policies and unfair trade practices of our economic competitors, our so-called allies, and our strategic rivals, particularly China.  He said, “This report called out China for its policies of economic aggression…China is engaged in unfair trade practices and currency manipulation.  From 2003 to 2014, it was documented that China was the worse currency manipulator in the world…so that we are running up annual trade deficits of half a billion dollars.”

He showed a chart, titled “China’s Categories of Economic Aggression.”  He said, “This chart is founded on the underlying assumption that China is a non-market economy, a state-directed economy. They use international rules when they benefit them and violate them when it’s to their benefit.”  He outlined` six economic strategies that China uses:

  • Protect their home markets from competition and imports
  • Protect China’s share of global markets
  • Secure and control core natural resources globally
  • Dominate traditional manufacturing industries
  • Acquire key technologies and Intellectual Property from other countries and the U. S.
  • Capture emerging industries of the future that will drive future growth and advancement in defense industries.

He said, “There are over 50 ways that China engages in these acts, policies and practices s to achieve these strategies…, if you could negotiate to eliminate 25 of these tactics, you would still have 25 that would hurt us.”

This point is very relevant to the preliminary agreement that President Trump negotiated with Chinese President Xi Xinping at the G20 this past weekend. The agreement included a 90-day delay to the planned January increase in US Section 301 tariffs—which were set to rise from 10 percent to 25 percent on $200B of Chinese imports.

Judging from past history of negotiations with China, it is unlikely that China will keep their part of the bargain of this latest agreement. It will probably unravel before the 90 days are up. Dr. Navarro alluded to the problem of negotiating with China when he said, “The biggest problem is the trust issues. One of the things about working in the White House is that you can ask for stuff. I asked them to give me all the instances where China has agreed to something and then not kept their promise. I got back like five pages of stuff going back 30 years. It’s frightening…”

Space does not permit me to cover his discussion of the tactics China uses. Through research, I discovered that Dr, Navarro had used this same chart when he spoke to the Hudson Institute on Thursday, June 28, 2018, an image of which can be viewed at this link..  It looks to me that he created the chart to be a visual summary of key points made in his report, “How China’s Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World,” which he submitted to President Trump in June 2018.

His comments included mention that the globalization of the supply chain has resulted in having only a single source for some critical product or components. For example, he mentioned that there is only one company that can make turrets for tanks. He said, “The F-34 has a seven-tier supply chain, and you need to make sure that production lines for parts can continue and expand if there is a surge of demand…If you have foreign sources for products and components, that is a big problem, especially if China is the source.”

He also briefly commented on the problem of the decline of U. S. STEM and trade skills saying that if you have labor shortages because you don’t have enough skilled labor, that is a problem.

He concluded by saying, “The day that Pat Shanahan turned in the report, DoD and other agencies of government were already moving forward to fill these gaps and vulnerabilities. The day that the report was handed in, we signed two Defense Protection Act Title III orders that would help a couple of small companies in that fragile supply chain…We have initiatives for the national defense stock pile program to help with critical material issues. There is an effort to modernize the organic industrial base…This administration is working tirelessly, tirelessly, to fix those gaps and vulnerabilities. This effort really is the purest expression of the principle of economic security is national security.  We will strengthen America’s manufacturing and defense industrial base, and in the process, we will create jobs and build factories and better protect our homeland…”

I’ve made the point repeatedly that we can’t protect our national security or even defend our country without a strong manufacturing base. After writing about how and why we needed to save and now rebuild our manufacturing industry by writing three books and over 300 articles since 2009, it is gratifying to me that action is finally being taken to address this situation the Trump Administration.

CPA’s Fair Trade Message Finds Favor in Capitol Hill Meetings

Thursday, May 31st, 2018

The week of March 12th, I was one of over 60 members of the Coalition for a Prosperous America (CPA) who attended our annual conference/fly-in.  In a two-day blitz, members visited more than 120 House and Senate offices in Washington, D. C. to sound the alarm: “America’s massive, growing trade deficit is killing jobs, harming communities, and stifling economic growth.”

Our conference began Monday afternoon with remarks by CPA Chairman Dan DiMicco touting Present Trump’s announcement of imposing Section 232 tariffs on steel and aluminum as a long-overdue measure to safeguard our domestic steel and aluminum mills.  He emphasized that CPA also supports all allowable trade enforcement remedies, such as the Section 201 Tariffs on imported solar panels and clothes washers and the Section 301 Investigation into Chinese intellectual property theft.

CEO Michel Stumo highlighted the new flyers covering issues that we were to discuss with Congressional Representatives and their staff.  Research Director Jeff Ferry introduced the new Job Quality Index he has created, which will differentiate high-paying jobs from low-paying jobs in the monthly job data.

We urged Representatives to support legislation that would eliminate the nation’s trade deficit, address an overvalued dollar, provide stronger trade enforcement, and tackle troubling trade issues with China.

In our meetings, we provided Representatives and their staffs with legislative solutions aimed at eliminating America’s trade deficit, which grew to $566 billion last year. A fact sheet produced by CPA highlighted that no other country has run 42 years of consecutive trade deficits, which has been an average 2.99% drag on our Gross Domestic Product. The flyer offered key reasons why “free” and “fair” trade can result in balanced trade—instead of the job loss that has plagued America’s productive sectors for the past 15 years.

Another fact sheet, showed that ten countries account for 97% of our trade deficit, namely China, Mexico, Japan, Germany, Ireland, Vietnam, Italy, India, South Korea, and Malaysia. Our deficit with China alone jumped from a $337 billion deficit or 38% in 2016 to a $375 billion deficit or 47% in 2017.

We discussed how the he Tax Cuts for Jobs Act narrowed, but did not eliminate, the tax benefit for moving operations overseas, and presented information on how the tax system could be improved with Sales Factor Apportionment, based, which is “a destination of sales system used by many states that would tax corporate income in proportion to a companies’ sales in the U.S. regardless of either domicile or location of operations.”  For example, a multinational corporation that still does 40% of its business in the U.S. would be taxed on the profits of that 40% of its worldwide sales.

The North American Free Trade Agreement (NAFTA) was also another topic of discussion during our visits. CPA supports “mending it or ending it” as CPA has long argued that NAFTA has hurt U.S. manufacturing, cost jobs, and incentivized investment in Mexico rather than the U.S. We explained the provisions that must be included in a renegotiated NAFTA to help America’s manufacturers, such as reinstating country of original labeling for beef and pork, tightening country of origin rules to require higher North American content, requiring periodic reviews, and a mechanism for countries to withdraw, if necessary.

During our Hill meetings, we emphasized the importance to our national security of a vibrant domestic steel and aluminum industry. I mentioned that we outproduced Germany and Japan in World War II, but we would not be able to do so in future wars if we let our domestic steel and aluminum industries be further decimated. We expressed our support for President Trump’s tariffs on steel and aluminum import, especially since CPA has many members in the steel industry.

In addition, we discussed the problem of the overvalued U. S. dollar. And presented the flyer that showed as of May 2017, the U. S. dollar was overvalued by 25.5%, whereas the currencies of Japan and Germany were undervalued by nearly as much, with South Korea not far behind at about 15% of undervaluation.  I told them that CPA has a new Advisory Board member, Dr. John R. Hansen, who is a 30-year veteran of the World Bank. He has proposed a solution to address this problem that “pushes American wages down, increases the trade deficit, disrupts capital markets, and hooks consumers on debt.” He proposed that “Congress should provide the Federal Reserve the responsibility to maintain the dollar at a current account balancing equilibrium price. New legislation should provide the Fed with a new tool to moderate the dollar exchange rate called a market access charge (MAC).” He projects that the MAC would balance trade in five years and that balance would be maintained in the future.

In addition to our congressional visits, CPA hosted a bipartisan group of Representatives to meet with our members, including Rep. Tom Reed (R-NY-23), Rep. Dan Lipinski (D-IL-23), Rep. Mo Brooks (R-AL-05), and Rep. Robert Pittinger (R-NC-09). Last fall, Representatives Brooks and Lipinski introduced House Congressional Resolution 37 for Congress to set a national goal to eliminate the trade deficit.  It is only one sentence long: “Expressing the sense of Congress that Congress and the President should prioritize the reduction and elimination, over a reasonable period of time, of the overall trade deficit of the United States.”

Rep. Pittinger is co-sponsor of HR 4311, the Foreign Investment Risk Review Modernization Act of 2017, which would expand and update the review by the Committee on Foreign Investment in the U.S. (CFIUS) to meet new national security risks. As we distributed this flyer to Congressional Members, we expressed our support for the order President Trump signed to prohibit the acquisition of Qualcomm by Broadcom.  When I met with Congressman Duncan Hunter, he said he had sent a letter to President Trump urging him to stop the takeover of Qualcomm by Broadcom.

As the publisher of my newest book, Rebuild Manufacturing – the Key to American Prosperity, CPA provided books for me to present at my 15 appointments with Congressional Members and/or staff, and I also had the pleasure of presenting a copy of my book to Rep. Mo Brooks and Rep. Robert Pittinger.

On March 16, CPA released a press release about the success of the annual conference fly-in. highlighting the following:

“The 2018 CPA fly-in was our best yet,” said Dan DiMicco, CPA Chairman. “The presentations and panels were very well received and by far the most informative yet, with great speakers and panelists. Without a doubt we made a strong impact on those we visited on the Hill. Our congressional speakers clearly showed us that our messaging is having an impact.”

Michael Stumo, CEO of the CPA said, “We came to Capitol Hill with a united message from our members that Main Street America urgently needs action on trade. We were encouraged to find that our elected officials are becoming more receptive to calls for greater trade enforcement. Our next step is to remind them that voters are watching, and that the time for action is now.”

CPA chair Dan DiMicco said, “In 2016, voters spoke very clearly at the ballot box. They are frustrated and tired with the business-as-usual approach in Washington. We came to Capitol Hill this week to remind our elected officials that the American people are waiting for action, and that reducing our mammoth trade deficit must be a top priority.”

“The Coalition for a Prosperous America trade conference was very useful and successful in educating our members and legislators about the dangers of continuing our country’s obsession with free trade,” said Roger Simmermaker, author of How to Buy American and a CPA member. “Several times, it was evident that many members of Congress and their staff experienced what I would call “light bulb moments” as we laid out our ideas and strategies for a better and fairer trade policy that will benefit our national economy.”

“When real workers, manufacturers, and agriculturalists converge on Washington, theory is tested against reality, and good things begin happening in America,” said Bill Bullard, CEO of R-CALF and a CPA board member. “There is no question that CPA had a positive impact on U.S. trade policy this week.”

The steel and aluminum tariff discussions proved particularly wide-ranging. And as Greg Owens, CEO of Sherill Manufacturing and a CPA member, noted, “Trade and our decades-long deficits are a critical and complex issue. While I applaud the recent move to levy tariffs on steel and aluminum, the comprehensive answer must go beyond that. The overvalued dollar and tax policies are major contributors to the problem that must be addressed. CPA has detailed concrete solutions to these and other issues that I fully support. It was a privilege and an honor to help CPA introduce and develop these solutions on Capitol Hill this week.”

I am proud to be one of the 4.1 million members in the manufacturing, labor, and agricultural sectors who are “united in their view that a continuing trade deficit hampers jobs and productivity nationwide. CPA will continue to urge action on America’s troubling trade deficit, and we look forward to expanding its relationship with Members of Congress who have pledged to fight for America’s manufacturers, farmers, and their workers.”

Chairman Dan DiMicco and CEO Michael Stumo will be in southern California April 18 – 20th speaking to members of Metal Service Center and NTMA, as well as speaking at the San Marcos Manufacturing Summit to be held at the San Marcos Community Center on Friday, April 20th.  As Chair of CPA’s California chapter, I invite you to register to attend.

How Trade Policies Led to the Decline of American Manufacturing

Wednesday, January 24th, 2018

Many people think that the decline in American manufacturing started with American manufacturers sourcing manufacturing offshore in order to achieve lower labor costs, avoid regulations, and pay lower taxes. While the decline accelerated after China was granted the status of Permanent Normal Trade Relations (PNTR) and was allowed to join the World Trade Organization, it actually began decades earlier.

PNTR is a legal designation in the U. S. for free trade with a foreign nation and was called Most-Favored-Nation (MFN) until the name was changed in 1998. Thefreedictionary.com defines it as “A method of establishing equality of trading opportunity among states by guaranteeing that if one country is given better trade terms by another, then all other states must get the same terms.

Thus, it is a method to prevent discriminatory treatment among members of an international trading organization. It provides trade equality among trading partners by ensuring that an importing country will not discriminate against another country’s goods in favor of those from a third. Once a country grants any type of concession to a third-party country, this concession must be given to all other countries.

At the end of World War II, the United States was the dominant manufacturing country of the world.  The American manufacturing base had enabled the U. S. to win the war with Germany and Japan by outproducing these two countries in implements of war from ships to tanks to weapons.

Over the next 20 years, American manufacturing became synonymous with quality and inventiveness.  Companies like Ford, General Motors, General Electric, Hewlett Packard, and Levi Straus became household names.

One of the main reasons why the United States became the dominant manufacturing country in the world was that for over 150 years, our government protected and fostered the growth of American industry through tariffs. The first tariff law passed by the Congress, was the Tariff of 1789.  The purpose was to generate revenue to fund the federal government, pay down the debt of the government, and also act as a protective barrier for domestic industries from imports from England and France in particular.

Tariffs played a key role in our country’s foreign trade policy and were the main source of revenue for the federal government from 1789 to 1914, the year after income taxes went into effect in 1913.  During this long period of time, tariffs averaged about 20% on foreign imports, and at times, tariff revenue approached 95% of federal revenue.

During the Truman Administration (1945-52), foreign trade policies began to focus on liberalizing trade through moving from protective tariffs to free trade. The instructions given from Congress to the U. S. Trade Representative were:  Remove barriers to trade. A key concept of the liberalization of trade was reciprocal tariffs and low tariff rates. Two of the main reasons for this change in trade policy were to help Europe and Japan rebuild after the war and engender closer relations with the U. S. as a deterrent to the spread of communism. This ended the use of tariffs as a significant source of Federal revenue and began the increase of corporate and personal income taxes.

In 1948, the General Agreement on Tariffs and Trade (GATT) treaty “was signed by 23 nations in Geneva on October 30, 1947, and took effect on January 1, 1948. It remained in effect until the signature by 123 nations in Marrakesh on April 14, 1994, of the Uruguay Round Agreements, which established the World Trade Organization (WTO) on January 1, 1995. The WTO is in some ways a successor to GATT, and the original GATT text (GATT 1947) is still in effect under the WTO framework, subject to the modifications of GATT 1994. GATT, and its successor WTO, have successfully reduced tariffs. The average tariff levels for the major GATT participants were about 22% in 1947, but were 5% after the Uruguay Round in 1999.”

GATT requires that exports of all countries that are party to the treaty should be treated alike by other countries that are party to the treaty, and each member is granted Most Favored Nation status. Since GATT was first signed, MFN (now PNTR) status has been granted to about 180 countries. Only a handful of communist countries have been denied MFN status.

For over 20 years, American manufacturers experienced little competition from foreign exports, but in the 1970’s Japanese and German products began to significantly penetrate the U. S. market. Due to the focus on demilitarization and decentralization in the U. S.- directed rebuilding of the Japanese and German economies, producing consumers goods was the focus.

Japan focused on audio/stereo products, cameras, pianos/keyboards, and TVs, as well as low cost automobiles and motorcycles. Companies such as Panasonic, Sony, Sanyo, Yamaha, Toyota, Mitsubishi, and Datsun (now Nissan) became the new household names in America. Mitsubishi had produced aircraft in Japan before and during WWII, including the infamous fighter plane, the Zero. Nakajima was another aircraft manufacturer that was reformed as Fuji Heavy Industries after the war and began to produce the Subaru vehicles.

Germany started focusing on automobiles such as the Volkswagen “Bug” and bus, BMWs, and then Mercedes vehicles.  They expanded into manufacturing equipment, machine tools, and scientific and laboratory instruments and equipment. Volkswagen was instrumental in Germany’s industrial recovery as their plants have escaped damage from bombing. The Volkswagen plant had been offered to England after the war as reparations, but England turned it down. Without Volkswagen being able to start manufacturing autos in 1946 after the war, the reindustrialization of Germany would have been delayed considerably.

It didn’t take long for the increased imports from Japan and Germanys to take their toll on the U. S. trade balance.  As the below chart shows, the last year we had a positive trade balance in goods was 1975:

Source:  Coalition for a Prosperous America

As a developing country, imports from China didn’t become a significant factor until the beginning of the 21st Century. The development and growth of China’s manufacturing industry was essentially funded through American companies setting up manufacturing plants in China starting in the 1990s and transferring manufacturing to Chinese contract manufacturers. Foxconn, Apple’s contract manufacturer for the iPhone and iPad, is the only Chinese manufacturer to become well known in the U.S. While Foxconn has plants in mainland China, it is actually owned by Hon Hai Precision Industry Co., Ltd., a Taiwanese multinational electronics contract manufacturing company headquartered in Tucheng, New Taipei, Taiwan.

“In article titled “The Death of American Manufacturing,” published in the February 2006 Trumpet Print Edition, Robert Morley wrote: “Manufacturing loss is occurring because of globalization and outsourcing. Globalization is the increased mobility of goods, services, labor, technology and capital throughout the world; outsourcing is the performance of a production activity in another country that was previously done by a domestic firm or plant.

At the dawn of globalization, the elimination of trade barriers opened up access to foreign markets for American manufacturers in return for building factories abroad. In due course, more and more manufacturers set up shop overseas, producing goods to be sold to Americans.”

According to Yashen Huang author of Capitalism with Chinese Characteristics, China’s “indigenous private sector is conspicuously small.” The majority of urban companies are still State-Owned Enterprises (SOE’s). Other companies are privately owned, but the owner(s) are government employees, so they are still essentially government controlled.

China had lost its status as MFN through suspension in 1951 after the Communists took over control of the government in 1949. It was “restored in 1980 and was continued in effect through subsequent annual Presidential extensions. Following the massacre of pro-democracy demonstrators in Tiananmen Square in 1989, the annual renewal of China’s MFN status became a source of considerable debate in the Congress…Congress agreed to permanent normal trade relations (PNTR) status in P.L. 106-286, President Clinton signed into law on October 10, 2000.  PNTR paved the way for China’s accession to the WTO in December 2000…;”

  1. S. trade with China began to be measured in 1985 by the U. S. Census Bureau, and we had only a small deficit of $6 million. The trade deficit grew to $83.8 billion by the year 2000. However, after China was granted PNTR and became a member of the WTO, the trade deficit started to escalate. It doubled to $162.3 in 2002 and doubled again by 2014 to $344.8 billion. The 2016 trade deficit was $347 billion, down from $367 billion in 2015.  In 2016, China represented 38% of our overall trade deficit of $654.5 billion.

As a result of the escalated trade deficits from 2001 to 2010, the U.S. lost 5.8 million manufacturing jobs and 57,000 manufacturing firms closed. Where do all the jobs go?  Well, the U.S. Department of Commerce shows that “U.S. multinational corporations… cut their work forces in the U.S. by 2.9 million during the 2000s while increasing employment overseas by 2.4 million.” So, we lost about half to offshoring of manufacturing to China and other parts of Asia.

The real story is even worse than this data. In an article by Terence P. Jeffrey published on www.CBSNews.com on May 12, 2015, “The number of jobs in manufacturing has declined by 7,231,000–or 37 percent–since employment in manufacturing peaked in the United States in 1979, according to data published by the Bureau of Labor Statistics.

As a result of more and more American manufacturers setting up plants in China, our domestic supply chain was weakened. From 2001 to 2010:  The U. S. textile industry lost 63% of jobs since 2001. Communication equipment industry lost 47% of its jobs. Motor vehicles and parts industry lost 43% of its jobs. U. S. machine tool industry consumption fell 78% in 2008 and another 60% in 2009. U. S. printed circuit board industry has shrunk by 74% since 2000.  We even lost whole industries, such as:  fabless chips, compact fluorescent lighting, LCDs for monitors, TVs and handheld devices like mobile phones displays, Lithium ion, lithium polymer and NiMH batteries, low-end servers, hard-disk drives, and many others.

After over 40 years of trade policies that foster offshoring, it’s time to have a new goal for trade policies.  Instead of “remove barriers to trade,” we need to have a goal of “eliminating the trade deficit.”  The Coalition for a Prosperous America has recommended this goal for years, and on March, Representatives Brooks and Lipinski introduced House Congressional Resolution 37 for Congress to set a national goal to eliminate the trade deficit.  It is only one sentence long:  “Expressing the sense of Congress that Congress and the President should prioritize the reduction and elimination, over a reasonable period of time, of the overall trade deficit of the United States.”

As soon as the tax reform bill is signed by President Trump, Congress needs to pass this Resolution before the end of the year, so we can start 2018 on a new track.

California Economic Summit Sets Goals to Elevate California

Wednesday, January 24th, 2018

The sixth annual California Economic Summit was held on November 2nd – 3rd in San Diego.  The Summit was convened by CA Fwd and the California Stewardship Network, with a long-list of sponsors and partners. More than 500 civic, business, attended the event held at the Hilton San Diego Bayfront.  The theme of the Summit was Elevate California with the goal of achieving:

  • One million more skilled workers
  • One million more homes
  • One million more acre-feet of water

The statewide gathering highlighted higher education as an important component to a new initiative to restore upward mobility in the state. I was only able to attend day two, which began with a welcome by Mark Cafferty, President of the San Diego Regional Economic Development Corporation, and San Diego County Supervisor Greg Cox. Mr. Cafferty said, “California’s brand around the world is remarkable.  We need to prepare and support our most important assets – people. We need to help Californians live in sustainable communities, and we need to create one million more middle class jobs to ‘future proof’ California for Californians.”

Supervisor Cox said, “We now have 1,400 “Blue tech” companies representing 46,000 employees and making a $14 billion contribution to our economic, creating blue collar and white-collar jobs.” He mentioned that according to the recent report, the impact of the military represents 22% of the region’s jobs.

The day started with a panel of millennial and Next Gen leaders discussing their perspective on how California’s economy and the high cost of living are affecting them and their peers. Christine Werstler was the panel leader, and the panelists were:  Assemblywomen Autumn Burke, Sean Bhardwaj, founder and CEO of Aspire 3, and Laura Clark of YIMBY Action. They shared that the major challenges are:  affordable housing, access to fundamental services like health care and education, rapid change, and an unknown future.

Assemblywoman Burke said, “You can only do so much with legislation. We need to provide resources. It’s important to know that we have a college system that doesn’t have room for everybody, even if they qualify, Access to education should be a high priority.” Burke added that many of those are students from disenfranchised communities. Burke said, “We have the data, and now we need to put it into action and work with private industry to provide the opportunities and resources. It is our job as legislators to provide all of the things they need. “

Panelist Sean Bhardwaj said, “We need to teach entrepreneurism as a skill across disciplines in colleges and universities so they are prepared to find and create their career opportunities for the future. Only 19% of millennials see other people as trustworthy, 10% lower than other generations. They need to build personal relationships or they will not engage.

Bhardwaj added, “Each and every one of us has a talent and a skill that we can bring to the world. We need to break out of the thinking of what we link learning is and think what it could be. Technology is a tool to make resources more accessible.  We need to look at what are the tools we can provide so we can use the tools quickly We need to figure out what are the skills needed today and quickly provide the opportunities to learn them.”

Clark said, “Millennials are angry – 20% are living in poverty, and we need to bring them up. It is important to have clustering of industries in regions to provide career advancement.” She urged institutions to make sure college students are registered to vote so they have a voice on issues including funding.

The next panel featured leaders from all three of the state’s public higher education systems: University of California President Janet Napolitano, California State University Chancellor Timothy White and California Community Colleges Chancellor Eloy Ortiz Oakley. Ryan Smith was the panel leader.

“When we think about income inequality in our country and California, the single tried and true tactic that has worked over time has been access to higher education in terms of increasing social mobility,” said Napolitano. “When I remind people that 45 percent of the entering class at University of California are first-generation college students, that’s real opportunity that public higher education presents in California. In the UC system, we have increased enrollment by 10% in the last two years.”

When asked about affordability, the leaders emphasized the widespread use of financial aid to cut tuition and fees, but reminded the audience that the total cost of education also includes California’s high housing costs and other expenses.

Chancellor White said, “There is a capacity problem. We turn away about 30,000 students every year. We need to build more capacity.  If we don’t make this investment, it will be a higher cost in the future if we don’t succeed.”

Ortiz Oakley said, “We are in 114 communities and we need to design for the future jobs, so we looking at what are the job needs of different regions to create upward mobility and train more skilled workers needed across the state. We’ve spent a lot of time and fortunately we’ve had the investment over the last several years through the Strong Workforce to take a hard look at the regions of California to begin preparing ourselves to develop curricula for the jobs of today and the future, not the jobs of yesterday.”

All three of the Democrat gubernatorial candidates appeared at the Summit.  I missed the appearance of Lt. Governor Gavin Newsom the first day, but day two, former Los Angeles Mayor Antonio Villaraigosa and State Treasurer John Chiang were interviewed. Villagorosa said, “If it were a country, California would rank sixth in the world economies, but we rank down with Romania in the level of poverty.”  He agreed with Assemblywoman Burke. “If we’re going to survive and thrive, we’re going to have to do a better job at growing middle class jobs,” adding that 60 percent of high school kids are Latino and African American, but only 13 percent go on to a four-year college. He said, “We’ve got to address that. We’ll be a million and half down in college graduates by 2025 and a million down in people with specialized skills.”

Chiang said, “We have to understand that we ought to celebrate the diversity of our resources. It’s all about the people and I believe we have an area that is the magnet that draws people. It’s the idea of what California is, so we can flourish uniquely because of the extraordinary diversity that we have.”

“The 2017 Summit sought to advance these ambitious themes during the event and in the coming year:

  • Create a unifying triple-bottom-line vision for increasing economic security and upward mobility
  • Expand the strength and diversity of the Summit network to increase its influence on state and local policy decisions
  • Mature the Summit as a formal civic partner with government to advance triple-bottom-line policies:

While I applaud the goals of the Summit co-conveners and partners, I wonder why no one seemed to connect the fact that our losing 33% (618,000) of our higher-paying manufacturing jobs from the year 2000 -2010 might be a major cause of our increased rate of poverty.

According to data from the California Manufacturing Technology Association, we have only regained about 50,000 manufacturing jobs since then.  As shown by the following chart from CMTA Champions of Manufacturing blog by V.P. Gino diCaro, California is lagging behind the rest of the country in regaining manufacturing jobs, and California only attracted 1.6% of reshored jobs from 2013 – 2016.

I also fail to see how we can achieve the goal one million more skilled workers without addressing California’s adverse business climate that is driving manufacturing companies to leave California. Not one speaker even mentioned the topic of California’s business climate.

For 20 years, the Small Business & Entrepreneurship Council has published a report, titled the Small Business Policy Index, by their Chief Economist, Raymond J. Keating, which ranks the states on policy measures and costs impacting entrepreneurship and small business growth. According to the 2016 report, California ranks dead last, and has been dead last for several years. The report “ties together 50 major government-imposed or government-related costs impacting small businesses and entrepreneurs across a broad spectrum of industries and types of businesses, which include: corporate and personal income tax rates, individual and corporate capital gains taxes, property taxes, sales, growth receipts, and excise taxes, death taxes, unemployment tax rates, gas and diesel tax rates, Workers’ Compensation premium costs, energy regulation, State minimum wage, paid family leave, etc.  It even ranks states by the number of government employees, Per Capita State and Local Government Spending, Per Capita State and Local Government Debt, and various categories of lawsuit reform.

A brief look at how California ranks reveals:

  • California has the highest personal income tax rate and individual capital gains tax at 13.3%
  • California ranks 50th in Workers Compensation premiums cost at 3.48
  • California ranks 49th in energy regulatory costs
  • California ranks 43rd in corporate income taxes and 44th in corporate capital gains tax at 8.84%

On the plus side, California ranks first in the lowest unemployment taxes at the low rate of 0.81. Thanks to Proposition 13 still being in effect, California only ranks 22nd in property taxes at 2.835%. In 2016, California only ranked 46th in gas taxes at 0.409 cents per gallon, but would rank 49th now after raising its gas taxes by 12 cents per gallon the week after the Summit.

As long as California’s legislators and other leaders have their “head in the sand,” nothing will be done about improving the business climate of California. I challenge the State legislature to do their job as legislators to provide all of the things business needs to grow and expand employment.

At the conclusion of the Summit, Oscar Chavez, assistant director at the Sonoma County Department of Human Services, announced that Sonoma County will be the site of the 2018 California Economic Summit. He said, “You cannot sit on the sidelines. This state needs you.” I would say, “This state needs leaders who address the issues affecting manufacturing if we want to achieve the lofty goals of the Summit.

How Tax Reform Could Grow our Economy and Create Jobs

Tuesday, September 19th, 2017

Over 150 countries in the world have shifted a significant portion of their tax mix to border adjustable consumption taxes – value added taxes (VATs) or goods and services taxes (GSTs).  Consumption taxes are “border adjustable taxes” and allowed under World Trade Organization rules. Consumption taxes are a tax on consumption – as opposed to income, wealth, property, or wages. Consumption taxes are called goods and services taxes in Canada, Australia, New Zealand or value added taxes in other countries.  They are usually a tax only on the incremental value that is added at each level of the supply chain to a product, material or service. Most countries VATs or GSTs are tariff and subsidy replacements, mimicking a currency devaluation if a country raises the VAT or GST and uses proceeds to lower purely domestic taxes and costs.

After 40 years of multilateral tariff reduction, other countries replaced tariffs with VATs but the U.S. did not. American export­ers face nearly the same border taxes (tariffs + consumption tax) as they did in the early 1970s. Foreign VATs are export subsidies as they are rebated to companies that export their goods. For example:

  • Mexico established a 15% VAT after NAFTA
  • Central American countries established a 12% VAT after CAFTA
  • Germany raised its VAT to 19% in 2007 to fund business tax reduction for trade competitiveness

The rates range from 12% to 24% and average 17% globally. This means that virtually all foreign countries tax our exports at 17% on top of tariffs. They subsidize do­mestic shipments abroad with the average 17% tax rebate. The figure below illustrates how it works.

U.S. Local Price = $100

 

China Local Price = $100

 

U.S. Price PLUS 17% VAT = $117.00

 

Chinese Price MINUS 17% VAT rebate = $85.47

 

The map below shows which nations have consumption taxes (red) and which do not (blue).

 

Because foreign consumption taxes are border adjustable, companies that export are double taxed. They pay U. S. taxes and the foreign border tax.  Importers can sell cheaper products because they receive a consumption tax rebate from their home country and do not pay U. S. VAT.

Eliminate Payroll Tax Burden with the most efficient VAT in world

In written testimony to the House Ways and Means Committee of the U. S. House of Representatives on May 18, 2017, the Coalition for a Prosperous America (CPA) recommended “a new border adjustable consumption tax (Goods and Services Tax) that funds a full credit against all payroll taxes.”

Highlights from the testimony paraphrased or quoted include: “A new U.S. goods and services tax (GST) of approximately 12% should be enacted to shift taxation to consumption using the credit/invoice method. The proceeds should be credited against payroll taxes paid by all workers and businesses. GST proceeds should be applied as a full credit against the 15.3% rate of payroll taxes to reduce the cost of labor in the US while increasing after tax wages.

Exported goods and services would receive a full rebate. Imports would pay the GST. Small business with less than, for example, one million dollars could be exempted without sacrificing significant tax revenue.”

CPA’s written testimony explained, “Domestic prices vs. wages would not worsen because the payroll tax is embedded in the cost of all goods and services. Thus, eliminating the payroll tax lowers the prices for goods and services or increases wages depending upon the particular competitive forces in each product sector. A GST raises goods and services prices, but the GST/payroll tax combination would largely cancel each other out thereby holding the domestic economy harmless.

The more modern GSTs implemented by free market economies are in Canada, Australia and New Zealand. The compliance and administration burdens are relatively low in comparison to other taxation methods. The U. S. can learn from those and other countries’ experiences to implement the most modern, streamlined GST in the world.”

In summary, the proposed GST would

  • Reduce the cost of labor in the U. S.
  • Give every worker a raise
  • Lower price of U/ S. exports
  • Levy a tax on imports

The following are some of the benefits of a payroll tax credit for manufacturers, ranchers, and farmers:

  • Regressiveness of VAT offset by elimination of regressive payroll tax
  • VAT costs on all domestic producers are offset
  • No impact on prices of domestic goods/services
  • Imported goods/services prices increase
  • Cost of production for exports reduced

Change to a Sales Factor Apportionment (SFA) Border Adjustable Profit Tax

 Last year, I wrote an article about corporate tax reform at the federal level based on the Sales Factor Apportionment Framework proposed by one of the members of the Coalition for a Prosperous America, Bill Parks. Mr. Parks is a retired finance professor and founder of NRS Inc., an Idaho-based paddle sports accessory maker. He asserted that “Tax reform proposals won’t fix our broken corporate system… [because] they fail to fix the unfairness of domestic companies paying more tax than multinational enterprises in identical circumstances.”

He explained that multinational enterprises (MNEs) can use cost accounting practices to transfer costs and profits within the company to achieve different goals. “Currently MNEs manipulate loopholes in our tax system to avoid paying U. S. taxes… MNEs can legitimately choose a cost that reduces or increases the profits of its subsidiaries in different countries. Because the United States is a relatively high-tax country, MNEs will choose the costs that minimize profits in the United States and maximize them in what are usually lower-tax countries.”

The way his plan would work is that the amount of corporate taxes that a multinational company would pay “would be determined solely on the percent of that company’s world-wide sales made to U. S. customers. Foreign MNEs would also be taxed the same way on their U. S. income leveling the playing field between domestic firms and foreign and domestic MNEs.”.

The Board of the Directors of the Coalition for a Prosperous America chose to support Sales Factor Tax Apportionment and included the following in their testimony to the House Ways and Means Committee:

“The US corporate tax system harms America’s trade competitiveness, overtaxes income from wages, under taxes consumption, and is bad at actually collecting what is owed. It also enables rampant base erosion through transferring profits to tax havens or countries with lower corporate tax rates. Full reform centered around destination based, border adjustment principles can result in an efficient, trade competitive, and largely tamper-proof tax system.

SFA is a destination based profit tax. Pretax income is allocated to the US in proportion to the percentage of a company’s total sales in the U. S. Pre-tax income earned outside the US is not taxed. Tax rates can be lowered substantially while still meeting revenue targets.”

The Coalition for a Prosperous America favors “a border adjustable business tax (for all entity types) which allocates pre-tax income based upon the destination of sales. Formulary apportionment based upon a single sales factor (sales factor apportionment or SFA) is well established at the state level. It solves most of the base erosion/profit shifting and tax haven abuse problems facing tax writing committees. SFA eliminates the disparate tax treatment between domestic companies (who pay the full income tax burden on worldwide income), multinationals (many of which shift profits to tax havens), and foreign companies (which pay a territorial income tax).

A broad based 12% GST could raise $1.4 trillion in new revenue. Payroll tax revenue in 2015 was 33% of total tax revenue at $1.056 trillion.”

CPA asserts that U. S. “trade competitiveness would be substantially improved because exports are freed from both the GST and payroll tax burden. Imports never include the cost of the U. S. payroll tax, but would pay the GST. This effect has been called Fiscal Devaluation because it mimics a currency devaluation for trade purposes. It only works if you combine a new GST with a ubiquitous domestic tax or cost reduction. The optimal domestic tax reduction is the payroll tax burden.”

The reason for CPA’s support is that “SFA taxes pre-tax income allocated to the U. S. but not profits allocated to foreign sales.  Domestic firms can legitimately ‘avoid’ taxation by exporting more. Profits from imports are subject to tax. Domestic, multinational and foreign firms are on an equal tax footing.

The current corporate tax system cannot be fixed because it allows the fiction of intra-firm transactions to erode the tax base.  Multinational companies use them to self-deal, strictly for tax purposes, shifting income to tax haven jurisdictions.  Companies sell products or services to themselves, governed only by an ‘arm’s length’ principle which allows them to create their own pricing terms subject to a nearly unenforceable ‘fair market value’ constraint.

The intra-company transactions are not free market, ‘arm’s length’ or true third-party transactions. The only economically meaningful ‘sale’ is one to a true third party outside the company.  As much of 30% of tax revenue may be lost from profit shifting to tax haven jurisdictions which have effective tax rates of 0-4%. These include Bermuda, Netherlands, UK Caribbean Islands, Ireland, Luxembourg, Singapore, and Switzerland.”

The CPA testimony provides the following example: “Assume a multinational corporation has worldwide sales of $100 billion, $50 billion sales in the U. S. and company-wide pretax income of $10 billion. Fifty percent of the profits, under SFA, are apportioned to the US.  So, the profits to be taxed in the USA in this case are $5 Billion.  Using a 20% corporate tax rate yields a SFA tax of $1 billion. Intra-company transactions with a Bermuda subsidiary would be irrelevant.

Merely lowering the U. S. corporate tax rate for example to 15% without further reform would not eliminate the tax competition with tax haven jurisdictions. SFA would make tax havens irrelevant because true sales to any foreign country would be ignored.  IRS litigation centered around the proper fair market value of intra-firm transactions would disappear. Only profits allocated to the US in proportion to true third-party sales would be taxable.”

CPA asserts that “SFA would allow a significant reduction in the business tax rate while collecting similar revenue because base erosion is largely fixed. By one estimate, a 13% corporate tax rate under SFA would collect the same revenue as the current system…”

In conclusion, CPA recommends, “The U. S. tax system should shift to more border adjustability through destination based taxation. If the House GOP Blueprint does not gain Senate or White House support, the Ways and Means Committee has solid alternatives to meet their goals. CPA supports enacting (1) a new GST to fund a full credit against payroll taxes, plus (2) a shift to sales factor apportionment of global profits as an alternative to our current corporate income tax system.”

We need to take bold action if we want to rebuild our manufacturing industry to create jobs and prosperity. As I visit district offices of our California Congressional delegation as chair of the California chapter of CPA, I am encouraged by the interest these recommendations for tax reform are generating on a bi-partisan basis.

 

Do Low American Savings Rate Cause Trade Deficits?

Saturday, September 2nd, 2017

Mainstream trade news continues to assert that trade deficits don’t matter. Economists help reporters write these fake news stories by claiming that America’s failure to save money is the problems, not foreign trade cheating. On June 20, 2017, the Coalition for a Prosperous America released a research paper titled “Do Savings Rates Cause Trade Deficits? by Michael Stumo (CEO) and Jeff Ferry (Research Director) that shows why globalist economists are wrong about what causes trade deficits, offshoring and job losses.

They write, “A popular, but misleading, claim is that low US savings, relative to investment, causes our trade deficit. For exam­ple, Harvard professor and former Reagan administration advisor Martin Feldstein.has said that the US fiscal defi­cit, which indeed reduces national savings, is the cause of the trade deficit. ‘If a country consumes more than it produces [thus saving little], it must import more than it exports.’”

These macroeconomists “claim that Americans spend too much, save too little, produce too little, and thus must import to support their gluttony.” They are incorrect.

White House economists use the “savings rate causes trade deficits” claim to create the false illusion that nothing can be done. But the real problem is that a few foreign countries – like China, Japan, Germany and South Korea – have economic strategies to overproduce, under consume and ship their overcapacity to the US. Their growth strategy is their full employment program. They export their unemployment to the US.

DISTINGUISHING CAUSES FROM MATHE­MATICAL INTERRELATIONSHIPS

To macroeconomists, the ”National savings, investment and net trade are variables within equations or formulas known as ‘national income identities’. Because the variables are within the identity, they are called “endogenous’ and are explained by the equation.” But they do not explain what causes the changes.

“The basic Gross Domestic Product equation is referred to as a national income identity, expressed in the following equation:

GDP = C + I + G + NE

C = Consumption; I = Investment, G =  Government and NE = Net Exports. Net Exports are also expressed as X – M in another version of this equation. When the Net Exports is a negative figure as it has been since 1979, this reduces the GDP.  According to previous research by the Coalition for a Prosperous America, “the annual trade deficit has reduced each year’s GDP by some 3% to 5.5% each year, and those reductions compound over time.”

The purpose of the paper is to explain “how to distinguish (a) causation from (b) math­ematical interrelationships in the national income identity or equation that underlies this debate. For reasons explained below, real world changes (exogenous factors) outside the identity are the true causes. These real-world changes directly impact one or more variables within the identity, transmitting through the equation by mathematical necessity. In short, na­tional savings is related to the trade deficit in an accounting sense but does not cause it.”

Government policies often affect each one of the variables of the above equation. For example, the income tax rate may affect Consumption.  If rates are high, then American consumers have less money to devote to consumption.  If Government consumption and expenditures through procurement is down as it was under Sequestration, then companies that sell to the government make less money and have less money to buy products as business and corporate consumers.

To clarify the relationship between savings and trade deficits, the authors cite Robert Scott of the Economic Policy Institute: “Accounting identities do not, and cannot, explain the causal relationships between savings, investment, and trade flows. Do low savings rates cause trade deficits, or does causation run in the other direction? A trade deficit reduces the incomes of domestic workers, pushing many into lower income brackets. Families with lower incomes gen­erally find it much harder to save. Therefore, increasing trade deficits can and do reduce national savings.”

DEBUNKING THE MORALITY VS SAVINGS RATE HYPOTHESIS

International economists in important positions “im­plicitly argue that no policy action is necessary or effective because US citizens simply do not save enough. We have caused our own problem. Our immoral, gotta-spend-it-now culture must become more austere.”

However, the authors explain that “National savings, in the context of the national in­come identity, is the aggregate of household, business and government savings. It is the extent to which national in­come exceeds private and public spending.

Household savings can, for example, go down if family earnings fall but they spend the same as before on necessities. Taxes or interest rates could go up causing con­sumers to spend less. Neither cause has anything to do with financial morality.”

Instead, government policies can and do affect savings rates. The authors state, “Surplus countries such as Germany and China have been deficit countries in the past… with low savings rates and trade deficits. Their cultural propensity to spend or save did not miraculously change…policy changes in the 1990’s and 2000’s caused trans­fers of wealth from households to industry forcing less consumption and more production at increased scale and with very competitive prices. The result was more national savings and trade surpluses.”

HOW OVERSUPPLY IS TRANSFERRED TO DEFICIT COUNTRIES

The authors show how the oversupply (overproduction) of some countries is transferred to other countries causing them to become deficit countries.  They write; “All countries cannot run trade surpluses. Offset­ting deficits must exist elsewhere. The primary reason for a country to engineer persistent surpluses is to spur domestic employment by excessive reliance upon foreign consumers. The deficit country, however, experiences de­valuation of its formerly well employed labor.”

They point out that in 2005, “then-Federal Re­serve Board chairman Ben Bernanke argued that the large and growing U.S. current account deficit is caused not by anything happening in the U.S., but by decisions taken by emerging economy nations to run very high savings rates, pursue export-led growth, and lend money to other countries, especially the U.S. He called the situation a ‘global savings glut.’ These excessive inflows of foreign savings raise the U.S. dollar exchange rate, drive down our interest rates, and force our economy into a trade deficit.”

The method by which this transfer takes place is described by Professor Michael Pettis, quoted in the paper:

“If any country takes steps to change the gap between its total domestic savings and its total domestic investment, then those steps must also affect its trade balance. Because a change in one country’s trade balance must be matched with an opposite change in the trade balance of all other countries, there must also be an opposite and equal change in the gap between the total domestic savings of the rest of the world and the total domestic investment of the rest of the world.”

Other factors affecting this transfer are “wage suppression (intentionally as in Germany) or because high volumes of new workers are entering the labor market (as in Asia) and redirect household resources to investment. The result is that productivity increases faster than wages. Increased production outstrips the ability of domestic households to consume. Domestic supply exceeds demand and the coun­try must rely upon foreign consumers to soak up the excess.”

What Tactics Do Surplus Countries Use?

The authors explain that “Export-oriented or investment-oriented countries can utilize policies to reduce consumption, increase pro­duction and export at very competitive prices.”

China:

  • Wage growth is constrained to well be­low the growth in worker productivity
  • Undervalued exchange rate…for much of the past two decades
  • Government subsidizes Chinese manufacturing exporters
  • Financial repression of Chi­nese households
  • Vast amounts of surplus labor that produces more than it consumes.

In essence, the authors state “They export oversupply, deflation and unemployment. The result is excessive reliance on demand from consum­ers in deficit countries.”

Germany

  • Holds down domestic wages
  • German banks provide direct loans and vendor financing to foreign countries to buy German products
  • Impose a 19% consumption tax (VAT) that is rebated to exporters

As a result, “The eco­nomic distress caused by the German-policy-induced cri­sis in other eurozone countries perversely holds down the value of the euro” making Germany’s exports more price competitive in the global marketplace.

SOLUTIONS TO REBALANCE TRADE AND CAPITAL FLOWS

The authors present the following recommended solutions to reduce trade deficits:

  1. Fix currency misalignment, especially the overvalued dollar.
  2. Implement a US consumption tax, such as a goods and services tax (GST), in a revenue neutral and distribution neutral way by completely offset­ting the payroll tax burden.
  3. Adopt a territorial business income tax called sales factor apportionment (SFA)
  4. Consider broadly applied tariffs to counter the unearned ad­vantages of trade surplus countries
  5. Apply selec­tive tariffs to high value or strategic products that the US wants to produce

In conclusion, the authors state: “…the level of US savings and invest­ment cannot and do not ‘cause’ our trade deficit. The true causes are surplus country policies, misaligned exchange rates and global labor oversupply. Persistent trade surplus countries export their oversupply and unemployment to deficit countries characterized by open economies and open financial markets. Policy leaders must become adept at determining the actual causes, how they are transmit­ted through national income identities and how they re­sult in imbalances. Effective policy responses can then be designed to rebalance trade and capital flows, increase US employment and restore our economic growth.”

The paper shows why America’s economy grew when the majority of manufactured goods were Made in America and consumed by US consumers.  The wages paid to the manufacturing workers who produced these products allowed them to save more because they earned more. When the U. S. lost 5.8 million higher paying manufacturing jobs from the 2000 – 2010 because American production was offshored to China and other Asian countries, American workers no longer had any money to save. The overproduction of trade surplus countries resulted in a glut of cheap imported products that further depressed or destroyed some American manufacturing industry sectors. The cheap imported goods that consumers bought became a curse rather than a blessing.

Therefore, the preposterous premise of many macroeconomists that low savings create trade deficits was proven false. It is incomprehensible to me why macroeconomists don’t understand that you can’t save if you don’t have a job or your non-manufacturing job is paying way less than your manufacturing job did. This is why I strongly support the recommended policies of the Coalition for a Prosperous America and urge you to do so also.

Coalition for a Prosperous America Summit Discusses How to Grow Economy

Thursday, December 8th, 2016

On October 13, 2016, the “Southern California Manufacturing Summit” was held at the Wedgewood Center in Aliso Viejo. The summit was hosted by the Coalition for a Prosperous America (CPA), with SDG&E/Sempra Utilities as the major sponsor, along with a long list of non-profit organizations, regional businesses and associations as sponsors and partners. The purpose of the summit was to learn and discuss how we can use Southern California’s advantages to re-grow manufacturing and create good paying jobs through smarter policies on trade, taxes, and the economy.

CPA is a unique alliance of manufacturing, agriculture, and labor working for smart trade policies and represents over three million households through our member associations and companies.
Since nearly all of our sponsors provide services that benefit manufacturers, we modified our format from previous summits to provide opportunities for our sponsors to tell about their services to promote networking among attendees.

Our first speaker was Greg Autry, Adjunct Professor of Entrepreneurship, Marshall School of Business, University of Southern California, who discussed “National Security Concerns with the Current U.S. Trade Regime.” Among the highlights of his presentation was his statement, “There are national security concerns with trade agreements. An economy that builds only F-35s is unsustainable – productive capacity is what wins real wars. Sophisticated systems require complex supply chains of supporting industries. They require experienced production engineers, machinists, and more.”

He recently prepared a report analyzing the competition and found that we are now outsourcing most of our space-related technology. He said, “NASA awards contracts for launch vehicles to Boeing and Space X, but chose to buy Russian lower stage engines. We have to choose if we are going to have a supply chain for the space industry. We cannot rely on China to produce what we need for our military and defense systems.

He added, “The International Space station was funded by the U. S. to the tune of $100 Billion of the $120 Billion that it cost. We should not be relying on Russia’s Mr. Putin to launch our satellites and space vehicles and provide us a seat to get to the international space station.”

Autry stated, “If you own stock in Alibaba, you actually own stock in a holding company in the set up in an offshore tax haven of the Cayman Islands, and the real owner behind Alibaba is the Chinese government. In contrast, he said, “It was the wealth he created at Amazon that enabled founder Jeff Bezos to now lead Blue Origin, which was selected by the United Launch Alliance to finish development of a new engine to replace the Russian made RD-180 rocket engine used by ULA’s Atlas 5 rocket.”

He pointed out that the Germans had the best technology in WWII, but didn’t win because we out produced them. Productive capacity is what wins wars. We wouldn’t be able to do the same for a future war as China has become the shop floor for too many American manufacturers. Take the U.S. F-22 airplane vs. the Chinese J20 airplane. We have 187 F-22s, and we stopped producing them because they were too expensive. China has several hundred J-20s, and they are still producing them.

He warned, “China has been an aggressive nation for thousands of years – it’s how the country grew from a small nation state. China has expanded their claim to territorial waters to include territory claimed by all of its immediate neighbors — Taiwan, South Korea, Vietnam, Japan, the Philippines, Japan and even New Zealand and Australia. China’s threat to these countries could eliminate getting supplies from Vietnam, Taiwan, and Korea, where companies are located that are now part of our supply chain for the military and space industry. We are going to lose our supply chain for the military and defense industry because the people in the State and Commerce Departments don’t talk to the Defense Department.”

After his presentation, July Lawton, President of The Lawton Group/TLC Staffing, explained that her company provides temporary to permanent staffing solutions for engineering, manufacturing, information technology, as well as the more traditional human resources, accounting, administrative, marketing, and healthcare positions.

Nicholas Testa, Jr., CFPIM, CSCP, CIRM, is founder and CEO of Acuity Consulting, Inc. a firm specializing in supply chain and operations management and systems consulting and training. He is president-elect of the APICS Orange County and described the types of supply chain education and training that APICS provides to its manufacturing industry members.

Economist Ian Fletcher, author of Free Trade Doesn’t Work” was the next speaker. A few highlights of his presentation were: “Free trade is trade without restrictions. Economic rivalry is taking place every day. There is rivalry for wealth and power. We live in America, and it does matter where you live. America’s trade deficit is averaging $500 B/year. Free trade is part of the cause of poverty, as well as family breakdowns. Free trade mostly destroys jobs. We are looking in a decline of quality rather than quantity of jobs. De-industrialization is occurring. Many major American companies are not American any longer; they are owned by foreign corporations. Boeing is losing manufacture of airplane wings to Mitsubishi. There is not a single airplane that doesn’t rely on parts from other countries.”

He stated, “Free trade simplified means there must be something good for both parties. Free trade is only one sided by the United States because many countries practice mercantilism. Trade is being manipulated to benefit our trading partners. The Euro currency has been manipulated to reduce the value of the currency of Germany to be lower by balancing it out with the economies of France, Italy, Spain, and Greece. The U.S. is being forced to compete with the state capitalism of Europe and Asia.”
He added, “Free traders say that trade deficit doesn’t a matter, but trade deficits mean that we consume more than we produce. David Ricardo’s theory of comparative advantage did not work when it was created and doesn’t work now. A nation needs some protection. Protectionism is really the American way. Alexander Hamilton was the founder of American protectionism. The U.S. had a protectionist policy until after WWII. Every country has done protectionism to succeed. He showed a chart showing the history of tariffs in the U. S.

 

 

 

 

 

He concluded, “After WWII, free trade became a policy because of the politics to win the Cold War. It is crumbling now because of politics. There are dangers in protectionism, but there are dangers in doing nothing. Treaties or trade agreements are basically about protecting property rights. The World Trade Organization has failed to enforce terms of current trade agreements and will not do any better with the proposed Trans Pacific Partnership Agreement.”

After the morning break, I provided a brief overview of California manufacturing prior to moderating our panel of manufacturers. California is the 8th largest economy in the world, and if it were a country, it would be equal to France. California lost 33.3% of manufacturing jobs between 2000 and 2009 compared to 29.8% nationwide, and lost 25% of its manufacturing firms.

I pointed out that even with its unfavorable overall business climate, California still ranks first in manufacturing for both jobs and output. However, since the Great Recession, California lags in manufacturing job growth at a 3.6% rate compared to the national 7.2% rate and a GDP growth rate in manufacturing of 11.2% in California compared to a 22.6% GDP growth in the U. S. as a whole.

On the positive side, California leads the nation in R&D and number of patents issued, and
California companies received $78.4 billion of VC dollars in 2015 (57% of U.S. total – up from 51% in 2010).

Mexico, Canada, China, and Japan are the top four export markets for California, and California represents 11% of total U. S. exports. California ranks second behind Texas in all exports, but
California ranks first among all 50 states in agricultural exports estimated at $13.6 billion per year. California is the biggest U. S. producer of nuts, dairy, ice cream, and wine. The top high tech export is computers and electronic products, which equals 26.1 % of all the state’s exports. Transportation goods are the second top export, consisting of airplanes, ships, unmanned vehicles, and underwater vehicles.

Besides the good weather, Southern California’s advantages are:

• Gateway to Pacific – two major ports – Long Beach and San Diego
• Major hub in western U.S. for air, rail roads & waterway transportation
• Skilled, educated workforce for ALL occupations
• Research Institutions and Universities
• Large inventor/entrepreneur pool
• Hundreds of business Incubators and Accelerators
• Angel investor networks
• Venture capital networks
• 18 Foreign Trade Zones
• Employment Training Panel funds for employee training
• Workforce Investment Boards

There is also an abundance of business resources in Southern California, such as the California Manufacturing Technology Consulting (designated California MEP), two Centers for Applied Competitive Technologies, several Small Business Development Centers and Economic Development Agencies, as well as many Chambers of Commerce and Business Councils.

I concluded with mentioning the opportunities we have to improve the California business climate, change our national tax and trade policies, return manufacturing to U.S. through reshoring, connect regional manufacturers with other U. S. suppliers, increase collaboration between manufacturers and community college to address workforce and skills gaps, and educate community/youth about career opportunities in manufacturing.

After my presentation, the following three panelists shared their stories:

James Hedgecock, Founder and President of Bounce Composites, which designs, engineers, and manufactures high-quality, durable composite goods for multiple industries, including wind energy, automotive, aerospace, and sporting goods. He shared that the company started out producing their own patented design of stand up paddleboards, but it has been tough to compete with offshore companies because of unfair trade practice. He said it was especially difficult to export to Mexico and Europe because Value Added Taxes (VATs) are added to the price of their products, making their product more expensive.

Robert Lane and Dave Mock, principals of Lane OPX, shared how they help companies optimize excellence through blending Lean Six Sigma principles, strategic business initiatives and participative management philosophies to grow organizations, and inspire high performing, motivated teams. By leveraging their deep experience in manufactur9ing, team dynamics, leadership development and organizational design, they have been able to power the turnaround of small to large companies. More recently, they have been able to help manufacturers return manufacturing to America from overseas.

Mr. Wei-Yung Lee, CEO of Carlsbad Technology Inc. was our final panelist. Based in Carlsbad, California, Mr. Lee said that Carlsbad Tech was founded 1990 and is a subsidiary of Taiwan’s leading YungShin Pharmaceutical Co. The company began as a contract manufacturer of generic pharmaceuticals and has become an industry leader in manufacturing and distribution of generics, supplements, and medical devices. He said, “We have 150 employees and 15 are well-trained chemists. We have the capacity to produce 60 million capsules and 400 million tablets per year. Last year, we Launched our Comfort Vision™ contact lenses in the USA and have sold over 1 billion units in Asia. We are striving to become a global health bridge, bringing a world of innovative health products to the markets that need them. ”

After the panel, Jill Berg, President of Advanced Test Equipment Rentals, told about the products and services of her company. They rent, lease, and sell a large selection of test and measurement equipment and other types of lab equipment to companies all over the world. She announced that her company was hosting a San Diego Test Equipment Showcase on October 18th.

Then, Chris Marocchi, Field Operations Manager of California Manufacturing Technology Consulting (CMTC), explained that his organization is a non-profit consulting organization that just won the competition to provide Manufacturing Extension Program services for all of California. These services provide innovation and growth strategies along with operational enhancements to foster profitable growth for California companies. MEP services include: innovate new products, open new markets, improve workforce skills, increase product quality and reduce costs through Lean training, increase energy efficiency and green production, and optimize supply chain performance.

After our lunch break, I presented information on Lean Six Sigma Institute (LSSI) as neither of the principals was able to attend and I had obtained my Yellow Belt Certificate in Lean Six Sigma from LSSI in 2014. LSSI is boutique-style training and consulting company that uses training and coaching model to guide companies to manage Lean Six Sigma change, develop internal leaders, and sustain the results. LSSI’s is headquartered in Chula Vista California, but has satellite offices located in nine countries and employs over 60 expert consultants worldwide. Lean and six sigma principles and tools apply to virtually any process, and LSSI has successfully helped clients implement Lean Six Sigma in a variety of industries, such as manufacturing, retail, and healthcare.

Our key note speaker for the summit was Michael Stumo, CEO of the Coalition for a Prosperous America, speaking on “Growing SoCal Manufacturing.” Mr. Stumo stated, “CPA is a true coalition
of manufacturing, agriculture, labor, Republicans, Democrats, Progressives, Conservatives, and Independents. Our members are: Trade Associations, companies, farm organizations, Labor Unions, and individuals from all walks of life. Our non-Agriculture industries are: manufacturers, steel, tooling and machining, electronics, textiles, copper, aluminum, etc. Our mission is to balance trade and produce more in America to reclaim American prosperity.”

Mr. Stumo explained that there is a difference between service jobs and manufacturing jobs. According to Investopedia, “Examples of service sector jobs include housekeeping, psychotherapy, tax preparation, legal services, guided tours, nursing and teaching. There are very few “tradable” service jobs. By contrast, individuals employed in the industrial/manufacturing sector might produce goods such as cars, clothing and toys.”

He said, “There is also a difference in income and purchasing power between manufacturing and service jobs. When considering what industry sectors to prioritize for workforce and economic development efforts, it is important to look beyond basic employment numbers. This is because, while a sector might have a lot of jobs, it might not actually be producing a lot of income for the region, which is also very important for overall economic health and vitality.”

Mr. Stumo stated, “The problem is that as more manufacturing jobs leave, more productivity leaves as well. Unlike manufacturing, service-sector jobs have strict limits in terms of productivity. For example, a live performance of Beethoven’s 5th requires the same amount of performers/employees as when it was performed early in the 19th century. Compare that with the production of almost anything manufactured — the number of workers now required to produce a bolt of fabric, for example.”

He added, “There is a regional ripple effect of service vs. manufacturing jobs. At $4.4 trillion in total sales, manufacturing is by far the biggest income generator in our nation, despite a fairly rapid decline in employment. Yet, manufacturing still manages to far outperform all other industries in terms of pure income creation. Manufacturing generates more income per worker and has much bigger ripple effects, creating much more impact in a region while helping to raise wages in lower-productivity service sectors.”

He asked the rhetorical question, “What’s wrong with a service economy? He answered, “It shrinks manufacturing employment as well as the manufacturing sector’s ability to prop up wages. A labor market that loses wage pressures of high-productivity manufacturing industries will settle at wage rates lower than markets where this wage-boosting effect is present. Economic development policy makers should be careful about shunning manufacturing or other production sectors in favor of service sectors. This is a problem because 66% of U. S. workforce is without a four-year college degree.”

He concluded stating, “America is at a crossroads. We are losing an economic competition against other nations whose mercantilist strategies are destroying our manufacturing jobs, critical industries, and our standard of living, our national security, the security of our food supply, and our children’s futures. For the U. S. to become prosperous again, our future strategy must include the following:

• National Priority of Balanced Trade
• Strong enforcement
• Stop new trade agreements to force a re-think.
• Neutralize currency manipulation
• Tax reform with VAT/consumption taxes
• Consider tariffs to neutralize imbalances

We have a choice. We can continue our current trade and tax policies or we can develop and implement a comprehensive strategy that retains and reinforces our leadership in innovation, locates investment and production in the U. S. and raises employment by creating good paying jobs.”

As chair of the California chapter of CPA, I hope you will join our efforts to make America prosperous again.