Posts Tagged ‘trade policy’

Will the TPP Stop Japan’s Currency Manipulation?

Tuesday, August 16th, 2016

The answer is a resounding “no.” The Trans-Pacific Partnership Agreement will not stop Japan’s currency manipulation or that of any other partner country because TPP has no provisions regarding currency manipulation misalignment in its text. The problem of currency manipulation is similar to the U. S. budget deficit that keeps being kicked down the road by one Congress after another.

In this case, it is negotiators of the U. S. Trade Representative’s office who have ignored the explicit instructions of Congress with regard to handling the problem of currency manipulation in one trade agreement after another. Despite explicit Congressional instruction in the Trade Promotion Authority Act of 2015, there is no currency provision within the TPP itself.

What is currency manipulation? According to Wikipedia, currency manipulation is “a monetary policy operation. It occurs when a government or central bank buys or sells foreign currency in exchange for their own domestic currency, generally with the intention of influencing the exchange rate.” Simply put, currency manipulation is the devaluation of a country’s own currency to make their exports cheaper and imports more expensive. In practice, foreign governments buy U. S. dollars to reduce the value of their currency to make their goods cheaper than U. S. goods.

Why is it a problem? According to Michael Stumo, CEO of the Coalition for a Prosperous America, “Foreign currency manipulation is trade cheating because it is both an illegal tariff and a subsidy. The U. S. economy cannot produce jobs and wealth without addressing this problem.” Former Secretary of the Treasury, Paul Volcker, explained, ‘In five minutes, exchange rates can wipe out what it took trade negotiators ten years to accomplish.”

The Peterson Institute Policy Brief of December 2012, “Currency Manipulation in the US Economy and the Global Economic Order” states, “More than 20 countries have increased their aggregate foreign exchange reserves and other official foreign assets by an annual average of nearly $1 trillion in recent years. This buildup of official assets—mainly through intervention in the foreign exchange markets—keeps the currencies of the interveners substantially undervalued, thus boosting their international competitiveness and trade surpluses. The corresponding trade deficits are spread around the world, but the largest share of the loss centers on the United States, whose trade deficit has increased by $200 billion to $500 billion per year as a result. The United States has lost 1 million to 5 million jobs due to this foreign currency manipulation.”

Why hasn’t currency manipulation been addressed in past agreements? A recent white paper issued by the Coalition for a Prosperous America explains:

“Since December 1945, currency manipulation has been prohibited under the rules of the International Monetary Fund. Article 4, Section 1 (iii) of the IMF Articles obliges members to: “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members….” This obligation is designed in part to serve one of the fundamental objectives set forth In IMF Article 1:  the expansion and balanced growth of international trade.

The framers of the post-World War II international system understood that imbalanced trade was mercantilism and sought a monetary system that would avoid one-sided trade results…One country, the United States, has run trade deficits for more than 40 years and has amassed more than $17 trillion in foreign debt. By no stretch of the imagination can this be the sort of ‘balanced growth of international trade” that the IMF rules are supposed to foster.’ ”

Thus, the IMF has had the authority to enforce Article 4 obligations for over 70 years, but in practice, it has only held regular forums “to persuade key members to adjust their policies…The use of mere moral persuasion has failed to produce meaningful results, rendering the IMF increasingly irrelevant. Earlier this year the Congress directed U.S. negotiators to seek to put teeth into the IMF obligations. ”

Instead, as reported by the Coalition for a Prosperous America, “the Treasury negotiated a ‘Joint Declaration of Macroeconomic Policy Authorities’ that largely restates existing obligations, fails to include any additional enforcement tools, and merely adds yet another consultation process. The Joint Declaration:

  • “Entails a ‘confirmation’ that each TPP country is “bound” under IMF rules to “avoid  manipulating exchange rates or the international monetary system in order to prevent effective Balance of payments Adjustment  or to gain an unfair competitive advantage.
  • Specifies that each macroeconomic authority is to ‘take policy actions to foster an exchange rate system that reflects underlying economic fundamentals and avoid persistent exchange rate misalignments. Each Authority will refrain from competitive devaluation and will not target its country’s exchange rate for competitive purposes.
  • Requires regular reporting on foreign exchange intervention and reserve holdings.
  • Establishes regular consultations among the macroeconomic authorities. This will be in addition to the periodic meetings of IMF officials, APEC, the G-7, the G-20 and bilateral consultations.”

Therefore, nothing has changed in 70 years ago. If they haven’t complied in the past, how could they be expected to comply with their IMF obligations in the future? Is another forum going to be of any value?

In the case of Japan, its government has strategically reduced the yen’s value to give its companies a massive global price advantage. Since Shinzo Abe became Japan’s prime minister in December 2012, the Japanese currency has fallen by 55%, and he has been a full participant in IMF meetings. Three years ago, one U.S. dollar bought 76 yen. Today, one U.S. dollar buys 105 yen, down from a high of 120 yen at the end of 2015.

This manipulation subsidizes Japan’s car companies who can now undercut U.S. competitors and make a bigger profit without innovation or quality improvements. The Japanese government’s currency manipulation gives Japanese automakers as much as $7,000 more profit per car.

Toyota, the world’s largest carmaker, does not want the party to end. An article by David Fickling of Bloomberg on May 12, 2016, stated,  “Foreign-exchange effects will pull about 935 billion yen from Toyota’s operating income in the coming 12 months, assuming that the yen will strengthen to 105 to the greenback, relative to about 109 at present. ”

In my recent article on the U.S. International Trade Commission (USITC) report, “Trans-Pacific Partnership Agreement: Likely Impact on the U.S. Economy and on Specific Industry Sectors,” I quoted the following:  “U. S. passenger vehicle imports would increase by $4.3 billion above the baseline upon full implementation of the agreement (table 4.15). Imports from Japan would increase by $1.6 billion, and imports from NAFTA partners would increase by $1.8 billion, making up the majority of the increase.”

No wonder that the American Automotive Policy Council, Inc. (AAPC) issued the following press release on May 26, 2016 regarding the USITC report, which states in part, ” We hope that Congress will carefully review this report, specifically how the ITC has measured the impact of the proposed Trans-Pacific Partnership on the U.S. auto industry and American manufacturing. American automakers remain concerned about possible currency manipulation by TPP trade partners, including Japan. AAPC, as well as economists from across the ideological spectrum, agree that the U.S. government should include enforceable rules prohibiting currency manipulation in its trade agreements to produce a positive economic impact on American manufacturing.”

Do you think that the Obama’s administration claim of “strict monitoring” of foreign currency manipulation will be enough? In May 2016, Japan’s finance minister, Taro Aso, said he will act to prevent the currency markets from working, telling Japan’s parliament he was “prepared to undertake intervention” in the foreign exchange market if the yen strengthens. So, a U.S. “move to put Japan on a monitoring list ‘won’t constrain’ Tokyo from intervening to manipulate the value of their yen.”

According to Michael Stumo, “There is ample precedent for taking strong action to correct currency misalignment in conjunction with past major trade agreements. The Tokyo Round and the Uruguay Round were each preceded by a realignment of currencies to reduce imbalances in the world economy. If the Joint Declaration indeed would make any difference in the real world of trade, one might expect it to come into effect immediately. Instead… Joint Declaration will take effect if and when the TPP enters into force.”

The bottom line is that economic and trade negotiators together have failed to produce even a modest step forward toward an effective, enforceable currency provision. As currently written, neither the Joint Declaration nor the TPP will stop currency manipulation by Japan or any other country. The only effective alternative would seem to be enactment of the Currency Reform for Fair Trade Act (H.R. 820) or its equivalent, the Trade Facilitation and Trade Enforcement Act of 2015 (H.R.644). Either would mandate the use of WTO-consistent remedies to offset injurious currency manipulation. This modest first step toward confronting mercantilist currency policies is long overdue.



CPA’s Balanced Trade Message has Impact on Congress

Wednesday, April 27th, 2016

I just returned last Friday night from the Coalition for a Prosperous America‘s 9th annual Fly-In to Washington, D. C. It was my 4th time to participate with CPA members from across the country to meet with Congressional Representatives and/or their staff. I noticed a big difference in the reception we got during our visits compared to my first trip. The Coalition for a Prosperous America is a nonprofit organization representing the interests of 2.7 million households through our agricultural, manufacturing and labor members, and I’ve been a member since 2011.

In his report, CEO Michael Stumo wrote, “It was an amazing experience to finally have the wind at our backs instead of facing headwinds…CPA is taken very seriously by congressional offices. They trust what we say. One-fourth of our meetings included the congressman/woman themselves, which is significant and a new high for us. Senior staffers attended our meetings rather than junior staffers as was the case only a few years ago.”

However, we have not just been doing an annual visit to D. C. once a year since 2008. Teams of CPA members led by Michael Stumo have made visits to D. C. once or twice a month since January 2015. Here in California, teams of members led by me have visited the offices of 37 of the 53 Representatives from one to six times since 2013. In addition, CPA has co-hosted four manufacturing summits in California starting in 2013 ? two in San Diego, one in Orange County, and our recent one in Sacramento in February. The same kinds of activities have taken place in other states where CPA has a state chapter, such as Ohio, New York, and Pennsylvania.

In all of our visits, either in district or in D. C., we have constantly focused part of our message on simply establishing why our huge trade deficit not only matters, but is core to our national economic malaise. As I have written in past articles, our annual trade deficit over the past 20 years has a relationship to our national debt and is a major cause of the loss of 5.8 million manufacturing jobs and the nearly 95 million people that are no longer part of the workforce.

For years, we have been emphasizing the following:

  1. Trade deficits matter, they kill jobs and growth: This may sound obvious to you and me, but many Representatives and their staffer did not believe trade deficits mattered in the past. They were unwilling to admit the serious consequences in having a huge deficit in goods. So, if trade deficits were not a problem, there was no need to pursue a solution. Michael Stumo wrote, “This past week showed we have largely won that argument. We can only grow jobs and our economy if we focus upon a national strategy to balance trade by identifying the biggest trade cheating problems and aggressively fixing them.”

Our teams distributed a flyer titled, “Balanced Trade: Fighting the New Mercantilism” recommending that Congress establish a national goal to balance trade over a reasonable period of time by means of:

  • Direct trade negotiators to pursue trade deficit reduction as a primary negotiating objective.
  • Review past agreements for compliance with this objective. Renegotiate those that fail the test.
  • Utilize tax, fiscal and monetary policies to achieve the goal.
  • Aggressively and systematically attack and neutralize foreign mercantilism.
  1. Past trade agreements have not improved our trade performance: For years, we have heard this line from the establishment and Congressional Representatives: “Trade agreements establish American leadership, grow exports and create jobs.” The refrain was: “Trade is beneficial. We are increasing exports, and we have a surplus in services.” The only time I heard this refrain this year was by a legislative assistant in Senator Dianne Feinstein’s office.

We were able to trounce this argument this year by distributing a flyer that clearly showed the poor trade performance of our past agreements through visual aids CPA spent a lot of time developing (see below). We clearly showed that modern foreign mercantilism has moved beyond the tariff and non-tariff barrier provisions in trade deals. Indeed, those deals often made our trade problems worse. For example, our trade deficit with Korea has nearly doubled since it went into effect in 2012 (from $14.7 billion to $28.4 billion in 2015.)

The TPP will likely make America worse off: CPA read and digested the pro-TPP studies by Petri and Plummer, Peterson Institute for International Economics, Working Paper 16-2, Jan 2016 and the “Global Economic Prospects: Potential Macroeconomic Implications of the Trans-Pacific Partnership,” by the World Bank, Jan 2016. These reports tried to hide the problems and exaggerate gains. Our CPA teams distributed a flyer that “displayed the results through insightful infographics showing that any projected gains were embarrassingly meager and fundamentally implausible”[because] “The studies assume, without analysis, (a) no currency misalignment, (b) no foreign border taxes that replace tariffs, (c) no industrial subsidies and state-influenced enterprises, and (d) no mercantilism.” As Michael Stumo wrote, “These assumptions are untrue. Therefore, we cannot achieve the meager growth projected. We showed how those studies were built upon a series of demonstrably false assumptions to produce those meager gains. Then we showed why losses to American workers, industry and the economy were nearly certain when you eliminated the false assumptions.”

This year we also proposed tax reform that can fix some major foreign trade cheating on a large scale. As Michael Stumo, wrote, “Tax reform is a challenge because K Street lobbyists rig the game for special interests and no connection is made with our success in producing here and winning the international trade competition. However, we made significant gains in showing how we can fight foreign consumption taxes that act as tariffs by smartly adding a US consumption tax and funding the reduction of other regressive taxes and costs to fix the problem. We also showed how we can fix the corporate income tax system with sales factor apportionment to halt tax haven abuse by transnationals, incentivize US domestic production, and make foreign companies pay their fair share of income tax when selling into the lucrative American market.”

The good news is that everyone we saw seemed to agree that the TPP does not have the votes to pass before the election. The danger will be in the “Lame Duck” session. We seem to be in a far better position to prevent future passage than we were last year at this time with regard to passage of the “Fast Track” Trade Promotion Authority. Michael Stumo, wrote, “We almost beat Fast Track last June. Indeed we won the first votes in regulation time but lost in overtime when the Empire Struck Back. Now, it seems that the anti-Fast Track block is holding strong and quite a lot of pro-Fast Track congressional members have either declared opposition to TPP or are leaning against it.”

Michael added, “GOP House leadership pushed Fast Track through last year but they seem to view TPP as toxic now. The GOP rank and file are letting House leadership know they do not want to vote on TPP at any time in the foreseeable future. The Senate side is less solid and has always posed the bigger challenge. Senate majority leadership wants changes to TPP but still wants get to ‘yes.’ However, the changes being demanded are difficult (but perhaps not impossible) to deliver.”

We are being helped by the stand against trade agreements by two of the major presidential candidates, Trump and Sanders, who bring up our broken trade policy in almost every speech. “Trade has become one of the few, rare ‘voting issues’… an issue that actually moves voters to support or oppose a candidate.”

While this has been a several year battle, we haven’t won yet and still have a lot to do. The establishment will continue say that the voters simply don’t understand the “greater good.” Pundits will continue to write many “reasoned” articles about why the voters should support trade agreements such as the TPP. But the success of Trump and Sanders shows that the establishment has not only lost its clout, it is actively disbelieved by many now.

Help us to grow this movement and increase our effectiveness. Encourage your friends and colleagues to participate. Let’s keep up the good fight!

CPA Criticizes Peterson Report on Trans Pacific Partnership Agreement

Sunday, March 13th, 2016

On January 25, 2016, the Peterson Institute for International Economics (PIIE) released a report  on the Trans-Pacific Partnership trade agreement. The Coalition for a Prosperous America (CPA) promptly released their commentary on the Peterson Institute report the same day, which was based on oral and written testimony CEO Michael Stumo had given to the U. S. International Trade Commission on January   15, 2016.

The Peterson Institute used the “”computable general equilibrium (CGE) model.” I’m not an economist. I live and work in the real world of manufacturing. Thus, I am not familiar with some of the terms economists use for economic models, and had not heard of this term previously. I try to find explanations that make sense, but even the Wikipedia definition was complex; “A CGE model consists of (a) equations describing model variables and (b) a database (usually very detailed) consistent with the model equations… CGE models are useful whenever we wish to estimate the effect of changes in one part of the economy upon the rest. For example, a tax on flour might affect bread prices, the CPI, and hence perhaps wages and employment. They have been used widely to analyse trade policy.”

The World Bank states, “Computable General Equilibrium (CGE) models offer a comprehensive way of modeling the overall impact of policy changes on the economy… However, CGEs are significantly affected by the assumptions that they are based on which, depending on their definition, can impact on the results.”

CPA criticized the PIIE for using “the controversial computable general equilibrium (CGE) model to analyze the TPP rather than models that produce less optimistic results.” Stumo stated that the CGE model is increasingly recognized as unreliable because:

Untrue Facts Assumed ? “full employment always exists, trade is in balance, that wages and productivity stay in alignment rather than diverge, and that all countries have perfectly free markets with rational economic behavior.” These assumptions are false ? “full employment rarely exists; trade is almost never in balance; wages have diverged downward from productivity for the past several decades; and many TPP countries have state-directed capitalism or strong industrial policies to influence and alter market outcomes.”

Untrue Past Results ? The CGE model was used to analyze China’s being granted Permanent Normalized Trade Relations with China (China PNTR) in 2000 and the Korea-U. S. trade (KORUS) agreement in 2012. A reduction in the trade deficits were predicted for both countries, but the reality is that U. S. trade deficit with China increased from $68.7 billion in 1999 to $337 billion in 2015, and the Korea trade “deficit worsened by $12 billion annually between 2012 (date of KORUS implementation) to 2015.” (US Census Bureau)

Untrue Assumption of No Net Job Losses? “The CGE model wrongly assumes that there are no job losses to produce its results. The International Trade Administration assumes that for every billion dollars of U.S. exports supported 5,796 jobs, down from 7,117 jobs per billion dollars of U.S. exports in 2009. Conversely, every billion dollars of imports has the opposite result. Thus, where trade agreements result in worsening trade deficits, as is the case for the NAFTA, Korea and China PNTR deals, the job losses are drastic.”

Additionally, Stumo criticized the Peterson report because it ignores the fact the Trans Pacific Partnership Agreement does not address problems with currency misalignment, border taxes (VATs), and industrial policies, such as state-owned enterprises and government subsidies.

Stumo stated, “The PIIE model incorrectly assumes that currency valuations will be set by the perfectly free market and will not be manipulated. It does not take into account rising foreign value added taxes – which replace tariffs – charged to imports from the US.  It also ignores the industrial policy and state-directed strategies that Japan, Vietnam and others use to give an advantage to state-influenced or national champion domestic industries.”

Stumo criticized the fact that PIIE admits the TPP will create no new jobs and little growth even if the CGE model’s conclusions are true.

Job Creation Will Not Occur ? “…while the TPP is not likely to affect overall employment in the United States, it will involve adjustment costs as US workers and capital move from less to more productive firms and industries. Section 4 estimates that 53,700 US jobs will be affected—i.e., that number is both eliminated in less productive import-competing firms and added in exporting and other expanding firms—in each year during implementation of the TPP. This kind of movement between jobs and industries is what economists refer to as “churn,” and most kinds of productivity growth cannot occur without it taking place. For perspective, 55.5 million American workers changed jobs in this way in 2014—so the transition effects of the TPP would represent only less than 0.1 percent increase in labor market churn in a typical year. Most workers who lose jobs do find alternative employment, but workers in specific locations, industries, or with skill shortages may experience serious transition costs including lasting wage cuts.”

The Peterson report even admits job loss from past trade agreements, stating “The largest loser is the United States, whose trade and current account deficits have been $200 billion to $500 billion per year larger as a result. The United States has thus suffered 1 million to 5 million job losses.

The reality is that we lost 6.2 million manufacturing million jobs in the past 20 years as a result of NAFTA, China’s being granted PNTR in 1999, and the subsequent trade agreements with Central America, Korea, and other countries. Since manufacturing jobs create three to four other supporting or related jobs, we really lost 18 – 20 million jobs, which partly explains why 94,610,000 Americans are no longer in the labor force, which is the lowest participation rate in 38 years.

What do the report’s authors mean by “import-competing firms”? It appears to me that this means American manufacturing firms whose domestically-made products compete with imports for market share in the U. S. In addition, the Made in USA products are also competing as exports to other countries against the exports of China, Korea, our other trading and non-trading partners. So what guarantee do we have that the people losing jobs at import-competing firms will find jobs at exporting companies? None!

In addition, the CPA commentary highlighted the following:

Income gains are Negligible ? “The study projects that, by 2020, US incomes will rise a mere 0.1% of GDP. (Table 2).  This means that 99.9% of growth will happen without regard to the TPP.  The number 0.1% is equivalent to, or less than, a rounding error. It can only come true if all untrue assumptions in the CGE model are true. It will take another 10 years for the optimistic projection to deliver a meager 0.5% income gain by 2030.”

Middle Class Will Not Benefit ?  “Assuming (which we do not) the small income gains are realized, the study is silent on who benefits from them. The Economic Policy Institute reported that trade agreements account for 90% of wage inequality. If there are any income gains, the middle class will be a net loser.”

Other countries will “benefit” more than the US ? “The Peterson Study projects that Japan, Malaysia and Vietnam will gain far more than the United States.  The US Trade Representative, by pushing the TPP, is helping open markets for competitors in Japan and other countries. Japan is estimated to gain five times more income (in relation to GDP) than the US, Vietnam 16 times more, and Malaysia 15 times more. (Report, Table 2).”

Finally, the CPA commentary points out that other economic models show losses to the U.S. and other TPP countries. The commentary cites the fact that scholars at the Global Development And Environment Institute of Tufts University released a working paper in January 2016 that used the United Nations Global Policy Model (GPM). The Executive Summary of this paper states, “This GDAE Working Paper employs a more realistic model that incorporates effects on employment excluded from prior TPP modeling. We find that any benefits to economic growth are more limited, and even negative in some countries such as the United States. More importantly, we find that TPP would lead to losses in employment and increases in inequality. This is particularly true for the United States, where GDP is projected to fall slightly (-0.54 percent), employment to decline by 448,000 jobs, and inequality to increase as labor’s share of income falls by 1.31 percent.”

The paper states that the job loss would not be limited to the U. S, stating, The TPP would lead to employment losses in all countries, totaling 771,000 lost jobs…Participating developing economies would also suffer employment losses, as greater competitive pressures force them to limit labor incomes and increase production for export.”

In fact, it also states that job losses would not be limited to TPP trading partners: “The TPP would lead to losses in GDP and employment in non-TPP countries. In large part, the loss in GDP (-3.77 percent) and employment (879,000) among non-TPP developed countries would be due to losses in Europe, while developing country losses in GDP (-5.24%) and employment (-4.45 million) would reflect possible losses in China and India.”

The CPA commentary concludes that “the PIIE report as revealing the lack of any economic benefit from the TPP under the most optimistic, albeit implausible, circumstances. It is more likely that job destruction and industry shrinkage will continue being the net result.”

I will be even more emphatic in my predictions if the TPP is approved by Congress. The TPP will result in millions of job losses since past predictions were always exceeded. It will be another nail in the coffin of American manufacturing. The TPP is so overreaching in its scope that it would change many aspects of American life. I’ve written several previous articles posted on the blog section of my website under “trade” on the dangers of the TPP and why we must stop it from being approved by Congress. Do your own research and don’t be fooled by the rhetoric of its supporters. You can read the full text of the agreement for yourself here.

What Could be done about China’s Theft of Intellectual Property

Sunday, March 13th, 2016

Hardly a week goes by without a report of Chinese “hacking” or Intellectual Property Theft, so it was no surprise that a published analysis by CrowdStrike, a California-based cyber security company, revealed that China violated its cyber agreement with the United States the very next day after CNBC reported that President Obama and China’s President Xi Jinping agreed to not conduct cyber theft of intellectual property on Friday, September 25, 2015. President Obama said. “The United States government does not engage in cyber economic espionage for commercial gain, and today I can announce that our two countries have reached a common understanding on a way forward.” However, the U.S.-China agreement “does not prohibit cyber spying for national security purposes.”

It is interesting to note that the day before the announcement, September 24, 2015, Chet Nagle, a former CIA agent and current Vice President of M-CAM, penned an article in the Daily Caller, stating, “At FBI headquarters in July, the head of FBI counterintelligence, Randall Coleman, said there has been a 53 percent increase in the theft of American trade secrets, thefts that have cost hundreds of billions of dollars in the past year. In an FBI survey of 165 private companies, half of them said they were victims of economic espionage or theft of trade secrets — 95 percent of those cases involved individuals associated with the Chinese government.”

He blamed the corruption of Chinese government officials for the problem and stated that “President Xi Jinping has instituted a strict anti-corruption campaign. Regrettably, the campaign has focused on “tigers” — senior government officials — at the expense of eliminating the rampant corruption by the “flies” — officials at the provincial and local level. In any event, putting a dollar value on direct corruption does not address the totality of the costs. Business confidence and foreign direct investment in China are already falling because of the absence of the rule of law.”

He concluded, “China’s disregard of the rule of law should be the underlying driver for all discussions of commercial topics during the coming visit of China’s president. Lack of the rule of law is the most difficult challenge American enterprises face in China.”

In researching this topic, I found out that three years earlier, May 22, 2013, the bipartisan Commission on the Theft of American Intellectual Property of the U.S. International Trade Commission released a report. Dennis C. Blair, former Director of National Intelligence and Commander in Chief of the U.S. Pacific Command, and Jon M. Huntsman, Jr., former Ambassador to China, Governor of the state of Utah, and Deputy U.S. Trade Representative, were the Co-chairs of the Commission.

The day after the release, Forbes published an article about the report, stating that “China accounts for at least half – and maybe as much as 80 percent – of U.S. intellectual property theft.” The article briefly discussed the problem of China’s Intellectual Property theft and included quotes from the co-chairs, but did not go into any detail about the recommendations of the Commission.

The article did provide the link to the 100-page report, which I have since read. In view of the continuing problem, it is time to reconsider the key findings of the report, titled, “The Impact of International IP Theft on the American Economy”:

  • ”Hundreds of billions of dollars per year. The annual losses are likely to be comparable to the current annual level of U.S. exports to Asia—over $300 billion…”
  • Millions of jobs. If IP were to receive the same protection overseas that it does here, the American economy would add millions of jobs.
  • A drag on U.S. GDP growth. Better protection of IP would encourage significantly more R&D investment and economic growth.
  • The incentive to innovate drives productivity growth and the advancements that improve the quality of life. The threat of IP theft diminishes that incentive.

The report stated, “A core component of China’s successful growth strategy is acquiring science and technology. It does this in part by legal means—imports, foreign domestic investment, licensing, and joint ventures—but also by means that are illegal. National industrial policy goals in China encourage IP theft, and an extraordinary number of Chinese in business and government entities are engaged in this practice.”

The report stated that existing remedies are not keeping up with the problem because of:

  • Short product life cycles – “the slow pace of legal remedies for IP infringement does not meet the needs of companies whose products have rapid product life and profit cycles.”
  • Inadequate institutional capacity ? a shortage of trained judges in developing countries
  • China’s approach to IPR is evolving too slowly – “improvements over the years have not produced meaningful protection for American IP.”
  • Limitations in trade agreements? there are also significant problems in the WTO process that have made it impossible to obtain effective resolutions. “Bilateral and regional free trade agreements are not a panacea either.”
  • Steps undertaken by Congress and the administration are inadequate.

The Commission recommended short-term, medium-term, and long-term remedies. The short-term measures are immediate actions that are largely regulatory or made effective via executive order and include the following:

  • Designate the national security advisor as the principal policy coordinator for all actions on the protection of American IP.
  • Provide statutory responsibility and authority to the secretary of commerce to serve as the principal official to manage all aspects of IP protection.
  • Strengthen the International Trade Commission’s 337 process to sequester goods containing stolen IP.
  • Empower the secretary of the treasury, on the recommendation of the secretary of commerce, to deny the use of the American banking system to foreign companies that repeatedly use or benefit from the theft of American IP.
  • Increase Department of Justice and Federal Bureau of Investigation resources to investigate and prosecute cases of trade-secret theft, especially those enabled by cyber means.
  • Consider the degree of protection afforded to American companies’ IP a criterion for approving major foreign investments in the United States under the Committee on Foreign Investment in the U.S. (CFIUS) process.
  • Enforce strict supply-chain accountability for the U.S. government.
  • Require the Securities and Exchange Commission to judge whether companies’ use of stolen IP is a material condition that ought to be publicly reported.
  • Enforce strict supply-chain accountability for acquisitions by U.S. government departments and agencies by June 1, 2014, and work to enhance corporate accountability for the IP integrity of the supply chain.

The Commission made the following medium term recommendations to build a more sustainable legal framework to protect American IP that Congress and the administration should take:

  • Amend the Economic Espionage Act (EEA) to provide a federal private right of action for trade-secret theft. If companies or individuals can sue for damages due to the theft of IP, especially trade secrets, this will both punish bad behavior and deter future theft.
  • Make the Court of Appeals for the Federal Circuit (CAFC) the appellate court for all actions under the EEA. The CAFC is the appellate court for all International Trade Commission cases and has accumulated the most expertise of any appellate court on IP issues. It is thus in the best position to serve as the appellate court for all matters under the EEA.
  • Instruct the Federal Trade Commission (FTC) to obtain meaningful sanctions against foreign companies using stolen IP. Having demonstrated that foreign companies have stolen IP, the FTC can take sanctions against those companies.
  • Strengthen American diplomatic priorities in the protection of American IP. American ambassadors ought to be assessed on protecting intellectual property, as they are now assessed on promoting trade and exports. Raising the rank of IP attachés in countries in which theft is the most serious enhances their ability to protect American IP.

The more idealistic long-term recommendations are:

  • Build institutions in priority countries that contribute toward a “rule of law” environment in ways that protect IP.
  • Develop a program that encourages technological innovation to improve the ability to detect counterfeit goods.
  • Ensure that top U.S. officials from all agencies push to move China, in particular, beyond a policy of indigenous innovation toward becoming a self-innovating economy.
  • Develop IP “centers of excellence” on a regional basis within China and other priority countries.
  • Establish in the private, nonprofit sector an assessment or rating system of levels of IP legal protection, beginning in China but extending to other countries as well.

Of particular interest is the mention in the report that an annual survey in late 2012 of member companies of the American Chamber of Commerce in the People’s Republic of China “over 40% of respondents reported that the risk of data breach to their operations in China is increasing, and those who indicated that IP infringement has resulted in “material damage” to China operations or global operations increased from 18% in 2010 to 48% in 2012,” and that “The longer the supply line, the more vulnerable it is to IP theft.”

The risk of Intellectual Property is one of the major reasons many companies are returning manufacturing to America through reshoring. This is also why I urge the inventors that are part of the San Diego Inventors Forum to avoid going to China if at all possible, and if they have to go to China to meet their target Bill of Material cost, they should never source all of the parts of their product with one vendor. Otherwise, they are at risk of being victimized by their Chinese vendor stealing their IP and getting a counterfeit version of their product on the market first.

In conclusion, “The Commission considered three additional ideas for protecting the intellectual property of American companies that it does not recommend at this time.” The following one of the three is particularly interesting to me because of the enormous trade deficits we have with China:

“Recommend that Congress and the administration impose a tariff on all Chinese-origin imports, designed to raise 150% of all U.S. losses from Chinese IP theft in the previous year, as estimated by the secretary of commerce. This tariff would be subject to modification by the president on national security grounds.”

“The Commission is not prepared to make such a recommendation now because of the difficulty of estimating the value of stolen IP, the difficulty of identifying the appropriate imports, and the many legal questions raised by such an action under the United States’ WTO obligations. If major IP theft continues or increases, however, the proposal should be further refined and considered.”

What is outrageous to me is that it is obvious to me that none of the short-term, medium-term or long-term recommendations have been implemented or we would not still have the serious problem of cyber espionage and Intellectual Property Theft three years later.

Supporters of developments in China “essentially argue that when China begins producing its own intellectual property in significant quantities, the country’s own entrepreneurs and inventors will put pressure on political and Communist Party leaders to change the laws and improve IP protections.” Since China has the stated goal of becoming the superpower of the 21st Century and is Intellectual Property Theft is one of their tools to achieve this goal, I do not feel that this will ever happen.

To me, the most important conclusion of the report is “If the United States continues on its current path, with the incentives eroding, innovation will decline and our economy will stagnate. In this fundamental sense, IP theft is now a national security issue.” It will be interesting to see if the next president and the next Congress we elect will have the courage to play hardball with China by implementing some of the recommendations of the Commission.

Why the Trans Pacific Partnership Would Hurt American Manufacturers

Tuesday, April 30th, 2013

The Obama Administration has continued negotiations on the Trans-Pacific Partnership agreement behind doors closed to the media and without the Congressional involvement that was requested by Congress. Besides being a threat to our national sovereignty as I discussed in a previous blog, it is time to shine the light on another egregious provision that would hurt American manufacturers.

The Buy American Act was passed by Congress in 1933 and required the U.S. government to give preferential treatment to American producers in awarding of federal contracts. The Act restricted the purchase of supplies that are not domestic end products. For manufactured products, the Buy American Act used a two-part test:  first, the article must be manufactured in the U.S., and second, the cost of domestic components must exceed 50 percent of the cost of all its components. Other federal legislation passed since extended similar requirements to third-party purchases that utilize federal funds, such as highway and transit programs.

“Buy American” provisions do not help all U.S. firms equally. Corporations headquartered in the U.S. that offshore most of their manufacturing operations do not benefit from the system designed to promote domestic production in the way that companies with actual U.S. manufacturing operations do. However, strengthening the “Buy American” provisions in our federal procurement system is one of the recommendations I made in my book to benefit American manufacturers and help save American manufacturing.

If a domestic producer offers the government a more expensive bid than a foreign producer, it can still be awarded the contract under certain circumstances, but more recent free trade agreements have granted other nations the same negotiating status as domestic firms.

In certain government procurements, the requirements may be waived if purchasing the material/parts domestically would burden the government with an unreasonable cost, as when the price differential between the domestic product and a identical foreign-sourced product exceeds a certain percentage, or the product is not available domestically in sufficient quantity or quality, or if doing so is not in the public interest. In recent years, the requirements have been increasingly waived to the point that we have lost domestic sources for some defense components and products.

In addition, the President has authority to waive the Act in response to the provision of reciprocal treatment to U.S. producers. Under the 1979 GATT Agreement on Government Procurement, the U.S.-Israel Free Trade Agreement, the U.S.-Canada Free Trade Agreement, the North American Free Trade Agreement, the Central American Free Trade Agreement, and the Korea Free Trade Agreement, access to government procurement by certain U.S. agencies of goods for the other parties to these agreements is granted. Every one of these trade agreements have increased the trade deficit that the U.S. has with the parties to these agreements.

The Obama administration is currently pushing to grant the several nations involved in the Trans-Pacific agreement the same privileged status. What this means is that the TPP’s procurement chapter would require that all companies operating in any country signing the agreement be provided access equal to domestic firms to U.S. government procurement contracts over a certain dollar threshold. To meet this requirement, the U.S. would have to agree to waive Buy America procurement policies for all companies operating in TPP countries.
Supporters of TPP argue that it would be good for America because these rules would apply to all the countries signing the agreement, so U.S. firms would be able to bid on procurements contracts in other countries on a national treatment basis. The question is whether this new access for some U.S. companies to bid on contracts in the TPP countries is a good trade-off for waiving Buy America preferences on U.S. procurement?

Lori Wallach of Public Citizen has written several articles warning about the dangers of the Trans-Pacific Partnership. In an article titled, TPP Government Procurement Negotiations:

Buy American Policy Banned, a Net Loss for the U.S., she points out that the total U.S. procurement market is more than seven times the size of the combined procurement market of the current TPP negotiating parties: Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam. But the United States already has trade deals with procurement provisions with six of these countries: Australia, Canada, Chile, Mexico, Peru and Singapore. Removing these countries would mean that the U.S. procurement market is 24 times the size of the total “new” TPP procurement market.

She concludes “the size of the new procurement markets that the TPP may open for the United States is in the order of $53 billion (national) to $72 billion (total), which is a terrible trade for giving up the U.S procurement market of $556 billion (federal) to $1.7 trillion (total).”

In addition, she notes that the TPP procurement rules would constrain how our national and state governments may use our tax dollars in local construction projects and purchase of goods and limit what specifications Governments can require for goods and services, as well as the qualifications for bidding companies.

She warns that if we do not conform our domestic policies to the TPP terms, the U.S. government would be subject to lawsuits before foreign tribunals empowered to authorize trade sanctions against the U.S. until our policies changed. “Also, any “investor” that happens to be incorporated in one of these countries would be empowered to launch its own extra-judicial attack on our domestic laws in World Bank and UN arbitral tribunals with respect to changes to procurement contracts with the U.S. federal government.”

A letter from Rep. Donna Edwards (D-Md.) and 68 other Congressional Reps to President Obama on May 3, 2012 states in part, “We are concerned about proposals we understand are under consideration in the Trans-Pacific Partnership (TPP) agreement negotiations that could significantly limit Buy American provisions and as a result adversely impact American jobs, workers, and manufacturers…We do not believe this approach is in the best interest of U.S. manufacturers and U.S. workers. Of special concern is the prospect that firms established in TPP countries, such as the many Chinese firms in Vietnam, could obtain waivers from Buy American policies. This could result in larger sums of U.S. tax dollars being invested to strengthen other countries’ manufacturing sectors, rather than our own.”

On November 30, 2012, 24 Senators sent a letter to President Obama outlining guidelines for the TPP and calling for Congressional consultation for the TPP. The letter urged that the TPP:

“Maintain “Buy American” government procurement requirements. The American people, through their elected officials, should not be prohibited from establishing government procurement policies that prioritize job creation in the United States. We hope that you will direct USTR negotiators to ensure that any TPP not restrict “Buyer American” and ”Buy Local” government procurement policies at the Federal or sub-federal level.

Require strong Rules of Origin. The Rules of Origin in the TPP should ensure that only signatories to the TPP will benefit from its increased market access and other provisions so that employment opportunities in the U.S. may be expanded. Non-TPP members must not be allowed to use weak rules of origin as a backdoor way to enter the U.S. market and further depress U.S. job prospects.

Ensure that State-Owned and State-Supported Commercial Enterprises (SOEs) operate on a level playing field.  Given that SOEs are more common in the other TPP countries than in the U.S., the TPP should require that SOEs competing with private U.S. enterprises operate and make decisions on a commercial basis.  The agreement should also incorporate a reporting requirement so that countries have to provide information on the operation of their SOEs in other TPP countries on a regular basis.”

Country of Original labeling is another one of the recommendations I’ve written about in previous blog articles and is the main recommendation of Alan Uke in his book Buying Back America. This would help American consumers make choices when they purchase consumer goods and allow professional procurement specialists in industry and government to choose to support American manufacturers through “Buying American.”

The TPP treaty would exacerbate our trade deficit problem and make it even harder for American manufacturers to compete in the global marketplace. Instead of weakening “Buy American” requirements through additional trade agreements such as TPP, we need to strengthen the requirements.

This drastic curtailment of “Buy American” procurement provisions is another reason why we must make sure Congress rejects any fast-track authority the Obama administration seeks to invoke when it comes time to get final congressional approval for the Trans-Pacific Partnership agreement.
Please join me in opposing granting fast-track authority by signing the petition at the American Jobs Alliance website and contacting your representatives directly at

Import Penetration Still Outweighs Reshoring Trend

Monday, March 11th, 2013

In January, the U. S. Business and Industry Council released a report, “Import Penetration Rises again in 2011; Challenges Manufacturing Renaissance, Insourcing Claims,” by Alan Tonelson. According to the report,” the share of U.S. markets for advanced manufactured goods controlled by imports reached another all-time high in 2011… and domestic manufacturing’s highest value sectors keep falling behind foreign-based rivals.”

The USBIC report shows that “imports captured 37.57 percent of the collective $2.01 trillion American market in 2011 for a group of more than 100 advanced manufactured products,” up from 37.07 percent in 2010. When government data to calculate import penetration rate were first issued in 1997,”imports controlled 24.49 percent of substantially the same group of U.S. manufactured products.”

“Fully 29 of the 106 sectors for which reliable data were available featured import penetration rates of 50 percent or more in 2011. In 2010, 31 of these industries had lost half of their home U.S. market to imports, and in 1997, only 8 of the 114 sectors initially studied were in this situation.”

Between 1997 and 2011, 98 industries lost shares of their home market while only 8 gained shares. The industries that gained shares are:  “semiconductor machinery; saw mill products; paperboard mill products; motor vehicle stamping operations; transformer, inductor, and coil manufacturing; electron tubes; computer storage devices; and heavy duty trucks and chassis.”

The 98 industries include:  “semiconductors; electro-medical apparatus; pharmaceuticals; turbines and turbine generator sets; construction equipment; farm machinery and equipment; mining machinery and equipment; several machine tool-related categories; and ball and roller bearings.”

The report states that “from 1997-2011, output fell in 38 of the 106 total industries studied over this time span – nearly 36 percent of the total. These ‘declining’ industries include electricity measuring and test instruments; relays and industrial controls; motors and generators; motor vehicle engines and engine parts; several machine tool-related categories; and environmental controls.” In 11 more sectors, output growth was less than 10 percent, “including semiconductors; semiconductor production equipment; motor vehicle transmission and power train equipment; miscellaneous industrial machinery; and medicinals and botanicals.”

Mr. Tonelson writes, “High and rising import penetration rates for this many critical domestic industries over nearly a decade and a half represent powerful evidence of chronic, significant weakness in domestic manufacturing.”

In a section titled, “The Manufacturing Renaissance that Isn’t, he disputes the predictions of the Boston Consulting Group’s 2011 report, “Made in America, Again: Why Manufacturing Will Return to the U.S.” This report contends that American manufacturing would experience a renaissance because of rising costs in China and other parts of Asia so there would be a convergence in the total costs of manufacturing by some regions of the U. S. by 2015.

If U. S. manufacturers are still losing market share to foreign competitors through import penetration in their home market, this is a sign that “the United States has not even started to become “increasingly attractive for the production of many goods sold to consumers in North America” as predicted by the Boston Consulting Group, much less experiencing a Manufacturing Renaissance.

What is even more troubling to Mr. Tonelson is that the USBIC report focuses on the capital-and technology-intensive sectors that are “keys to maintaining national prosperity, technological leadership, and national security.”  The report shows that “dozens of America’s most advanced manufacturing industries are becoming just as vulnerable to import competition – and in some cases to import domination – as labor-intensive industries like clothing and toys.”

He concludes that the conventional stimulus strategies have had the disappointing results of “less growth and employment bang per investment-target stimulus buck with each passing year” because “U. S. imports of capital goods as such generates much less American output supported by much less American employment than purchases of domestically produced capital goods.”

In his opinion, President’s Obama’s goal of doubling exports during the 2009-2014 period isn’t going to improve the situation either when imports keep rising faster than exports. While there was a 15.45 percent improvement from 2010 to 2011, the January-October 2012 period only showed a 4.56 percent improvement.

Mr. Tonelson points out that negotiating new trade agreements isn’t producing the desired effect of increasing exports. The latest agreement negotiated with Korea has had the opposite effect  ? U. S. exports to Korea dropped by more than 18 percent while imports from Korea are up 4.74 from when it came into force in March 2012.

He concludes that the continued rise of import penetration in the U. S. indicates that American industry is losing ground relative to foreign-based competitors and “the nation is not making enough of the structural changes needed to create healthy growth and avoid reflating the last decade’s credit bubble.”

In an interview by Richard McCormack in the January 15, 2013 issue of Manufacturing & Technology News, Mr. Tonelson, stated, “I think the only way that these trends reverse meaningfully is if American trade policy changes. Unless we reduce the incentives of U.S. companies and companies all over the world to supply the U.S. market from overseas, this tide will not turn.”

While reducing the incentives of U. S. companies and foreign companies to supply the U. S. market from overseas is an important step in turning the tide, it would be the first of many steps we need to take. As I have written previously, we need to change our trade, tax, and regulations policies to help U. S. manufacturers be more competitive in both their home market and the global marketplace. We need to develop a national manufacturing strategy that would address all of the various factors that are resulting in the decline in the decline in the United States’ share of the global manufacturing output.

I did take exception to Mr. Tonelson’s dispute of the predictions of the Boston Consulting Group’s report and told him that the data is lagging reality ? “reshoring” is happening. As a manufacturers’ sales rep for American companies that perform fabrication services, I am in the “trenches” competing with offshore companies. Nearly every manufacturer I represent has experienced gaining new customers that are “reshoring” manufacturing from China. I have interviewed dozens of companies at trade shows over the past year and a half, and every company I interviewed had experienced “reshoring.” Nearly all of the San Diego region’s contract manufacturers of electronic manufacturing services have benefitted from “reshoring” in the past year.

The Reshoring Initiative, founded by Harry Moser in 2010, has documented case studies of companies reshoring. In the article, “Pumping Muscle into U.S. Manufacturing,” by Craig Barner in the March 6, 2013 issue of Forbes magazine, Mr. Moser said, “For example, about 220 to 250 organizations have brought manufacturing back to the U.S….with the heaviest migration from China. This represents about 50,000 jobs, which is 10% of job growth in manufacturing since January 2010, he said.”

“The top reshoring industries include electrical equipment, appliances and components; transportation equipment; and machinery, Moser said. Key reasons for returning to the U.S. include rising wages offshore, better quality of goods produced in the U.S., easier access to repairs and lower delivery costs, he said.”

On March 4, 2013, Prime Advantage, the leading buying consortium for midsized manufacturers, announced the findings of its eleventh semi-annual Group Outlook Survey. “A large majority — more than 70% of respondents — have increased their material and service purchases from American suppliers and service providers. Mexico is the second choice for sourcing, with nearly 28% of respondents moving sourcing to that region. The most frequently cited benefits that manufacturers hope to see in nearshoring are shorter lead times, as indicated by 67% of respondents, and lower inventories (49%). Among other benefits, companies cited better supply chain control (40%) and better overall communication (39%).”

If more American manufacturers would utilize the free Total Cost of Ownership Estimator™ developed by Harry Moser, more companies would understand the benefits of “reshoring” and foster a true renaissance in American manufacturing.


The Trans-Pacific Partnership Would Destroy our National Sovereignty

Tuesday, February 26th, 2013

In his State of the Union address, President Obama declared in his intent to complete negotiations for a Trans-Pacific Partnership (TPP). The Obama administration has pursued the TPP through the offices of U.S. Trade Representative Ron Kirk instead of under the auspices of the Department of State.

This was the first time negotiations to create a free trade zone with Pacific Rim countries were made public although 15 rounds have been concluded. Eleven nations are participating: Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam. Although Japan and China are not presently participating in TPP negotiations, “docking provisions” being written into the TPP draft agreement would permit either Japan or China to join the TPP at a later date without suffering any disadvantage.

To implement the TPP free-trade agreement, Congress will be asked to surrender its responsibility under Section 1, Article 8 of the Constitution to regulate commerce with foreign nations, and grant President Obama extra-constitutional “Trade Promotion Authority” to negotiate the final TPP agreement. The administration seeks to gain “fast-track authority,” a provision under the Trade Promotion Authority that requires Congress to review an FTA under limited debate, in an accelerated time frame subject to a yes-or-no vote by a simple majority vote rather than a two-thirds vote, as required for the ratification of a formal treaty.

Under fast-track authority, there is no provision for Congress to modify the agreement by submitting amendments. Fast-track authority also treats the FTA as if it were trade legislation being negotiated by the executive branch. The purpose is to assure foreign partners that the FTA, once signed, will not be changed during the legislative process.

A report released Jan. 24 by the Congressional Research Service, “The Trans-Pacific Partnership Negotiations and Issues for Congress,” makes clear that the present negotiations are not being conducted under the auspices of formal trade promotion authority as the latest TPA expired July 1, 2007. However, the Obama administration is acting as if fact-track authority were in effect already.

The report states that the TPP is being negotiated as a regional free-trade agreement that U.S. negotiators describe as a “comprehensive and high-standard” FTA. The U.S. hopes the agreement “will liberalize trade in nearly all goods and services and include commitments beyond those currently established in the World Trade Organization (WTO.)”

Oppostion to the TPP ranges from one end of the political spectrum to the other ? from the liberal Public Citizen non-profit, consumer rights advocacy group founded by Ralph Nader in 1971 to the far-right, conservative news organization, World Net Daily founded in 1997 by Joseph Farah.

Lori Wallach of Public Citizen has written several articles warning about the dangers of the Trans-Pacific Partnership. According to her review of TPP, foreign firms would gain the follow privileges:

  • Risks and costs of offshoring to low wage countries eliminated
  • Special guaranteed “minimum standard of treatment” for relocating firms
  • Compensation for loss of “expected future profits” from health, labor environmental, laws (indirect or “regulatory” takings compensation)
  • Right to move capital without limits
  • New rights cover vast definition of investment: intellectual property, permits, derivatives
  • Ban performance requirements, domestic content rules. Absolute ban, not only when applied to investors from signatory countries

Ms. Wallach opines that U.S. multinational corporations have the goal of imposing on more countries a set of extreme foreign investor privileges and rights and their private enforcement through the notorious “investor-state” system. “This system elevates individual corporations and investors to equal standing with each TPP signatory country’s government- and above all of us citizens.” This would enable “foreign investors to skirt domestic courts and laws, and sue governments directly before tribunals of three private sector lawyers operating under World Bank and UN rules to demand taxpayer compensation for any domestic law that investors believe will diminish their ‘expected future profits.’ Over $3 billion has been paid to foreign investors under U.S. trade and investment pacts, while over $14 billion in claims are pending under such deals, primarily targeting environmental, energy, and public health policies.”

This opinion was confirmed by Jerome Corsi in an article last week on World Net Daily, in which he reported that a “leaked copy of the TPP draft makes clear in Chapter 15, ‘Dispute Settlement,’ that the Obama administration intends to surrender U.S. sovereignty to an international tribunal to adjudicate disputes arising under the TPP. Disputes concerning interpretation and application of the TPP agreement, according to Article 15.7, will be adjudicated by an “arbitral tribunal” composed of three TPP members.

He states, “Because the TPP agreement places arbitral tribunals created under TPP to be above U.S. law, the Obama administration’s negotiation of the Trans-Pacific pact without specific consultation with Congress appears aimed at creating a judicial authority higher than the U.S. Supreme Court. The judicial entity could overrule decisions U.S. Federal District and Circuit courts make to apply U.S. laws and regulations to foreign corporations doing business within the United States. The result appears to allow foreign companies doing business within the United States to operate in a legal and regulatory environment that would give the foreign companies decided economic advantages over U.S. companies that remain subject to U.S. laws and regulations.”

Another group opposing the TPP is Americans for Limited Government , a lobbying group and advocacy organization which describes itself as a non-partisan, nationwide network committed to advancing free-market reforms, private property rights and core American liberties President Bill Wilson states, “This new trade agreement will place domestic U.S. firms that do not do business overseas at a competitive disadvantage. Foreign firms under this trade pact could conceivably appeal federal regulatory and court rulings against them to an international tribunal with the apparent authority to overrule our sovereignty. If foreign companies want to do business in America, they should have to follow the same rules as everyone else. Obama is negotiating a trade pact that would constitute a judicial authority higher than even the U.S. Supreme Court that could overrule federal court rulings applying U.S. law to foreign companies. That is unconstitutional. The U.S. cannot be allowed to enter a treaty that would abrogate our Constitution.”

As a director on the board of the American Jobs Alliance, an independent, non-partisan, non-profit organization, I wish to point out some of the additional problems with the TPP that are cited on our website:

TPP Undermines Our Sovereignty and Democracy – it is misleadingly called a trade agreement when in fact it is an expansive system of enforceable global government.  Only two of its 26 chapters actually cover trade issues, like cutting border taxes (“tariffs”) or lifting quotas that limit consumer choice. In reality, most of the deal would impose one-size-fits all international rules to which U.S. federal, state and local law must conform. This includes limits on the U.S. government’s right to regulate foreign investors operating here and control our natural resources and land use. TPP also would provide preferential treatment to foreign banks and other firms operating here. The pact would subject the U.S. to the jurisdiction of two systems of foreign tribunals, including World Bank and United Nations tribunals. These foreign tribunals would be empowered to order payment of U.S. tax dollars to foreign firms if U.S. laws undermined the foreign firms’ new special TPP privileges.

TPP Threatens States Rights – the agreement undermines the critical checks and balances and freedoms established by the U.S. Constitution, which reserves many rights to the people or state governments. TPP would obligate the federal government to force U.S. states to conform state laws to 1,000 pages of rules, regulations and constraints unrelated to trade? from land use to whether foreign firms operating in a state can be required to meet the same laws as domestic firms.

The U.S. federal government would be required to use all possible means – including law suits, and cutting off federal funds for states – to force states to comply with TPP rules. Already a foreign tribunal related to the World Trade Organization has issued a ruling explicitly stating that such tactics must be employed against U.S. states or the U.S. would face indefinite trade sanctions until state laws were brought into compliance.

TPP bans Buy American – it explicitly prohibits both Buy American and state-level Buy Local programs.

UN and World Bank Tribunals Would Replace U.S. Courts – the “Investment” chapter would submit the U.S. to the jurisdiction of international tribunals established under the auspices of the United Nations or World Bank. It would shift decisions over the payment of U.S. tax dollars away from Congress and outside of the federal court system established by Article III of the Constitution to the authority of international tribunals. These UN and World Bank tribunals do not apply U.S. law, but rather international law set in the agreement. These tribunals would judge whether foreign investors operating within the U.S. are being provided the proper property rights protections. The standard for property rights protection would not be those established by the U.S. Constitution as interpreted by the U.S. Supreme Court, but rather international property rights standards, as interpreted by an international tribunal.

TPP Cedes a Quarter of all U.S. Land to Foreign Control (544 million acres of public land)  – it would subject to the foreign tribunals’ judgment all contracts between the U.S. federal government and investors from TPP nations – including  subsidiaries of Chinese firms –  “with respect to natural resources that a national authority controls, such as for their exploration, extraction, refining, transportation, distribution, or sale; to supply services to the public on behalf of the Party, such as power generation or distribution, water treatment or distribution, or telecommunications; or to undertake infrastructure projects, such as the construction of roads, bridges, canals, dams, or pipelines, that are not for the exclusive or predominant use and benefit of the government.”

In conclusion, the TPP is a direct threat to American national sovereignty, the U.S. Constitution and American-owned businesses. TPP would destroy American jobs and our independence. It would have a negative impact on jobs, the safety of our food, Internet freedom, our right to ‘Buy American,’ and our laws. We must make sure Congress rejects any fast-track authority the Obama administration seeks to invoke when it comes time to get final congressional approval.

Please join me in opposing granting fast-track authority by signing the petition at the American Jobs Alliance website: In addition, email, write, or call your Congressional representative to let them know that you oppose approving the Trans-Pacific Partnership.


Could California Manufacturing Thrive Again?

Wednesday, February 20th, 2013

On February 14, about 135 business, civic, academic, and labor leaders met at the conference facilities of AMN Healthcare for the “Manufacturing in California – Making California Thrive” economic summit. Comments to welcome attendees were made in turn by San Diego City Councilman Mark Kersey, Assembly member Marie Waldron, Dale Bankhead from Assembly member Toni Atkins office, and Senator Mark Wyland.

Then, Michael Stumo, president of the Coalition for a Prosperous America, provided an overview of the schedule for the day that included an overview of manufacturing in California, a panel of local manufacturers, a panel of national presenters, and breakout sessions after lunch.

I provided the overview of California manufacturing in which I briefly discussed the history of manufacturing in California that I wrote about in a previous blog and pointed out that even though California is perceived as bad for manufacturing, it is the 8th largest market in world and ranks first in manufacturing for both jobs and output. Manufacturing in California accounts for 11.7% of Gross State Product and 9% of workforce. California leads the nation in monies spent on R&D, and California companies received over 50% of all Venture Capital dollars invested in the U. S. in 2011. California high-tech exports also ranked first nationwide, totaling $48 billion in 2011.

The major manufacturing industries are shown by the following chart:

Besides the great weather, California also has world-famous research institutions and research universities, a skilled, educated workforce, a large pool of inventors/entrepreneurs, and strong networks of “angel” investors and venture capitalists. California inventors and entrepreneurs are supported by more than 20 business incubators throughout the state, including two incubator facilities in San Diego – EvoNexus and the San Diego Technology Incubator, as well as the incubator-without-walls, CONNECT’s Springboard program.

In addition, California has 40 Enterprise Zones throughout the state, two of which are in San Diego’s south county. Enterprise Zone companies are eligible for substantial tax credits:

  • Hiring Credits – Firms can earn $37,440 or more in state tax credits for each qualified employee hired
  • Up to 100% Net Operating Loss (NOL) carry-forward for up to 15 years under most circumstances.
  • Sales tax credits on purchases of up to $20 million per year of qualified machinery and machinery parts;
  • Up-front expensing of certain depreciable property
  • Unused tax credits can be applied to future tax years
  • Enterprise Zone companies can earn preference points on state contracts.

There are also 17 Foreign Trade Zones (FTZs) in California that are sites in or near a U.S. Customs port of entry where foreign and domestic goods are considered to be in international trade. Goods can be brought into zone without formal Customs entry or without incurring Customs duties/excise taxes until they are imported into the U. S. FTZs are intended to promote U.S. participation in trade and commerce by eliminating or reducing the unintended costs associated with U.S. trade laws

Of course, no overview would be complete without mentioning the disadvantages of manufacturing in California. In the Small Business Entrepreneur Council Survival Index of 2011, California ranks 46th for its business climate because of the following:

  • Highest personal income & capital gains taxes
  • Highest corporate income & capital gains taxes
  • Highest gas and diesel taxes
  • High state minimum wage
  • High electric utility costs
  • High workers’ compensation costs
  • More stringent Cal OSHA & Cal EPA regulations
  • Stringent Air Quality Monitoring District rules
  • Large number of health insurance mandates

As a result, California has lost over 500,000 manufacturing jobs since the year 2001 as shown by the chart below.

No state, county, or city agency keeps track of the number of manufacturing companies leaving California, but there are frequent anecdotal stories in the news. Of course, everyone had seen or heard one of the ads by Texas Governor Rick Perry to woo California companies to relocate to Texas, as well as the fact that he was in California that very week to meet with some California companies.

I then moderated a panel of the following local manufacturers, who gave their viewpoints of the challenges of doing business in California:

  • Karl Friedrich Haarburger – VP, Solar Energy Industrial Operations, SOITEC
  • Neal Nordstrom – COO, PureForge
  • Rick Urban – COO, Quality Controlled Manufacturing, Inc.
  • Paul Brown – CFO, The Wheat Group
  • Craig Anderson – EHS Director, Solar Turbines, Inc.

Their comments provided examples of most of the above-cited disadvantages of doing business in California with particular emphasis on the problems of raising taxes retroactively in the last election by the passage of Proposition 30. Neal Nordstrom said, “It isn’t just the increase in income taxes and sales taxes, it’s the cumulative effect of all of the taxes and the uncertainty of what is happening next.” Businesses need to be able to have some certainty in their planning, so passing retroactive taxes makes planning for the future difficult and hurts their profitability greatly.

Mr. Anderson commented that there biggest problem was caused by the passage of AB 32. He stated, “The technology to comply with AB 32 does not currently exist, so there is great uncertainty as to whether Solar Turbines will be able to comply with the law by the deadline for compliance.”

Greg Autry, School of Business and Economics, Chapman University, led off the national panel with the topic of Trade Policy. The U. S. had a trade deficit $559.8 billion in 2011, of which over half ($295.4 billion) was with China. Every trade agreement signed in the past 20 years has resulted in an increase trade deficit with our trading partners. The U. S. already has an increased trade deficit with Korea and Columbia from the recently signed trade agreements. He said, “States need to stop trying to “poach” companies from other states and work together against our common adversary, China. States cannot compete against another country where the government is subsidizing manufacturing companies to take control of markets.” Mr. Autry showed a video he had taped during a visit to China in which an employee of Foxconn stated that the Chinese government had provided the land and built the facility where the iPads and iPhone are being manufactured without cost to Foxconn, as well as covering all of the expenses for running the facility for three years. He also showed a video interview with an executive of CODA Automotive Inc. that has opened its HQ in Los Angeles and claims to be making their electric car in the U. S. when, in fact, they are importing the “glider” (a car without the drive train) from China. Miles Automotive partnered with China-based Hafei Saibao Electric Motor Car and Qingyuan Electric Vehicle Co. to establish Coda Automotive as an affiliate company. Mr. Autry opined that federal tax rebates should not be going to purchase an electric car for essentially a Chinese import to the detriment of American car manufacturers like General Motors.

Pat Choate – Economist; Author, Saving Capitalism: Keeping America Strong, covered the importance of the protection of Intellectual Property to the future of American manufacturing. He said that the U. S. is the most innovative country in the world and issues more patents than any other country. However, the recent passage of the America Invents Act converting the U. S. from a “first-to-invent” to “first-to-file” is hurting our innovation. Most growth comes from “disruptive” technology developed by inventors/entrepreneurs of small companies, and the “first-to-file favors large companies that can file a challenge against these small companies in the hopes of bankrupting them to avoid disruptive technology from harming their business. The length of time for the Patent Office to issue a patent has increased from an average of 18 months to 36 months, which is hurting startup companies. The share of patents granted to U. S. residents and small entities has dropped several percentage points since 2007.1988.  He concluded by saying that the constitutionality of the America Invents Act is being challenged, and he hopes that it will be deemed unconstitutional.

Michael Stumo – CEO, Coalition for a Prosperous America, described the math about how a consumption tax could reduce the domestic tax burden, include imports in our tax base, and narrow the trade deficit, increase U.S. production, and fund reductions in the income tax while maintaining progressivity. He explained that our national Gross Domestic Product (GDP) equals of Consumption plus Investment plus Government Procurement plus Net Exports (Total exports minus Total Imports). Every one of our trading partners (150 countries) has a form of consumption tax, including value added taxes (VATs), with an average 17% level. These countries rebate these taxes on their exports, while the U. S. does not add a tax on its imports. The taxes are “border adjustable” because they act as a tariff on our goods sent to them and charged the VAT. This has created our more than $500 billion trade deficit with our trading partners, $298 billion with China alone. CPA advocates changes in U. S. trade policy to address this unfairness which tremendously distorts trade flows.

Thea Lee – Deputy Chief of Staff, President’s Office at AFL-CIO spoke passionately on the need to have a national manufacturing strategy that will create good paying jobs for American workers. Key points that she made were: We need to have a longer-term goal of what kind of country we want to be and how to achieve it. It will require some strategic investment in infrastructure. We need to figure out what kind of trade we want and what other countries are doing. Having an ideological position that free trade is good when other countries are pursuing mercantilism is harmful. We need to be responsive to what other countries are doing. We need to have a competitive trade policy. The ultimate goal is not to have more free trade but more prosperity at home. We need to get back into a job creation policy. We haven’t done trade policy very well, and we need to rethink our trade policies. We don’t need more dopey free trade agreements (taken from notes but not verbatim quotes.)

After lunch, the attendees were split into three groups for the breakout session, in which five issues were discussed and voted against each other, one pair at a time, to determine the top two issues. The five issues were:

  • Trade Reform
  • Tax Reform
  • Intellectual Property
  • Regulatory Reform
  • Manufacturing Strategy

After voting, the groups reconvened to share the outcome of their voting. The top two issues voted as most critical to be addressed were:  Regulatory Reform and Manufacturing Strategy. Regulatory Reform was chosen as the top issue by all three groups because they felt manufacturers needed to have their immediate “pain” alleviated before other issues could be considered. A manufacturing strategy was deemed the second most important issue because if you have a strategy that supports manufacturing, it will encompass intellectual property protection and trade reform. Attendees were invited to sign up to participate in a Task Force to be formed. I will be chairing the Task Force, so please contact me at if you would like to participate.

If our elected representatives will work with business, civic, academic, and labor leaders, I believe we can make manufacturing in California thrive again and once more be the “Golden State” of opportunity.

What Could We Do Right Now to Create Jobs?

Tuesday, January 17th, 2012

There are numerous ideas and recommendations on how we could create jobs that range from the cautious to the extreme.  Most job creation programs proposed by commentators, politicians, and economists involve either increased government spending or reductions in income or employment taxes at a time of soaring budget deficits and decreased government revenue.  Other recommendations would require legislation to change policies on taxation, regulation, or trade that would be difficult to accomplish. Many of these solutions involve borrowing money or taking money from one group of citizens or a future generation to give to another.  Let’s start with what we as individuals can do from the viewpoint of entrepreneurs, business owners, employees, and consumers.

If you are an entrepreneur starting a company, find a niche product for which customers will be willing to pay more for a “Made in USA” product.   Plan to sell your product on the basis of its “distinct competitive advantage” rather than on the basis of lowest price.  Select your suppliers from American companies as this will create jobs for other Americans.

If you are the owner of an existing manufacturing company, then you could do a Total Cost of Ownership analysis for component parts that you are having made offshore to see if you could “reshore” some of all of them to be made in the United States.  Check out for a TCO worksheet estimator to conduct your analysis.  Also, you could choose to keep R&D in the United States or bring it back to the United States if you have “offshored” it.    Every manufacturing job you keep or bring back to the United States will create an average of three to four support jobs for other Americans.  If you are a service company, you could choose to keep your customer service department in the United States or bring it back if it is “offshored.”  If enough manufacturing is “reshored” from China, we would drastically reduce our trade  $600 billion trade deficit .  We could create as many as three million manufacturing jobs, which would, in turn, create 9 – 12 million total jobs, bringing our unemployment down to 4 percent.

If you are an inventor ready to get a patent or license agreement for your product, select American companies to make parts and assemblies for your product as much as possible.  There are some electronic components that are no longer made in the U. S., so it may not be possible to source all of the component parts with American companies.  As I’ve written previously, there are many hidden costs to doing business offshore so that in the long run you may not save as much money as you expect by sourcing your product offshore.  Don’t forget about the danger of having your Intellectual Property stolen by a foreign company that will use it to make a copy-cat or counterfeit product sold at a lower price than your product.

If you are fortunate enough to have a regular, stable job, do everything in your power to contribute to the success of your company.  Do your job to the best of your ability.  Be willing to learn new job skills to increase your value to your employer.  No matter what your job, adopt the marketing mindset where you realize that everyone in a company is part of the marketing team regardless of their job function.  Every interaction that a customer or potential customer has with anyone in a company influences his or her opinion about doing business with that company.  Even though you are being paid by your employer, it’s actually your company’s customers that provide you with a job.

You may not realize it, but you have tremendous power as a consumer.  Even large corporations pay attention to trends in consumer buying, and there is beginning to be a trend to buy ‘Made in USA” products.  Pay attention to the country of origin labels when you shop and buy “Made in USA” products whenever possible.  Be willing to step out of your comfort zone and ask the store owner or manager to carry more “Made in USA” products.   If you buy products online, there are now a plethora of online sources dedicated to selling only “Made in USA” products.   Each time you choose to buy an American-made product, you help save or create an American job.  There is a ripple effect in that every manufacturing job creates three to ten other manufacturing jobs, depending on the industry.  If 200 million Americans bought $20 worth of American products instead of Chinese, it would reduce our trade imbalance with China by four billion dollars.  During the ABC World News series called “Made in America,” Diane Sawyer has repeatedly said, “If every American spent an extra $3.33 on U. S.-made goods, it would create almost 10,000 new jobs in this country.”

Now, let’s consider what Congress could do to create jobs.  First, Congress must enact legislation that addresses China’s currency manipulation.  Most economists believe that China’s currency is undervalued by 30-40% so their products may be cheaper than American products on that basis alone.  To address China’s currency manipulation and provide a means for American companies to petition for countervailing duties, the Senate passed S. 1619 last fall.  Even though the corresponding bill in the House, H. R. 639, had bi-partisan support with 231 co-sponsors, GOP leadership bottled up the bill in committee and prevented it from being brought up for a vote, so the session ended without action to address this serious issue.  The 112th Congress lasts two years, starting in Jan 2011 and ending December 2012, so there is the opportunity for the bill to be voted on this year.

We  voters need to pressure our elected representatives in the House to pass this bill this year so that American products can compete against Chinese imports.  It’s an obvious fact that if American companies can increase sales of their products, then they will be able to hire more workers.

Second, Congress should pass legislation allowing American corporations to “repatriate” income earned by plants in foreign countries at a reduced tax rate of 5-5.5% if the income is permanently reinvested in the United States.  This would bring nearly 1.2 billion dollars of monies back to the U. S. to be invested in R&D, plants, equipment, and hiring workers.

Third, Congress should strengthen and tighten procurement regulations to enforce “buying American” for all government agencies and not just the Department of Defense.   All federal spending should have “buy America provisions giving American workers and businesses the first opportunity at procurement contracts.  New federal loan guarantees for energy projects should require the utilization of domestic supply chains for construction.  No federal, state, or local government dollars should be spent buying materials, equipment, supplies, and workers from China.

My other recommendations for creating jobs are based on improving the competitiveness of American companies by improving the business climate of the United States so that there is less incentive for American manufacturing companies to outsource manufacturing offshore or build plants in foreign countries.  The proposed legislation would also close tax loopholes and prevent corporations from avoiding paying corporate income taxes.  They are:

  • Reduce corporate taxes to 25 percent
  • No negotiation or ratification by Congress of any new Free Trade Agreements
  • Make capital gains tax of 15 percent permanent
  • Increase and make permanent the R&D tax credit
  • Eliminate the estate tax (also called the Death Tax)
  • Improve intellectual property rights protection and increase criminal prosecution
  • Prevent sale of strategic U.S.-owned companies to foreign-owned companies
  • Enact legislation to prevent corporations from avoiding the U.S. income tax by reincorporating in a foreign country
  • Change the tax code to a “partial exemption system” to eliminate incentives for companies to move offshore by taxing all corporate income at a reasonable rate once

In this election year, it is unlikely that legislation proposing any of these recommendations would have a chance of being passed by Congress.  The problem is that no Democrat would want to allow any credit to go to a Republican, which might help them win re-election, and no Republican would want to allow any credit to go to a Democrat, which might help them win re-election.   We will need to wait until after the 2012 election before we have any hope of such legislation being considered.

Finally, the Obama administration is considering a high-level task force to manage China trade enforcement issues. Such a task force is desperately needed and long overdue.  The challenge will be to ensure that the task force has the authority to take bold steps to lower our trade deficit with China.  Holding China accountable for their compliance with terms of their membership in the World Trade Organization would be a major step in helping American manufacturers compete in the global marketplace to be able to succeed, grow and create jobs in America instead of China.