savingusmanufacturing.com

Last week, I attended the imX (interactive manufacturing eXperience) in Las Vegas (September 12-14, 2011.)  The imX was jointly sponsored by the Society of Manufacturing Engineers (SME) and the American Machine Tool Distributors’ Association (AMTDA).  The event had eight eXperience partners:  DMG/Mori Seiki U.S.A., Fanuc, Kennametal, MAG IAS LLC, Makino, Methods Machine Tools, Okuma America, and Sandvik Coromant, as well as strategic media partner, Manufacturing Engineering, and three media sponsors, www.cnc-west.com, Micro Manufacturing, and Cutting Tool Engineering.

It was different than any other trade show that I have attended in the past 30 years.   What made it different was that the whole focus of the show was benefits for the attendee instead of focusing primarily on benefits to the exhibitors.  Traditional shows concentrate on bringing as many attendees as possible to the show to be sales leads for the exhibitors and may offer some technical sessions as an added draw to increase attendance.  To attend imX, you had to be invited as a guest by one of the sponsors, the eights partners, or other exhibitors in the event. The goal of imX was to chart a new course for the future of the domestic manufacturing industry by fostering collaboration among American Manufacturers of all sizes.

SME President, Paul Bradley, PE, said that this event was in development for five years.  The imX team spoke with members and customers to discover what they wanted and needed from an event. AMTDA and the eight eXperience partners identified the needs of their members and customers.  Individual meetings and group discussions between exhibitors and attendees were identified as key needs to provide a higher level of customer engagement and education to create an event that was unlike any other.  For the first time, the manufacturing industry came together not as competitors, but as collaborators with the common goal and focus of long-term industry viability.  The participants had the opportunity to meet to discuss and foster an understanding of the challenges and opportunities facing their customers and their competition and to explore the latest manufacturing technology.

imX event manager, Steve Prahalis said  that their survey of exhibitors and buyers revealed that some hadn’t been to a show in as long as five years.  Instead, they were attending corporate technical sessions at plants around the country.  They got together a roundtable of CEO’s over a period of three years to come up with ideas for a new kind of event that would be invitation only and incorporate the kind of experience the corporate technical sessions provided, but in one location and one time.

For decades, trade shows for the manufacturing industry were events at which you either exhibited or attended every year.  If you didn’t, you would be missing out on the latest trends in your industry, missing out on getting new sales leads, and missing out on networking opportunities with peers in your industry.  For show managers, it was easy to sell booth space because trade shows were the “in” thing to do, and attendance at some shows like COMDEX was as high as 250,000.

According to Prahalis, two major events changed trade shows forever:   the internet and 9/11.  It became possible to keep up with industry trends and find out information about potential sources for equipment, products and services on the internet.  If 9/11 and the subsequent recession caused you to miss a trade show, you discovered it didn’t matter as much as you thought it would.  You may have missed the networking opportunities, but LinkedIn and Facebook became the replacements.

This is why education received major emphasis at imX in the form of Learning Labs presented by the eight eXperience partners and “knowledge bars” provided by other exhibitors.  The Learning Labs provided a small setting where buyers and sellers could share information on business-critical solutions.  Each partner had from one to four theaters scheduled at one to five time slots during the three days of the event.  A few examples of the topics are:  Delivering Productivity from Art to Part, Tooling Trends and Technologies, The Fearless Use of Today’s Technology, and Training within Industry.  The Knowledge Bars were intimate sessions to discuss such trends and topics as:  manufacturing software, automation, machining, energy, aerospace and defense manufacturing, and medical manufacturing. .   Invited attendees were able to sign up ahead of time for technical sessions in the Leaning Lab and “knowledge bars.”

There was a keynote presentation and an interactive industry panel scheduled each day.  The keynote presentation on the first day featured the newly appointed National Institute of Standards and Technology (NIST) Chief Manufacturing Office, Michael Molnar.  Mr. Molnar shared information about how individual manufacturers can participate in and benefit from the new national Advanced Manufacturing Partnership recently launched by President Obama.  According to the Department of Commerce, the Partnership “brings industry, universities and the federal government together to invest in emerging technologies…building domestic manufacturing capabilities to create the new products, new industries and new jobs for our future.”

The second day’s keynote presentation featured Peter Schutz, Harris & Schutz Inc., author of The Driving Force and retired CEO of Porsche AG.  Mr. Schutz led Porsche to its peak performance during the 1980s and shared his thoughts on how the leadership of people in a company becomes the pivotal competitive edge for business in his address:  “Leadership:  Extraordinary results from ordinary people.”  I especially liked it when Mr. Schutz said, “Only you can create jobs, nobody in Washington can do it.”    He emphasized the importance of putting together a team that has “diversity,” of views, attitudes, priorities, and outlook so you can listen and learn from others in making decisions.  He advised to “always hire character and teach skills.”  He said, “labor costs globally will equalize and transportation costs are going to be critical…quality instead of cost and outperforming will become more important.”

On the third day, the keynote presenter was Jim Carroll, acknowledged as one of the world’s leading global futurists, trends, and motivation experts.  In his address on “What do world class innovators do that others don’t?” he outlined eight strategies that world class leaders concentrate on to ensure market success and seize transformative opportunities.  In these rocky times, his admonition to abandon doomsday scenarios, put things in perspective, adopt a realistic view, and don’t be afraid of thinking boldly were especially pertinent.

The interactive panels also provided opportunities for executive guests to engage directly with leading end users and industry observers on topics from future technologies to automation and benchmarking.

On Monday, the panel on “Market & Technology Outlook:  Charting a Course for the Future” featured an interactive discussion focused on the outlook of key markets and how future enabling technologies impact the way many manufacturers do business.  Featured panelists were:

• William J. Geary, Director of Mid-Body Assembly, the Boeing Company
• Michael Packer, V. P. Manufacturing Strategy & Technical Integration, Production Operations, Lockheed Martin
• Peter Schutz, Harris & Schutz Inc.
• Rob Wideboer, Executive Chairman, Martinrea International
• Moderator:  Rick Kline Sr., President, Garner Publications, Inc.

On Tuesday, the topic was “The Edge Factor:  Best Practices in Manufacturing Automation,” in which the owners of Straitline Components shared their successful transition from a job shop to creators of  a line of mountain bike components now used by some of the top competitive racers  in the world.  Jeremy Bout, Executive Producer of The Edge Factor show, shared the video on “Mountain Biking …Getting Back to Making America Great,” showing how some of the components were made and  “the edge factor” of the quality, “made in USA” components played in the race won by Mike Montgomery, freestyle mountain bike rider.  Mike Montgomery then commented on the importance of being able to trust his safety and even his life to these quality components.

On Wednesday, the panel shared the results of a comprehensive survey of 200 machining businesses in the panel on “Top Shops:  Benchmarking Your Machining Business.”   The panel identified optimal shop floor practices, as well as operational and business metrics that define world-class competitiveness in parts manufacturing.  Derek Korn, Senior Editor, Modern Machine Shop, Ron Woosel, President, C&R Manfuacturing, Mike Dufford, V. P., Altech Machining participated in the panel moderated by Travis Egan, Publisher of Modern Machine Shop.

On the last day of the show, ImX event manager, Steve Prahalis said that attendees were giving a good rating for the event and had shared some of their experiences.  As an example, the owner of a small company from Ohio got to have a private meeting with the technical team at the Kennemetal exhibit, and they provided a solution to a key problem they were having in their shop.

Judging by what I saw at the event, I would say that ImX succeeded in accomplishing its goal to chart a new course for the future of the domestic manufacturing industry by fostering collaboration among American manufacturers of all sizes.  I am sure everyone who attended this event will look forward to attending the next eXperience.

A July 2011 poll of 1,202 likely voters American voters conducted by The Mellman Group and Ayres, McHenry & Associates revealed that voters want Washington to act on jobs, especially in manufacturing, which they believe will help restore America’s lost status as the world’s number one economy.  Despite overwhelming public concern about these issues, fewer voters now believe the President or either party in Congress is focused on jobs than thought so in 2010.

“This poll is a stark reminder that while official Washington goes back and forth in our newest crisis, Americans still feel no one is focusing on the real problems that matter to them:  losing jobs, losing our manufacturing base, and the decline of our position in the world,” said Scott Paul, Executive Director of the Alliance for American Manufacturing (AAM).

The study finds that across the partisan spectrum, Democratic and Republican voters ranked job creation and rebuilding the nation’s manufacturing base at the top of their list of priorities.  When asked to select the most important task for Congress and the President, “creating new manufacturing jobs” ranked just below creating jobs more generally and saw a bigger gain from 2010 (up 9%) than any other option.

Americans don’t believe that Congress or the President has done enough to support manufacturing.   Poll results showed that by a more than two-to-one margin (67% to 29%) voters prefer that Washington focus on job creation rather than deficit reduction.  This was down from the 2010 poll where 94% of voters wanted Washington to focus on jobs even more than on the deficit, with 85% specifying creating manufacturing jobs, and 88% of voters wanting Congress and the President to strengthen manufacturing in the U. S.

Voters are less convinced than a year ago that Congress and the Administration are doing anything to create manufacturing jobs or to enforce fair trade.  Although manufacturing was again ranked as the most important source of economic strength (by a wide margin over both healthcare and high tech), voters gave both Congress and the President lower marks on creating manufacturing jobs or addressing trade issues than they did in 2010.

AAM’s 2010 poll first demonstrated serious voter concern about factory closings and job loss.  In the 2010 poll, there was very little difference in the opinion of Independents, Democrats, and Republicans (64%, 67%, and 66% respectively) on the viewpoint that “manufacturing is a critical part of the American economy and we need a manufacturing base here if this country and our children are to thrive in the future.”

Said Paul, “Voters see manufacturing as the key to recovery, and though it may surprise some pundits, this is the clear message from every voting demographic, including Tea Party and Republican voters.”

Along with manufacturing’s rising profile, support for “Made in America” has also skyrocketed since 2010.  Pollster Whit Ayres explains, “Americans strongly believe that we cannot be the world’s leading economy and job creator without manufacturing.  They want to be able to buy top-quality products that say ‘Made in America.'”

The poll also found concern over America’s lost standing in the world.  Pollster Mark Mellman says, “Americans no longer believe we have the world’s strongest economy.  But they do believe that a renewed focus on manufacturing jobs can turn things around.  Americans understand that manufacturing is central to creating jobs and getting the economy back on track.”   Some key findings from the poll include:

• 90% have a favorable view of American manufacturing companies – up 22% from 2010
• 97% have a favorable view of U. S.-made goods – up 5% from 2010
• 94% of voters say creating manufacturing jobs is either “one of the most important” things government can do or “very important.”
• 83% have an unfavorable view of companies that go to China to manufacture
• 90% support Buy American policies “to ensure that taxpayer funded government projects use only U. S.-made goods and supplies wherever possible.”
• 95% favor keeping “America’s trade laws strong and strictly enforced to provide a level playing field for our workers and businesses.”
• 59% say we need to “get tough with China and use every possible means to stop their unfair trade practices

Only 50% of voters believe that the President is working to create manufacturing jobs – an 11% drop from 2010. Congress fares even worse – 41% say Democrats in Congress are working to create jobs, and 32% see the GOP working to create jobs.
In an Op Ed article, “How Congress can start creating jobs in the U.S,” that appeared August 15, 2011 in The Hill, Mr. Paul made the following recommendations of what Congress could do to spur private sector job creation that would not increase our federal budget deficit.

“Establish a national infrastructure bank to leverage capital for large-scale transportation and energy projects.

Reshape the tax code in a revenue neutral way to provide incentives for job creation and inward investment.  R&D tax credits should help firms that not only innovate in America but also make their products here.  Lower tax rates for manufacturing activity in America and eliminate tax shelters for hedge funds or financial transactions that have no real value.

Apply “buy America” provisions to all federal spending to ensure that American workers and businesses get the first shot at procurement contracts.

Shift some education investment to rebuilding our vocational and technical skills program, which would address looming shortages in the manufacturing sector.

Refocus the trade agenda by giving American businesses new tools to counter China’s currency manipulation, industrial subsidies, intellectual property theft and barriers to market access.

Condition new federal loan guarantees for energy projects on the utilization of domestic supply chains for construction.

In addition, President Obama could do the following on his own immediately:

Expedite small business loans through the Small Business Administration and Treasury Department to help firms expand, retool and hire.

Convene a multilateral meeting to address global imbalances and Chinese mercantilism. If China doesn’t agree to participate, designate it a currency manipulator. (China ships fully one-third of its exports to the U.S. and finances less than 10 percent of our public debt, so we have more leverage than some might suggest.)

Secure an additional agreement from all foreign and domestic car companies to increase their levels of domestic content by at least 10 percent over the next three years.

Direct the Department of Defense to leverage existing procurement to contractors that commit to increasing their domestic content of our military equipment, technology and supplies.

Approve additional applications for renewable and traditional energy projects, contingent on the use of American materials in construction.

Kick any CEO off of federal advisory boards or jobs councils who has: (1) not created net new American jobs over the past five years, or (2) is expanding the company’s foreign workforce at a faster rate than its domestic workforce. Replace them with CEOs who are committed to investing in America.”
In contrast,  Henry Nothhaft, veteran entrepreneur and author of  Great Again: Revitalizing America’s Entrepreneurial Leadership (Harvard Business Review Press, 2011) had some very different suggestions for President Obama in a Labor Day letter to President Obama published in the Wall Street Journal.  Since “100% of net job growth in the U.S. comes from entrepreneurial start-ups.” he asked:

“…why aren’t you doing everything you can to nurture start-ups and make it easier for them to access capital, grow and hire people so they can develop the breakthrough products, services and medical advances that drive our national prosperity?

He urged the President “to seek an exemption for small job-creating start-ups from the more onerous Sarbanes-Oxley rules, at least until they reach $500 million in revenues. This will help to revive the feeble IPO market, and job creation with it.”

He suggested the President and his “Republican opponents could also spur job creation by withdrawing your support for a patent-reform bill that puts the needs of big technology firms ahead of the real job creators—entrepreneurial start-ups—and that continues to divert hundreds of millions of dollars annually in patent-office user fees to other purposes …Congress has starved it of funds and created a backlog of 1.2 million patent applications waiting for examination. Your own patent office director, David Kappos, says this backlog has cost the nation “millions of jobs.”

He questioned  “why are we the only major nation on Earth that refuses to offer tax and other incentives to manufacturers who set up shop here? Every other nation in the Organization for Economic Cooperation and Development does so.”

None of the measures suggested by Mr. Paul or Mr. Nothhaft would increase the deficit.  They would work to create millions of new jobs quickly.  I agree with Mr. Nothhaft ? “Mr. President, there’s still time for you to kick-start the engine of job growth.  All you need to do is listen to the voices of entrepreneurs who create those jobs.”

When I succumbed to peer pressure as a teen ager and asked my mother if I could do something that “everyone else was doing,” her refrain would be “don’t be a sheep and follow the crowd; be a leader.”

The management of American manufacturing companies should have followed my mother’s advice of being a leader in their industry instead of following the “herd mentality” of outsourcing their manufacturing offshore to China to the detriment of the overall American manufacturing industry and the United States’ position as the world’s pre-eminent country.

A new report by the Boston Consulting Group, Made in America, Again – Why Manufacturing Will Return to the U. S., reveals that “China’s overwhelming manufacturing cost advantage over the U. S. is shrinking fast.”  The authors, Harold L. Sirkin, Michael Zinser, and Douglas Hohner, conclude that within five years, “rising Chinese wages, higher U. S. productivity, a weaker dollar, and other factors will virtually close the cost gap between the U. S. and China for many goods consumed in North America.”

Their report substantiates the Total Cost of Ownership worksheet calculator that Harry Moser, founder of the Reshoring Initiative, has developed and is teaching to managers of American manufacturers that want to be leaders in bringing manufacturing back to the United States.

The Boston Consulting Group makes the same recommendation as Moser:  conduct a rigorous, part-by-part, product-by-product analysis to fully account for total costs rather than just factory wages.  In doing so, they may discover that manufacturing in the U. S. is a more attractive option, especially for products sold in the U. S. market.   For products with high labor content that are destined for mainly Asian markets, manufacturing in China will remain the best choice because of economies of scale or technology.  They key idea is to recognize that China is no longer the default option to lower costs and increase profitability.

What is the basis for authors’ conclusion that manufacturing will return to the United States?  They say the key reasons for the shift are the following:

• Wage and benefits have increased 15 to 20 percent per year at the average Chinese factory, which will slash China’s low-cost advantage over the U. S. from 55 percent today down to 39 percent by 2015, when adjusted for the higher productivity of U. S. workers.
• When the Total Cost of Ownership factors such as transportation, duties, supply chain risks, cost of inventory, and other costs are calculated, the cost savings of manufacturing in China rather than some U. S. states will become minimal within five years.
• “Automation and other measures to improve productivity in China won’t be enough to preserve the country’s cost advantage.  Indeed, they will undercut the primary attraction of outsourcing to China – access to low-cost labor.”
• Demand of goods in Asia will increase rapidly due to rising income level so multinational companies are likely to devote more of their capacity in China to serving the Asian market and bring some production back to the U. S. to service the North American market.
• “Manufacturing of some goods will shift from China to nations with lower labor costs, such as Vietnam, Indonesia, and Mexico.”  However, this will be limited by the supply of skilled workers, inadequate infrastructure, supply networks, as well as by political and intellectual property risks, corruption, and the risk to personal safety in those countries.

The BCG report presents an interesting perspective on the decline and forecast renaissance of American manufacturing.  They acknowledge the effect of Japan and the “Asian Tigers of Korea and Taiwan had on the shrinking of the American manufacturing industry, in which the U. S. share of the world’s manufacturing dropped from the high of around 40 percent in the early 1950s down to less than 20 percent today.  However, they point out that “U. S. industry and the economy responded with surprising flexibility to reemerge more competitive and productive than ever” by the late 1990s.

They opine that the “U. S. manufacturing sector is today in the midst of a similar process of readjustment in response to perhaps its greatest competitive threat ever?­the rise of China.”  As proof, they state that the “output of manufacturing is almost two and a half times its 1972 level in constant dollars, even though employment has dropped by 33 percent…the value of  U. S. manufacturing has increased by one-third, to $1.65 trillion, from 1997 to 2008?before the onset of the recession?thanks to the strongest productivity growth in the industrial world.”

The authors conclude that within five years, “the total cost of production for many products will be only about 10 to 15 percent less in Chinese coastal cities than in some parts of the U. S. where factories are likely to be built,” such as South Carolina, Alabama, and Tennessee.  When you add in the other factors of Total Cost of Ownership, the cost gap will be minimal.   Although some production is moving to Chinese cities in interior provinces to reduce costs, these regions lack the abundance of skilled workers, supply networks, and efficient transportation infrastructure of the coastal cities.  “As a result, they expect companies to begin building more capacity in the U. S. to supply North America.”  A few of their examples are:

• NCR moved production of its ATM’s to a plant in Columbus, Georgia, that will employ 870 people by 2014.
• The Coleman Company is moving production of its 16-quart wheeled plastic cooler from China to Wichita, Kansas.
• Sleek Audio has moved production of its high-end headphones from Chinese suppliers to its plant in Manatee County, Florida.
• Peerless Industries will consolidate all manufacturing of audio-visual mounting systems in Illinois, moving work from China in order to achieve cost efficiencies, shorter lead times, and local control over manufacturing processes.

These examples corroborate what I’ve been seeing and wrote about in my book and subsequent blog articles about companies in the San Diego region.  For example, at a TechAmerica Operations Roundtable event last April, Luke Faulstick, COO of DJO Global said that they have brought back the manufacturing of their cold therapy unit from China, their printed circuit boards to a supplier in South Dakota, their textile manufacturing to North Carolina, and their screw machined parts to Texas.  He recommended that any company on the “lean” journey should rethink their outsourcing offshore.

The BCG report goes into quite a bit of detail about the factors that are starting to dramatically shift the manufacturing cost equation in favor of the U. S.  A key factor is that China’s average wages have become more volatile.  In 2010, “the giant contract manufacturer Foxconn International, which employs 920,000 people in China alone, doubled wages” after a string of worker suicides.

They assert that rising Chinese productivity will be insufficient to offset these wages increases because output will increase at only half the pace of the rise in wages.  Even though Chinese wages will still be much lower in 2015, labor content is only part of the cost of making a part so the savings could shrink to as low as 10 percent when other costs are included.

The price of labor is increasing so rapidly that manufacturers are automating their plants in China to reduce the labor content, but as the labor content is reduced, it reduces the advantage of keeping manufacturing in China for the low labor rates.

Another factor is the increasing cost of land in China for building factories.  For example, industrial land costs average $10.22 per square foot, but ranges up to $21 per square foot in Shenzhen.  In contrast, industrial land in Alabama ranges from $1.86 to $7.3 per square foot and $1.30 to $4.65 in Tennessee and North Carolina.

Other low-cost nations won’t be able to absorb all of the high labor content manufacturing moving from China because China has the highest proportion of able-bodied adults in the workforce (84 percent), and 28 percent of those workers are employed by industry.  The estimated 215 million industrial workers in China are 58 percent more than the industrial workforce of all of Southeast Asia and India combined.

The authors predict that “instead of pulling out of China, most multinational companies will orient more of their production to serve China and the rest of a growing Asia… The shifting cost structure between China and the U. S. will present more manufacturing and sourcing options.

U. S. manufacturers should undertake a thorough analysis of their global supply networks, factoring in worker productivity, transit costs, time-to-market considerations, logistical risks, energy costs, as well as other hidden costs of sourcing offshore.

The question is:  Are you going to be one of the leaders in bringing manufacturing back to the  U. S. or are you going to follow the “herd mentality” by continuing to outsource manufacturing in China?

After dominating the globe for over 60 years as the world’s largest, most productive, and technologically advanced in the world, America’s manufacturing sector is in a decline in nearly all industries. America’s lead in a number of industries vanished years ago, and nearly all industries are facing potentially dangerous erosion.

No single indicator represents manufacturing capabilities or trends.  But several key indicators, when taken together, provide strong evidence that America’s manufacturing has greatly weakened in the last decade.  These are:  industrial output (as measured by share of Gross Domestic Product), industrial capacity, employment, number of manufacturers, balance of trade in goods, and import penetration rate.

The trend in employment and number of manufacturers is dramatic – 5.5 million manufacturing jobs and over 50,000 manufacturing companies gone since 2000.   The balance of trade in goods has grown steadily since 1979, growing from a deficit of $25.5 billion in 1980 to $645.8 billion in 2010, which was down from a high of $835.7 billion in 2006 (Balance of Payment basis.)   Manufacturing’s share of the Gross Domestic Products had taken a serious downward trend – dropping from a high of 28% in 1965 to 11% in 2010.

What about capacity and important penetration?  They are tied together because the capacity of American companies to manufacture products is impacted by the import penetration of the products of other countries in the U. S. market.    There has been an across-the-board increase in the import penetration rate for 114 high-tech and capital-intensive manufacturing sectors – from 21.4% of domestic consumption to 34.3 percent between 1997 and 2007.

Let’s take a look at a few industries.  For example, if you were to go to a store to buy a set of glasses, you would have trouble finding a set made in the U. S.  That’s because America’s oldest industry, glassware, is down to two companies that manufacture in the United States:  Libbey Glass Inc. of Toledo, Ohio, and Anchor Hocking of Lancaster, Ohio.  In 2009, nearly every major domestic competitor was either out of business, in Chapter 11, or up for sale.  Corning Consumer Products and Oneida had already changed to outsourcing offshore instead of manufacturing their own product lines.  Beginning in late 2003, Oneida closed five factories in the U. S., Mexico, Italy and China.

Libbey Glass CEO John Meier blames “unfair trade” and the fact that the U.S. government is allowing foreign governments “to get away with subsidizing their producers and not enforcing their laws . . .” The U.S. glass industry has been swamped by imports.  In 1996, imports from China and Turkey accounted for 12 percent of the U.S. market, but by 2006, imports were up to 53 percent of the U. S. market.

According to the U.S. International Trade Commission (ITC), another U.S. industry has virtually disappeared – the industry that makes travel goods out of textiles.  In 2006, the total U.S. market for travel goods with an outer surface of textile materials was estimated at approximately $3 billion wholesale.  The nine remaining U. S. firms identified by the ITC in this industry reported totaled revenues of $37 million in 2006.  Thus, U.S. producers commanded only a one percent share of the U.S. market.  This primarily reflected a decline in shipments to commercial markets. These nine companies said that at least 70 percent of their business goes to the U.S. military and government, but this market represents less than five percent of domestic production of such goods.  China has become the preferred source for offshore production, since the removal of U.S. import quotas on textile travel goods in 2002, because of its low-cost labor, fabric, and accessories.  In 2006, China accounted for 80 to 90 percent of imports of textile travel goods to the United States.

This same International Trade Commission report stated that the United States has completely lost the capability to make high-tech warm and water-resistant clothing for the commercial market often called performance outerwear.  Skiers, hikers, mountain climbers, bikers, firemen, policemen, military personnel, and those in hazardous environments use performance outerwear. The ITC identified 13 companies making high-tech jackets and pants, but six said they produce strictly for the U.S. government and military.  Only two said they produce solely for the commercial market.  Conflicting estimates for the U. S industry share of the commercial market range from less than five percent to 1.3 percent of the U.S. commercial market for performance outerwear.  The report noted that most companies in this industry had moved production offshore primarily to Asia, namely China and Vietnam, where the technology used to produce such garments, such as seam sealing and laser cutting, is prevalent.

The air conditioning industry is facing the same challenges from China that the machine tool industry is facing.  The September 28, 2008 issue of Manufacturing & Technology News reported that “the last U.S. manufacturer of air-conditioning window units is moving its production to Mexico.  Frederich Air Conditioning Company has announced its intention to close its San Antonio manufacturing plant and move the work to Monterrey, Mexico . . . The company says that low-priced air conditioners from China are forcing it to move out of the United States.”

This was only two months after Lennox International announced that it would shift production of Lennox air conditioners from two U.S. Plants (Marshalltown, Iowa and Grenada, Mississippi) to a new plant in Saltillo, Mexico. Lennox CEO Todd Bluedorn said, “We must produce quality products at lower costs to compete and grow our business.”

The trend is even more serious for the manufacturing industries that supply products, components, and technologies that the Pentagon considers import to defense.  University of Texas at Austin engineering professor Michael Webber evaluated the economic health of sixteen industrial sectors within the defense industrial system.  Of the sixteen industries he examined, thirteen showed significant signs of erosion, especially since 2001.

The American machine tool industry is facing intense competition from foreign competitors, especially China.  Machine tools are used to cut and form metal, used in nearly all manufacturing involving metals, from autos to airplanes.  Foreign penetration of the U. S. market rose steadily from about 30% in 1982 to 72% in 2008.   The U. S. fell from the world’s third largest machine tool producer in 2000 to seventh in 2008 (behind Japan, Germany, China, Italy, Taiwan, and Korea.

The U. S. loss of competitiveness in the manufacturing of five-axis machine tools exemplifies the serious erosion of this industry.  Five-axis machine tools are among the most technologically advanced machine tools used in the production components in the aerospace, gas & diesel engines, automobile parts, medical, and heavy industrial equipment industries.  Only six U. S. companies capable of making fix-axis machines remain, compares to at least 20 in China and 22 in Taiwan.

The importance of semiconductors to today’s military is well understood.  Preserving a world-class domestic semiconductor industry is vital to our national security.  However, the industry lost nearly 1,200 plants of all sizes between 1998 to2000, a 17% drop.  The U. S. share of global semiconductor capacity fell to 17% in 2007 and down to 14% in 2009.   Of the sixteen semiconductor fabs under construction around the world in 2009, only one was being built in the United States.   The U. S. led the world in closure of fab plants between 2008 to 2009 – 19 out of 42.   These losses have been driven by the migration of microelectronic manufacturing to low-cost foreign locations, such as Taiwan, Singapore, China, and Korea.

These are just a few examples of the erosion of U. S. industries that could be included in this article.  There is hardly a day that goes by without news of some company either closing a plant, having a mass layoff, or going completely out of business.

General Electric chairman and CEO, Jeffrey Immelt, commented, “Over the last five years, we have really positioned ourselves as a global company . . . the world has never been more independent from the U.S. economy . . . The U.S. economy is still important, but not like it was five, 10 or 20 years ago.” Immelt said that globalization is “profound.  It’s irrefutable and it’s irreversible.” He later added that the fate of the U.S. economy “is going to be decided in the next three to five years.”

The future looks dim for U.S. manufacturing if we continue on the same path.  The trends discussed above show that we need to elevate revitalizing American manufacturing to a very high priority among policy makers.  The fate of the U.S. economy will be decided in the next four to five years.  The question is:  Do we continue on the course to becoming a third-world country, importing finished goods and exporting raw materials, or will we rebuild our manufacturing base and once again become the premier industrial leader?  If we descend into being a third-world country, then we will lose our position as the world’s super power and our ability to defend our nation.

When I give my presentation on “Why Should we Save American Manufacturing and What can I do?” I am often asked if unions drove manufacturing offshore.   My answer is “not in general.”  This answer elicits disbelief so I briefly explain the reality.  This article will explain my answer in more detail and consider the real reasons why manufacturing in the United States has gone offshore.

First of all, unions only represent about seven percent of the private sector workforce today, down from 12 percent in 2007.  At the peak in 1945, nearly 36 percent of American workers were represented by unions in the private sector workforce.  Now, 36 percent of national union membership is comprised of public sector workers; in other words, people who work for local, state, and federal government directly or indirectly for government-funded agencies.

Second, the first industries to set up manufacturing offshore were not unionized – electronic component and toy manufacturers.  I’ve worked in San Diego’s electronics and manufacturing industry since I was 18 years old, and I never worked for a company that was unionized.  In fact, at the most there were only a dozen or so companies that were unionized, and at the present time, I only know of two companies that are unionized – General Dynamics NASSCO (shipbuilding) and Caterpillar’s Solar Turbines (gas turbine engines, compressors, and power generator sets).

California’s high technology industry in Silicon Valley was never unionized, and virtually all of California’s technology-based manufacturing industry is not unionized.  The only union that still has any significant membership in California’s manufacturing industry is the International Association of Machinists & Aerospace Workers, and its membership has dropped dramatically in the past 20 years.

The search for lower cost areas for manufacturing isn’t something new.  Sixty years ago, northern and New England companies started moving manufacturing to the southern states.   Why did these companies move?  First, because southern states were “right to work” states; in other words, not unionized, so wages were lower.  Second, there were less burdensome government and environmental regulations in these states in the years before the establishment of the national Environmental Protection Agency and OSHA.  And third, most of the southern states had lower personal and corporate tax rates than the northeast states.

Thirty years ago, manufacturers, particularly West Coast manufacturers, started moving high-volume production to Hong Kong, Singapore, and the Philippines for the same reasons – lower wages, less government regulations, and far less stringent environmental regulations.  About the same time, manufacturers set up assembly and manufacturing in Mexico in maquiladoras to produce goods for the U.S. and world markets for all of the same reasons.

The next area for lower cost manufacturing was Asia, predominantly China and India.  At first, U. S. manufacturers outsourced specific parts and components of products with offshore vendors.  Then, they outsourced whole product lines to offshore vendors, and finally they built their own manufacturing plants in China after the Chinese government’s policies changed to allow private ownership of companies and foreign investment.

The difference between sourcing in foreign countries such as Hong Kong, Singapore, the Philippines, and Mexico is that the manufacturing facilities in those countries have been either manufacturing plants owned by U.S. companies or owned by private entrepreneurs of the particular country and were not companies owned all or in part by their government as was the case initially when manufacturing was set up in China.

In my opinion, the main reasons why U. S. companies have offshored manufacturing are:

• Lower labor costs
• Few or no environmental regulations
• Less government regulation on building construction and operations
• Lower taxes
• Global “free trade” mentality

The benefits of the first two are eroding as wages increase in China and other foreign countries and environmental laws are passed and starting to be enforced.  A good understanding of the Total Cost of Ownership about which I have written previously and which is now quantified by Harry Moser’s Total Cost of Ownership worksheet calculator for the Reshoring Initiative will help bring some manufacturing back to the U. S. from offshore.

What I call the global economy mentality is even starting to be questioned, although there have been key people in the past 20 years that have been warning of its perils.

The late Sir James Goldsmith, a billionaire international business leader, wrote two books, The Trap (1993) and The Response (1995) warning of the perils of globalism.  He even gave a speech to the U. S. Senate in 1994 warning of the perils of globalism.  He “predicted that the working and middle classes in the United States and Europe would be ruined by the greed of Wall Street and corporations, who would boost corporate earnings by replacing their domestic work forces with foreign labor, which could be paid a fraction of labor’s productivity as a result of the foreign country’s low living standard and large excess supply of labor.”

Roger Milliken, who led Milliken & Company for 71 years, during which it grew to become the world’s largest privately owned textile and chemical manufacturer, shared the same opinion.  One of the last in the tradition of those great industrialists who built America’s manufacturing success; he believed that America’s manufacturing leadership was the foundation of his nation’s economic achievement.

Ralph Gomory, an American applied mathematician, former IBM executive, and president of the Alfred P. Sloan Foundation for 18 year, has written extensively on the nature of technology development, industrial competitiveness, models of international trade, and the function of the corporation in a globalizing world.  In 2007, he became president emeritus and joined the Stern School of Business at New York University as a research professor.  He currently focuses his work on addressing the increasing complexities of the globalized economy and the differing goals of countries and companies.  In his 2001 book, Global Trade and Conflicting National Interests, co-written with Professor William Baumol, Gomory wrote, “A country that ends up producing little value will have little to consume at home and little to trade abroad, and will have a low standard of living.”  The book also presents the idea that the free trade theory of “comparative advantage” of David Ricardo was merely a special case, not a general theory.  Mr. Gomory’s books and papers have contributed to shaping the national argument on the roles and responsibilities of American corporations in the modern American economy.

Another person of like mind is Paul Craig Roberts, an American economist and columnist for Creators Syndicate who served as an Assistant Secretary of the Treasury in the Reagan Administration and earned fame as a co-founder of “Reaganomics.”  He is a former editor and columnist for the Wall Street Journal, Business Week, and Scripps Howard News Service.  He has written or co-written eight books, contributed chapters to numerous books and has published many articles in journals of scholarship.

In an opinion article in the June 20, 2011 issue of Manufacturing & Technology News, he said, “Anytime there is an excess supply of labor, or the ability of corporations to pay labor less than its productivity, the corporations bank the difference, share prices rise, and Wall Street and shareholders are happy.”

In this article, Mr. Roberts comments on the key points made by Nobel prize winning economist, Professor Michael Spence, and Sandile Hlatshwayo, a researcher at New York University, in their report “The Evolving Structure of the American Economy and the Employment Challenge,” published by the Council on Foreign Relations.

Mr. Roberts writes that Spence and Hlatshwayo use data from the Bureau of Labor Statistics and the Bureau of Economic Analysis to show that “U. S. industries are separated into internationally tradable and non-tradable components.”  Non-tradable goods and services cannot be offshored or produced in locations distant from their market, and government and health care have become the largest employers in the past 20 years.  Tradable jobs produce goods and services that can be produced in locations distant from their markets and can be exported.   This has resulted in “the adverse movements in the distribution of U. S. income over the past 20 years, particularly in the middle of the income range…The evolution of the U. S. economy supports the notion of there being a long-term structural challenge with respect to the quantity and quality of employment opportunities in the United States “

Jobs paying the $20 per hour that have historically enabled American wage earners to support a middle-class standard of living are leaving the U. S.  Only 16 percent of today’s workers earn the $20 per hour baseline wage, down 60 percent since 1979.

This is expected to get worse according to the U. S. Department of Labor Occupational Outlook for 2006-2016 in which the prediction in 2006 was that 70 percent of the jobs created between 2006 and 2016 would be service jobs, paying low to very low wages.  Of course, this report was written before the start of the Great Recession, and we’ve lost another one and a half million manufacturing jobs since then.

State employment data released on July 22, 2011 by the Bureau of Labor Statistics mirrors national patterns of the past two months.  American workers continue to pay a staggering price for the lack of concerted action to create jobs for the millions who are unemployed.  In June, 19 states and the District of Columbia continued to have unemployment rates of 9.0% or higher, and seven states and Washington, D. C. continued to have rates of 10.0% or more.  Ten states and D. C. have lost jobs since June 2010, even though the economy has technically been experiencing a recovery.

In a meeting on June 13, 2011, the Jobs and Competitiveness Council, headed by General Electric CEO Jeffrey Immelt, told President Obama that there isn’t so much a shortage of jobs, but a shortage of trained workers, engineers, and skilled foreign immigrants to fill jobs that may exist.  Their answer for the manufacturing industry that has lost 5.5 million jobs in the past decade is to increase training of CNC machining and advanced production.  While I agree that there is a shortage of CNC machinists, their plan would only generate a grand total of 2,000 jobs in the first year, and 4,000 jobs in the second year.  This is nothing compared to the 21 million jobs we need to get to full employment.

Another suggestion of the Council was to increase immigration of foreigners with graduate degrees and PhDs so they could quickly receive Green Cards.  Tell that to the millions of highly educated technicians and engineers that remain unemployed at the same time foreigners on HB-1 and I-1 visas are filling many of the jobs that remain within the United States.   There was no discussion on how to create more jobs for American engineers, computer scientists, programmers and other technology specialists who are currently unemployed.

It’s frustrating that many experts say that education is the answer to the unemployment crisis.  I’ve never known so many highly educated General Managers, Operations Managers, Vice Presidents, CFOs and even CEOs that are unable to find jobs in San Diego’s high technology manufacturing industries.  The last thing these people need is more education.   What they need are more companies willing to hire a person with the education and experience that puts them in a higher salary bracket.

One of the most useful recommendations of the Council was that the federal tax code be changed to allow training of advanced manufacturing workers to be a depreciable expense under Section 179 of the tax code.  This would help manufacturers train their workers in the concepts and tools of lean manufacturing and Six Sigma, which is one of the best ways for U. S. manufacturers to be more competitive in the global economy without having to offshore their manufacturing.

Reshoring American manufacturing will bring back more jobs than any training programs could possibly do and create more American made products for export, which will reduce our trade deficits.

The Korea Free Trade Agreement (KORUS) was first signed on June 30, 2007, with a renegotiated version signed in early December 4, 2010.  However, the agreement has not yet been ratified by the United States Congress or the National Assembly of South Korea and thus has not become in force.

After being stalled for more than four years, the treaty is once again being considered in Congress, and supporters had hoped it would be ratified shortly after many of the objections has been addressed in the renegotiated version.

The original negotiations were conducted under the trade promotion authority (TPA), also called fast-track trade authority, which Congress granted the President under the Bipartisan Trade Promotion Act of 2002. (P.L. 107-210).  The authority allowed the President to enter into trade agreements that receive expedited congressional consideration with no amendments and limited debate.  The fast-track trade authority under TPA expired on July 1, 2007 and has not been renewed.

The December 2010 deal represented a compromise between the two sides.  Significant concessions were granted to the U.S. on trade in automobiles: tariff reductions for Korean automobiles were delayed for five years, and U.S. autos were granted broader access to the Korean market. At the same time, the negotiators agreed to set aside disagreements over U.S. beef exports for the time being.

The agreement would eventually eliminate tariffs between the two countries. Because those levies are typically higher on the South Korean side, administration officials estimate the deal could mean more than $10 billion annually in increased U.S. exports to Seoul and tens of thousands of new U.S. jobs. South Koreans say they would benefit from lower prices — some tariffs on food imports from the U.S. are as high as 40 percent — and a more efficient flow of investment in and out of their country.

The deal was supported by Ford Motor Company, as well as the United Auto Workers, both of which had previously opposed the agreement.  With widespread support from both Democrats and Republicans in Congress, the Obama administration expected approval in both houses to be easy.

However, on Thursday, June 30, 2011, several Senate Republicans boycotted a preliminary hearing on free trade agreements with South Korea, Colombia and Panama by staging a simultaneous press conference and bringing the stop-and-go process to yet another halt.

While Republican senators stood before television cameras to declare that they would not allow a hearing on legislation that much of their own base strongly supports, Democratic senators filled half a hearing room to declare their support for trade deals opposed by much of their party’s political base.

Senator Orrin Hatch, the ranking Republican on the Finance Committee, said Republicans were responding to a decision by the White House to include in the free trade legislation the expansion of a benefits program for workers who lose jobs to foreign competition, known as Trade Adjustment Assistance (TAA).  During the portion of the press conference I heard, Republicans stated that part of the funds to provide TAA would come from a $400 million cut to Medicare funding for “imaging” for seniors such as MRIs, Cat scans, etc., and they objected to taking this funding from Medicare to partially fund TAA.

Senate Republicans had not been included in a deal with House Republicans and Senate Democrats over the terms of the benefits program.  An expansion of TAA passed by Democrats in 2009 expired at the beginning of this year, and the deal would reinstate about 60 percent of the lapsed financing ($964 million) for an additional two years.  Democrats had demanded the deal as a condition of their support for the trade agreements.  House Republicans had agreed after several weeks of negotiations.

It seems to me that the fight over Trade-Adjustment Assistance is a tacit admission by both sides that this treaty will put more American on the unemployment rolls; i.e., Republicans would not oppose it unless they felt displaced workers would use it and Democrats would not support it unless they felt displaced workers would use it.   Historically, trade agreements do displace workers, and the effects of other trade agreements have shown that more American jobs are lost than gained.

Just before the Senate Finance Committee convened Thursday afternoon to consider the legislation, the Republican members invoked Senate rules to prevent the meeting.  After all the Democrats spoke, they got up and left.  Senator Orrin Hatch said, “We made it clear time and time and time again that we would not stomach attaching a big government spending program onto these agreements.  “The president knew where we stood, and he decided to ignore those who don’t agree with him.”

The Obama administration planned to submit that deal as part of KORUS to give Democrats the assurance that it will rise or fall with the agreement.  House Republicans say they will hold separate votes on the trade pact and the benefits program.  Because Senate Republicans lack the power to set the terms of debate, they said that their actions were an assertion of the rights of the minority party to be heard and respected.  Republicans cannot prevent the legislation from leaving the committee, but they can delay it.

This delay is a good time to reconsider whether KORUS and the other pending trade agreements with Panama and Chile should be ratified by Congress.   The fundamental dispute is over free trade itself. Presidents Bill Clinton and George W. Bush aggressively promoted it, while President Obama promised more protection for American workers in future agreements when he was a candidate.

The appeal of free trade has waned amid large U.S. trade deficits and concerns that more American manufacturing jobs will disappear overseas at a time when unemployment remains stuck above nine percent

The mistake many people make is lumping free trade, free enterprise, and free markets together, whereas each has its own specific meaning. In simple terms, free trade allows faster and more business between two countries/regions by agreeing to lift tariffs, quotas, special fees and taxes, and other barriers to trade between the two entities.  Free enterprise is the freedom a company has to select the headquarters and manufacturing locations to make its product as inexpensively as it can, regardless of where that might be, in order to enjoy continued profitability and remain viable.  Of course, a company is subject to the laws of the country in which they are located.  A free market is a one in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts, relying on supply and demand.

The underlying economic theory of free trade agreements is that of “comparative advantage,” which originated in an 1817 book entitled “On the Principles of Political Economy and Taxation” by British political economist David Ricardo.  He postulated that in a free marketplace, each country/area will ultimately specialize in that activity where it has comparative advantage; i.e., natural resources, skilled artisans, agriculture-friendly weather, etc.  The result should be that all parties to the agreement should increase their income.  Unfortunately there are winners and losers if the “comparative advantage” of one country is unequal to the other.

Advocates of free trade argue that it is essential to our country’s growth and point out that the North American Free Trade Act (NAFTA) and other trade agreements have created more than 20 million jobs around the world since their passage.

Opponents to free trade argue that the U.S. has lost over six million jobs to offshore countries since 1994 when NAFTA was passed.  Furthermore, they make the point that American jobs are not being supported when we buy products that have been made offshore, and that the U.S. should not encourage and even facilitate its corporations to ship jobs out of the country.  They believe that manufacturing is the foundation of the U.S. economy and that American jobs must be protected from being outsourced to other countries.

The reality is that we don’t really have free trade – we have negotiated trade agreements in which the United States has gotten “the short end of the stick” in most cases.  Instead of free trade, I would say that we have “dumb” or “stupid” trade instead of free trade.  What we need is “smart” trade.

For example, over 150 countries have a value added tax (VAT), and the United States doesn’t have a VAT.  A VAT is a tax on consumption – as opposed to income, wealth, property or wages.   It is s a tax only on the “value added” to a product, material or service, from an accounting view, at every stage of its manufacture or distribution.  VATs are “border adjustable” and average about 17%.  This means that virtually all foreign countries tax our exports with their 17% VATs, when our goods cross into their country.   While those countries tax their domestic production as well, they rebate their VAT when their companies export.  This means that American imports to our trading partners are charged a VAT while we don’t charge a similar VAT on imports of their products to our country.   Thus, American companies are victims of unfair competition when trying to penetrate foreign markets.

VATs are the biggest trade problem for the U.S. globally.  Trade agreements do not address VATs when tariffs are lowered. The WTO allows VATs.  During the last 40 years, the U.S. has lowered tariffs, and other countries lowered tariffs.  However, other countries implemented and raised their VATs.  The net result is that other countries replaced tariffs with VATs, but the U.S. did not.  No trade barrier costs us more money.  Our exports are double taxed – once in the U.S. and once upon arrival at a foreign country’s shores.  Foreign sales to us are partially tax free.

In addition, U.S. opponents of the agreement argue it doesn’t do enough to benefit American industry while it gives South Korean businesses greater rights in the United States.  The organizations taking the lead in opposing KORUS are:  Coalition for a Prosperous America (CPA), Alliance for American Manufacturing, Economy in Crisis, and the    U. S. Business & Industry Council.

What’s missing in the list of organizations that oppose trade agreements is one that truly represents American workers, who will suffer the most from the effects of KORUS just as they have from past agreements.  Today, union membership only represents 12 percent of the private sector workforce, which means that 88 percent of private sector workers have no organization to voice their opinions on trade issues.  Many small businesses and industries that have been harmed by past trade agreements were never unionized, such as high technology companies making computers, electronics equipment, medical devices, and biotech products.  Thus, a supermajority of American workers have no way to voice their opinion collectively.

While all of the above organizations have similar reasons for opposing KORUS, CPA’s reasons include:

1. Trade deficits:  The trade agreement would cause worsening trade deficits.  Trade deficits depress GDP growth and increase unemployment because U.S. facilities are offshored or because components and subassemblies are procured offshore.  Any foreign market share achieved is overwhelmed by domestic market share ceded.
2. Job loss:  The trade agreement would cause job losses.  Government data shows no support for a net job gain argument.  Third party studies are in accord with the historical data that net job losses will result from this trade agreement.
3. Non-tariff barriers:  The trade agreement fails to address foreign non-tariff barrier tactics by trade rivals.  These non-tariff barriers eviscerate hoped-for U.S. net export gains from tariff reductions.  Currency manipulation, border adjustable taxes, state subsidies are prime examples.  South Korea is a known currency manipulator.  South Korea has a 10% value added tax that is charged to virtually all imports and can increase that import charge without restriction.  Like China, South Korea practices a form of state managed capitalism.  South Korea is not a “free trading nation,” and this agreement does not change that fact.  Any concessions by South Korea are easy to negate through its pre-existing non-tariff tactics.
4. Sovereignty Loss:  The U.S. will be handicapped in domestic trade law enforcement.  South Korea would have special rights in our trade law systems.  The U.S. will be prevented from enacting tough financial industry reform, despite the need shown in the Great Recession, under these agreements.  Further, hundreds foreign companies will be given special standing to challenge U.S. laws that are claimed to interfere with those companies’ investment expectations, in unaccountable foreign tribunals.
5. Gateway from China/Transshipment through Korea:  The South Korea trade agreement allows Chinese companies to produce 65% of a products’ value, with 35% Korean content, and still qualify for low tariff rates.  China is Korea’s largest trading partner and has proven particularly aggressive in routing its products through third countries to either avoid antidumping duties or to achieve lower tariff rates.  The volume of future Chinese transshipments should not be underestimated.
6. Food and product safety:  The U.S. border control, food safety and product safety agencies will be hampered in verifying that imported food and other products are safe.  The inspections of imported products are nearly non-existent.  Yet U.S. companies must fully comply with food and product safety rules.

On the other hand, the organizations and companies comprising the U.S.-Korea FTA Business Coalition that strongly supports Congressional approval of the U.S.-Korea Free Trade Agreement includes but is not limited to:  American Insurance Association, Boeing Company, Caterpillar, Inc., Chevron, Citigroup, Inc., Entertainment Industry Coalition for Free Trade, General Electric, Goldman Sachs, FedEx Express, Johnson & Johnson, Motion Picture Association of America, National Association of Manufacturers, National Cattlemen’s Beef Association, National Pork Producers Council, MetLife, Microsoft Corporation, Pfizer, Inc., QUALCOMM, Inc., Securities Industry & Financial Markets Association, SPI: The Plastics Industry Trade Association, Telecommunications Industry Association, Time Warner, U.S. Chamber of Commerce, U.S. Council for International Business, and UPS.

Notice that virtually all of the above private companies have a global presence so that I refer to them as multinational globalist companies.  While they may still be headquartered in the United States, they have worldwide locations and may even have re-incorporated in tax haven countries.  They no longer have an inherent loyalty to the United States as American companies; instead, their loyalty is to the bottom line of their profitability.

Thus, my answer to the question posed in the title is “No, Congress shouldn’t ratify the Korea Free Trade Agreement.”  If you agree with me in opposing its ratification, make your voice heard before it is too late.  Contact your congressional representative or Senator and express your opinion on the Korea Free Trade Agreement.   If you don’t know who your representative in Congress is, you can find out by typing in your zip code at http://www.congress.org/

The House passed H. R. 1249, The Leahy-Smith America Invents Act, on June 23rd by a 304-to-117 vote, a bipartisan tally with more than two-thirds of lawmakers from each party supporting the bill.  The Senate passed similar legislation in March on a 95-to-5 vote.  The bill would change how the U.S. grants patents and award them to the party which is “first to file” an invention instead of the “first to invent” it.  The bill to reform the U.S. patent system for the first time in nearly 60 years would bring the U.S. in line with other countries who adopted first to file patent systems years ago, a move that will simplify the patent process for companies that file applications in multiple countries.

Congress has been trying to reform U.S. patent rules for more than a decade, but previous efforts to reach a compromise on new rules fell apart because of disagreements by various industries, including pharmaceutical and Silicon Valley companies.  However, many of the most divisive issues have been settled by the courts in recent years, leading to the current legislation.

The banking industry scored a victory when lawmakers included a provision in the bill which would make it easier for banks to get re-examination of patents on financial business processes such as check-scanning, in an effort to avoid paying patent-infringement fees.  The U.S. Chamber of Commerce and the National Retail Federation joined the banking industry to push for the provision, which was opposed by some small inventors.  An amendment sponsored by six lawmakers to strip that provision from the bill failed.  The banking industry measure is also in the Senate version of the bill.

Fifteen amendments were introduced, and only seven were accepted.  Among the amendments rejected were Rep. Sensenbrenner’s Amendment 502 to strike Section 3 of the legislation converting the U. S. patent system from a “first to invent” to a “first to file” system and Amendment 492 by Rep. Conyers (D-MI), which would have inserted language to move the United States to a “first to file” system only upon a Presidential finding that other major patent authorities have adopted a similar one year grace period.

Rep. John Conyers (D., Mich.) said the legislation would “benefit large multinationals at the expense of independent inventors and small businesses” and would “harm jobs, harm innovation and harm our nation.”

Even though the legislation enjoyed broad industry support and was relatively uncontroversial, the House bill ended up filled with some thorny provisions that riled a few industry groups.  Some inventors and small businesses complained that switching to a “first to file” system would give large companies an advantage and hurt individual inventors.  Opponents argued there is no reason to change the U.S. system.

The bill’s supporters say it will improve patent quality by creating a new process for reviewing patents after they have been issued and allow third parties to provide information on other parties’ applications.  To address concerns by university researchers, the bill would also give inventors a grace period to file for patents after publicly disclosing their inventions.  It would also stop the ability of inventors to receive patents on tax strategies.

“This bill is designed to help all inventors,” said Rep. Lamar Smith (R – Texas), who chairs the House Judiciary Committee and helped author the legislation.  The current system “seriously disadvantages small inventors and companies” because it can lead to years of costly legal challenges to their patents, he said.

Representative Mike Michaud (D-ME), who voted in favor of the bill, said, “We need to make it easier for companies to innovate and make things here at home, and this bill does that.   Although I was disappointed that the bill did not improve the funding structure for the Patent and Trademark Office, I am pleased that provisions were added to make it better for U.S. manufacturing.  This bill shows how effective Congress can be when both sides of the aisle work together.  I look forward to working in a bipartisan fashion with my colleagues to further advance U.S. manufacturing and see this bill through the conference process with the Senate.”

Rep. Don Manzullo (R-IL) voted against the bill after his two proposed amendments failed.  One would have totally transformed the bill by simplifying it with a plan focused solely on reducing the huge backlog in patent applications, and the other would have eliminated one section of the bill that gives the Patent & Trademark Office the ability to set its own fees.  Rep. Manzullo stated, “This bill would weaken our strong patent system that has protected American entrepreneurs for centuries from overseas companies trying to pirate their inventions.” Manzullo said. “Any patent reform we undertake should focus on reducing the backlog in patent applications, not dramatically altering the system and giving multinational corporations advantages over American innovators.  The last thing we should be doing right now is giving foreign companies an even greater opportunity to take our ideas and our jobs.”

Manzullo also believes the bill is unconstitutional (earlier this month, the Supreme Court reaffirmed that patent rights belong to the inventor) and unnecessarily adds a new post-grant review provision that will further delay and add further litigation to the patent approval process.

Biotechnology Industry Organization (BIO) President and CEO Jim Greenwood released the following statement:  “BIO will continue to work with House and Senate leaders to ensure that final patent reform legislation addresses any remaining concerns and is enacted into law this year.”

“Small biotechnology companies rely heavily on their patents to attract investment to fund the lengthy and expensive research and development process necessary to bring breakthrough medical therapies and other products to patients and consumers.  Strong intellectual property protection is critical for these companies.

“The Leahy-Smith America Invents Act will bring our patent system into the 21^st century.  The improvements made by the bill will benefit all sectors of the national economy by enhancing patent quality and the efficiency, objectivity, predictability and transparency of the U.S. patent system.”

The most important difference between the two bills is funding for the United States Patent and Trademark Office.  The bill passed by the Senate put an end to the practice of fee diversion, which occurs when the Congress appropriates the USPTO less than they collect in fees.  The excess in the fees collected from users of the USPTO then go to the federal government as general revenues and are used for purposes other than the operation of the United States Patent and Trademark Office.

Interest groups are already lining up to continue the fight, and there will probably be many more interest groups that protest the removal of provisions that would end fee diversion once and for all.  The Innovation Alliance, a lobbying group representing some biotech and tech companies including Qualcomm Inc., pulled its support of the legislation prior to passage last week over a disagreement on how patent office operations are funded.

The Innovation Alliance’s Executive Director, Brian Pomper, released the following statement shortly after the America Invents Act passed:  “The Innovation Alliance is disappointed that the House of Representatives has approved legislation that will not end permanently the diversion of user fees from the U.S. Patent and Trademark Office (USPTO).

“Along with many other patent stakeholders across a range of sectors and business models, we believe that the anti-fee diversion provisions approved by an overwhelming vote of 95-5 in the U.S. Senate and a 32-3 vote in the House Judiciary Committee offer the USPTO the reliability and structure it needs to reduce today’s significant backlog of 700,000 patent applications.  Reducing the patent backlog and strengthening the USPTO is essential for driving innovation, job creation, and economic growth. We will continue to work with lawmakers and other stakeholders to ensure that any patent bill that becomes law ends fee diversion permanently.”

Prior to passage in the House, Senator Tom Coburn (R-OK), who was the champion in the Senate of the provisions that would end the practice of fee diversion, issued the following press release:  “For too long tomorrow’s inventions have been stymied by today’s incompetence in government.  It is outrageous for Congress to take fees paid by Americans for a specific service and spend those dollars on other programs.  Since 1992, Congress has pilfered nearly $1 billion in user fees dedicated to the Patent and Trademark Office and spent those dollars elsewhere.  As a result, we have 700,000 patents waiting for a first review that, if approved, could help get our economy moving again,” Dr. Coburn said.

“The Senate voted to end this egregious practice by a margin of 95 to 5 when it passed legislation this March that included an amendment I offered to end fee diversion once and for all.  The House, unfortunately, decided to water down this language and allow the Appropriations Committee to control this account.  Unfortunately, the Appropriations Committee has a poor record of managing such accounts responsibly and honestly in this area and others.  For instance, the Appropriations Committee has stolen billions from the Crime Victims’ Fund and other funds,” Dr. Coburn said.  “There is no reason to believe they won’t continue to do the same with the patent account.”

Now, the fight will go back to the Senate where Senators will be asked to swallow the changes adopted by the House of Representatives, which seems unlikely.  Senator Patrick Leahy (D-VT) and Congressman Lamar Smith (R-TX) will likely want to find compromise language that can pass both the House and the Senate.  A formal Conference on the bill is unlikely, which would mean that the Senate would need to work out language acceptable to the Senate while also being acceptable to the House.

Meanwhile, David Kappos, Under Secretary of Commerce for Intellectual Property and the Director of the United States Patent and Trademark Office, issued the following statement:  “I want to congratulate the House of Representatives for passing the Leahy-Smith America Invents Act today…The effort to reform our nation’s patent laws began a decade ago, and House passage today brings patent reform a significant step closer to becoming law.  This bi-partisan legislation will transform our patent system, enhance our Nation’s competitiveness and promote economic growth and job creation.

We are encouraged by the statements of so many Members of Congress calling for the USPTO to have full access to all of its fee collections.  We are particularly thankful to Chairman Rogers for his commitment to ensure that the USPTO has full access to its fees when fee collections exceed Congress’ annual appropriation for USPTO. Full funding of the USPTO is necessary for the USPTO to successfully implement this legislation and to more effectively perform its core mission.  We are hopeful that this critical legislation can move expeditiously toward final passage and enactment.”

Many are not at all thankful for the role of Congressman Hal Rogers (R-KY) because it was Rogers who protested the end to fee diversion and inserted the language that does not guarantee the USPTO will be able to access 100 percent of the user fees it receives.  Under a compromise, House lawmakers did agree to let the agency keep patent fees but would put any funds excess of its annual budget into a reserve account overseen by Congress.  The provision conflicts with the Senate’s patent bill and the White House expressed concerns about the proposal Tuesday, saying the patent office “must be able to use all the fees it collects to serve the users who pay those fees.”

The House and Senate must now negotiate a final bill before patent reform can be sent to President Obama to be signed into law.  It seems unlikely that the Senate would accept the removal of provisions that will end fee diversion and the across-the-board-prior-user rights also in the House version.  Although the House and Senate bills must now be reconciled, the White House has already signaled its support for the legislation to be signed into law.

Once again, our elected representatives have sold out to the interests of multinational corporations at the expense of inventors and small businesses.