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Does it Matter Where Products are Made?

Tuesday, May 28th, 2013

We now live in a globalized economy, and many people say it doesn’t matter where something is made. They say that the industrialization of third world countries is good because it has provided jobs for millions of people and raised their standard of living. American consumers have benefitted from cheaper prices for the products they need and want. However, where products are made should matter to people who are concerned about the environment and the health and well-being of people around the world.

Manufacturing in America developed over a period of more than 200 years. It developed gradually, so there was the opportunity to learn about the hazards of industrialization on a smaller scale than has been possible with the rapid industrialization of developing countries. Pollution caused by specific industries affected small geographic areas, like West Virginia’s coal mining and Pennsylvania’s steel regions.

The Bill of Rights provided freedom of speech, freedom of the press, and the right to assemble, enabling affected communities and workers to address unsafe working conditions and pollution. Residents spoke out against pollution’s health effects in their communities. Workers formed unions to fight for better working conditions and higher wages, especially in hazardous occupations. Newspapers, and later radio and TV, made the public aware of what was happening in factories and mines. After sufficient pressure was put on elected officials at the local, state, and federal levels, laws were passed that improved working conditions, protected worker safety, and reduced pollution.

As a result, great strides on these issues were made in the U.S. in the 20th century. These efforts culminated in the establishment of the Environmental Protection Agency in December 1970, consolidating 15 components from five agencies for the purpose of grouping all environmental regulatory activities in a single agency.

Since then, the U.S. has developed a comprehensive body of law to protect the environment and prevent pollution. The EPA enforces more than 15 statutes or laws, including the Clean Air Act; the Clean Water Act; the Federal Food, Drug, and Cosmetics Act; the Endangered Species Act; the Pollution Prevention Act; and the Insecticide, Fungicide, and Rodenticides Act. In turn, each of the 50 states has its own body of law to comply with federal laws and regulations.

Cleaning up the nation’s air, water, and land hasn’t come cheap. Since passing these laws, the U.S. government has spent trillions of dollars to clean up and prevent pollution. Individuals, small businesses, and corporations paid the taxes that funded these programs. But businesses were hit with a double whammy. They not only had to pay taxes for the government to carry out its end of these programs, they had to pay cleanup costs for their own sites and buy the equipment to prevent future pollution. In addition, they had to hire and train personnel to implement and maintain mandated pollution prevention systems and procedures.

According to a Census Bureau report “Pollution Abatement Costs and Expenditures,” as a result of a survey of 20,000 plants last conducted in 2005, U.S. manufacturers spent $5.9 billion on pollution equipment, and another $20.7 billion on pollution prevention.

The EPA has achieved some major successes:

  • New cars are 98 percent cleaner than in 1970 in terms of smog-forming pollutants.
  • Dangerous air pollutants that cause smog, acid rain, lead poisoning have been reduced by 60 percent.
  • Levels of lead in children’s blood have declined 75 percent.
  • 60 percent of the nation’s waterways are safe for fishing and swimming.
  • 92 percent of Americans receive water that meets health standards.
  • 67 percent of contaminated Superfund sites nationwide have been cleaned up.

As a result, we now have cleaner air in our cities and cleaner and safer water in our streams, rivers, lakes, bays, and harbors than at any time since the Industrial Revolution began. These vast environmental improvements made in the last 40 years have benefitted every single American.

In contrast, India and China have been getting more polluted in the last 30 years as they have industrialized. Since 2006, Blacksmith Institute’s yearly reports have been instrumental in increasing public understanding of the health impacts posed by toxic pollution, and in some cases, have compelled cleanup work at pollution hotspots. Blacksmith Institute reports have been issued jointly with Green Cross Switzerland since 2007.

Six cities in China and four cities in India were listed in the Blacksmith Institute’s “Dirty 30” of the 2007 report, “The World’s Worst Polluted Places.” This list was based on scoring criteria devised by an international panel including researchers from Johns Hopkins, Harvard, and Mt. Sinai Hospital, along with specialists from Green Cross Switzerland who participated in assessing more than 400 polluted sites.

It’s hard to describe the horrors of pollution in Chinese cities. Imagine living in Xiditou (pronounced shee-dee-tow), about 60 miles east of Beijing, where the Feng Chan River that runs through the town is now black as ink and clotted with debris. The local economy has doubled in just four years, but at a terrible cost. More than 100 factories occupy what were once fields of rice and cotton. These include dozens of local chemical plants, makers of toxins including sulfuric acid, and these factories disgorge wastewater directly into the river. Industrial poisons have leached into groundwater, contaminating drinking supplies. The air has a distinctively sour odor. The rate of cancer is now more than 18 times the national average.

According to the USA Today article, “Pollution Poisons China’s Progress,” of July 4, 2005, “People regard their drinking water as little better than liquid poison, but unable to afford bottled water for all their daily needs, most adults continue to drink it. They buy mineral water only for their children.”

Another horrible location is Tianying, in Anhui province, which is one of the largest lead production centers in China, with an output of half of the country’s total. Low-level technologies, illegal operations, and a lack of air-pollution control measures have caused severe lead poisoning. Lead concentrations in the air and soil are 8.5 to 10 times national standards. Local crops and wheat at farmers’ homes are also contaminated by lead dust, at 24 times the national standard.

The ironic note to these statistics is that China actually has more stringent restrictions on lead than the U.S. The difference is that neither the local nor the national government is enforcing the laws. Residents, particularly children, suffer from lead poisoning, which causes encephalopathy, lower IQs, short attention spans, learning disabilities, hyperactivity, hearing and vision problems, stomachaches, kidney malfunction, anemia, and premature births.

Perhaps you would like to live in Wanshan, China, termed the mercury capital of China because more than 60 percent of the country’s mercury deposits were discovered there. Mercury contamination extends throughout the city’s air, surface water, and soils. Concentrations in the soil range from 24 to 348 mg/kg, 16 to 232 times the national standard. To put this into perspective, the mercury from one fluorescent bulb can pollute 6,000 gallons of water beyond safe levels for drinking, and it only takes one teaspoon of mercury to contaminate a 20-acre lake – forever. Health hazards include kidney and gastrointestinal damage, neurological damage, and birth defects. Chronic exposure is fatal.

China is now the largest source of CO2 and SO2 emissions in the world (SO2 causes acid rain). Japan, South Korea, and the northwest region of the U.S. suffer from acid rain produced by China’s coal-fired power plants and higher CO2.readings from easterly trade winds.

The horrific effects of pollution in China and its staggering cost in human life, are a graphic example of why Chinese companies can outcompete American companies – not only because of their disparity in wages, but also because their government does not enforce the same environmental and social standards. As Americans, who place a high value on human life and protecting our environment, we wouldn’t have it any other way. But American manufacturing industries do pay a penalty competing against China.

During China’s rapid industrialization of the last 30 years, the U.S. has spent billions on technologies and equipment to clean up and prevent pollution. China had a golden opportunity to benefit from all the hard lessons learned by developed countries during their own industrialization. If China had purchased the pollution abatement equipment developed in the U.S., their industrialization would not have caused such horrendous pollution. Millions of lives would have been saved!

In the U.S., our landfills wouldn’t be filling up with discarded products from China that are so cheap that it is easier to throw them away than repair them. Wouldn’t it be worth paying more for “Made in USA” products that are higher quality and last longer?

Thus, if you are concerned about global pollution and want to save lives in both China and the U. S., you should choose to buy “Made in USA” products that have been produced in the most non-polluting manner that is technically feasible at present. My next article will take a look at India’s environment.

 

 

 

 

Posted in Cleantech, Manufacturing, Outsourcing | 1 Comment »

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.

 

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Posted in Economy, Manufacturing, Outsourcing, Reshoring, Trade Policy | 2 Comments »

What is the State of the American Metal Forming and Fabricating Industry

Tuesday, February 12th, 2013

The Precision Metalforming Association (PMA) held an executive conference in Irvine on February 6-7, 2013 for their forming and fabricating members. Attendees came from as far away as Illinois, Minnesota, and Ohio. The companies represented ranged in size from a low of 50 employees to a high of 350 employees.

On the first day, the schedule of events included presentations on business conditions and benchmarking by PMA President, Bill Gaskin. Mr. Gaskin reported that the metal forming and fabricating industry had sustained 40 months of a general upturn in business since the Great Recession officially ended in the summer of 2009.

In 2011, orders were up 8% over 2010, and shipments were up 11% over 2010. The Year to Date figures through November for 2012 showed an upturn of 6% for orders and 5% for shipments based on the control group of 100 member companies. Employment was up 4.3% on the average, and 34% of companies had openings for skilled workers.

Other good news was that metal prices in general had gone down by about 50% since 2011, except for copper and high nickel stainless steel alloys. In turn, prices that the companies get for scrap material have dropped.

Then, Kathie Poindexter, Manager of Production Marketing of Epicor Manufacturing gave a presentation on “Maximize Lean Strategies with Mobile Technologies on the Plant Floor. One of the top business drivers is utilizing an Enterprise Resource Planning (ERP) strategy to reduce cost of operations (44%) and because workers are increasingly mobile (39%).

About 35% of manufacturers provide front-line workers with mobile devices to increase worker productivity and improve collaboration. Some of the benefits of utilizing hand-held mobile devices on the shop floor in conjunction with Epicor’s ERP software solutions are:

  • Asset tracking
  • Real-time equipment usage
  • Electronic Kan Ban
  • Instant inventory counts
  • Electronic work orders
  • Maintenance scheduling
  • Quality and error proofing
  • Labor tracking per job or piece of equipment
  • Real-time production management
  • Support for lean initiatives
  • Improved decision making
  • Increased management effectiveness

Laptops, tablets, and “smart” phones utilized by field sales and service personnel provide “business anywhere, anytime” benefits:

  • Instant quotes
  • Real-time inventory
  • Immediate order processing
  • Real-time delivery status

After this presentation, the group was bused to the nearby facility of MK Products/MK Manufacturing to see how the Epicor ERP solutions have been utilized by the company. MK Products is a privately owned company, founded in 1966, to manufacture a full line of Push-Pull welding products and Orbital welding systems, welding “guns” and fusion tube welding products. The sister company, MK Manufacturing, performs contract design, engineering, and manufacturing services, including machining, fabrication, processing, and assembly.

Chris Westlake, President, conducted the tour of the over 100,000 sq. ft. facility and gave an enthusiastic description of how they have utilized the Epicor ERP solutions and hand-held mobile devices from the initial concept design to manufacturing, processing, assembly, and shipping. Real-time tracking and retrieval of inventory for use on the shop floor reduced their labor needs and improved efficiency substantially.

After dinner, I gave a presentation on “Returning Manufacturing to America,” focusing on how American metal forming and fabrication manufacturers can use the principles of Total Cost of Ownership  and the Total Cost EstimatorTM developed by Harry Moser of the Reshoring Initiative to help their customers and prospects understand the benefits of returning manufacturing to America.

I presented case studies showing that many manufacturers often make the decision to offshore based on faulty assumptions that prove to be far off from reality in execution. Many times the anticipated cost savings in offshoring have been offset by the hidden costs and risk factors in doing business offshore. This has resulted in an increasing number of companies, even multinational corporations such as General Electric and NCR, to return product line manufacturing to the United States. The Reshoring Initiative estimates that about 10% of manufacturers have “reshored” resulting in 50,000 jobs.

The next day featured breakfast and a tour of the re-opened Amada America, Inc. Solution Center in Buena Park California. The Solution Center is Amada’s equipment showcase and technical center for the western United States. Amada America, Inc. was established in Seattle, Washington in 1971 and has been located in California since 1973. Its company headquarters are located in a nearby building in Buena Park.

Amada America COO and President, Mike Guerin, began the tour with overview of Amada’s history as a company in Japan and America. What was exciting to me was the fact that in 2011 Amada made a decision to manufacture laser-cutting machines in America, opening a new plant recently in Brea, California to do so, with plans to also manufacture turret presses and brakes at the facility in the future.  The main reasons are:  lower labor rates in the U. S. than Japan, reduced transportation costs, and proximity to their major market.

The facility tour was conducted by Joe Greeninger, Division Manager, and featured several new models of fiber laser machines with 3-axis linear drive systems, traditional servo-driven lasers, turret presses, automation equipment, and press brakes.

The technical capabilities of the new fiber laser machines were quite impressive compared to CO2 laser cutting systems. Some of the advantages are:

  • No harmful emissions because they don’t require gas to generate the laser beam
  • Expanded capabilities – can cut copper, brass and titanium in addition to aluminum and steels and can cut thinner gauge material
  • Lower maintenance because there are no mirrors in the laser source

After returning from the tour, the attendees participated in a business roundtable discussion of “hot button” business issues. The top issues were:

Skilled workers  – A few of the companies attending were providing training in-house using ToolingU curriculum and others were using paying for employees to take classes at local community colleges. One of the Illinois companies had an apprenticeship program through the Technology Manufacturing Association in Illinois. California attendees from Walker Corporation mentioned getting training through a private company in San Bernardino, Technical Employment Training, Inc. Training is also available through California’s Manufacturing Extension Program (MEPs), CMTC in southern California and Manex in northern California. I shared information about the new Workshop for Warriors in San Diego providing training for veterans in machining, sheet metal fabrication, welding, and manufacturing software.

Economy – Manufacturers need certainty to be able to plan, and there is no certainty with the fear of sequestration, high federal budget deficits, and national debt. Companies are remaining lean and not adding people unless need to replace someone or need special skills.

One company shared how they reduced utility costs by paining walls white and converting from pneumatic to electric compressors. Another company shared that their utility company did and energy assessment and provided them with free lighting to reduce energy usage.

Health Care – Most of the companies pay for all or most of their employees’ health insurance now, but it will be cheaper to pay penalty when Obamacare goes into full effect. Question is whether they can get and retain skilled employees if do not provide some health care benefit. One company pays for cost of “Medigap” insurance to retain older skilled workers when they qualify for Medicare.

Doing business in California – California attendees reported that their supply chain is going away, their Workers’ Compensation insurance costs are higher, and regulations by Cal OSHA, Cal EPA, and the Air Quality Monitoring District are more stringent than federal regulations. In addition, the cost of living, housing prices, and taxes are higher than other states. The only advantages most could see were the great weather and that California seems to be a hotbed of invention/innovation by startups coupled with a strong angel and Venture Capital investor network.

Sustaining Lean – Attendees agree that you need a lean “champion” and cultural change to succeed. Engaging customers to help and networking with others is important. Setting an annual goal of regularly scheduled Kaizen events is beneficial. The ERP system you use can help of hurt lean sustainability.

Taxes – It is important to get elected representatives at the state and federal level to realize that 60-70% of manufacturers are sub-chapter “S” corporations so they are taxed at the individual rate. Reducing taxes for “C” corporations as is being discussed will not help these companies. The R&D tax credit needs to be made permanent instead of renewed every year. The Value Added Taxes (VATs) charged by most other countries were discussed, but no one thought they would be seriously considered in the near future.

Suggestions for the next executive conference included having a sub-group for technical personnel to share knowledge and case studies on how to make particular parts and having a tour of a metal forming and fabricating member company near the conference location.

It is great that the U. S. metal forming and fabricating industry has remained strong, but it would be even better if more manufacturing sectors were doing as well so they could be providing more jobs. One of the reasons that metal forming and fabricating industry is so doing so well is that new, state-of-the-art equipment is very automated and highly efficient so it is less labor intensive than many other manufacturing industries. Transportation costs for metal parts, especially larger parts, cost more than plastic or rubber parts so there is more incentive for original equipment manufacturers to use vendors that are closer to them. This means that there has been less outsourcing offshore for metal formed and fabricated parts than plastic and rubber parts. As transportation costs and labor rates increase even more than they already have, there will be even less incentive to offshore metal formed and fabricated parts in the future.

 

Posted in Manufacturing, Outsourcing | 1 Comment »

What Do American Manufacturers Owe Their Country?

Tuesday, February 5th, 2013

Last week The Economist conducted an on-line debate on the question:  Do multinational corporations have a duty to maintain a strong presence in their home countries? After a very intense written debate between Harry Moser, former president of GF AgieCharmilles  and founder of the Reshoring Initiative, and Jagdish Bhagwati, Professor of Economics and Law, Columbia University, the vote was 54% “yes,” and 46% “no.”

The moderator of the debate was Tamzin Booth, European business correspondent for The Economist, who introduced the topic by stating, “after the Great Recession, with high levels of unemployment persisting in rich countries, politicians are putting enormous pressure on firms to either keep operations at home or bring them back. The offshoring and outsourcing of work overseas have never been more unpopular. So strong is the backlash against firms which shift jobs abroad that many companies are choosing not to do it for fear of igniting a public outcry. And a “reshoring” trend, bringing factories home to America from China and elsewhere, is gathering pace and support from several American multinationals, including General Electric and Ford Motor Company.”

While Mr. Moser acknowledges that multinational corporations (MNCs) “have a responsibility to enhance shareholder return and obey relevant laws and regulations,” he believes that “MNCs also have a duty to maintain a strong presence in their country of origin,” which he defines “as investing, employing, manufacturing and sourcing at least in proportion to their sales in the origin country.”

He states, “This duty has two sources. The first is a quid pro quo for the special benefits that their charter provides. The second is based on understanding that a strong presence is almost always in the interest of their shareholders.”

In his pro argument for the first duty, Mr. Moser quotes Clyde Prestowitz: “Corporations are not created by the shareholders or the management. Rather they are created by the state. They are granted important privileges by the state (limited liability, eternal life, etc). They are granted these privileges because the state expects them to do something beneficial for the society that makes the grant. They may well provide benefits to other societies, but their main purpose is to provide benefits to the societies (not to the shareholders, not to management, but to the societies) that create them.”

This view is corroborated by a recent essay, “The American Corporation,” by Ralph Gomory and Richard Sylla, in which they provide a brief history of corporation formation in America. From 1790 to 1860, over 22,000 corporations were chartered under special legislative acts by states, and

several thousand more were chartered under general incorporation laws introduced in the 1840s and 1850s. These state granted charters were not perpetual and had to be renewed periodically, “with its “powers, responsibilities?including to the community?and basic governance provisions carefully specified.”

The essayists comment that general incorporation laws were the answer to the problem of corruption in legislative chartering, but created their own problems in the late 19th Century with the rise of “Robber Barons, both the business leaders who amassed great power and wealth in the rise of mass-production and mass-distribution industries, and the great financiers of Wall Street who collaborated with them.” The concentration of wealth and power in the hands of so few led to the passage of antitrust laws and corporate regulations at both the federal and state levels regulations in the 20th Century to prevent or rein in monopolies.

The stock market crash of 1929 and the Great Depression resulted in a multitude of “New Deal” reforms and regulations on the corporate and financial sectors to protect and inform stockholders and the general public.

Gomory and Sylla write that for decades after WWII, “the problem of corporate goals seemed under control,” and “the interests of managers, stockholders workers, consumers and society seemed well aligned” while the U. S. and the Soviet Union were fighting a Cold War.

As late as 1981, the U. S. Business Roundtable issued a statement recognizing the stewardship obligations of corporations to society:  “Corporations have a responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts investment to continue and enhance the enterprise, provide jobs, and build the economy.” In addition, “The long-term viability of the corporation depends upon its responsibility to the society of which it is a part. And the well being of society depends upon profitable and responsible business enterprises.”

Establishing plants in another country in order to do business in that country and be closer to your customers is a reasonable business decision for many companies whose products are sold globally, such as Coca Cola and other food and beverage manufacturers. I concur with Mr. Moser’s statement. “We do not question multinational companies’ right to invest offshore.” However, it is another thing to transfer all or most of the manufacturing of your products to be sold mainly in the U. S. market to another country, at the cost of hundreds, if not thousands, of American jobs.

This brings us to Mr. Moser’s second pro argument to the question; namely, “a strong presence is almost always in the interest of their shareholders.” He states that his experience with the Reshoring Initiative’s free Total Cost of Ownership Estimator™ has shown that “in their excessive focus on offshoring of manufacturing, many MNCs make suboptimal decisions, actually reducing the long-term return to their shareholders. Thus many MNCs will more fully maximise returns for shareholders if they maintain a stronger presence.”

This is because most MNCs do not accurately measure the “Total Cost of Ownership” or “landed costs” in making decisions regarding where to manufacture their products. They ignore the “hidden costs” of doing business offshore about which I have written extensively in my book , such as:  quality problems, legal liabilities, currency fluctuations, travel expenses, difficulty in making design changes, time and effort to manage offshore contract, and cost of inventory.

In addition, Mr. Moser states that the behaviors of MNCs include:

  • “Ignoring a whole range of medium-term risks: IP loss; impact on innovation; and loss of competence and control due to increasing reliance on offshore outsourcing firms. The further a firm is removed from the manufacturing of its products, the harder it is to evolve and make future related products.
  • Ignoring longer-term catastrophic risks associated with shifting their presence offshore, including the decline in American economic, technological and military strength: risk of losing sales and assets in developing countries, especially when competing with local state-owned enterprises (SOEs); loss of the government-funded R&D that gives them a head start in many technologies; loss of strong origin-country defence and legal systems that protect the corporate charter; loss of “Pax Americana” that protects their trade around the world; and populist calls for anti-MNC political actions resulting from income inequality driven by a shriveling middle class.”

One important risk that Mr. Moser did not mention is the risk of theft of Intellectual Property by offshore manufacturers, especially in China. For many years, China has been doing this by reverse engineering, counterfeiting, and cyber espionage, but it has been made easier in the past two years by the mandatory technology transfer required by the Chinese government for corporations who set up plants in China.

In his con argument, Professor Bhagwati asserts that global sourcing and locating plants around the world has happened already, and “there is little point in tilting at reality.” He states, “Multinationals’ products, after all, can now hardly even be defined as American, French or any other nationality when their parts come from every corner of the world. All that matters, he argues, is that worldwide operations bring profits to the multinational, thereby benefiting the country in which it is headquartered. , “MNC investment abroad is good, not bad, for America unless it is a result of distorting tax policies that lead to overinvestment abroad. Asking MNCs to have a presence at home, and subsidising or forcing them under threat of penalties to do so, makes little sense unless you claim that this presence produces some externalities…the benefits to the MNC, and hence to America most likely, will accrue regardless of where the MNC does R&D, in Bangalore or Boston.”

In is rebuttal, Professor Bhagwati states, “Compelling an American MNC to retain a strong presence in America would be the wrong prescription no matter which of the two rationales you accept…Forcing them to produce at home when that makes them uncompetitive in world markets is surely the wrong prescription: it makes them uncompetitive in markets which today are fiercely competitive.

While I realize and have written about the fact that American manufacturers are under a disadvantage in dealing with countries like China that practice “predatory mercantilism,” it is my opinion that American multinational and national manufacturing corporations have more than a “duty to maintain a strong presence in their home countries.” As American citizens, we “pledge allegiance to the Flag of the United States of America, and to the Republic for which it stands, one Nation under God, indivisible, with liberty and justice for all.” Thus, we owe “allegiance” to our country, which is defined as “the loyalty of a citizen to his or her government.” Other synonyms are:  fidelity, faithfulness, adherence, and devotion.

Obviously, if you are a loyal, faithful, devoted citizen of the United States this means that you take actions in your personal and business life to support your country and do not purposely take actions that may cause harm to your country. Moving a majority of manufacturing to other countries, especially China is doing harm to your country since China has a written plan to replace the United States as the world’s super power. Therefore, American multinational corporations and other American manufacturers owe allegiance to the United States of America by maintaining a strong presence in our country.

 

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Posted in Manufacturing, Outsourcing, Reshoring | No Comments »

Chinese Innovation Mercantilism is Hurting American Manufacturers

Tuesday, December 11th, 2012

On Wednesday, December 5, 2012, Robert D. Atkinson, President of the Information Technology and Innovation Foundation (ITIF), testified before the House Science Committee Subcommittee on Investigations and Oversight in a hearing on “The Impact of International Technology Transfer on American Research and Development.” His testimony was based on his book, Innovation Economics: The Race for Global Advantage (Yale University Press, 2012) and the ITIF report, “Enough is Enough:  Confronting Chinese Innovation Mercantilism,” released February 2012.

Atkinson began his testimony by stating, “A nation’s investments in research and development (R&D) are vital to its ability to develop the next-generation technologies, products, and services that keep a country and its firms competitive in global markets. Until recently, corporate R&D was generally not very mobile, certainly not in comparison to manufacturing. But in a “flat world” companies can increasingly locate R&D activities anywhere skilled researchers are located…. the United States has seen its relative competitive advantage in R&D and advanced technology industries decline. While the United States still leads the world in aggregate R&D dollars invested, on a per-capita basis it is falling behind.”

He testified that the “decline in America’s innovative edge is due to a number of factors, not the least of which are failures of federal policy, such as an unwillingness to make permanent and expand the R&D tax credit, limitations on high-skill immigration, and stagnant federal funding for R&D. But the decline is also related to unfair practices by other nations that collectively ITIF has termed as ‘innovation mercantilism.’”

The ITIF report cited above states that these policies “include currency manipulation, relatively high tariffs (three times higher than U.S. tariffs), and tax incentives for exports.” In addition, “some policies help Chinese firms while discriminating against foreign establishments in China. These policies include “discriminatory government procurement; controls on foreign purchases designed to force technology transfer to China; land grants and rent subsidies to Chinese-owned firms; preferential loans from banks; tax incentives for Chinese-owned firms; cash subsidies; benefits to state-owned enterprises; generous export financing; government-sanctioned monopolies; a weak and discriminatory patent system; joint-venture requirements; forced technology transfer; intellectual property theft; cyber-espionage to steal intellectual property (IP); domestic technology standards; direct discrimination against foreign firms; limits on imports and sales by foreign firms; onerous regulatory certification requirements; and limiting exports of critical materials in order to deny foreign firms key inputs.”

The report explains that “in the last decade China has accumulated $3.2 trillion worth of foreign exchange reserves and now enjoys the world’s largest current account balance. In 2011, it ran a $276.5 billion trade surplus with the United States. This ‘accomplishment’ stems largely from the fact that China is practicing economic mercantilism on an unprecedented scale. China seeks not merely competitive advantage, but absolute advantage. In other words, China’s strategy is to win in virtually all industries, especially advanced technology products and services… China’s policies represent a departure from traditional competition and international trade norms. Autarky [a policy of national self-sufficiency], not trade, defines China’s goal. As such China’s economic strategy consists of two main objectives: 1) develop and support all industries that can expand exports, especially higher value-added ones, and reduce imports; 2) and do this in a way that ensures that Chinese-owned firms win.”

The report states that “because China is so large and because its distortive mercantilist policies are so extensive, these policies have done significant damage to the United States and other economies…The theft of intellectual property and forced technology transfer reduce revenues going to innovators, making it more difficult for them to reinvest in R&D. The manipulation of standards and other import restrictions balkanizes global markets, keeping them smaller than they otherwise would be, thereby raising global production costs…if Chinese policies continue to be based on absolute advantage and mercantilism…the results will be more of the same: the loss of U.S. industrial and high-tech output, and the jobs and GDP growth that go with it.”

Chinese mercantilist policies are unprecedented in their scope and size. Atkinson testified, “A principal arrow in China’s innovation mercantilist quiver is to force requirements on foreign companies with respect to intellectual property, technology transfer, or domestic sourcing of production as a condition of market access. While China’s accession agreement to the WTO contains rules forbidding it from tying foreign direct investment to requirements to transfer technology to the country, the rules are largely ignored.”

He added, “Rather than doing the hard work to build its domestic technology industries, or better yet focus on raising productivity in low-producing Chinese industries, China decided it would be much easier and faster simply to take the technology from foreign companies… China’s government unabashedly forces multinational companies in technology-based industries—including IT, air transportation, power generation, high-speed rail, agricultural sciences, and electric automobiles—to share their technologies with Chinese state-owned or influenced enterprises as a condition of operating in the country.”

The ITIF report explains that in 2006, “China made the strategic decision to shift to a “China Inc.” development model focused on helping Chinese firms, often at the expense of foreign firms. Chinese leaders decided that attracting commodity-based production facilities from multinational corporations (MNCs) was no longer the goal…The path to prosperity and autonomy was now to be ‘indigenous innovation’…”

The document “advocating this shift was ‘The Guidelines for the Implementation of the National Medium- and Long-term Program for Science and Technology Development (2006-2020)’…to ‘create an environment for encouraging innovation independently, promote enterprises to become the main body of making technological innovation and strive to build an innovative-type country.’”

Some 402 technologies, from intelligent automobiles to integrated circuits to high performance computers were included so that China could seek the capability to master virtually all advanced technologies, with the focus on Chinese firms gaining those capabilities through indigenous innovation.

However, China is not alone in trying to force the transfer of technology and R&D from foreign multinationals ? Indonesia, Malaysia, India, Portugal, and Venezuela have the same goal.

Why do so many nations engine in innovation mercantilism? Atkinson testified that there are two principle reasons. “First, these nations have embraced a particular and fundamentally limited model of economic growth that holds that the best way to grow an economy is through exports and shifting production to higher-value (e.g., innovation-based) production. Moreover, they don’t want to wait the 20 to 50 years it will take to naturally move up the value chain through actions like improving education, research capabilities, and infrastructure, as nations like the United States did. They want to get there now and the only way to do this is to short-circuit the process through innovation mercantilism. This explains much of China’s economic policies. The Chinese know that to achieve the level of technological sophistication and innovation that America enjoys will take them at least half a century if they rely on only their own internal actions. So they are intent on stealing and pressuring as much of American (and other advanced nations’) technology as they can to their own companies. If you can’t build it, steal it, is their modus operendi.”

Atkinson added that the second reason why these nations do this is because they don’t believe in the rule of law and the principles of free trade like Western nations and much of Europe do. These nations also “work on the ‘guilt’ of Western, developed nations. The narrative goes like this: the West has used its imperialist powers to gain its wealth, including at the expense of poor, developing nations and now it wants to “pull the ladder” up after it. This means turning a blind eye to intellectual property and giving our technology, including pharmaceutical drugs, to nations almost for free. After all, we are rich and they are poor because we are rich.”

The reality is that forced technology transfer is enabling China and other nations to gain global market share. It is doing “considerable harm to U.S. technology companies and to the U.S. economy, if for no other reason than reducing their profits and ability to reinvest in the next wave of innovation.”

Atkinson posed the question, “So what should the U.S. government do? He responded that “this is a difficult question because if there were easy solutions, they would have been done by now.” He recommended the following actions:

  • Try to do more through conventional trade dispute channels and expand funding for the U.S. Trade Representative’s Office (USTR) so it can do more.
  • Ensure that future bilateral trade and investment treaties (BIT) contain strong and enforceable provisions against forced technology and R&D transfer.
  • Congress should make it clear that it will not judge any administration by whether a BIT with China is concluded, but rather by if the United States made a strong effort to conclude a treaty that provided full protection against mercantilist practices like forced transfer of R&D.
  • Congress should pass legislation that allows firms to ask the Department of Justice for an exemption to coordinate actions regarding technology transfer and investment to other nations.
  • Congress should exclude mercantilists from the Generalized System of Preferences (GSP).

Finally, he recommended that the United States actively explore alternatives to the WTO and  pursue a two-pronged trade strategy, continuing as best it can to improve conventional trade organizations like the WTO, but also creating alternative “play-by-the-rules” clubs of like-minded countries.

He concluded his testimony stating, “Pressured or mandatory technology transfer by other nations has, is, and will continue to negatively impact American R&D and innovation capabilities. It’s time for the federal government to step up its actions to fight this corrosive mercantilist practice.”

Curbing Chinese mercantilism must become a key priority of our trade policy if we want to address this serious threat to American manufacturers and the U. S. economy.

 

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ITIF Report Details 50 Policies to Improve U.S. Manufacturing Competitiveness

Tuesday, September 25th, 2012

Last week, the Information Technology and Innovation Foundation (ITIF) released a report titled, “Fifty Ways to Leave Your Competitiveness Woes Behind: A National Traded Sector Competitiveness Strategy,” by Stephen Ezell and Robert Atkinson in which they stated, “A comprehensive strategy aimed at strengthening U.S. establishments competing in global markets is needed for the United States to boost short-term recovery and long-term prosperity…”

“The United States is increasingly isolated in its belief that countries don’t compete with one another and that only firms compete” said ITIF Senior Analyst Stephen Ezell, co-author of the report. “Our traded sector establishments are up against competitors that are aided in countless ways by their governments. It’s time to level the playing field.”

The report, presents 50 federal-level policy recommendations to help restore U.S. traded sector competitiveness, along with 13 state-level recommendations. The recommendations are organized around federal policies regarding the “4Ts” of technology, tax, trade, and talent, as well as policies to increase access to capital, reform regulations, and better assess U.S. traded sector competitiveness.

A nation’s traded sector includes industries such as manufacturing, software, engineering and design services, music, movies, video games, farming, and mining, which compete in international marketplaces and whose output is sold at least in part to nonresidents of the nation. They are the core engine of U.S. economic growth and face unique challenges.

Because these industries face competition in the global market that non-traded, local-serving industries (retail trade or personal services) do not, their success is riskier. “The health of U.S. traded sector enterprises in industries such as semiconductors, software, machine tools, or automobiles—all far more exposed to global competition than local-serving firms and industries—cannot be taken for granted.”

If a company like Boeing loses market share to Airbus, thousands of domestic jobs at Boeing, its suppliers, and the companies at which their employees spend money will be lost. In contrast, a local grocery store may compete for business with other supermarkets, but it is not threatened by international competition. If Safeway loses market share to Wal-Mart, the jobs remain in the United States.

Ezell and Atkinson state, “The fact that the U.S. traded sector has not created a single net new job in 20 years is a core reason for the current U.S. economic malaise.” They cite the research of Nobel Prize-winning economist Michael Spence, who has demonstrated that “from 1990 until the Great Recession started in 2007, the U.S. achieved virtually no growth in traded sector jobs. The malaise has been a downright decline in manufacturing, as the United States lost nearly one-third of its manufacturing workforce in the previous decade, saw on net over 66,000 manufacturing establishments close, accrued a trade deficit in manufactured products of over $4 trillion, and experienced a decline in manufacturing output of 11 percent at a time when U.S. GDP increased by 11 percent (when measured properly).”

Ezell and Atkinson corroborate what I have written previously ? “every lost manufacturing job has meant the loss of an additional two to three jobs throughout the rest of the economy. The 32 percent loss of manufacturing jobs was a central cause of the country’s anemic overall job performance during the previous decade, when the U.S. economy produced, on net, no new jobs….at the rate of growth in manufacturing jobs that occurred in 2011, it would take until at least 2020 for employment to return to where the economy was in terms of manufacturing jobs at the end of 2007.”

The reasons why the authors emphasize the importance of manufacturing as a “traded sector” are:

  • It will be difficult for the U. S. to balance its foreign trade without a robust manufacturing sector because manufacturing accounts for 86 percent of U.S. goods exports and 60 percent of total U.S. exports.
  • Manufacturing remains a key source of jobs that both pay well.
  • Each manufacturing job supports as an average of 2.9 other jobs in the economy.
  • The average wages in U.S. high technology are 86 percent higher than the average of other private sector wages.
  • Manufacturing, R&D, and innovation go hand-in-hand.
  • The manufacturing sector accounts for 72 percent of all private sector R&D spending.
  • Manufacturing employs 63 percent of domestic scientists and engineers.
  • U.S. manufacturing firms demonstrate almost three times the rate of innovation as U.S. services firms.
  • Manufacturing is vital to U.S. national security and defense.

They contend that “the engines of a nation’s competitiveness are in fact not mom and pop small businesses, but rather firms in traded sectors, high-growth entrepreneurial companies, and U.S.-headquartered multinational corporations. Although such firms comprise far less than 1 percent of U.S. companies, they account for about 19 percent of private-sector jobs, 25 percent of private-sector wages, 48 percent of goods exports, and 74 percent of nonpublic R&D investment. And, since 1990, they have been responsible for 41 percent of the nation’s increase in private labor productivity.”

The report notes that “traded sector businesses improve the local economy in three ways:

  1. Traded sector businesses bring money into a region by selling to people and businesses outside the region.
  2. They help keep local money at home through import substitution, which occurs when local residents and businesses purchase locally produced products instead of importing goods and services.
  3. They improve economic equity since “their productivity and market size tends to lead them to offer higher wage levels” and “jobs at traded sector companies help anchor a region’s middle class employment base by providing stable, living wage jobs for residents.”

While the authors believe all 50 recommendations are needed, they believe the 10 most critical recommendations are:

  1. Create a network of 25 “Engineering and Manufacturing Institutes” performing applied R&D across a range of advanced technologies.
  2. Support the designation of at least 20 U.S. “manufacturing universities.”
  3. Increase funding for the Manufacturing Extension Partnership (MEP).
  4. Increase R&D tax credit generosity and make the R&D tax credit permanent.
  5. Institute an investment tax credit on purchases of new capital equipment and software.
  6. Develop a national trade strategy and increase funding for U.S. trade policymaking and enforcement agencies.
  7. Fully fund a nationwide manufacturing skills standards initiative.
  8. Expand high-skill immigration, particularly which focuses on the traded sector.
  9. Transform Fannie Mae into an industrial bank.
  10. Require the Office of Information and Regulatory Affairs (OIRA) to incorporate a “competitiveness screen” in its review of federal regulations.

Only two of their top 10 recommendations made the list of the most critical recommendations in the second edition of my book:  # 4 and # 10. However, I support all of their other top 10 recommendations, as well as many of their other 40 recommendations, especially the following:

  • Lower the effective U. S. corporate tax rate – As of April 1, 2012 (when Japan lowered its corporate tax rate), the United States took the mantle of having the highest statutory corporate tax rate at almost 39 percent (when state and federal rates are combined) of any OECD nation.
  • Combat foreign currency manipulation
  • Better support and align trade promotion programs to boost U. S. exports.
  • Better promote reshoring.

I also support their recommendation that Congress should broaden the R&D tax credit’s scope to make it clear that process R&D (R&D to develop better ways of making things) qualifies for the tax incentive and that Congress should expand the R&D credit to allow expenditures on employee training to count as qualified expenditures.

With regard to trade enforcement, they recommend that the U. S. “exclude mercantilist countries from the Generalized System of Preferences (GSP)” because “the top 20 GSP-beneficiary countries — Argentina, Brazil, Bolivia, Colombia, India, Indonesia, Pakistan, the Philippines, Russia, Thailand, Turkey, and Venezuela—are on the U.S. Trade Representative’s Special 301 Watch List (which documents countries that fail to adequately protect U.S. companies’ or individuals’ intellectual property rights).”

I believe that enacting legislation to address foreign currency manipulation by China in particular should be in their top 10 recommendations. I also recommend that we enact legislation to establish either a Natural Strategic Tariff as recommended by economist Ian Fletcher in his book Free Trade Doesn’t Work:  What Should Replace It and Why, or a Balanced Trade Restoration Act to authorize sale of Import Certificates using either the Warren Buffet plan or the Richmans plan (as explained in their book Trading Away our Future).

I completely disagree with their recommendation to “Forge new trade agreements, including a high-standard Trans-Pacific Partnership and Trans-Atlantic Partnership.” As documented by Alan Uke in his book, Buying Back America, the U. S. has a trade deficit with nearly every single one of the countries with which it has a trade agreement. In fact, the U. S. has a trade deficit with 66 countries, the most egregious being the $278 billion deficit with China. Remember the touted benefits of NAFTA with Canada and Mexico? Well, in 2010, we had a trade deficit with Canada of $28 billion and $66 billion with Mexico. Do we want to increase our current trade deficit by adding more trading partners?

Additionally, the report articulates four key themes that the authors believe should be viewed as essential components of a U.S. traded sector competitiveness strategy. They recommend that the following key themes must be embraced by U.S. policymakers if the United States is to restore its traded sector competitiveness (summarized):

  1. The federal government must place strategic focus on its traded sectors, because it simply can’t rely entirely on its non-traded sectors to sustainably power the U.S. economy.
  2. The United States needs become much more of an engineering economy because gains from engineering-based innovation are capturable and appropriable within nations.
  3. The United States must move toward an economic system more focused on production than consumption, giving short-term consumption less priority in our politics.
  4. The structure of the global trading system must be seriously restructured to ensure that it is a trading system based on market-oriented principles and not the “innovation mercantilism” that has risen in the last decade, which fundamentally hurts the U.S. competitive position while violating the spirit and often the letter of the World Trade Organization.

Beyond federal policies to support traded sector competitiveness as a nation, the report also includes a section on recommended policies that states should implement to bolster their competitiveness, and in turn, the competitiveness of the broader U.S. economy. The state policy recommendations utilize the same “4Ts” framework as the federal recommendations.

Ezell and Atkinson state, “Implementing the policies recommended in this report will make the United States a more attractive investment environment for traded sector enterprises and their establishments. The technology policies will help spur innovation in advanced manufacturing, upgrade the technology capacity of manufacturing and other traded sector firms, help restore America’s industrial commons, and support the productivity, innovation, and competitiveness of traded sector SMEs. The tax policies will stimulate a favorable climate for private sector investment by making the overall U.S. corporate tax code more competitive with that of other nations and also by leveraging tax policy to incent private sector R&D and investment.”

In conclusion, they urge that U.S. policymakers understand that “manufacturing is not some low-value-added industry to be cavalierly abandoned.” Manufacturing is vital to U.S. competitiveness. I highly recommend reading all of this comprehensive, well-researched, well-documented report to be able to evaluate all of their recommendations and benefit from the details that are the basis for each recommendation.

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U.S.-China Trade Deficit Cost More than 2.1 Million Manufacturing Jobs

Tuesday, September 4th, 2012

On August 23rd, the Economic Policy Institute released a briefing paper, “The China Toll ? Growing U.S. trade deficit with China cost more than 2.7 million jobs between 2001 and 2011, with job losses in every state, written by Robert Scott.

“Between 2001 and 2011, the trade deficit with China eliminated or displaced more than 2.7 million U.S. jobs, over 2.1 million of which (76.9 percent) were in manufacturing. These lost manufacturing jobs account for more than half of all U.S. manufacturing jobs lost or displaced between 2001 and 2011.”  The growing trade deficit with China has been a prime contributor to the crisis in U.S. manufacturing employment. When you take into account the multiplier effect of manufacturing jobs creating 3-4 other jobs, this explains why we have had a virtually jobless recovery since the end of the recession and why the unemployment rate has stayed so high for so long.

The growing trade deficit between China and the United States since China entered the World Trade Organization in 2001 has had a disastrous effect on U.S. workers and the domestic economy. It has cost jobs in all 50 states, as well as the District of Columbia and Puerto Rico.

“A major cause of the rapidly growing U.S. trade deficit with China is currency manipulation. Unlike other currencies, the Chinese yuan does not fluctuate freely against the dollar. Instead, China has tightly pegged its currency to the U.S. dollar at a rate that encourages a large bilateral trade surplus with the United States.”

China’s currency should have increased in value as its productivity increased, which would have created balanced trade. But, the yuan has remained artificially low as China acquired dollars and other foreign exchange reserves to further depress the value of its own currency. The paper explains “To depress the value of its own currency, a government can sell its own currency and buy government securities such as U.S. Treasury bills, which increases its foreign reserves.”

As a result of pressure for action on China’s currency manipulation, the Ryan-Murphy Currency Reform for Fair Trade Act (H.R. 2378) was approved by the House of Representatives on September 29, 2010, in the 111th Congress, but it did not pass the Senate. Last year, the Senate passed a similar bill, the Currency Exchange Rate Oversight Reform Act of 2011 (S. 1619), authored by Sen. Sherrod Brown (D-Ohio), but a similar measure introduced in the House by Rep. Sander Levin (D-Michigan) with strong bi-partisan support from 234 cosponsors is being held up by the House leadership. “These bills would revise the Tariff Act of 1930 to include a “countervailable subsidy” that would allow tariffs to be imposed on some imports from countries with a ‘fundamentally undervalued currency’.”

Scott identifies several other Chinese government policies that also illegally encourage exports:

  • Extensive suppression of labor rights, lowering manufacturing wages of Chinese workers by 47 percent to 86 percent
  • Massive direct export subsidies provided to many key industries
  • Maintaining strict, non-tariff barriers to imports

The EPI paper states, “As a result, China’s $398.5 billion of exports to the United States in 2011 were more than four times greater than U.S. exports to China, which totaled only $96.9 billion…making the China trade relationship the United States’ most imbalanced by far.”

Scott believes that another crucial missing link is foreign direct investment (FDI) and outsourcing, about which I have written extensively in my own book and articles. He writes, “FDI has played a key role in the growth of China’s manufacturing sector. China is the largest recipient of FDI of all developing countries…Foreign-invested enterprises (both joint ventures and wholly owned subsidiaries) were responsible for 52.4 percent of China’s exports and 84.1 percent of its trade surplus in 2011…Outsourcing—through foreign direct investment in factories that make goods for export to the United States—has played a key role in the shift of manufacturing production and jobs from the United States to China since it entered the WTO in 2001. Foreign invested enterprises were responsible for the vast majority of China’s global trade surplus in 2011.” This includes investments by American corporations in their plants in China.

Another factor that has contributed to the trade deficit is that the expectations of a growing Chinese market for U.S. goods failed to occur. The U. S. was supposed to benefit from increased exports to a large and growing consumer market in China. Instead, “the most rapidly growing exports to China are bulk commodities such as grains, scrap, and chemicals; intermediate products such as semiconductors; and producer durables such as aircraft and non-electrical machinery…”

The paper provides a detailed analysis of trade and job loss by industry to show “the employment impacts of the growing U.S. trade deficit with China using an inputoutput model that estimates the direct and indirect labor requirements of producing output in a given domestic industry. The model includes 195 U.S. industries, 77 of which are in the manufacturing sector…”

The rapidly growing imports of computer and electronic accounted for 54.9 percent of the $217.5 billion increase in the U.S. trade deficit with China between 2001 and 2011. “…the trade deficit in the computer and electronic products industry grew the most, and 1,064,800 jobs were displaced, 38.8 percent of the 2001–2011 total.” As a result, the hardest-hit congressional districts were in California, Texas, Oregon, Massachusetts, Colorado, and Minnesota, where jobs in that industry are concentrated. Some districts in North Carolina, Georgia, and Alabama were also especially hard hit by job displacement in a variety of manufacturing industries, including computers and electronic products, textiles and apparel, and furniture.

The three hardest-hit congressional districts were all located in Silicon Valley in California, and of the top 20 hardest-hit districts, seven were in California, four were in Texas, two in North Carolina, two in Massachusetts, and one each in Oregon, Georgia, Colorado, Minnesota, and Alabama.

According to Scott, “The composition of imports from China is changing in fundamental ways, with serious implications for certain kinds of high-skill, high-wage jobs once thought to be the hallmark of the U.S. economy. China is moving rapidly “upscale,” from low-tech, low-skilled, labor-intensive industries such as apparel, footwear, and basic electronics to more capital- and skills-intensive sectors such as computers, electrical machinery, and motor vehicle parts. It has also developed a rapidly growing trade surplus in high-technology products.”

This growth of trade in advanced technology products (ATP) is of serious concern because it includes the more advanced elements of the computer and electronic products industry, as well as other sectors such as biotechnology, life sciences, aerospace, nuclear technology, and flexible manufacturing. It also includes some auto parts ? China has surpassed Germany as one of the top suppliers of auto parts to the United States.

“In 2011, the United States had a $109.4 billion trade deficit with China in ATP, reflecting a nine-fold increase from $11.8 billion in 2002. This ATP deficit was responsible for 36.3 percent of the total U.S.-China trade deficit in 2011. It dwarfs the $9.7 billion surplus in ATP that the United States had with the rest of the world in 2011…”

This increase in ATP is mainly the result of foreign direct investment and outsourcing by   U. S. corporations that have set up manufacturing in China or are using Chinese manufacturers as vendors so that products they make in China are imported for sale domestically that these corporations previously made in the U. S.

The growing U.S. trade deficit with China has displaced millions of jobs in the United States and contributed heavily to the crisis in U.S. manufacturing employment. At the same time, “the United States is piling up foreign debt, losing export capacity, and facing a more fragile macroeconomic environment.”

Scott writes, “The bottom line of the influences discussed above is this:  As a result of China’s currency manipulation and other trade-distorting practices (including extensive subsidies, legal and illegal barriers to imports, dumping, and suppression of wages and labor rights), the increase in foreign direct investment in China and related growth of its manufacturing sector, and the absence of a growing market for U.S. consumer goods in China, the U.S. trade deficit with China rose from $84.1 billion in 2001 to $301.6 billion in 2011, an increase of $217.5 billion…” ? a 72 percent increase!

He concludes, “Unless China raises the real value of the yuan by at least a third and eliminates these other trade distortions, the U.S. trade deficit and related job losses will continue to grow rapidly…The U.S.-China trade relationship needs a fundamental change. Addressing the exchange rate policies and labor standards issues in the Chinese economy is an important first step. It is time for the administration to respond to the growing chorus of calls from economists, workers, businesses, and Congress and take action to stop illegal currency manipulation by China and other countries.” If elected representatives will not serve the interests of the American people, then they need to be replaced by ones who will in the next election!

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Will Countervailing and Anti-Dumping Duties Help or Hurt America’s Solar Industry?

Tuesday, July 24th, 2012

The answer to this question depends on what role you play in America’s solar industry ? manufacturer, distributor, or retail installer ? and what China will do in retaliation.

In May 2012, ChinaGlobalTrade.com, a program of non-profit organization The Kearny Alliance, released a well-researched and well-documented report titled “China’s Solar Industry and the U. S. Anti-Dumping/Anti-Subsidy Trade Case. The purpose of the report is to “present a balanced, fact-based discussion of the trade case; an exploration of how China’s solar industry has grown so big so fast; and a thorough analysis of what might be the consequences – many of them likely unintended – of likely outcomes of this trade case” to encourage readers to look at the issue from new angles.

As background to the case, the report presents these facts about the global solar industry:

  • On-grid installation of solar photovoltaic (PV) systems grew an average of 45 percent per year on average between 2003 and 2009, driven mainly by government policies in Germany, Spain, Italy, Japan, and the U.S. “These policies are designed, in one way or another, to subsidize the cost of solar power so that it is competitive with other on-grid electricity sources.”
  • Global production of solar PV systems rose dramatically in the last decade – from 371 megawatts in 2001 to more than 24 gigawatts in 2010, an increase of 6,376 percent.
  • The price of solar cells and modules started declining rapidly beginning in 2008 from about $3.30 per watt in 2008 to about $1.80 per watt at the beginning of 2011 and $1.00 per watt at the end of 2011. The price is projected to fall to $0.74 per watt by 2014.

During this time period, China’s growth in solar manufacturing was rapid. “In 2001 China produced 1 percent of the world’s solar cells and modules. By 2010 it produced nearly half. Today, four of the top 5 solar cell producers are Chinese; three of the five module producers are. Of the top fifteen solar cell manufacturers in 2010, six were Chinese companies. Two were American. Of the fifteen solar module manufacturers in 2010, eight were Chinese. One was American.”

Estimates of the cost advantage of Chinese cell and module manufacturers compared to their U.S. counterparts range from about 18 percent to 30 percent, but GTM Research analyst, Shyam Mehta, estimates the cost differential to be about 25 to 30 percent in 2012.

As a result of this loss in market share by American companies, in October 2011 an anti-dumping and anti-subsidy trade case was filed by SolarWorld Industries America, the U.S. division of German manufacturer SolarWorld AG, and six other U. S.-based solar manufacturers with the U. S. International Trade Commission and Department of Commerce to seek relief for U. S. producers injured by Chinese imports of crystalline silicon photovoltaic (CSPV) products.

The report says “the stakes are high. For one thing, countervailing (anti-subsidy) duties, if high enough, could dramatically affect the solar industry in the U.S. and around the world, as could anti-dumping tariffs. There are potentially severe unintended consequences of any policy action in this case – or inaction, for that matter.”

On March 20, 2012, U.S. Department of Commerce announced its preliminary determination in the countervailing duty (anti-subsidy) investigation. Chinese companies received preliminary countervailing duties ranging from a high of 4.73 percent for Trina Solar down to 2.90 percent for Suntech Power, with all other Chinese producers at 3.61 percent.

The report states that “Chinese reaction to the preliminary countervailing duties was relatively mild. Two Chinese trade groups asked the China Ministry of Commerce (MOC) to start an investigation against U.S. into dumping and illegal subsidies. However, the Chinese reaction to the May 17th preliminary anti-dumping determination, in which the Department of Commerce found that Chinese manufacturers dumped solar cells on the U. S. market and assessed tariffs of about 31 percent, was very different.

The report states that the reactions to this case could have significant ramifications for the global solar industry and presents several potential reactions by China.

  • China could remove its subsidies and stop dumping – the precedent for this is that when the U.S. Trade Representative (USTR) launched an investigation into export restraints, subsidies, and discrimination against foreign companies for imported goods by China in green technologies in October 2010, the pressure from the petition led China to remove local content requirements for wind technology.
  • Chinese manufacturers could retaliate in a number of ways against the imposed tariff, which is “why only three of the seven companies behind the petition have named themselves publicly (and two of those only after the preliminary countervailing duties were announced).”
  • Chinese manufacturers could ramp up their own production of polysilicon (which they have already begun doing) and turn to Germany and Switzerland to fill the equipment gap – effectively cutting out the U.S. firms that are still competitive in the solar supply chain.
  • Chinese firms could move cell manufacturing to Taiwan, which the authors of the report feel “could be their best solution because it would allow Chinese manufacturers to keep their upstream supply chains intact…Then, they could assemble the modules anywhere in the world ? in Taiwan, in China, in Mexico, or in the end-use country.”

According to Melanie Hart, Policy Analyst for Chinese Energy and Climate Policy at the Center for American Progress, “Retaliation can also spread beyond the actual petitioners to harm the U.S. economy more broadly.” China could block market access for U.S.-based firms in other cleantech industries.

Tom Zarrella, a former chief executive of GT Solar, a New Hampshire supplier of solar manufacturing equipment, said, “It would be a travesty for the solar industry.” The U.S. is still an important supplier of polysilicon, as well as CSPV manufacturing equipment.

In addition, Chinese solar manufacturers could ramp up production in the U.S. similar to how trade cases against Japanese automakers in the 1970s and 1980s pushed Japanese companies into building factories in the U.S. “Chinese solar manufacturer Canadian Solar already said that would be one possible response to countervailing duties and anti-dumping duties in this case too.”

However, this would not be a way for Chinese manufacturers to circumvent tariffs because the trade case applies to Chinese-made cells as well as modules comprised of Chinese-made cells, no matter where those modules are assembled. To avoid the tariffs, Chinese manufacturers would have to locate not just module assembly plants but cell production facilities in the United States as well.

The trade case “will only accelerate the setting up of solar module and solar cell manu-facturing in the United States,” said the president of Grape Solar, a company based in Eugene, Ore., that is a big importer of solar panels from China, Korea and Taiwan, as quoted in the New York Times. Grape Solar has already been in discussions with big Chinese panel makers on ways to move more manufacturing to the United States.”

The report states that around 100,000 Americans are employed in the solar industry in the U.S with about 24,000 manufacturing, including manufacturers of equipment and polysilicon producers. About 50 percent work in installation, construction, and engineering; another 18 percent in sales and distribution. Of the 24,000 people who work in solar manufacturing in the U.S., just about 5,000 manufacture cells or modules that compete with those made in China (and are the subject of the trade case).

Adam Hersh, Economist at the Center for American Progress, argued that if Chinese producers have an unfair advantage, it will undermine the world’s transition to renewable energy as a source of power. “If the producers are being given unfair advantages in China it’s going to undermine innovation in the sector of renewable energy infrastructure and will set back the pace of our transition to using sources of renewable energy. That’s why it’s so important to have a level playing field in this…There are some who argue that we should let in these subsidized, dumped products from China because it makes it cheaper to install and build out renewable energy here in the U.S. But that is a very shortsighted view of the dynamics of the industry. We need to have the innovation competition which will allow us to scale up and produce the most efficient and next generation of solar and other renewable energy sources going forward.”

The main petitioner in the trade case is SolarWorld Industries America, the U. S. division of a German company. SolarWorld operates factories in the United States and Germany and has been the largest U.S. solar panel manufacturer for more than 35 years. SolarWorld is the only vertically integrated company left in the U. S., meaning that it combines all stages of the photovoltaic value chain, from the raw material silicon to turn-key solar power plants. SolarWorld has its U.S. headquarters in Hillsboro, Ore. and a second plant located in Camarillo, Calif.

The other top American company is First Solar that “manufactures thin-film cells and modules (not crystalline silicon photovoltaics) and held the top spot among solar cell and module manufacturers in 2009. It is still the world’s largest producer of thin-film solar modules, accounting for more than 40 percent of world output. First Solar is headquartered in Tempe, Arizona, but the “lion’s share” (68 percent in 2010) of its output is produced in Malaysia.”

The main target of the anti-subsidy and anti-dumping trade case is Chinese company, Suntech Power, which was the world’s biggest producer of solar cells and solar modules in 2010. The company was founded in 2001 by Dr. Shi Zhengrong, who had been a research director of Pacific Solar Pty., Ltd., an Australian PV company. Suntech built its first manufacturing plant in the U.S. in Goodyear, Arizona in 2010, making it the first Chinese cleantech company to set up a manufacturing facility in the U.S. The 50 MW module assembly plant enables Suntech to label solar modules assembled there as “made in U.S.A.” As a result, Suntech now qualifies for federal “Buy American” subsidies.

Andrew Beebe, Chief Commercial Officer at Suntech, wrote an op-ed in the Wall Street Journal stating, “the fact that 95 percent of U.S. solar-related jobs are outside of cell or module manufacturing, is the reason why “many large and small U.S. solar industry leaders – including AES Solar, Dow Corning, Grape Solar, GroSolar, GT Advanced Technologies, MEMC/SunEdison, REC Silicon, Rosendin Electric, SolarCity, Swinerton and Verengo Solar – have banded together in the Coalition for Affordable Solar Energy to oppose tariffs and defend free trade. They not only represent American consumers; they represent thousands of American manufacturing jobs and 95% of all American solar-industry jobs.”

The Coalition for Affordable Solar Energy (CASE) states that punitive tariffs against Chinese cell imports could affect solar PV sellers, distributors, and installers and the 76,000 Americans they employ in a number of ways. The imposition of tariffs could cause costs to increase and cause demand for solar products to decline, which would result in an associated reduction in American jobs in areas like installation, construction, engineering, sales, and distribution.

This report makes clear that “China’s solar cell and module manufacturers are highly competitive for many more reasons than having received subsidies on the order of 3-5 percent. Chinese manufacturers will still have the scale, the vertical integration, the discounted materials and equipment, and the low labor costs that allow them to sell cells for significantly less than their American competitors…And they will still have the significant support of the Chinese government’s industrial policy.”

The report then considers actions the U.S. or U.S. manufacturers could take that would help improve their competitiveness in the global solar industry. According to Shyam Mehta, Senior Analyst at GTM Research, Western and Japanese crystalline silicon manufacturers will never beat China at the CSPV game because China has such lower costs. He said that the future lies in either differentiated technology or a new business model. They must either:

  • Commercialize a revolutionary technology at high scale that lowers the PV cost curve. China has had no success developing non-crystalline silicon PV technology. Elsewhere, there is only one notable semi-success, and that is First Solar thin-film technology; or
  • Find a different business model. For example, First Solar and SunPower build and operate solar farms, and have done so successfully in the U.S. The advantage of building and operating solar power plants is that then the company has a dedicated sales channel that insulates its profit margins against China’s low-cost panels.

Others suggest that the U.S. develop an industrial policy and develop U.S. incentives to level the playing field. At present, the scale of Chinese incentives dwarf U.S. efforts. Access to capital is a critical compliment to the United States’ capacity to innovate.” To that end, the SEMI PV Group recommends:

  • Large, long-term, stable, market-side support policies, including a national Renewable Clean Energy Standard (RES), state Renewable Portfolio Standards, buyer incentive programs, and sales and property tax credits;
  • Maintain the Investment Tax Credit (ITC) through 2016;
  • Extend the Section 1603 Treasury Grant Program that has provided a grant in lieu of the advanced energy investment tax credit (ITC);
  • Increase Department of Energy funding for both R&D and manufacturing infrastructure development of the U.S. solar industry;
  • Establish the R&D tax credit on a long-term basis to assure solar manufacturers greater consistency in tax and investment planning;
  • Revive the Advanced Energy Manufacturing Tax Credit (MTC), and creation of a federal Green Bank to supplement PV and other green energy projects, particularly for manufacturing; and
  • Work with foreign counterparts and the WTO to develop a strong, effective and enforceable rules-based international trading system that promotes free and open trade.

“We need to make sure we are investing in the foundations of innovation here in the United States to give our companies the policy environment they need to remain competitive against a rising China…we have to make sure that we do not cede critical American jobs to the Chinese – in solar manufacturing as in other U.S. industries – just because we were lax on the policy side,” argues Melanie Hart, Policy Analyst for Chinese Energy and Climate Policy at the Center for American Progress.

Speaking at the Conference on the Renaissance of American Manufacturing, Gordon Brinser, President of SolarWorld Industries America, said that the U.S. must respond more quickly when there is evidence that China is violating international or domestic trade laws. Brinser recommended some specific policy improvements:

  1. The administration’s new trade unit should closely monitor import data for early signs of market distortions spurred by foreign governments;
  2. Our trade agencies must look hard at ways to preserve an open, transparent process for trade cases but in fewer steps and less time;
  3. They also must, in conjunction with U.S. Customs, aggressively find ways to anticipate and stop circumvention of trade remedies and theft of intellectual property;
  4. The government should bring legitimate cases for industries that are too small or injured to afford them; and
  5. The government must shed light on foreign companies that raise capital on U.S. exchanges and then withhold audit information from securities regulators.

I believe implementing these recommendations would benefit American manufacturers in all industries. The solar industry has not been the only target of Chinese “dumping.” We must enforce international and domestic trade laws to protect our entire manufacturing industry if we ever want to revive our economy and create more American jobs.

Posted in Cleantech, Energy, Manufacturing, Outsourcing | No Comments »

Does this book hold the key to Restoring American Prosperity?

Tuesday, June 26th, 2012

Every day Americans face choices on what products to buy to meet their every day needs.  A 2010 Harris poll, showed three in five Americans (61%) say they are more likely to purchase something when the ad touts it is “Made in America.”  Recently, an ongoing poll on www.ewednewz shows that 61 percent say they would buy American products if they existed.

Take a look at what you have in your own home and check the country of origin label.  If you have set up your residence in the last 15 years, it is likely that most everything was made somewhere else besides America.  It is highly likely that the majority of the products were “Made in China” because so much of the manufacturing of consumer products has been shifted offshore to Asia, especially China.

As our country slogs along in a recession that has never ended for many, more and more Americans are realizing that making and buying products made in America is essential to strengthening our economy, creating jobs and balancing our trade deficit.

San Diego entrepreneur and businessman, Alan Uke, has written a book, Buying American Back:  A Real-Deal Blueprint for Restoring American Prosperity, that provides a simple solution that “puts control in the hands of American consumers to make powerful buying choices to boost our economy and create jobs,” as well as reduce our trade deficit.

Mr. Uke is the founder and president of Underwater Kinetics, which he started 41 years ago as a sophomore at the University of California San Diego.  He holds more than 40 patents, and the majority of his SCUBA diving and his industrial lighting products are exported to more than 60 countries.

In his introduction, he writes, “Our future as a nation and as individuals is being threatened.  Since our spending habits as consumers have contributed to this situation we can change our spending habits to reverse it… in order for a change to happen, consumers must demand to be more honestly and completely informed about what they are buying and where their money goes.  To this end, we are starting a consumer movement to bring this to the attention of Congress…The goal of this movement and of this book is to encourage people to change their buying habits toward purchasing things that help the U. S. economy and job situation.”

In chapter 1, Mr. Uke states that because consumer spending makes up 70% of the U. S. economy, we consumers have been encouraged to spend in order to spur the economy.  The problem is that when the majority of the consumer goods we buy are imported, our shopping doesn’t support our own economy and create jobs.  Our money goes to support the economies of foreign countries.  Mr. Uke writes, “In order to support our economy and American industries, we must have easily accessible, clearly communicated, and truthful information about a product’s entire origins.”

In chapter 2, Mr. Uke shares his perspective as a business owner stating that “despite the challenges and the heartache, I like making my products in the U. S. because I want to help our country.”  He could move his production to Asia like many of his competitors, but he wants to keep his factory here in America, see more companies return, bringing jobs back with them, and see the American worker regain security and prosperity.  As I have pointed out in my book and previous articles, he writes that “U. S. factories lost 5.2 million jobs from 2000 to 2010” while large, multinational corporations hired 2.4 million workers at their oversees operations.

In chapter 3, “The Importance of Manufacturing in America,” I really like his illustration of the jar of marbles that we as a nation have to use to trade with.  When we buy something within the U. S., the marbles stay in the jar, but when we buy something from another country, the marbles go out of the jar.  If they buy from us in the same amount that we buy, then the number of marbles in the jar stays the same, but if we buy more than they buy, our jar of marbles begins to empty.  Our jar is becoming empty because in 1960, only 8% of the manufactured consumer products Americans purchased were imported, but today 60% are imported.   Our deficit with China alone reached $260 billion in 2010, and the Department of Commerce estimates that each $1 billion in trade deficit translates to about 13,000 lost jobs.  Manufacturing jobs now only make up 9% of the American workforce.

Imports to the U. S. now represent 17% of the gross domestic product (GDP) while manufacturing’s share of the U. S. GDP has dropped to 11.5%.  Alan quotes economist Ian Fletcher, who stated, “We could quite literally export our entire manufacturing output and still not balance our trade,” and concludes that “we are importing almost 25% more than we are exporting.”

Mr. Uke emphasizes that he isn’t against trade because “it’s good for business,” “good for foreign relations,” and good for development in all sectors of the economy.”  However, it’s important for us to have balanced trade because “in 2010, each person’s share of the annual trade deficit adds up to about $2,700.”   He comments that “creating free-trade agreements around the world are devastating for our country because they only benefit big businesses that can boost their profit margins by replacing our American workforce.”

In chapter 4 on “How Competing Countries are Succeeding,” Mr. Uke provides insights into how Germany, Japan, and South Korea have managed to keep a strong manufacturing base and successfully export more manufactured goods than they import.  One of the key factors is that consumers in these countries prefer to buy products made in their own country even if they cost more than imports.

Chapter 7, “The Label Game,” discusses the fact that current information provided on country of origin labels is “misleading, incomplete, inaccessible, or all of these.”    In order to have a “Made in USA” label, a product has to be “substantially all” made in the USA, defined as follows by the Federal Trade Commission:

  • “The product was last substantially transformed in the United States and U. S. manufacturing costs are at least 75% of the total manufacturing costs; or
  • The product was last substantially transformed in the United States and all significant parts or components of the product were last substantially transformed in the United States.”

The vagueness and looseness of these definitions have led companies to intentionally mislead the public with brand names that imply that the product was made in one country when it was actually made in another, such as expensive “American Girl” dolls that are actually made in China.  Labels that say “assembled in the United States from domestic and foreign components” are even more confusing and vague.

It’s even worse for consumers who purchase products online or from catalogs ? no information on country of origin is required to be provided.  It is estimated that 11% of all retail sales will be Internet sales by 2015.  A few companies, such as Levi Strauss, Patagonia, and Nike provide the locations of manufacturing plants around the world on their websites, and New Balance goes a step further in providing a comprehensive listing “detailing exactly which of its shoes are made in the United States, which ones are assembled or only partially made in the U. S., and which ones are entirely imported.”  Mr. Uke recommends that consumers be provided the country of origin information they need at the point of sale whether at a store or online.

In chapter 6, Mr. Uke presents his proposal for the U. S. government to require detailed country-of-origin labels for all manufactured products similar to the nutritional information labels now required on packaged food products.  These labels now list all ingredients, the nutritional information about the food, and the possible presence of eight of the most common allergens in the product.    He feels that it is important for consumers to not only “see the last place where the product was manufactured. You should be able to discern what portion of its components came from other places.”

So far the only industry that provides detailed country of origin information is the automobile industry.  The American Automobile Labeling Act of 1992 “requires all cars to  have labels displaying the percentage of American/Canadian parts content, the country of its assembly, as well as the country of origin of the engine and transmission…Any car with less than 70% American/Canadian content is classified as an “import.”

Chapter 7 describes what “The Transparent Label” would be:  one that would include the cost by country of origin by both percentage and trade ratio, as well as the location of the company’s headquarters.  The percentage is the total cost of the product that is produced or transformed in a particular country.  The trade ratio describes the amount of exports vs. imports for a country in relation to the United States.  “A healthy, balanced trade ratio is close to 1.0” ? equal exports to imports.  A number more than one means more U. S. exports to that country than imports from that country, and a number less than one means more imports from that country than U. S. exports to that country.   Part Two of the book provides information on our major trading partners by detailing the state of their manufacturing and what kind of trade balance we have with that country.  For example, we have a balanced trade relationship with New Zealand at 1.02, Switzerland at 1.06, and the United Kingdom at .97 whereas our balance with China is .25.

According to Mr. Uke, accessibility is just as important as accuracy.  A consumer shouldbe able to review this data before making a purchase whether it is in a store, online, or through a catalog.    Since manufacturers succeed by providing products that consumers want to buy, the “ultimate goal is to apply consumer pressure on companies in order for them to see a direct, profitable benefit in relying on American labor and components.”

Accurate labeling of the percentage of the product that is attributable to the U. S. will benefit manufacturers because consumers can select products that have the highest content of American parts and labor even if it doesn’t qualify for a “Made in USA” label under current law.

The last chapter shows how Americans can make every dollar count by choosing what products to buy.  Mr. Uke writes that “it is really, we, the consumers, who are the power that can initiate the change…This power is located in the sum of our buying decisions.  Our climb back to the top begins with where you spend your next dollar.”

If every American would make the decision to buy American products and avoid imports from countries with which we have a deficit trade balance, we could make a real difference in our nation’s economy.  That’s why Mr. Uke has called on Congress to pass a resolution to make July 1 to 7 “Buy American Week.”  Whether or not this resolution passes, I urge every American to make a personal resolution to “buy American” that week and continue doing so thereafter.

Posted in Economy, Manufacturing, Outsourcing | 1 Comment »

Senate Report Reveals Extent of Chinese Counterfeit Parts in Defense Industry

Tuesday, May 29th, 2012

On May 21, 2012, the Senate Armed Services Committee released a report on counterfeit parts in the Department of Defense supply chain.  The Committee discovered counterfeit electronic parts from China in the Air Force’s C-130J and C-27J cargo plane, in assemblies used in the Navy’s SH-60B helicopter, and in the Navy’s P-8A surveillance plane, among 1,800 cases of bogus parts.

“The systems we rely on for national security and the protection of our military men and women depend on the performance and reliability of small, incredibly sophisticated electronic components.  Our fighter pilots rely on night vision systems enabled by transistors the size of paper clips to identify targets.  Our soldiers and Marines depend on radios ad GPS devices, and the microelectronics that make them work, to stay in contact with their units and get advance warning of threats that may be around the next corner. The failure of a single electronic part can leave a soldier, sailor, airman, or Marine vulnerable at the worst possible time,” the report says. “Unfortunately, a flood of counterfeit electronic parts has made it a lot harder to prevent that from happening.”

The year-long investigation launched by Sen. Carl Levin, D-Mich., the committee’s chairman,and Ranking Member Sen. John McCain, R-Ariz., found over a million suspect counterfeit parts involved in those 1,800 cases.

“Our report outlines how this flood of counterfeit parts, overwhelmingly from China, threatens national security, the safety of our troops and American jobs,” Levin said. “It underscores China’s failure to police the blatant market in counterfeit parts – a failure China should rectify.”  The Chinese government denied visas to Committee staff to travel to mainland China as part of the Committee’s investigation.

The investigation revealed that China was the dominant source of counterfeit electronic parts ? more than 70 percent of the parts tracked were traced to China, coming from more than 650 companies.  Counterfeit parts included unauthorized copies of an authentic product and previously used parts that were made to look new and sold as new.  The parts often change hands multiple times before being bought by defense contractors, who may know little about the source of the parts they buy, the report said.

“Our committee’s report makes it abundantly clear that vulnerabilities throughout the defense supply chain allow counterfeit electronic parts to infiltrate critical U.S. military systems, risking our security and the lives of the men and women who protect it,” said McCain. “As directed by last year’s Defense Authorization bill, the Department of Defense and its contractors must attack this problem more aggressively, particularly since counterfeiters are becoming better at shielding their dangerous fakes from detection.”

In November 2012, the Committee held a hearing on the investigation’s preliminary findings.  Following that hearing, Committee Chairman Carl Levin and Ranking Member John McCain offered an amendment to the National Defense Authorization Act for Fiscal Year 2012 to address weaknesses in the defense supply chain and to promote the adoption of aggressive counterfeit avoidance practices by DOD and the defense industry. The amendment was adopted in the Senate and a revised version was included in the final bill signed by President Obama on December  31, 2011.

The law requires the Secretary of Defense to conduct an assessment of Department of Defense acquisition policies and systems for the detection and avoidance of counterfeit electronic parts not later than 180 days after the date of the enactment of the Act to:

  • establish Department-wide definitions of the terms “counterfeit” or “suspect counterfeit electronic part”
  • issue guidance regarding “training personnel, making sourcing decisions, ensuring traceability of parts, inspecting and testing parts, reporting and quarantining counterfeit electronic parts and suspect counterfeit electronic parts, and taking corrective actions (including actions to recover costs…”
  • issue or revise guidance “on remedial actions to be taken in the case of a supplier who has repeatedly failed to detect and avoid counterfeit electronic parts or otherwise failed to exercise due diligence in the detection and avoidance of such parts, including consideration of whether to suspend or debar a supplier until such time as the supplier has effectively addressed the issues that led to such failures.”
  • require contractors or subcontractors that suspect a counterfeit part provide “a report in writing within 60 days to appropriate Government authorities and to the Government-Industry Data Exchange Program
  • “establish a process for analyzing, assessing, and acting on reports of counterfeit electronic parts and suspect counterfeit electronic parts” that are reported.
  • Require the Secretary to revise the Department of Defense Supplement to the Federal Acquisition Regulation to address the detection and avoidance of counterfeit electronic parts not later than 270 days after the date of the enactment of this Act.

The law includes provisions to help stop counterfeit electronic parts before they enter the U.S, strengthens the inspection regimen for imported parts, and gives the government wider berth in seeking assistance from the private sector in determining whether parts are authentic.  It also requires that contractors or subcontractors “obtain electronic parts that are in production or currently available in stock from the original manufacturers of the parts or their authorized dealers, or from trusted suppliers who obtain such parts exclusively from the original manufacturers of the parts or their authorized dealers manufacturers or authorized distributors.”

The investigation revealed that the defense industry also has routinely failed to report cases of suspected bogus parts.  For example, the majority of the 1,800 cases involving counterfeit parts appear to have gone unreported to the DOD or criminal authorities.  Boeing failed to report a case of a suspect counterfeit part used in the Navy’s P-8A surveillance airplane until the Senate Armed Services Committee began inquiring, the report said.  And L-3 Communications didn’t report the suspect memory chip to the Air Force until the day before the committee’s staff was scheduled to meet with the Air Force program office responsible for the program.

The Committee’s report includes detailed descriptions of how counterfeits are flooding the supply chain, risking the performance and reliability of critical defense systems. In just one example described in the report, the U.S. Air Force says that a single electronic parts supplier, Hong Dark Electronic Trade of Shenzhen, China, supplied approximately 84,000 suspect counterfeit electronic parts into the DOD supply chain. Parts from Hong Dark made it into Traffic Alert and Collision Avoidance Systems (TCAS) intended for the C-5AMP, C-12, and the Global Hawk.  In addition, parts from Hong Dark made it into assemblies intended for the P-3, the Special Operations Force A/MH-6M, and other military equipment, like the Excalibur (an extended range artillery projectile), the Navy Integrated Submarine Imaging System, and the Army Stryker Mobile Gun.

The Armed Services Committee reached the follow conclusions on counterfeit parts:

Conclusion 1: China is the dominant source country for counterfeit electronic parts that are infiltrating the defense supply chain.

Conclusion 2: The Chinese government has failed to take steps to stop counterfeiting operations that are carried out openly in that country.

Conclusion 3: The Department of Defense lacks knowledge of the scope and impact of counterfeit parts on critical defense systems.

Conclusion 4: The use of counterfeit electronic parts in defense systems can compromise performance and reliability, risk national security, and endanger the safety of military personnel.

Conclusion 5: Permitting contractors to recover costs incurred as a result of their own failure to detect counterfeit electronic parts does not encourage the adoption of aggressive counterfeit avoidance and detection programs.

Conclusion 6: The defense industry’s reliance on unvetted independent distributors to supply electronic parts for critical military applications results in unacceptable risks to national security and the safety of U.S. military personnel.

Conclusion 7: Weaknesses in the testing regime for electronic parts create vulnerabilities that are exploited by counterfeiters.

Conclusion 8: The defense industry routinely failed to report cases of suspect counterfeit parts, putting the integrity of the defense supply chain at risk.

Of course, China denies any culpability.  On May 25, 2012 an article appeared in China Defense News that stated, “The U.S. government has found yet another reason to ignore its own problems and bash China, this time accusing the country of compromising national security via the manufacture of counterfeit electronic components used by the U.S. military…The accuracy of the claims is questionable at best, but bigger questions should be answered first: how did counterfeit parts end up slipping into the U.S. military system in the first place? And for what purpose were the parts originally shipped for?

The U.S. has maintained a military embargo on China for 23 years. Military components and weapons aren’t supposed to be officially traded between the two countries to begin with. Taking this into consideration, the U.S. ought to find out precisely who purchased the parts and how they passed muster before accusing China of wrongdoing.”

I answered the question of how counterfeit parts ended up “slipping into the U. S. military system in the first place” in my blog article last fall, titled “What Led to the Problem of Chinese Counterfeit Parts.”  I detailed the following four main reasons for the problem of Chinese counterfeit parts:

  1. Mil. Spec. qualified components replaced by off the shelf components by allowing use of “dual use technology” of commercial components
  2. Relaxing “Buy American” requirements for Federal procurement
  3. American companies sourcing manufacturing offshore, mainly in China
  4. Rapid obsolescence of components, especially micro chips

The provisions of the National Defense Authorization for FY 2012 don’t directly address these four main reasons for the counterfeit part problem.  This is another typical example of Congressional legislation where they attempt to have their cake and eat it too by seeming to crack down on counterfeit parts while not endangering U. S. corporate investments in China.  In order not to anger their big political donors, who include some of the corporations that export our jobs to China, they place the burden of identifying and reporting counterfeit parts on contractors and subcontractors instead of addressing the root causes I have listed above.

The new Federal procurement regulations being drafted by the Department of Defense are supposed to “address the detection and avoidance of counterfeit electronic parts,” but there has been no mention of eliminating “dual use technology” of commercial parts for military/defense applications.  And, there has been no discussion of tightening or strengthening the “Buy American” requirements for Federal procurement to what they were prior to 1993.

Worst of all, there has been no action by Congress on addressing the trade and tax laws that currently incentivize American manufacturers to continue to offshore manufacturing in China and other foreign countries.  Congress must act to eliminate the incentives for offshoring and provide incentives for bringing manufacturing back to America.  Until these root causes are addressed, we will continue to have counterfeit parts slip into the military/defense procurement system and endanger the lives of our military personnel and threaten our national security.

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Posted in Economy, Manufacturing, National security, Outsourcing, Trade Policy | No Comments »

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