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What do Manufacturers Need to Succeed and Grow?

Tuesday, November 12th, 2024

Now that we have re-elected President Trump for a second term to work on achieving his goal of Making America Great Again, it’s time to focus on how to rebuild America’s manufacturing industry because we can’t be great again without a strong domestic manufacturing industry.

My book, Rebuild Manufacturing – the Key to American Prosperity, provides detailed ways to rebuild American manufacturing based on my over 40 years in the manufacturing industry.  As a start on the path to rebuilding American manufacturing, here are a few suggestions on what manufacturers need to succeed and grow:

 Restoration of Patent Rights

 Manufacturers mainly fall into one of three groups:

 Original Equipment Manufacturers – selling a finished product such as a motor vehicle, ship, airplane, satellite, etc.

Suppliers – manufacturing a component, subsystem, or assembly for a finished product, such as a motor, power supply, semiconductor, etc.

Fabricators – perform a manufacturing process to make a particular part or assembly for a finished product such as an enclosure, bracket, panel, gasket, seal, etc. 

During my career, I have worked for OEMs and suppliers, but currently represent fabricators as a sales rep.  Each of these manufacturers requires a unique selling point (USP) or unique value proposition (UVP) that is part of a company’s marketing strategy to inform customers about how their brand, product, or service is superior to its competitors.

One or more patents are often an important component of the USP/UVP for products, components, and subsystems incorporating new technologies. While fabricators rarely have patents, many have trade secrets covering their manufacturing processes.

 My previous blog articles have shown how patent rights have been eroded by the America Invents Act (AIA) of 2011 and why patent rights must be restored to help technology-based companies have the strong patent protection they need to be successful. The threat of having their patent invalidated by the Patent Review and Trial Board (PTAB) established by the AIA is discouraging inventors from applying for a patent, and they are going to other countries to get their patents.  In addition, the lack of secure patent rights is also hindering the willingness of angel investors to invest in new technologies for startup companies. We must also continue to protect trade secrets because China uses espionage to steal both patented technologies and trade secrets.

 Protection from Unfair Trade Practices

In an increasingly interconnected global economy, American manufacturers face significant challenges, particularly from China’s trade practices. As concerns over unfair trade continue to rise, it’s crucial to understand the implications these practices have on U.S. businesses and the broader economy. Common examples of mercantilist trade practices by China are:  currency manipulation, rampant intellectual property theft, product dumping (selling products at below-market prices), and government subsidies for Chinese companies.  These unfair trade practices have created an uneven playing field. According to the U.S. Trade Representative, these practices have contributed to a substantial trade deficit with China, severely impacting American manufacturing sectors.

 Several industries have borne the brunt of these practices. For instance, the U.S. steel industry has faced aggressive pricing from Chinese manufacturers, which has led to factory closures and job losses across the country. In the textile sector, similar patterns have emerged, where Chinese imports flood the market at prices that domestic producers cannot match, resulting in significant downturns in American jobs.

The U.S. government has implemented various measures to counteract these unfair practices, such as tariffs and trade negotiations to foster fair competition. Addressing unfair trade practices is essential for the survival and growth of American manufacturing. We need fewer imports and more domestic production. Now is the time to take a stand and implement strategies that ensure a fair playing field for American manufacturers. The following strategies should be considered:

  • Establish Tariffs on all Chinese Products – read my previous article on “Why we Need Tariffs on Chinese Products”
  • Strengthening Enforcement of Trade Laws: Increasing the capacity of trade enforcement agencies to investigate and combat unfair practices can deter such actions.
  • Promoting Domestic Production: Incentives for manufacturers to produce locally can help rebuild industries affected by unfair competition.

 Access to Affordable Energy

In the modern manufacturing landscape, access to affordable energy is not just a necessity; it is a fundamental pillar of success. As industries strive to remain competitive in a global market, the cost of energy can significantly impact operational efficiency, profitability, and innovation. Energy costs represent a substantial portion of manufacturing expenses. From powering machinery to heating facilities, energy consumption is intrinsic to production processes. When energy prices rise, manufacturers face difficult choices: pass costs onto consumers, reduce labor, or cut back on investment in technology and innovation. These decisions can hinder growth and competitiveness.

Lower energy costs can lead to reduced overall production expenses, enabling companies to offer more competitive pricing and improve profit margins. For example, industries such as steel and chemicals, which are energy-intensive, benefit tremendously from stable, low-cost energy sources. This advantage can be a deciding factor for companies considering where to locate new facilities or expand existing operations.

Affordable energy is also crucial for fostering innovation. Manufacturers need access to reliable energy sources to invest in new technologies and processes that enhance efficiency and reduce waste. By keeping energy costs low, regions can attract and retain manufacturing businesses, leading to job creation and economic development.

Access to affordable energy is vital for the health and growth of the manufacturing industry. It influences operational efficiency, competitive advantage, innovation, and job creation. Policymakers, industry leaders, and communities must work together to foster an environment where affordable energy is a reality for all manufacturers.

 Reasonable Corporate Tax Rates

Tax policies that govern businesses can significantly influence manufacturers’ operational success and growth potential. Reasonable corporate tax rates are essential not only for maintaining profitability but also for fostering innovation and job creation.  Manufacturers often operate on thin margins, making it crucial to manage costs effectively. Lower tax liabilities provide manufacturers with the capital needed to expand operations, upgrade equipment, and develop new products.

High corporate tax rates can place an additional financial burden on these businesses, reducing their ability to reinvest profits into operations, technology, and workforce development. When manufacturers are forced to allocate a significant portion of their earnings to taxes, they may struggle to remain competitive, especially against international rivals with lower tax obligations. In a global marketplace, manufacturers often compete not only with domestic companies but also with foreign firms that may benefit from more favorable tax regimes.

By implementing reasonable corporate tax rates, governments can level the playing field, allowing American manufacturers to compete effectively against their international counterparts. This is particularly important in industries where price competitiveness is key to success.

Reasonable corporate tax rates can stimulate investment in the manufacturing sector. For example, when businesses have more disposable income, they are more likely to invest in research and development, which is essential for driving innovation and maintaining a competitive edge in the market.

To support the manufacturing sector, policymakers must consider tax reforms that prioritize reasonable corporate tax rates. This can include reducing rates, closing loopholes that disproportionately benefit large corporations, and creating incentives for small and medium-sized manufacturers. A balanced approach to taxation can foster a more equitable environment that encourages growth and investment across the sector.

Reasonable corporate tax rates are crucial for the health and vitality of the manufacturing industry. They enable manufacturers to invest in growth, create jobs, and compete effectively on a global scale. As policymakers consider tax reforms, it is essential to recognize the significant role that reasonable taxation plays in supporting American manufacturers and, by extension, the broader economy. A commitment to fair corporate tax rates will help ensure a robust and thriving manufacturing sector for years to come.

Regulatory Relief in Manufacturing

The burden of overregulation can stifle the potential of manufacturers, hindering productivity and competitiveness. Overregulation refers to the imposition of excessive or unnecessarily complex rules and standards that can burden businesses. For manufacturers, compliance with these regulations often requires significant time, resources, and financial investment. This can divert attention away from core operations, stifling creativity and limiting growth opportunities.

Excessive regulations can make it difficult for U.S. manufacturers to keep pace with competitors who operate in more business-friendly environments. Lowering the regulatory burden can enhance competitiveness, allowing manufacturers to focus on innovation and efficiency.

The costs associated with compliance can be substantial. From hiring specialized staff to implementing new technologies for regulatory adherence, manufacturers often find their budgets stretched thin. This financial strain can lead to higher product prices, which may result in lost sales and reduced market share. A more streamlined regulatory environment can foster a culture of innovation, allowing companies to focus on creating cutting-edge solutions that meet market demands.

While regulations are essential for ensuring safety, environmental protection, and fair labor practices, it is crucial to strike a balance. Policymakers should engage with industry leaders to understand the unique challenges manufacturers face and develop regulations that protect public interests without imposing undue burdens. Streamlining regulatory processes, simplifying compliance requirements, and providing clarity in regulations can significantly benefit manufacturers. A collaborative approach to regulation that prioritizes both public welfare and the needs of manufacturers will pave the way for a robust and resilient manufacturing sector.

Manufacturing is not only vital for the U.S. economy but also plays a crucial role in driving innovation, job creation, and economic prosperity. Manufacturing provides millions of Americans with jobs, both directly in manufacturing plants and indirectly through supporting industries such as logistics, finance, and technology. Manufacturing has a vast supply chain that includes raw materials, components, and finished goods, supporting a wide range of businesses and services across the country. The manufacturing sector is a hub of innovation and research and development (R&D), driving technological advancements and creating new products and processes that can benefit various industries.

Manufacturing exports contribute significantly to the U.S. trade balance, helping to generate revenue and create a favorable balance of trade. The manufacturing sector often leads to economic growth by attracting investment, generating tax revenue, and increasing productivity. Most importantly, a robust manufacturing sector is essential for national security, as it ensures domestic production of critical goods and reduces reliance on foreign sources during times of crisis.

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Tax Cuts Act Hurts Small Corporations

Wednesday, January 30th, 2019

When we attended the Christmas party for one of the small fabrication companies we represent in December 2018, the owner announced that employee bonuses would be less this year because his corporate tax rate went up from 15% to 21%. As manufacturers sales representatives, we wondered if other small corporations were being similarly hurt.

When President Trump signed the Tax Cuts and Jobs Act on December 22, 2017, business and economic experts lauded the reduction in corporate tax rates as one way to help American companies be more competitive in the global marketplace. The National Association of Manufacturers and the U. S. Chamber of Commerce had long complained that the U. S. had the highest corporate tax rate in the world at 39.1 percent, which the Tax Foundation explained was “a combination of our 35 percent federal rate and the average rate levied by U.S. states.”

Doing research, I found an article titled “Trump’s Tax Plan and How It Affects You” on The Balance website.  I learned that the Act permanently cut the corporate tax rate from a progressive rate of 15 percent to as high as 35 percent down to a flat tax rate of 21 percent beginning in 2018, the lowest since 1939. Besides C corporations, the corporate tax rate also applies to LLC’s who have elected to be taxed as corporations. This rate does not apply to S corporations, partnerships or sole proprietorships, which are taxed at the personal tax rate, ranging from 10% to the new limit of 37%.

Most people didn’t realize that while the previous tax rate for corporations started at only 15%, and went up to 35 percent, the average “effective rate was 18.6 percent,” according to a 2017 report by the Congressional Budget Office.

At the Small Business & Entrepreneurship Council’s website, it states that “according to the Census Bureau’s Statistics of U.S. Businesses for employer C corporations in 2015, 99.0 percent of all business are small businesses” with fewer than 500 employees as defined by the Small business Administration; “96.4 percent of firms had fewer than 100” and “84.9 percent of firms had fewer than 20 employees.”

This means that the majority of C corporations paid tax rates well below the maximum tax rate of 35%. Therefore, the flat tax of 21 percent replacing is hurting low-earning corporations that were paying a lower rate and benefiting high-earning wealthy corporations.

The Balance website also states: “The Act allows companies to repatriate the $2.6 trillion they hold in foreign cash stockpiles. They pay a one-time tax rate of 15.5 percent on cash and 8 percent on equipment.”

The reason corporate monies need to be repatriated is that according to Wikipedia, “tax deferral is one of the main features of the worldwide tax system that allows U.S. multinational companies to delay paying taxes on foreign profits. Under U.S. tax law, companies are not required to pay U.S. tax on their foreign subsidiaries’ profits for many years, even indefinitely until the earnings are returned to U.S.”

Thus, repatriation benefited wealthy corporations because they are the ones that shifted manufacturing to subsidiary plants outside of the United States in the past 20 years. It is unlikely that any small business has a plant outside of the U.S., and thus wouldn’t have any profits stockpiled offshore to repatriate.

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

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

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

On January 24, 2019. the Coalition for a Prosperous America (CPA) released a Press Release stating that  a letter was sent to both the Senate Finance and House Ways & Means Committees asking “for consideration of both a destination-based Sales Factor Apportionment tax system (SFA) and a Strategic Goods and Services Tax (GST).”

A Goods and Services Tax (GST) is a strategic consumption tax, which would improve America’s trade competitiveness. The Release states: “Currently, foreign governments charge US exporters value-added (VAT) taxes—averaging 17 percent globally—at their borders. Most of these countries have reduced tariffs over the last 45 years—but replaced them with value added taxes. They use this new revenue to reduce other taxes and costs, and to fund national pension systems and health care. The US is virtually alone in not collecting value added taxes on imports.”

CEO Michael Stumo said, “Congress should fix this foreign trade advantage through an innovative and strategic consumption tax called a Goods and Services Tax…a 13 percent GST could raise $1.4 trillion in revenue and fund a full credit against payroll taxes, reduce personal income taxes, and provide a credit for healthcare costs. US companies would benefit from the cost reduction and receive a 13 percent GST rebate when exporting. Foreign companies would pay a 13 percent GST tax when bringing goods into the US.”

Stumo continued, “Tax reform can reduce our trade deficit, drastically reduce complexity and put even more Americans to work in good paying jobs. Congress should tax the profits and sales of all companies selling here and eliminate taxes on exports. The combination of an SFA and a strategic GST is the most pro-American tax system Congress could devise.”

It’s time that small American domestic corporations stop bearing the brunt of corporate taxes that benefit the large multinational enterprises.  Bi-partisan tax reform that benefits all Americans should be made a priority by our newly elected Congressional Representatives and Senators.

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

Thursday, May 31st, 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Posted in Currency Misalignment/Munipulation, Economy, Legislation, Manufacturing, National security, Taxes/Regulations, Trade Policy | No Comments »

How Tax Reform Could Grow our Economy and Create Jobs

Tuesday, September 19th, 2017

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

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

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

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

U.S. Local Price = $100

 

 China Local Price = $100

 
U.S. Price PLUS 17% VAT = $117.00

 

 Chinese Price MINUS 17% VAT rebate = $85.47

 

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

 

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

Eliminate Payroll Tax Burden with the most efficient VAT in world

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

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

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

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

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

In summary, the proposed GST would

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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“Eliminate the Trade Deficit” Resonates in Halls of Congress

Tuesday, March 21st, 2017

 “You were ahead of the curve on trade.” This was the common refrain heard last week by members of the Coalition for a Prosperous America who attended our annual fly-in to Washington, D. C. We had eight teams of members visiting Congressional Representatives and Senators on March 14th and 15th. As Chair of our developing California chapter, it was my fifth year attending the CPA fly-in, and our simple message of eliminating the trade deficit resonated well in the halls of Congress.

No one could deny that we have a huge deficit as shown on the chart below:

 

The annual trade deficit has reduced our U. S. GDP by some 3% to 5.5% each year, and those reductions compound over time.

There is no historical record of any other country in history running 41 years of consecutive trade deficits. Why is this important? Because every billion dollars of net imports costs 4,500 American jobs according to conservative estimates. So last year’s $502 billion deficit equates to 2.25 million jobs lost.

As a result, our Labor Force Participation is in serious decline. The U. S. is the only G7 nation with a DECLINE in LFPR since 1998 for workers ages 15-64. It peaked at 77.4% in 1998 and dropped down five points to 72.6% in 2015, meaning that over 7 million people dropped out of labor force since 1998.

The remedy recommended by the Coalition for a Prosperous America is simple: Congress should establish a national goal to eliminate the trade deficit.

Balanced trade over time is the goal of free trade and of fair trade. Balanced trade will re-industrialize our country, enable massive job creation, grow our wealth and effectively neutralize foreign mercantilism. Trade policy must address true drivers of deficit, these countries and their practices. Many of these countries have export-oriented growth strategies in which they rely upon the US market to consume their exports rather than increasing their internal consumption. China, Germany, Japan and other countries pursue net exports through strategic mercantilism, not free trade. Currency manipulation, value added taxes, state influenced enterprises, and other
tactics are used.

The following top 10 countries account for 90% of America’s 2016 goods trade deficit:

Rank Country 1992 Deficit 2016 Deficit Change 1992-2016
1 China -$18B -$355B -$337B
2 Mexico -$6B -$115B -$121B
3 Japan -$50B -$75B -$25B
4 Germany -$8B -$70B -$62B
5 Canada -$15B -$58B -$53B
6 Ireland +5B -$36B -$37B
7 Vietnam $0B -$34B -$34B
8 South Korea -$2B -$30B -$30B
9 Italy -$4B -$30B -$26B
10 India -$2B -$30B -$28B

Note: These figures are based on U.S. Commerce Dept. data subtracting Imports for Consumption from Domestic Exports which are intended to strip out goods that enter and leave the U.S. simply for re-export, without having any significant value added to them inside the U.S.

Currency manipulation and misalignment are key tactics that the above countries use to gain an advantage in trade. Currency manipulation is trade cheating, because it is both an illegal tariff and a subsidy.

Foreign governments intervene in foreign exchange markets by buying dollars. More than 20 countries have intervened in foreign exchange markets to undervalue their currencies in the past ten years. These countries account for one-third of the world economy and two-thirds of the world’s current account surpluses. Gagnon has calculated that “A country’s current account balance increases between 60 and 100 cents for each dollar spent on intervention.”

“The largest loser is the United States, whose trade and current account deficits have been $200 billion to $500 billion per year larger as a result. The United States has thus suffered 1 million to 5 million job losses.” (Bergsten, 2012) The U. S. economy cannot produce jobs and wealth without addressing this problem. The Coalition for a Prosperous America proposes the following solutions:

• U.S. trade enforcement law should treat currency undervaluation as a countervailable subsidy
• Tariffs should be applied against currency manipulators to neutralize their unearned advantage
• Government policy should pursue a dollar priced at equilibrium rather than accept a persistently overvalued dollar
• Trade agreements should include effective controls on currency manipulation and misalignment

Border Adjustable Consumption Taxes (aka VATs) are a tariff by another name. They are allowed under WTO rules and range from 12% to 24% with the average being 17% globally. This means that virtually all foreign countries tax our exports at this average 17% VAT. They subsidize domestic shipments abroad with rebating the VAT to their manufacturers. The U.S. does not have a VAT to offset this advantage.

Consumption taxes are a tax on consumption as opposed to income, wealth, property, or wages. A Goods and Service Tax (GST) and a Value Added Tax (VAT) are consumption taxes. They are usually a tax only on the “value added” to a product, material, or service. Over 150 countries have such taxes, but the U. S. does not.

The U. S. negotiated tariff reductions or elimination in good faith with our trading partners under NAFTA and the Central America Free Trade Agreement (CAFTA, but Mexico instituted a 15% VAT, and Central America established a 12% VAT.

After 40 years of tariff reduction under various trade agreements, other countries replaced tariffs with VATs, but the U. S. did not. Thus, American exporters face nearly the same border taxes as they did in the early 1970s.

To solve this problem, the Coalition for a Prosperous America proposes that Congress implement a border adjustable consumption tax (VAT) and use the proceeds to credit against the payroll taxes paid by all workers and businesses. The benefits would be:

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

In President Obama’s 2016 budget, Payroll Taxes were projected to be 31% of the revenue or $1.11 trillion. If a 12.9% VAT were set, it would produce approximately $1.45 trillion in tax revenue, completely offsetting the revenue from Payroll Taxes. All Payroll Taxes could be eliminated with a credit. With a 15% VAT, other tax reform or domestic production cost reduction could be funded. European Union countries use their VATs to provide another revenue stream to allow them to reduce their corporate taxes to be more globally competitive.

The benefit of giving a Payroll Tax credit out of VAT funds is that it would offset the regressiveness of a VAT by elimination of the regressive Payroll Tax. There would be no impact on prices of domestic goods and services, but prices of imported goods and services would increase. This would incentivize consumers to buy Made in USA products instead of imports. In addition, it would reduce the cost of production for U. S. producers enabling them to be more competitive in the global marketplace.

Our Coalition members also encouraged Congress to reinstate the Country of Origin Labeling (COOL) that was struck down by an unelected foreign tribunal of the World Trade Organization. Congress caved in to the WTO ruling and passed repeal legislation that exceeded the WTO ruling eliminating COOL for beef and pork, as well as for ground beef and ground pork.

Canada and Mexico want to export their cattle, hogs, beef, and pork to the U. S. without informational labeling that reveals where the cattle and hogs were born, raised, and slaughtered. Right now, meat packers are able to import cattle and hogs and slaughter them to get the USDA stamp. Consumers want to know where cattle and hogs were born and raised, not just slaughtered for reasons of food safety.

Congressional Representatives and Senators need to have the courage to reinstate COOL and vigorously defend our national sovereignty and consumer choice against international interference. COOL legislation enables consumers to Buy American in the grocery store. It prevents consumer deception and empowers consumers to buy food produced under the safety regime of their choosing. It would help to jumpstart America’s ailing rural economy through supporting domestic producers and preventing industry consolidation.

The final message that is critical is that the U. S. must modernize its foreign investment rules to protect American companies that are critical to our national security and economic security. Investors from countries like China, Japan, and South Korea are making strategic acquisitions of U. S. companies and land that threaten our security and future prosperity. These same countries either severely restrict or do not allow 100% acquisition of companies in their country. The Committee on Foreign Investment in the U.S. (CFIUS) can block incoming investment based upon national security concerns, but not for economic strategy reasons as other countries do.

Congress must update the laws governing foreign investment to include economic security and allow longer review periods, beyond 30 days, for CFIUS to review proposed investments. This would allow more time to gauge systemic threats to U. S. interests in addition to individual cases. The legislation should include a “net benefit” test to encompass American economic interests where proposed acquisitions of companies that are important to future U. S. technology and employment are concerned (both civilian and defense related).

The question now is – Will Congress have the courage to take the bold action needed to eliminate the trade deficit, address currency manipulation, reinstate COOL and control foreign investments? Time will tell.

 

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Coalition for a Prosperous America Summit Discusses How to Grow Economy

Thursday, December 8th, 2016

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

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

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

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

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

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

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

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

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

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

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

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

 

 

 

 

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Is Bi-partisan Tax Reform Possible?

Wednesday, April 27th, 2016

Tis the season of talk about tax reform. Every presidential election cycle, the candidates all propose some kind of tax reform. However, once the new president is elected, Congress does not do anything because tax reform becomes the “third rail” to special interests who lobby for or against reforms that would affect them. The last comprehensive tax reform that Congress passed was the Tax Reform Act of 1986, more than a generation ago. Thus, we must pose the question: Is it possible for Congress to pass bi-partisan tax reform.

First, let’s separate fact from the rhetoric:

Rhetoric: Corporations play games to keep from paying their fair share of taxes.

Fact: Out of the 34 countries in the Organization for Economic Co-operation and Development (OECD), a group that includes most advanced, industrialized nations, America ranks first with a 39.1 percent corporate tax rate, compared to an OECD average of 24.1 percent. However, the effective rate for 2014 was 27.9 percent, which was second highest behind New Zealand among OECD countries and 15th-highest among the 189 countries measured. Effective tax rate takes into consideration the tax deductions allowed corporations to reduce the pool of taxable profits.

Some corporations aren’t paying their fair share of taxes because multinational corporations that have subsidiaries or divisions in other countries use legal accounting strategies to transfer profits to lower corporate tax rate countries or set up shell corporations in tax haven countries. This means that American corporations whose only facility is in the U. S. bear the brunt of our high taxes, making it more difficult for them to compete in the global marketplace.

One of the strategies used is what is called “Corporate inversion” by Investopedia, which refers to re-incorporating a company overseas in order to reduce the tax burden on income earned abroad. Corporate inversion as a strategy is used by companies that receive a significant portion of their income from foreign sources, since that income is taxed both abroad and in the country of incorporation. Companies undertaking this strategy are likely to select a country that has lower tax rates and less stringent corporate governance requirements.
How can we get these multinational corporations to pay their fair share of taxes in the United States?

Well, we can follow the example of states that have passed bi-partisan tax reform to address the problem of getting corporations to pay a fair share of taxes in their state. The solution was “apportionment” of corporate income taxes that is a share of taxes to be paid by a corporation to a state based on a particular formula. According to a Policy Brief by the Institute on Taxation and Economic Policy, all but the five states that don’t have a corporate income tax (Nevada, South Dakota, Texas, Washington, and Wyoming) have adopted some type of formula for state apportionment of corporate taxes.

  • “First, if a corporation does not conduct at least a minimal amount of business in a particular state, that state is not allowed to tax the corporation at all. Corporations that have sufficient contact in a state to be taxable are said to have “nexus” with that state.
  • Second, each state where a corporation has nexus must devise rules for dividing the corporation’s profits into an in-state portion and an out-of-state portion — a process known as “apportionment.” The state can then only tax the in-state portion.”

About half the states with a corporate income tax adopted the model legislation worked out in the 1950s, called the Uniform Division of Income for Tax Purposes Act (UDITPA). UDITPA recommends the following three factors to determine the share of a corporation’s profits that can be taxed by a state:

  • “The percentage of a corporation’s nationwide property that is located in a state.
  • The percentage of a corporation’s nationwide sales made to residents of a state.
  • The percentage of a corporation’s nationwide payroll paid to residents of a state.”

Only two states use the percentage of property tax since local government jurisdictions already impose a property tax, and state governments don’t want to encourage corporations to relocate to other states by doubling up on property tax. Only eight states still use the unmodified formula, and many have moved to just sales. Most of the rest of the states have increased the weight on sales, and 18 states “double weight” the sales tax percentage.

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

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

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

For example, if a MNE’s share of worldwide sales in the United States is 40%, then the company would pay taxes on 40% of its sales. Mr. Parks states that the advantages of his plan are:

  • “Inversions [and transfer pricing] for tax purposes become pointless because the company would pay the same tax no matter what its base.
  • It would encourage exports because all exports are fully excluded from corporate income tax.
  • It simplifies the calculation for federal, state, and local taxes because the profit to be taxed by the U. S. is determined by a simple formula.
  • Reduces or eliminates the tax incentives to locate jobs, factories, and corporate headquarters offshore, boosting employment and U. S. tax revenue.
  • Ends the disguised income taxes which are actually royalty payments.
  • Allow Congress to raise revenue without raising rates because it stops U. S. and foreign multinationals from being able to place their profits offshore to avoid U. S. taxes.”

A couple of additional benefits listed at www.salesfactor.org are:

  • “Removing the incentives for multinational corporations to leave their profits in off-shore tax havens.
  • Maintaining Congress’ ability to lower rates and/or increase revenue.”

Bill concludes that “Sales Factor Apportionment is simpler and more effective than our current system which attempts ? and often fails ? to tax the worldwide business activities or U. S. corporations. Because it is based on sales, not payroll or assets, it is a difficult system to game. Companies can easily move certain business operations and assets out of the U. S., but few, if any, would be willing to give up sales to the world’s largest market.”

Mr. Parks was part of my team visiting the offices of Congressional Representatives in Washington, D. C. the week of April 11th, and several Representatives appeared quite interested in the Sales Factor Apportionment tax proposal he described. Mr. Parks is the author of a much more in-depth article in the April 4, 2016 issue of Tax Notes (available only by subscription), and I am happy that he gave me permission to write about this topic for my audience. For further information, you may email him at Bill@nrs.com. You can also read the results of several studies on SFA at www.salesfactor.org.

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CPA’s Balanced Trade Message has Impact on Congress

Wednesday, April 27th, 2016

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

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

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

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

For years, we have been emphasizing the following:

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

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

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

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

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


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

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

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

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

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

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

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Traditional Industries Generate High-tech Spinoffs in Southwest Florida

Tuesday, November 3rd, 2015

My last article featured the stories of two companies that I visited, so this article will feature the four other companies I toured during my brief visit to Lee County earlier this month as the guest of the Lee County Economic Development Office.

Shaw Development is a family-owned company with the third generation now involved and specializes in the design, development and manufacturing of custom fluid management solutions, including Diesel Emissions Fluid (DEF) systems (headers, reservoirs, caps, adapters, strainers, etc.) for heavy-duty vehicles and machinery, such as trucks, buses, construction, mining, military vehicles, as well as agriculture and forestry equipment, power generation, and locomotive equipment.

Stephen Schock, Director of Manufacturing, gave us a plant tour first, and then we met with Lane Morlock, Chief Operations Officer. Lane told me that Frank Shaw founded the first Shaw company, Shaw Metal Products, in 1944 Buffalo, New York as a machine shop to support the military and developing aerospace market.

Shaw Aero Devices, Inc. was founded in 1954 to add engineering to their core capability and develop products with proprietary intellectual property. Frank’s son, Jim Shaw, headed up this company, and it became the industry standard for a variety of fuel, oil, water, and waste components and systems. Shaw Aero Devices moved Naples, Florida (Collier County) in the early 1980s and moved to Fort Myers in Lee County 1993. The company relocated back to Naples in 2001 after it outgrew its Lee County location.

Lane, said, “Shaw Development, LLC was formed in 1959 to transfer Shaw Aero Devices technology to ground vehicle markets particularly the lift and turn technology for fuel caps. We moved into our current 50,000 sq. ft. plant in Bonita Springs in 2008. Shaw entered into the DEF system business early on, and business has grown dramatically in the last 6 to 7 years.”

When I asked how much they outsource, he said, “We have a fair amount of capability in-house ? machining, stamping, forming, welding, paint, assembly and test capabilities. In 2009, we vertically integrated plastic injection molding by acquiring Gulf Coast Mold to bring back our molding from China. We bought a robot for welding that saves us a great deal of time. We buy some machining and sensors outside. In 2014, we added 17,000 sq. ft. to our production space in the plant and expanded our injection molding operation by 6,500 sq. ft. We added 75 employees over the past 3 years and our revenue has been increasing +25% YOY in this time period. We are now up to about 200 employees, so we are the second largest manufacturer in the region.”

In response to my question about their challenges, Lane said, “Our biggest challenge is to get the right talent. We work with Florida Gulf Coast University (FGCU) and more recently, we have engaged with the University of Miami to find the right talent. We work with local schools and the Southwest Regional Manufacturers Association to develop curriculum and manufacturing industry awareness to the local area. We are heavily involved with STEM and bring in students as interns and offer them the opportunity to work on private projects. One of our welders took a job with the local technical college to train welders, and this has provided us with an opportunity to work with this program and provide them with industry experience.”

With regard to my inquiry about being a lean company, he said that he had spent two years at NUMMI (Toyota Joint Venture) gaining an in-depth understanding of the Toyota Production System prior to spending seven years in a leadership role at General Motor’s corporate Lean Office. He added, “We have a full time Lean black belt to train our employees. We have gone from 43-day material turnaround to an average of 27 days in the past two years. Our model for business planning is Hoshin Kanri, and we have a five-year business plan and an annual business plan tied into it. Our on-time delivery is 98.8% year to date, and our quality PPM has improved by 60% in the past two years. We use a two-bin Kan Ban system and one-piece flow for our assembly line operations. Our employees are cross trained, and we review our manufacturing cell metrics at weekly meetings.”

With this emphasis on lean and the fact Shaw Development is both ISO 9000 and 14000 Certified, I could see why the company has been recognized as the Manufacturer of the Year for the State of Florida and Southwest Regional Manufacturer of the year.

My next visit was to American Traction Systems (ATS), a privately owned company formed in 2008 by Bonne Posma, as an affiliate of his other company, Saminco, Inc. ATS specializes in the design and manufacturing of electric propulsion systems for on and off road electric vehicles such the Ford Fusion, fuel cell buses, Hybrid trucks and buses, streetcars, trolleys, trams, GenSet Locomotives, Hybrid Diesel-Electric marine vessels, airline ground support vehicles. ATS has manufactured electric traction drives for Fuel Cell Buses designed by Ballard and Georgetown University, Hybrid-Electric systems for Allison Electric Drive division of General Motors as well as over 3,500 AC/DC and DC/DC controllers for underground mining vehicles. All design and manufacturing is performed in the Fort Myers, Florida facility with the capacity to deliver production of several hundred units per month.

General Manager Lem Vongpathoum led the plant tour at ATS and then we met with Mr. Bonne Posma and his niece, Cari Posma Wilcox, Vice President of Saminco, Inc. In a phone interview with Cari after returning home to clarify some details, she told me that Bonne was born in Indonesia of Dutch parents just as WWII erupted in Asia and spent the war years in a prison camp with his parents. His family returned to the Netherlands after the war and then immigrated to Canada. Mr. Posma founded Saftronics in 1968 in Johannesburg, South Africa and then opened a second facility in Ontario, Canada in 1976, which is still in operation as Saft Drives. He opened a Saftronics plant in Buffalo, New York in 1986, which he moved to Ft. Myers, Florida a year later. He left Saftronics and founded Saminco in 1992. Saftronics was sold to Emerson in 2005. After founding American Traction Systems in 2008, he opened a Saminco service office in China in 2009 and a service office in South Africa in 2011. He also opened an ATS facility in South Africa in 2013. Bonne’s energy and excitement about his companies was that of someone half his age when he showed us around Saminco and gave us a demonstration of some of the mining equipment at their testing yard.

Bonne clarified the difference between the three companies he has founded, saying “Saftronics made variable speed drives. Saminco makes solid-state electric vehicle traction controllers powered by batteries, diesel-hybrid, fuel cells and power systems, mainly for underground mining equipment. American Traction Systems makes electric and hybrid-electric propulsion systems for a variety of vehicles and equipment. I am the sole owner of both Saminco and ATS, and we have about 120 employees at the Ft. Myers Saminco and ATS plants. We also have a repair facility in Huntington, West Virginia that has 35-40 employees.”

Bonne explained, “We are competing with major corporations like Siemens, ABB and GE. We have to be more nimble to compete successfully. We competed against these companies for a Navy contract for a propulsion system for the USNS Waters operated by the Military Sealift Command and won the contract. We are getting into solar and working on a new diesel electric propulsion system for a Load Haul Dump (LHD) vehicle that is like a large Bobcat. We are also working on a new induction motor for ‘Mag lev’ trains.”

When I asked him about his suppliers, he said, “We use all American suppliers for what we can’t do in-house. We buy machining and sheet metal fabrication and use a contract manufacturer for our PCBs. We do full power testing in our lab.”

He added, “American workers are some of the highest paid workers in the world. There are three things that have destroyed American manufacturing: litigation, regulation, and taxes. If we want to level the playing field, we need to get rid of these three things.”

On my last morning in southwest Florida, we visited JRL Ventures, Inc. dba Marine Concepts headquartered in Cape Coral, Florida. The facility contains 42,000 sq. ft. of manufacturing and office space, equipped with state of the art CNC robotic machining centers and other technologies. Marine Concepts opened its doors in 1976 under the leadership of Augusto “Kiko” Villalon to be able to go from design to production of boats. Marine industry veterans, J. Robert and Karen Long, purchased Marine Concepts in 1994. As a leading manufacturer for nearly 40 years, Marine Concepts is now the largest manufacturer of tooling and molds for the marine industry in the United States. They make CNC plugs, composite molds (open and closed silicone/LRTM), CNC molds, CNC parts, limited production composite parts, scale models, and CNC cold mold kits. In 2012 Marine Concepts opened a facility in Sarasota, Florida with over 260,000 sq. ft. of manufacturing and office space. The two plants provide 300,000 sq. ft. of manufacturing space and seven 3 – 5-axis CNC milling machines.

Mac Spencer, CFO, gave us the plant tour where we watched a boat mold being machined by their very large machining robot. We met with Dan Locke, Design Manager and Senior Designer, who has been designing boats since the 1980s, using Unigraphix software that provides more free style for designing surfaces than Solid Works. Mr. Spencer said that normally their business was 80% marine vs. 20% non-marine, but during the recession, it was reverse. They diversified into making composite figures and structures for resort parks, such as Disneyland, Universal Studios, and Six Flags. They also make composite parts for trams and electric buses. Design work for other marine companies is also a growing part of their business. We briefly met with President Matt Chambers before departing.

My last visit was to Nor-Tech Boats where we met with Cindy Trombley, Director of Administration. She said the company was founded in 1980 by Trond Schon, who had moved with his family from Norway to Cape Coral, Florida. Nor-Tech manufactures high performance powerboats using advanced technologies, unique manufacturing processes, and stylish designs. The main manufacturing facility in North Fort Myers encompasses over 45,000 sq. ft. complete with a 20’ x 60’ downdraft paint booth. Within the main building a state of the art rig shop and in house upholstery departments are climate controlled year round to insure a clean and work friendly environment. The in-house engine development and production division is housed in a secondary facility along with the service department and a rigging facility. We could see three boats in various stages of production in the main plant, but we did not have time to go visit the secondary facility.

Cindy said they currently have 107 employees, but survived the recession by dropping down to only 35 and going into debt. She said they can make boats up to 80 ft. long, and most of the larger sized boats go overseas or to Canada. They make every style of powerboats except for “T-tops.” Cindy said, “Our biggest challenge outside of heat and humidity in Florida is finding skilled labor. There are no vocational schools teaching how to build boats. We have low turnover, but an aging workforce. One of the advantages of Florida is that there are no corporate or personal income taxes.”

A common thread for most of these companies is the concern about finding the right workers now and in the future. As I have discussed in past articles, this is a nationwide problem, not just in southwest Florida. During discussions with the management of the Lee County Economic Development office and members of the Southwest Regional Manufacturers Association at breakfast, lunch, and dinner meetings during my visit, I shared what is being done to address this problem in other parts of the country and by organizations such as SME’s PRIME schools, ToolingU, and Project Lead the Way that I have written about in previous articles. The more manufacturers and trade associations that get involved in solving this problem, the more successful we will be in attracting and developing the next generation of manufacturing workers.

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How would the Trans-Pacific Partnership Agreement affect the Reshoring Trend?

Tuesday, June 2nd, 2015

Reshoring has become a trend, not just anecdotal, as hardly a week goes by without an article about a company returning manufacturing to America in some news outlet. However, the Trans-Pacific Partnership Agreement is projected to reduce the rate of reshoring and manufacturing jobs being brought back to the U. S. Combined with the high U. S. dollar, the impact is likely to be severe.

Utilization of the Total Cost of Ownership worksheet estimator developed by Harry Moser, founder of the Reshoring Initiative, has provided a method for companies to do a true analysis to be able to see that they may not be saving as much, if any, of the money anticipated by sourcing offshore because the cost savings are often outweighed by the hidden costs of doing business offshore.

Total Cost of Ownership (TCO) is “the sum of all the costs associated with every activity of the supply stream,” according to the 13th edition APICS dictionary.” However, most companies don’t look beyond quoted unit price to make decision of where to source and ignore 20% or more of the total cost of offshored products. According to the Archstone Consulting survey reported in the American Machinist Magazine July 16, 2009, 60% of manufacturers apply only “rudimentary” total cost models: Wage Arbitrage, PPV (Purchase Price Variance), and Landed Cost.

This is because in the cost accounting systems used by most corporations, transportation costs, travel costs to vendors, rework costs of defective parts, cost of inventory, etc. are in separate accounting categories. This is why it is critical that CFOs and Supply Chain managers be trained in how to use the TCO worksheet to increase reshoring. Harry Moser’s TCO worksheet is able to quantify many of the following hidden costs of sourcing offshore that are not captured by any other current method:

  • Currency fluctuations
  • Cost of managing offshore contract
  • Design changes
  • Quality problems
  • Legal liabilities
  • Travel expenses
  • Time and effort to make transition
  • Poor communication
  • Intellectual Property infringement
  • Cost of inventory

The reshoring trend has also benefited by the following changing supply chain dynamics in offshore sourcing that have occurred since 2007:

  • Oil prices tripled, raising logistics costs
  • Labor rates in China rose by 300%
  • Component/material prices increased
  • Automation increased U.S. productivity
  • Political instability in China – Labor riots/strikes
  • Exchange rate variables
  • Risk of disruption from natural disasters

This is why the Boston Consulting Group issued a press release May 5, 2011, stating, “We expect net labor costs for manufacturing in China and the U.S. to converge by around 2015… since wage rates account for 20 to 30 percent of a product’s total cost, manufacturing in China will be only 10 to 15 percent cheaper than in the U.S.” This prediction was very controversial at the time and generated a great deal of debate.

On October 11, 2011, the Boston Consulting Group issued a report, stating, “Seven industry sectors had reached “tipping point” of returning to U.S.” They are:

  • Appliances and electrical equipment
  • Computer/electronics
  • Fabricated metal products
  • Electrical equipment/appliances
  • Furniture
  • Machinery
  • Plastics and rubber products
  • Transportation goods

Note: These sectors account for 70% of U.S. imports and 2 trillion in U.S. consumption

Because robotics, automation, lean manufacturing, and the rapidly improving technology of additive manufacturing have helped companies do more with fewer people, many have been skeptical that reshoring would create many jobs. The Boston Consulting Group’s predictions of which industry sectors would return to the U. S. first are now verified by data that the Reshoring Initiative has captured since its founding in 2010. This data also provides the answer to the question of how many jobs have been created by reshoring.

The following chart shows the number of jobs created by reshoring:

Industry

 Jobs Companies
Transportation Equipment 13,823 33
Electrical Equipment, Appliances, Components 9,240 58
Computer/Electronic Products 3,483 25
Machinery 2,860 20
Apparel/Textiles 2,154 46
Fabricated Metal Products 1,721 39
Food 1,628 9
Wood Products 1,028 18
Medical Equipment    738 17
Hobbies    723 29
Construction    577 4
Plastic/Rubber Products    470 16
Castings      57 8
Non-Metallic Mineral Products      12 1
Primary Metal Products        0 5
Chemicals & Energy        0 1 each
Other 1,016 24

The Reshoring Initiative has also captured reshoring data by state. You will be surprised by some of the states that made it in the top ten because the Boston Consulting Group predicted that reshoring would mainly occur in the low wage states of the south. The data for the top ten states is shown on the chart below.

State

Jobs

 Cases Jobs/Facility
South Carolina 7,530 8 941
Texas 3,792 13 292
Kentucky 3,412 4 853
Georgia 3,145 8 393
Tennessee 3,137 15 209
Ohio 2,739 24 114
Michigan 1,742 16 109
New York 1,165 19 61
North Carolina 1,020 15 68
Kansas 1,000 2 500

Three of these states, Ohio, Michigan, and New York are definitely not low wage states. California dropped from a rank of 10th in the number of jobs shown on the 2014 table to 12th on this new table. Frankly, if a company can reshore to California, Michigan, New York and Ohio, they can reshore to anywhere in the U. S.

According to the 2012 Annual Re-Shoring Report by the MIT Forum For Supply Chain Innovation, the top decision drivers for reshoring are: (1) Time-to-Market – 73.7% (2) Cost Reductions – 63.9% (3) Product Quality – 62.2% (4) More Control – 56.8% (5) Hidden Supply Chain Management Costs – 51.4% and (6). Protect IP – 48.5%.

If reshoring continues to expand at its current rate, the Reshoring Initiative predicts that the $600 billion/year trade deficit would be eliminated; the U. S. economy would add 3 million manufacturing jobs while adding 9-12 million total jobs because of the multiplier effect of manufacturing jobs; reduce unemployment by 4%; cut the U.S. budget deficit by about 50%, and increase manufacturing output by 25%.

Because of my concerns about the impact of the Trans-Pacific Partnership Agreement about which I have written, I recently asked Harry Moser for his opinion on the potential effects.

He said, “We have made huge progress from around 2003 when we were losing net about 130,000 manufacturing jobs/year till 2014 when reshoring plus FDI exceeded offshoring by about 10,000 jobs. However there are still about 3 million manufacturing jobs offshored. So, reshoring is still in its infancy and is still fragile. Offshore LLC prices are still typically 25% lower than domestic prices. It is a struggle to get companies to understand that in some cases the domestic total cost is lower even though the price is so much higher. Tariffs are one of the largest, most unambiguous of the “hidden costs” that need to be quantified. TPP will reduce tariffs, making the TCO argument more difficult and less likely to suggest reshoring. This is also an especially poor time for TPP with the USD up substantially and at its highest level in several years. The combination of the high USD and TPP will reduce the rate of reshoring by a roughly estimated 20 to 50%.”

He added, “Since the U.S. is the world’s largest market, with one language and with consumers who are mainly driven by price not nationalism, ours is the target market for all offshore companies. TPP will reduce barriers to trade, making our market even more attractive. If TPP has equal percentage impacts on our imports and our exports, the result will be negative since our goods imports exceed our exports by about 40%. ”

The TPP would reduce or eliminate tariffs for 11 more countries, so it will have the most impact on the companies that have reshored because of cost savings. I think Harry’s opinion that the TPP would have a 20 – 50% reduction on the rate of reshoring is conservative. This adverse effect on reshoring is one more reason why we must stop the fast track Trade Promotion Authority from being passed by the House. Now that the Trade Promotion Authority fast tracking the TPP passed the Senate, it is critical that you contact your Congressional Representative to urge them to oppose granting fast track Trade Promotion Authority for the Trans-Pacific Partnership Agreement.

 

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