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Could California Manufacturing Thrive Again?

Wednesday, February 20th, 2013

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

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

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

The major manufacturing industries are shown by the following chart:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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How do Obama and Romney Stand on Issues Affecting Manufacturing?

Tuesday, October 23rd, 2012

Both President Obama and Governor Romney have put the manufacturing industry as the cornerstone of their plans to strengthen the U.S. economy and revitalize business activity. How would their differing plans affect manufacturers, and which would provide the most benefits to the manufacturing industry?

Government has the most impact on the manufacturing industry with regard to its tax, regulation, energy, and trade policies, but budget priorities of an administration also have a powerful effect for the good or the bad. We will use these policies and priorities to compare the plans of President Obama and Governor Mitt Romney. Governor Romney’s plan is extracted from his “Believe in America – Mitt Romney’s Plan for Jobs and Economic Growth” available on his website. President Obama’s plan is derived from his record and his “Blueprint for an America Built to Last,” released by the White House on January 24, 2012.

Taxes:  The more taxes a business pays, the less money a business has to grow the company, buy equipment, conduct R&D, expand into new markets, and hire more workers.

President Obama’s plans include:

  • Reduce overall corporate rate to 28 percent with an even deeper cut to an effective tax rate of 25 percent for corporations manufacturing in the U. S.
  • End tax breaks for outsourcing and provide a 20 percent tax credit for expenses of moving manufacturing operations back to America
  • Expand, simplify, and make permanent the R&D tax credit
  • Extend the 30 percent-Advanced Energy Manufacturing Tax Credit for clean energy manufacturing projects
  • Introduce a new Manufacturing Communities Tax Credit to encourage investments in communities affected by job loss
  • Reauthorize 100% expensing of investment in plants and equipment

Governor Romney’s proposal includes:

  • Reduce the overall corporate tax rate to 25 percent
  • Make permanent the R&D tax credit
  • Reduce the top individual tax rate from 35 percent to 28 percent since most small businesses pay taxes at the individual level, not corporate taxes
  • Eliminate the Death Tax
  • Pursue a Fairer, Flatter, Simpler Tax Structure

Taxes on corporations and individuals will increase January 1, 2013 when the current tax rates that have been in effect for 11 years expire (referred to as the Bush tax cuts) and return to the higher rates in effect under President Clinton. There are additional taxes that will go into effect at the same time as a result of the Patient Protection and Affordable Care Act, commonly called Obamacare.

As Governor of Massachusetts from 2003-2007, Mitt Romney closed a $1.3 billion state budget deficit in 2004 without raising taxes by using a combination of funding cuts, fee increases, collection of more business taxes from eliminating tax loopholes, and drawing from the state’s “rainy day fund.”

Regulations:  Regulations function as a hidden tax on manufacturers. A multitude of rules, restrictions, mandates, and directives impose stealth expenses on businesses and acts like a brake on the economy at large. The federal Office of Management and Budget own study places the annual cost of regulation on the economy at $1.75 trillion, which is nearly double the total of all individual and corporate income taxes.

President Obama’s record:

  • The Federal Register’s compendium of new rules and regulations hit a record in 2010 of 81,405 pages with a projected annual cost of compliance of $26 billion.
  • In one month alone, July 2011, the Obama administration issued 229 proposed rules, 379 final rules, and 10 economically significant rules—totaling more than $9 billion in regulatory costs.
  • The over 2,000-page Dodd-Frank Act mandates 259 rules and suggests another 188.
  • The Patient Protection and Affordable Care Act (PPACA) may generate up to 10,000 pages of regulations to implement.
  • The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 produced federal restrictions on credit card companies that have led to higher interest rates, higher annual fees, and lower credit limits.

Governor Romney’s proposal:

  • Issue an executive order paving the way for Obamacare waivers for all 50 states and work with Congress to accomplish full repeal
  • Seek to repeal Dodd-Frank and replace it with a streamlined regulatory framework
  • Eliminate the regulations promulgated in pursuit of the Obama administration’s costly and ineffective anti-carbon agenda
  • Press Congress to reform our environmental laws and to ensure that they allow for a proper assessment of their costs
  • Order all federal agencies to initiate repeal of any regulations issued by the Obama administration that unduly burden the economy or job creation
  • Impose a regulatory cap that forces agencies to recognize and limit these costs
  • Restore a greater degree of congressional control over the agency rulemaking process

Trade: The U. S. had an overall trade deficit of $558 billion in 2011, but our deficit with China was $295.5 billion, and the combined deficit with Canada and Mexico rose to a combined $185 billion of the total. In fact, we have a trade deficit with 66 countries. Both President Obama and Governor Romney support current trade agreements and propose additional agreements.

President Obama – As a candidate in 2007 and 2008, he said, “there’s no doubt that NAFTA needs to be amended,” in December 2007 at the Des Moines Register debate, and at a June 2008 speech in Flint, MI, he said,” If we continue to let our trade policy be dictated by special interests, then American workers will continue to be undermined, and public support for robust trade will continue to erode.”

But as president, he pushed hard for passage of the trade agreements with Korea, Colombia and Panama, which were passed and signed in October 2011, all drafted on the NAFTA template. He has instructed his team at the U.S. Trade Representative’s office to spearhead the proposed Trans-Pacific Partnership, a trade agreement involving nine Pacific region nations, including Vietnam and Brunei, two undemocratic countries with serious and well-documented human and labor rights problems.

Unlike his predecessors, he has imposed tariffs on imported Chinese products that have been determined to be “dumping, such as the 2009 tariff on imported Chinese tires, and the recent Commerce Department final determination of anti-dumping duties from just over 31 percent up to 250 percent on photovoltaic solar cells, and anti-subsidy duties of up to more than 15 percent were also recommended.

His Blueprint states that he will:

  • Create a new trade enforcement unit that will bring together resources and investigators from across the Federal Government to go after unfair trade practices in countries around the world, including China
  • Enhance trade inspections to stop counterfeit, pirated, or unsafe goods before they enter the United States
  • Put American companies on an even footing by providing financing to put our companies on an even footing.

Governor Romney – As a candidate, he supported the free trade agreements with Korea, Colombia and Panama and also calls for passage of the Trans-Pacific Partnership, in addition to new FTAs with nations such as Brazil and India.

Romney would pursue the “formation of a ‘Reagan Economic Zone.’ This zone would codify the principles of free trade at the international level and place the issues now hindering trade in services and intellectual property, crucial to American prosperity and that of other developed nations, at the center of the discussion.”

Romney proposes to get tough with China in the following ways:

  • Impose “targeted tariffs” or economic sanctions for unfair trade practices or misappropriated American technology
  • Designate China as a currency manipulator and instruct the Commerce Department to impose countervailing duties
  • Improve enforcement at the border by allocating the necessary resources to investigate the actual point of origin for suspect products arriving on our shores
  • Impose harsher penalties on those who would circumvent our laws

Energy:  The manufacturing industry both produces and uses energy; therefore, government policies affecting energy have a major impact on the growth, development, and financial position of manufacturers. Energy policy is critical to our country’s economic future, and we have the natural resources we need to be more energy independent.

President Obama’s plan:

  • Promote safe, responsible development of the near 100-year supply of natural gas, supporting more than 600,000 jobs while ensuring public health and safety
  • Incentivize manufacturers to make energy upgrades, saving $100 billion over the next decade
  • Create clean energy jobs in the United States

President Obama’s Track Record:

  • Imposed a moratorium in 2010 on underwater drilling that eliminated more than 10,000 jobs and cost $1 billion in lost wages.
  • Delayed the construction of the Keystone XL Pipeline, which would bring enormous supplies of Canadian tar sands oil from Alberta to the U. S and create an estimated 25,000 to 100,000 American jobs.
  • Proposed a cap-and-trade system that was a complex plan for allowing industries to trade the right to emit greenhouses gases, which failed to pass Congress.
  • Under Obama, the EPA has issued a 946-page “hazardous air pollutants” rule mandating “maximum achievable control technology” under the Clean Air Act, which could put 250,000 jobs in jeopardy.
  • New regulations for industrial boilers—the so-called “Boiler MACT”—may put another 800,000 jobs at risk.

Governor Romney’s proposed energy policy focuses on significant regulatory reform, support for increased production, and funding basic research instead of specific technologies, including the following:

  • Streamline and fast-track the permitting process for exploration and development of oil and gas
  • Consolidate procedures for issuing permits so that businesses have a one-stop shop for approval of common activities
  • Overhaul outdated legislation such as the Clean Air Act, Clean Water Act, and other environmental laws
  • Reform the regulatory structure of the nuclear industry
  • Inventory our nation’s carbon-based energy resources
  • Explore and develop our oil reserves wherever it can be done safely, taking into account local concerns, including the Gulf of Mexico, both the Atlantic and Pacific Outer Continental Shelves, Western lands, the Arctic National Wildlife Refuge, off the Alaska coast, and the more recently discovered shale oil deposits
  • Partner with  our neighbors Canada and Mexico to develop their oil reserves
  • Pave the way for the construction of additional pipelines that can accommodate the expected growth in Canadian supply of oil and natural gas
  • Extract natural gas by means of “fracking” (hydraulic fracturing, coupled for these purposes with horizontal drilling)
  • Redirect government funding of clean energy spending towards basic research and development of new energy technologies and on initial demonstration projects that establish the feasibility of discoveries

Manufacturing has been a key driver of what limited economic recovery we have had since 2009 and will play a major role in U.S. economic success in the future if it gets the right support. On the surface, Obama and Romney seem to have roughly the same economic goals – stimulate job creation, boost American competitiveness in the global market and drive down the deficit, but as we have seen, their plans for reaching these objectives differ greatly. I urge everyone to carefully compare their plans and what they have said and done before choosing for whom to vote. Don’t waste the precious freedom to vote that our ancestors risked or gave their lives to gain.

 

 

Posted in Economy, Energy, Manufacturing, Taxes/Regulations, Trade Policy | No Comments »

Senate Report Reveals Extent of Chinese Counterfeit Parts in Defense Industry

Tuesday, May 29th, 2012

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Changing to WTO’s “Made in the World” Labeling Would Harm Americans

Tuesday, May 22nd, 2012

How would you like to go shopping and find that everywhere you went, the label said “Made in the World” instead of “Made in China,” “Made in India,” “Made in USA” etc.?  The label on products Americans purchase that names the country in which they are made may soon be gone.    How could this be possible?

The World Trade Organization has been working on the “Made in the World” initiative for years, and in 2008, the WTO and Organization for Economic Co-operation & Development (OECD) began cooperating with other stakeholders to provide data that would shed lights on what is called “trade in tasks” i.e., the domestic value added content of trade.   While traditional statistics are necessary, they don’t identify the contribution of each trade partner to the total value of the final good in the supply chain. By contributing to specific segments of a global value chains, trade partners are actually “trading tasks” rather than trading final products.

In 2011, Andreas Maurer, chief of the WTO’s International Trade Statistics Section, “… in the past two or three years there has been huge momentum to get the necessary information” that would be used to rationalize elimination of country of origin labeling.”

The World Trade Organization and the European Union moved one step closer to eliminating “country of origin” labeling. On April 16, 2012, the European Commission and WTO held a conference to mark the launch of the World Input-Output Database (WIOD).  This new database allows trade analysts to have a better view of the global value chains created by world trade.

Globalization is changing business models and increasing fragmentation of production.  Companies divide their operations around the world, from product design, manufacturing, to assembly and marketing, creating global production chains.  More and more products are ‘made in the world’ rather than in any particular country.

Today’s traded products are not produced in a single location but are the end-result of a series of steps carried out in many countries around the world.  For example, cars and trucks produced by General Motors or Ford may have parts and assemblies coming from several other countries, including China.

Instead of counting the gross value of goods and services exchanged, the new database reveals the value-added that make up these goods and services as they are traded internationally.  The findings The Europe-based organizations instead want to adopt a “Made in the World” logo for all products on the grounds that global supply chains have rendered country of origin labeling inaccurate and obsolete. are significant as they may change the perception of the competitiveness of certain industrial sectors in some countries.

The WTO and OECD have been working with the U.S. International Trade Commission and the World Bank in the United States, the Institute of Developing Economies (IDE) and the Japan External Trade Organization in Asia, and the recently created World Input-Output Database (WIOD) consortium in Europe to implement the new trade statistics. The WTO has signed a contract with the OECD to start issuing official statistics on international trade based on value added.

The WTO’s Made in the World initiative is part of the process of “re-engineering global governance,” said WTO Deputy Director General Alejandro Jara at the event launching the opening of the World Input-Output Database.  With the rise of global supply chains “it is misleading to rely solely on gross trade flows as a measure” of a country’s competitive position.  As companies have created global supply chains, “attributing the full commercial value of imports to the last country of origin can skew bilateral trade balances, pervert the political debate on trade imbalances and may lead to wrong and counter-productive decisions,” says the WTO.

The intent of the WTO’s “Made in the World” initiative is to modernize global trade statistics, reduce public pressure on politicians for protectionist trade policies, and reduce public opposition to free trade.

Director-General Pascal Lamy has said that “improved measurement and knowledge of actual trade flows will help better understand the interdependencies of today’s national economies, supporting the design of better policies and better trade regulation worldwide.”

In an article on the Economy in Crisis website, “WTO Pushes ‘Made in the World’” on May 16, 2012, Karl Rusnak commented, “This may be a good PR move for the WTO and its agenda, but it doesn’t change the facts: trade still picks winners and losers, and the United States consistently finds itself in the “losers” column…This new initiative takes the same ill effects that have been occurring from free trade and attempts to reframe them in a more positive light…Trade deficits lead to bad results, but ultimately it is the bad results we need to look at, not the nominal number that represents the trade deficit.  If the numbers had shown that the United States was running a trade deficit but maintaining strong job growth, the WTO’s new calculation method might be something worth looking at.  Instead, we have lost millions of jobs as a result of free trade. Whether you calculate our trade deficit as $100 billion or $600 billion, those job losses can still be directly attributed to our failed free trade agreements.”

This Initiative could have dire consequences for America’s manufacturers and consumers. For manufacturers, it could eliminate one of the options allowed by the WTO ?  filing a charge for product  “dumping” against another country to have countervailing duties applied against that country.  For consumers, “Made in the World” labels wouldn’t allow you to protect your family from the tainted, harmful, and even life threatening products coming from China.  You wouldn’t be able to support saving and creating jobs for other Americans by buying “Made in USA.”

Alan Uke, founder of Underwater Kinetics, a company that manufactures high intensity lighting and other products, believes that “country of origin” labels could change consumer behavior and revive U.S. manufacturing.  He wants the government to require a detailed country-of-origin label on every product sold in America. The label would include sourcing information on all of the product’s parts and components along with the trade balance the U.S. maintains with each of those countries. Uke outlines his proposal in his book, Buying America Back, a Real-Deal Blueprint for Restoring American Prosperity.

The labels would be similar to those that have been successfully implemented in the U.S. food industry, describing such things as fat content, calories and nutritional values. Those labels have changed consumer behavior, forced producers to change ingredients, and motivated retailers to stock items that are demanded by customers.

“I am trying to start a movement of American consumers,” says Uke. “We need a home-team preference.” Uke is convinced that only the American consumer, whose spending represents 70 percent of the economy, will change the international trade dynamic in favor of U.S. manufacturing.  Knowledgeable consumers demanding products made in the United States or in countries that have employ ethical business practices could motivate companies to change their sourcing practices.

During my interview, Uke said, “The “Made in the World” label is the antithesis of my proposal. This initiative was probably promoted by those who profit from environmental abuse and child labor.  It makes countries that rape our environment and support child labor unaccountable to the world.  Knowing the sources for products is the only way that people can make countries accountable for their actions. Consumers can’t determine their own destiny if they have no idea of the sources.  If we want a better world, consumers need to be able to send their money to countries whose policies they support.  This isn’t free trade, it is slave trade.”

Peter Navarro and Greg Autry, the authors of Death by China – Confronting the Dragon, A Global Call to Action, also recommend that “country of origin” information be provided for all products sold on the Internet by online retailers that “Congress should require all food and drug producers to clearly label the countries of origin for all major ingredients that go into a product – and do so in a standardized and legible manner” in order to protect American consumers from tainted and poisonous products coming from China.

Greg Autry told me, “The “Made in the World” label is an obvious attempt to disguise the political differences between countries and normalize despotic regimes like China. This initiative can only result in the reduction of critical information to consumers.  I agree that we don’t have full information provided on the sources for products today, but this is the exact opposite direction to go.”

The authors believe that if 10% or more of Chinese products were boycotted by Americans, it could be enough to destabilize the Chinese economy and topple the Communist regime.  Converting to “Made in the World” labels would eliminate this possibility.

 

I urge everyone to contact your current representative to urge them to oppose this initiative and ask all candidates for federal office if they support our current “country of origin” labeling laws and oppose “Made in the World” labeling.

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Will the AME, NAM and NACFAM Alliance Revitalize Manufacturing?

Tuesday, March 6th, 2012

The Association for Manufacturing Excellence (AME) is joining with leading organizations, such as the National Association of Manufacturers (NAM), and the National Council For Advanced Manufacturing (NACFAM) to form an alliance to revitalize manufacturing and grow the economy, while improving the standard of living of all citizens in North America.  These organizations are inviting public and private sectors to come together to build on the NAM study, A Manufacturing Renaissance: Four Goals for Economic Growth.

The AME white paper “Challenges Facing the Manufacturing Industry…” states “The strategy calls for putting people, schools, businesses and the government to work; producing literate career-ready citizens capable of joining the workforce; and enabling manufacturers to once again lead the designing, building and exporting of quality products and services around the globe.” The top three priorities are:

  • Build a better educated and trained workforce
  • Promote product and process innovation, as well as research and development
  • Improve global competitiveness for companies

AME advocates that each priority “must be considered in developing public policies that support the revitalization of the manufacturing sector, and policy-makers must consider these elements in shaping future public policy and legislation.”   The goal is to help companies and our education systems transform themselves by using more innovative processes to become more competitive to put people back to work in making things in America.

I  strongly agree with AME’s viewpoint that we need to revitalize American manufacturing because “manufacturing is very critical to economic growth, prosperity and a higher standard of living.”  This is because manufacturing jobs have a multiplier effect-? every manufacturing job creates three to four other jobs.  Manufacturing creates more wealth than any other sector in the economy.  “Manufacturing pays higher wages and provides greater benefits, on average, than other industries. It performs almost two-thirds of private sector research and development, creates the highest number of jobs to support the industry while serving the surrounding communities, and contributes to more than 50 percent of the country’s total exports.”

The White Paper notes that we’ve lost nearly six million manufacturing jobs in the United States since January 2000, for an average of about 54,000 per month, according to the Bureau of Labor Statistics.  We also lost 56,190 manufacturing facilities from 2001 to 2010, or about 15 per day.

AME has issued a call for action to policy-makers, industry professionals and academic leaders to play critical roles in revitalizing the economy through the rebirth of manufacturing jobs.  To do this, we need to ensure the supply of educated citizens, necessary physical infrastructure, and a favorable tax and regulatory framework that fosters increased collaboration between public and private sector partners.

AME has been leading the “Revitalization of Manufacturing” initiative, wherein AME and their allied organizations have been reaching out to policy-makers nationwide, and encouraging them to join or develop efforts focusing on local and state job creation.  AME states that “itt is imperative that policy-makers recognize the importance of an industry that has been the backbone of the North American economy.  To date, AME has received more than 400 signatures of support from state and federal policy-makers, industry trade associations and operations executives representing manufacturers across North America.”

AME advocates “a renewed emphasis on making businesses more competitive by developing the educational and training infrastructure to produce qualified individuals to fill these new opportunities.”   To accomplish these initiatives, AME is joining with leading organizations to adopt the three priorities by:

Reforming public education to produce career ready citizens – Parents, teachers and business leaders need to recognize that other nations are both out-educating us and out-competing us.  Some of the ongoing initiatives by manufacturing organizations to help reform public education are:

  • The Manufacturing Institute’s Roadmap to Education Reform for Manufacturing, a comprehensive blueprint for education reform
  • American Productivity and Quality Center’s (APQC) Education North Star program that helps school districts do more with less by transforming education through process and performance management
  • Career Pathways,  a program that encourages students to consider a career in manufacturing and help prepare them by using the Manufacturing Pathway Map

Last fall, I wrote about a number of programs sponsored by other organizations to interest and prepare youth for careers in manufacturing in the article, “How Can we Attract Youth to Manufacturing Careers?”

Establishing consortiums of like-minded individuals with the same mission to help sustain and grow businesses through sharing technology and innovative ideas.  AME recommends that businesses “grow a culture that achieves results through engaging their people” to “develop pragmatic, working-level leaders who can pull it all together.”  In addition, businesses “need to foster rapid advancement of technology and innovation by establishing regional consortiums to help bring jobs back home.”

“AME Northern Kentucky/Cincinnati Consortium is the first building block of the AME Consortia network, and the organizations plans to deploy at least 10 more in 2012.  AME also has alliance partners, like the Virginia Business Excellence Consortium.”

Reshoring by making better informed business decisions  to keep and bring jobs back home – the Reshoring Initiative was founded by Harry Moser in 2010.  He is collaborating with AME to promote reshoring as part of the “Revitalization of Manufacturing” initiative.  AME recommends that companies use the Total Cost of Ownership (TCO) analysis tool Mr. Moser developed “to effectively compare total cost of local and offshore sources, enabling them to make informed business decisions. ‘We are committed to changing the sourcing paradigm from ‘off-shored is cheaper’ to ‘local reduces the total cost of ownership,’ said Moser.”

Redeploying Training Within Industry (TWI) programs to train or retrain workers to have the skills to work in advanced manufacturing jobs to revitalize manufacturing and re-energize the economy.  First created during WWII to replace workers who left the factories and went off to war, the TWI programs were revived in 2001 by the Central New York Technology Development Organization, a member of the U.S. Manufacturers Extension Partnership (MEP), after which the TWI Institute was formed to oversee the global deployment of the program.

AME’s White Paper only identifies the TWI programs, but I wrote about training programs sponsored by other organizations, such as the Society of Manufacturing Engineers’ Tooling U and The Fabricators and Manufacturers Association, International in my article, ”What’s Being Done to Address the Lack of Skilled Workers?

In order to be more globally competitive, AME recommends that companies use Lean Certification, an internationally recognized certification process developed by the Society of Manufacturing Engineers (SME), AME, Shingo Prize, and the American Society for Quality (ASQ), which establishes the standard for continuous improvement and Lean practices.

The White Paper states that at its 2012 national board meeting, “AME reaffirmed its commitment to helping small-and medium-sized businesses create more manufacturing jobs, and the organization’s strategic plans address the challenges facing manufacturing by formulating counter-measurements to address them with its public and private alliance partners.”

In conclusion, the White Paper states, …the public and private sectors must come together to build an integrated plan supportive of these initiatives, especially NAM’s Manufacturing Strategy for Jobs and Competitiveness and Roadmap to Education Reform for Manufacturing; the LEARN Act; and the Reshoring Initiative.  These will ultimately revitalize the industry and grow the economy.”

I have repeatedly said in my book and blog articles that it will take the efforts of the public and private sectors, as well as individual Americans, to first save and then revitalize American manufacturing.  I agree that these strategies will be beneficial, but they will not be enough to accomplish this goal.   First of all, I do not agree that the challenges to accomplish this goal are the “four major challenges on which its future depends and has been failing to meet… globalization, the revolution in information technology, the nation’s chronic deficits and its pattern of energy consumption” that are quoted from Thomas L. Friedman and Michael Mandelbaum’s book, That Used to Be Us, How America Fell Behind in the World It Invented and How We Can Come Back.

These are all realities that must be addressed, but they are not the main challenges that face America’s manufacturing industry.  The main challenge can be summed up in one word:  China.  By this I mean China’s predatory mercantilism in the form of currency manipulation, export subsidies, theft of intellectual property, product “dumping,” export restrictions on raw materials, and more recently, technology transfer and rare earth hoarding.

As long as companies that are members of AME, NAM, and NACFAM, such as Westinghouse, General Electric, and Caterpillar, choose to close factories in the United States to offshore manufacturing to China for the illusion of selling to the 1.3 billion Chinese consumers, we will continue to lose manufacturing jobs.

As long as these organizations and their member companies advocate so-called free trade policies and are afraid to stand up to China’s predatory mercantilism and urge our elected officials to demand that China adhere to the terms of its admission into the World Trade Organization, our huge trade deficits will continue to escalate.

These companies must stop being Chinese apologists and appeasers just to add more profit to their bottom line.  They need to realize that complying with China’s demand for technology transfer in order to build or establish a plant in China is destroying the future of their own companies.

Now is the time for action.  The best thing that AME, NAM and NACFAM members could do is to take a pledge to not close any more plants in the U. S. to set up manufacturing in China.  Then, we would really be able to revitalize American Manufacturing.

 

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What’s Really Happening to America’s Solar Industry?

Tuesday, February 21st, 2012

There’s been a lot of negative press about the American solar industry in the past few months because six companies went bankrupt in 2011, even after receiving government loans.   At least 12 U.S. manufacturers have suffered layoffs, plant shutdowns or bankruptcies over the past two years.  Solyndra and Evergreen Solar are the most well-known because of media coverage about their government loans, but Beacon Power Corp, Mountain Plaza, Stirling Energy Systems, and Spectrawatt Inc. also went out of business, resulting in the loss of thousands of jobs.  What’s behind the financial trouble that many of these American solar companies have experienced?

“Dumping” of solar cells and modules produced in China is the real culprit for the financial woes of the American solar industry.  According to a report released by George Washington University in December 2011, China’s production of solar photovoltaic cells and modules has grown from 1 gigawatt (GW) to 20 GW in three years, and its industry now accounts for more than 50 percent of the global market.  During the same period, prices for solar modules decreased to $1.40 per watt and may go down as low as $1 per watt.  It is clear that over capacity in both purified silicon feedstock and module manufacturing have played a key role in the recent major price declines.  The annual market for solar more than doubled between 2009 and 2010.  For 2011, estimates of total market range from 21 to 24, which is a 44 percent increase from the year prior.

On October 19, 2011, SolarWorld, the largest U.S. producer of crystalline silicon photovoltaic products, filed antidumping and countervailing duty petitions at the International Trade Commission (ITC) of the Department of Commerce.  The petition alleges that China is unfairly subsidizing its solar manufacturing industry with cash grants, multi-billion dollar preferential loans, raw material discounts, tax incentives, and currency manipulation.  SolarWorld seeks to establish that Chinese companies could not possibly have production costs low enough to be selling modules and cells at their current prices in the U.S.

SolarWorld’s petitions were supported by six other members of the newly formed Coalition for American Solar Manufacturing, started by a group of seven U.S. solar manufacturers that has grown to 150 companies representing employing more than 14,650 workers.  However, SolarWorld was the only U.S. manufacturer identified publicly in these petitions because the “unnamed companies are said to fear retaliation from essential Chinese suppliers and customers and, if they have facilities in China, the Chinese government.”

China’s Ministry of Foreign Commerce responded to these petitions as being overly protectionist and a threat to global economic recovery. China’s Suntech, the world’s largest solar panel maker, with manufacturing facilities in Goodyear, Arizona, stated that “a misguided solar trade conflict against China…could threaten the livelihood of the global solar ecosystem, particularly solar jobs in the U.S.”

U. S. opponents of the petition have formed the Coalition for Affordable Solar Energy (CASE) recruiting 132 solar companies as members representing 13,134 jobs.  Kevin Lapidus, Sr. V. P<> of legal and government affairs for SunEdison, a lead member of CASE, said “Today the solar industry is 100,00 employees of which 57 percent are in the installation business, 21 percent are in sales and distribution, and only 14 percent are in manufacturing.”  These companies benefit from the cheap Chinese products they sell, distribute, and install.

The petitions request that the ITC investigate imports of Chinese crystalline solar cell and modules but exclude thin-film products and solar technology that is not photovoltaic, such as solar thermal products.

The petitions seek relief for the U.S. domestic companies injured by Chinese imports and seek duties to offset Chinese dumping alleged to exceed 100 percent.  “The countervailing duty petition alleges that China illegally subsidizes its solar industry by providing cash grants; discounted polysilicon and aluminum necessary for production of solar panels; heavily discounted land, power and water; multi-billion dollar preferential loans and directed credit; tax exemptions, incentives and rebates; and export grants and insurance. The countervailing duty petition also alleges that China’s currency undervaluation is an illegal subsidy.”

The next step is for the ITC to decide whether the petitions are legally and factually sufficient and are adequately supported by the U.S. industry.  During such investigations, the Commission gathers information from the U.S. industry and the ITC gathers information from the foreign government and industry.

On December 2, 2011, the ITC issued a unanimous preliminary determination that Chinese trade practices are harming the U.S. domestic solar manufacturing industry.  The next step in the trade case will be Commerce’s preliminary determination on whether to levy countervailing import duties to offset the effects of any illegal Chinese subsidies.  The finding of “critical circumstances” means that if the agency imposes preliminary countervailing duties on March 2, the duties will apply to all imports of cells and modules from Chinese exporters that were brought into the United States starting Dec. 3, 2011.

This critical-circumstances ruling marks the first time that Commerce has issued such a finding in advance of a preliminary countervailing duty determination.  Aside from the determination on countervailing duties, the agency is scheduled to issue a separate preliminary ruling on anti-dumping duties on March 27.  Commerce will issue a separate critical-circumstances ruling in the anti-dumping investigation. A final decision from the U. S. ITC can take up to a year.

On February 7, 2012, the National Renewable Energy Laboratory posted a revised research presentation on the NREL website, which CASM praised.  The presentation concludes Chinese production of crystalline silicon solar technology for the U.S. market costs more than U.S. production for the domestic market, when the costs of shipping are included.

CASM contends the findings validate its position that the Chinese solar-manufacturing industry doesn’t enjoy a cost advantage in solar production costs but, rather, benefits from a government-underwritten export campaign designed to injure competition from U.S. manufacturers.

The NREL presentation, “Solar PV Manufacturing Cost Analysis: U.S. Competitiveness in a Global Industry,” concludes that Chinese producers have an inherent cost advantage of no greater than one percent, compared with U.S. producers.  However, when trans-ocean shipping costs are counted, Chinese producers face a 5 percent cost disadvantage, according to the analysis…Massive government subsidies the government says, sponsor the Chinese industrial drive to export about 95 percent of domestic production, a campaign that has already seized 55 percent of global market share.”

“This analysis from the renewable-energy research arm of the U.S. government corroborates our view that an export drive sponsored by the Chinese government is improperly intervening in the U.S. market,” said Gordon Brinser, president of SolarWorld Industries America Inc., based in Oregon.  “Highly efficient U.S. producers like SolarWorld can vie with any company in the world in legal competition.  But the government of China’s illegal trade practices are neither economically nor environmentally sustainable for anyone.  Free trade is trade free of illegal foreign government intervention.”

“We are countering the illegal trade practices of China and its state-sponsored industry only as a first step to reviving renewable-energy competition, manufacturing and jobs and augmenting national energy security and world environmental stewardship,” Brinser said. “All of the advantages of solar should be available to the United States and to the competitive U.S. industry that pioneered this technology.”

Chinese silicon solar PV producers more than doubled their exports of crystalline silicon solar cells and modules in advance of potential U.S. government duties on those imports, according to an evaluation of PIERS’ reports, which are based on US Customs and Border Protection Automated Manifest System data.

“This significant increase in imports demonstrates that the Chinese know they have violated U.S. and international trade rules and are trying to evade the consequences,” said Gordon Brinser, president of SolarWorld Industries America Inc., based in Oregon.  “Year to date, Chinese imports of solar cells and modules in 2011 are up 346 percent by quantity and 138 percent by value. Since 2008, Chinese imports have risen 939 percent by value and 1664 percent by quantity.  This most recent surge of Chinese solar imports gives the U.S. Department of Commerce the evidence it needs not only to make a preliminary determination in our favor, but also to apply a critical-circumstances finding to address this last-minute import surge.”

“The Chinese have made it clear that, contrary to various World Trade Organization agreements they signed 10 years ago, they will employ any means necessary to dominate the American and international solar markets,” Brinser said.  “Rather than reward the Chinese for cheating, Commerce and the International Trade Commission need to take every possible action to enable American manufacturers to compete fairly.”

Most of the solar technology was developed in the U. S., but the Chinese government decided the industry was something it wanted to dominate and provided the financing necessary to its manufacturers to build the capacity to do so enabling China to take a dominant market position. Chinese companies such as LDK Solar, JA Solar, Suntech, and Trina Solar obtained billions of dollars in financing from the China Development Bank in the last five years.

In contrast, the U.S. solar industry has had to rely on a tax credit to fund its expansion until federal stimulus money gave a jolt to the industry.  This funding was given to solar and wind project installers, not manufacturers. Investor advisor, Travis Hoium wrote, “Since it was a tax credit, it often required a tax equity investor, often a foreign company, to fund the project. The subsidy was there, but instead of being direct, it was convoluted and too complex to be as effective as China’s subsidies in building an industry.”

He added, “The stimulus money helped in some ways. The 1603 Treasure Program turned the tax credit into a cash grant for 30% of a renewable energy installation’s cost, helping attract more investors. But more direct funding blew up in the government’s face.  The Solyndra debacle showed that loan guarantees don’t guarantee success and that the government probably isn’t the best at picking industry winners.  The outrage after the company’s collapse could be heard around the country.”

This shows the contrast in the ways that China and the U.S. have subsidized their solar industries.  As a capitalistic economy, the U. S. doesn’t want direct government meddling in business.  On the other hand, China will subsidize businesses to create jobs and help them maintain their position as the world’s #1 exporter.

Filing a trade case is the last resort for an industry harmed by China’s “dumping,” government subsidies, and currency manipulation.  Other industries that have been forced to file similar cases are steel, semiconductors, textiles, furniture, and tires.  This latest case is part of a long trend of industries on the verge of being wiped out by China’s predatory mercantilism.  Our elected leaders seem to be afraid to do anything because it would start a trade war.  When are our leaders going to realize that we are already in a trade war, and China is winning?  If China can defeat us in an economic war and destroy the economy of the United States, they won’t have to fight us in a military war.  It’s time for our elected to have the courage to stand up to China and address China’s “dumping” and currency manipulation.  We Americans need to demand action!

 

 

 

 

 

 

 

 

 

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What are the Positions of Presidential Candidates on Trade?

Tuesday, December 20th, 2011

As a candidate for president in 2007-2008, the then-Illinois senator, Barrack Obama talked a good game.  In December 2007 at the Des Moines Register debate, he pledged “there’s no doubt that NAFTA needs to be amended. “  At a June 2008 speech in Flint, MI, he said, “If we continue to let our trade policy be dictated by special interests, then American workers will continue to be undermined, and public support for robust trade will continue to erode.”

But as president, Obama’s flip-flops on trade rank up there with the best moves of an Olympic gymnast.  He pushed hard for passage of the trade agreements with Korea, Colombia and Panama, all based fail NAFTA template.  He has instructed his team at the U.S. Trade Representative’s office to spearhead the proposed Trans-Pacific Partnership, a trade agreement involving nine Pacific region nations, including Vietnam and Brunei, two undemocratic countries with serious and well-documented human and labor rights problems.

So how about the Republicans?  Former Massachusetts governor, Mitt Romney, has the most detailed position on trade of all the GOP candidates.  Romney supports the free trade agreements with Korea, Colombia and Panama that were passed by Congress and signed by Obama.  He also calls for passage of the Trans-Pacific Partnership, in addition to new FTAs with nations such as Brazil and India.

However, Romney would get tough with China by imposing “targeted tariffs” or economic sanctions for unfair trade practices or misappropriated American technology.  He would also designate China as a currency manipulator and instruct the Commerce Department to impose countervailing duties.  Romney would also pursue the “formation of a ‘Reagan Economic Zone.’ This zone would codify the principles of free trade at the international level and place the issues now hindering trade in services and intellectual property, crucial to American prosperity and that of other developed nations, at the center of the discussion.”

Not much can be said for Newt Gingrich on the subject of trade and jobs. The once-powerful House speaker wants to make “mutual trade”–neither free trade nor protectionism–the country’s goal,” whatever that means.  Back in 2006, Gingrich felt that protectionism helps China and India challenge U.S. supremacy.  Writing on his website, he said, “In the US, there exists a coalition of union leaders who prefer protection over competition. This liberal coalition complains about companies’ outsourcing jobs while insisting on corporate taxes that encourage companies to go overseas. They prefer that government impose on business obsolete, absurd work rules, even though these raise costs, lower productivity, and make America less competitive in the world market. The challenge to American economic supremacy from 1.3 billion Chinese and more than 1.1 billion Indians is vastly greater than anything we have previously seen.  India’s embrace of capitalism and China’s bizarre combination of Marxist-Leninist government and free market initiatives will create a future where one-fourth of the world’s markets will be controlled by these countries.  Those who advocate economic isolationism and protectionism are advocating a policy that could help China and India surpass the US in economic power in our children’s or grandchildren’s lifetime.”

Texas Governor Rick Perry’s plan for “Energizing American Jobs and Security” on his campaign website makes no mention of trade issues.  However, in his 2010 book Fed up!, Perry says “I see an America where the innovation and hard work of the American people creates still more opportunities, jobs, and wealth. I see a nation that is not cowering to the prospect of a united Europe or an ever-growing China and India, but rather welcomes those markets and many others as opportunities for the entrepreneurial and industrious spirit of the American people. I see a world where free trade opens up more doors and where people embrace trade’s benefit to both America and the rest of the world.”

Congresswoman Michele Bachmann pledges to cut spending and the size of government, reduce taxes, and repeal onerous legislation, such as ObamaCare and the Dodd-Frank Act.  The first of the 11 points of her “American Jobs, Right Now” blueprint is to repatriate the foreign earnings of American corporations to create immediate jobs, but the other ten points make no mention of trade issues.  However, she voted for the Peru FTA in 2007, her first year in the House, and she backed the Korea, Colombia and Panama FTAs this year.

Former Pennsylvania Senator Rick Santorum pledges to negotiate five Free Trade Agreements and submit them to Congress in the first year of his presidency.  During his tenure in Congress, Santorum voted for Permanent Normal Trade Relations with China and all of the free trade agreements of the George W. Bush era including CAFTA, Chile, Oman and Singapore.  All of these votes resulted in Senator Santorum compiling a perfect 100% rating from the CATO Institute, the libertarian think tank co-founded by Charles Koch, one of the Koch brothers that own the conglomerate Koch Industries, Inc.

U.S. Rep. Ron Paul is another candidate whose economic planks are standard Republican positions.  To understand Paul’s views it is best to look at his quotes and votes. During his two stints in Congress, Paul voted against NAFTA and free trade agreements with Australia, CAFTA, Chile, Peru and Singapore.  In addition, Paul voted to withdraw from the WTO and to not renew the “fast track” authority for the president to negotiate FTAs because he feels it cedes power from Congress to the executive branch.

In his 2008 presidential campaign, Paul explained his opposition to FTAs as threats to American sovereignty, saying “I opposed both the North American Free Trade Agreement and the World Trade Organization, both of which were heavily favored by the political establishment.  Many supporters of the free trade market supported these agreements. Nearly six decades ago when the International Trade Organization was up for debate, conservatives and libertarians agreed that supranational trade bureaucracies with the power to infringe upon American sovereignty were undesirable.”

Jon Huntsman is selling himself as an unabashed free trader. The former Utah governor boasts of leading trade missions overseas that helped grow his state’s exports, and he touts his appointment as deputy U.S. trade representative under President George W. Bush as giving him experience in helping to negotiate trade agreements across the globe. Like Romney, Huntsman would push for completion of the Trans-Pacific Partnership, and he would initiate FTAs with Japan, India, Taiwan and other nations. Huntsman also supports the Doha Development Round of World Trade Organization (WTO) negotiations.

In contrast, Buddy Roemer has taken a hard line against Free Trade Agreements and China. In a September 1, 2011 speech in front of the Chinese Embassy in Washington, DC, the former Louisiana congressman and governor unveiled his jobs plan where he slammed open trade with China as the “biggest disaster for the American economy.”  He claims to be “the only presidential candidate who is speaking the truth about global free trade.”   To level the playing field on trade, Roemer called for an elimination of the foreign tax credit for taxes paid to a foreign country.   In addition, he proposed the elimination of tax deductions for business expenses and costs of goods sold for companies that buy goods or services outside the United States.  Only businesses that employ American workers and buy American products would be allowed these tax deductions.  He also called for importers to pay the government an adjustment fee “equal to the unfair advantage they gain from importing goods from foreign countries to the United States.”

It’s a shame that the Republican candidate with the best position on trade has garnered less than 1% support in the polls so that he isn’t being included in the debates with the other Republican candidates.  This is the same position that Congressman Duncan Hunter occupied in the 2008 election when he was the only candidate on the right side of the trade issue and supported American manufacturing.  He wasn’t included in the 2008 debates so millions of people missed out on hearing his message.

When are Americans going to wake up to what is really causing the lack of jobs in the United States?  The real culprits are free trade agreements with Mexico, China, and other countries, as well as the outsourcing of manufacturing offshore..  They have led to the loss of nearly six million manufacturing jobs since the year 2000.   Since manufacturing jobs create an average of three to four other jobs, we’ve really lost 18 to 24 million jobs.  We need to review our unilateral free trade agreements with China and other countries that only seem to benefit other countries at the cost of jobs and even whole industries in the United States.  We need to let all the candidates for president know that we don’t want any more free trade agreements.  We need to let them know that we want them to support the American manufacturing industry and stop giving our wealth and jobs to foreign countries.

 

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What Led to the Problem of Chinese Counterfeit Parts?

Tuesday, November 15th, 2011

Last week, the Senate Armed Services Committee reported that an investigation found and examined about 1800 cases of suspected counterfeit electronic parts dating from 2009 to last year, totaling about a million individual components.  Tracing the supply chain, 70% of the components came through China, where a variety of methods were used to misrepresent the parts as new and genuine.  Hearings now being conducted by Senator Carl Levin (D-Michigan) and Senator John McCain (R-Arizona).

At a news conference on Monday, November 7, 2011, Sen. Carl Levin told reporters, “There’s a flood of counterfeit parts entering the defense supply chain.  It is endangering our troops and it is costing us a fortune.”

Sen. John McCain said the investigation documents the alarming “threat counterfeit parts pose to the safety of our men and women in uniform, to national security and to our economy.”  He added, “We can’t tolerate the risk of a ballistic missile interceptor failing to hit its target, a helicopter pilot unable to fire his missiles, or any other mission failure because of a counterfeit part.”

This dangerous state of affairs has taken over 20 years to develop and is a complex web of unintended consequences of seemingly innocuous changes in policies.  There are four main reasons for the problem of Chinese counterfeit components:

1.      Mil. Spec. qualified components replaced by off the shelf components

2.      “Buy American” requirements relaxed

3.      Manufacturing outsourced offshore, mainly in China

4.      Rapid obsolescence of components, especially micro chips

It all started with the scandals of the 1980s over the $600 toilet seats and $400 wrenches that President Reagan’s Defense Department, under Caspar Weinberger, was accused of wasting its money on by the Democrat-controlled Congress.

At the time, the news media ignored reasonable voices pointing out that tooling often has to be made to produce metal, plastic, rubber, and fiber glass parts in certain manufacturing processes.  This tooling cost then has to be amortized into the piece price of the part; i.e., tooling cost divided by the number of parts ordered plus piece price equals selling price. Since defense and military parts are produced in much lower volume than commercial products, the amortized tooling costs add much more to the part cost than it does for commercial parts.

The $600 toilet seat was actually a uniquely shaped, molded fiberglass shroud that fits over the toilet and had to satisfy specifications for vibration resistance, weight, and durability for the P-3C Orion antisubmarine aircraft, which went into service in 1962.  Since the airplane had been out of production for years, new tooling was required to produce the part.  The price reflected the design work and the cost of the equipment to manufacture them, and Lockheed Corp. charged $34,560 for 54 toilet covers, or $640 each.  The president of Lockheed at the time, Lawrence Kitchen, adjusted to the price to $100 each and returned $29,165.

Because of the public outcry over these scandals, the procurement regulations were changed.  The Defense Department, branches of the military, and their supply chain of vendors were allowed to purchase commercial off the shelf parts (COTS) if they met the same fit and function of parts made to strict military specifications.  In the early 1990s, most commercial parts were still being made in the United States, with some outsourcing to the Philippines, Hong Kong, and Singapore, so this change was pretty safe.  Permitting commercial parts to replace Mil. Spec. parts probably drove out of business the small companies that catered exclusively to the military and that provided traceability, per Mil. Spec., for parts supplied to government agencies, military contractors, and subcontractors.  This was all done in the name of cost savings.  Now, however, most commercial electronic components and micro chips are fabricated in China.

Second, after the end of the Cold War and the successful conclusion of the first Gulf War, the provisions of the “Buy American Act” were eased to allow purchasing off the shelf commercial parts from foreign countries by the Defense Department and other government agencies.  Previously, parts, assemblies, and systems were required to be substantially made in the United States or in a NATO country, such as Great Britain, France, and Germany.

This led to parts being made in China as more and more American companies started to outsource manufacturing in China either by selecting Chinese companies as vendors or setting up their own manufacturing plants in China.   This trend accelerated after China received “most favored nation” status with the approval of the World Trade Organization treaty in the year 2000, and American companies started to build semiconductor wafer fab plants in China to produce micro chips.

The problem with counterfeit parts is not something new to industry – there were always a small number of rejected parts that went out the “back door” of companies to be sold on the black or “gray” markets by individual employees.  What is new is the purposeful production of counterfeit parts by a foreign government, namely, China, as a form of economic warfare and counter espionage.

Brian Toohey, president of the Semiconductor Industry Association (SIA), testified Tuesday before the Senate Armed Services Committee calling counterfeit parts “a ticking time bomb.”   He added, “The catastrophic failure risk inherently found in counterfeit semiconductors places our citizens and military personnel in unreasonable peril,” said Toohey. The SIA estimates that counterfeits cost US-based semiconductor companies more than $7.5 billion a year.

EBN Editor, Barbara Jorgensen wrote in her blog, “Counterfeits have been appearing in the consumer and industrial sectors for as long as anyone can remember, but their presence in mission-critical defense equipment and military and passenger aircraft threatens lives  The efforts have a ways to go, but the dialogue between industry associations such as the SIA and the Defense Department and Justice Department are a major step in the right direction.”

Bruce Rayner, Contributing Editor, EE Times, wrote “counterfeiting is on the rise and it is getting harder to detect.  Counterfeit computer hardware, including chips, was one of the top commodities seized in 2010 by the US Immigration and Customs Enforcement agency (ICE) … up five-fold over 2009…The reason for the increase is that there’s a lot of money to be made.  Many obsolete components are in demand by the military because they need to repair very old equipment, such as 1980s-vintage fighter jets.  But the parts are no longer manufactured, and only a few authorized distributors stock the vintage components.  In some cases, the only place to buy these chips is from independent distributors or brokers who don’t have formal sourcing relationships with the original component manufacturer. They buy them over the Internet from sources they don’t know and who can’t validate their authenticity.”

The August 2011 issue of Industry Week reported, “In 2010, government agents seized fake goods totaling $188.1 million, which if genuine would have been worth $1.4 billion.  Goods from China accounted for 66% of the value of seizures by U. S. Customs and Border Protection.”  In the same article, Wes Shepherd, CEO of Channel IQ, said that the outsourcing of manufacturing in China combined with online selling “introduced the specter of counterfeiting as a much more serious problem.”

Joe O’Neill, owner of O’Neill Technologies and formerly with Intel, Samsung and Toshiba, told me in an interview, “the counterfeit problem is a product life cycle mismatch between consumer and more traditional applications, such as industrial, medical, and defense.  The life cycle of micro chips, also referred to as micro processors and controllers, are very short in the networking, computer, and telecommunications industries.  The life cycle of a cell phone model may range from six to 12 months, while industrial and military products may have a life cycle of decades.  Products for the military are a small piece of the market so there is a real problem with part obsolescence.  Availability of these parts that have been made ‘end of life’ force manufacturers to go into the Gray Market or other non-traditional sources to keep their factories supplied with parts.  There are a few companies that specialize in making obsolescent microprocessors for industrial, medical or military manufacturers by “cloning” the parts.” One such company is Innovasic, which makes the X86 series of Intel and AMD micro processors.

During the Senate hearings, part of which I watched after work, photos of bins of electronic parts were shown as Thomas Sharpe, V. P. of SMT Corporation, described visiting electronic component marketplaces in July 2008, where scrapped electronic parts were washed in rivers or left for the daily monsoon rains, dried on river banks, and collected in bins to be ready for counterfeit processing.  Counterfeiters buy used parts for pennies in the street markets of Shenzhen and other Chinese cities, re-mark them, fix broken leads and buff them up, then ship them to brokers in the West who unknowingly or knowingly sell them to other brokers or to OEMs for multiples of what they paid.

Last year, the Department of Justice’s Task Force on Intellectual Property was created specifically to prosecute counterfeiters, and last week Stephanie McCloskey was sentenced to 38 months in federal prison for her role in a scheme by VisionTech Components to import fake chips from China into the U. S. that were sold to a variety of customers including defense contractors and the military.

Until we implement more stringent procurement regulations, strengthen “Buy American” procurement regulations for defense and military components, and return more manufacturing to the United States from offshore, it will be up to manufacturers to have a system to detect and deter counterfeits.  Many defense contractors have put in place strict regimen for inspecting, testing, and reporting counterfeits, but all companies need to be vigilant by inspecting, testing, and reporting.

 

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Posted in General, Outsourcing, Trade Policy | 2 Comments »

What Can I do to “save” American Manufacturing?

Tuesday, October 25th, 2011

You may feel that there is nothing you can do as an individual to stop the total destruction of American manufacturing and watch the United States go over the precipice. Don’t think this way!   American activist and author, Sonia Johnson said, “We must remember that one determined person can make a significant difference, and that a small group of determined people can change the course of history.” Eleanor Roosevelt echoed this sentiment saying, “Never doubt that a small group of thoughtful, committed citizens can change world; indeed, it’s the only thing that ever has.” Remember that our country was founded by a small group of people that did indeed change the world by forming the United States of America.

Here are suggestions of what each one of us can do:

As a Consumer:  It matters if we buy American-made products.  First, our addiction to imports has helped create our high trade deficit, especially with China, where most of the consumer goods we import are manufactured.  Second, American-made products create American jobs.  Each time you choose to buy an American-made product, you help save or create an American job.

Look at the country of origin labels of goods when you go shopping. Most imported goods are required to have these labels.  Buy the “Made in U.S.A.” even if it costs more than the imported product. It is a small sacrifice to make to insure the well being of your fellow Americans. The price difference you pay for “Made in USA” products keeps other Americans working.

If the product you are looking for is no longer made in America, then avoid countries such as China, who have nuclear warheads aimed at American cities. It would not be an exaggeration to say that American consumers have paid for the bulk of China’s military buildup. American service men and women could one day face weapons mostly paid for by American consumers. Instead, patronize impoverished countries such as Bangladesh or Nicaragua, which have no military ambitions against the United States.

In addition, you will be reducing your “carbon footprint” by buying a product made in America instead of a product that is made offshore that will use a great deal of fossil fuel just to ship it to the United States.

If you have a “Made in USA” appliance that needs repair and all the new ones are imported, have it repaired. If it can’t be fixed, and it is a small appliance that you can live without, then don’t buy a new one.

We Americans buy many things that we really don’t need just because they are so cheap. If a product that you are considering purchasing is an import, ask yourself, “Do I really need this?” If you don’t need it, then don’t buy it.

If you are willing to step out of your comfort zone, you could ask to speak to the department or store manager of your favorite store. You could tell the person that you have been a regular customer for x amount of time, but if they want to keep you as a customer, they need to start carrying some (or more) “Made in USA.” products.  If you buy products on line or from catalogs, you could contact these companies via email with a similar message. Your communicating with a company does have an effect because the rule of thumb in sales and marketing is that one reported customer complaint equals 100 unreported complaints.

If you think that Americans no longer care about where goods are made or have concerns about the safety of foreign products, you may be surprised to learn that poll after poll shows that the majority of Americans prefer to buy American.

A nationwide poll conducted by Sacred Heart University in September 2007 found the following:

  • 68.6 percent of Americans check labels for information like manufacturer, nation of origin and ingredients
  • 86.3 percent of Americans would like to block Chinese imports until they raise their product and food safety standards to meet U.S. levels.3

Buying American has been made even easier by a book by Roger Simmermaker – “How Americans Can Buy American: The Power of Consumer Patriotism” released in March 2008 and updated in 2010.  According to Simmermaker, “buying American” is not just about buying “Made in USA.”  “Buying American, in the purest sense of the term, means we would buy an American-made product, made by an American-owned company, with as high a domestic parts content within that product as possible . . . ‘American-made’ is good. ‘Buying American’ is much better!”

One of our greatest statesmen, Thomas Jefferson, stated, “I have come to a resolution myself, as I hope every good citizen will, never again to purchase any article of foreign manufacture which can be had of American make, be the difference of price what it may.”

Simmermaker has made it easy by listing companies and their nation of ownership. You can see his list of American-owned companies at his website: www.howtobuyamerican.com However, Simmermaker’s website isn’t the only one available. You can also check many other websites, found simply by “Googling” “buy American.” These include:

www.buyamericanmart.com

www.ionlybuyamerican.com

www.madeinusa.org

www.americansworking.com

www.shopunionmade.org

www.MadeInUSAForever.com

www.stillmadeinUSA.com

There are also brick and mortar stores springing up around the country that are either stocking only “made in America” products, such as the American Apparel stores or primarily “made in America” products, such as the Urban Outfitters stores.

As American consumers, you have many choices to live safely and enjoy more peace of mind with American products. It’s high time to stop sending our American dollars to China while they send us all of their tainted, hazardous, and disposable products. If 200 million Americans refuse to buy just $20 each of Chinese goods, that’s a four billion dollar trade imbalance resolved in our favor – fast!

As a Voter:  There’s only one way for manufacturers to find relief from high taxes, burdensome regulations, and unfair trade laws and that’s through Washington, D.C.  Voter apathy is partially responsible for the state of our affairs as a country. Too many people have decided that there is nothing we can do on an individual basis and have even stopped voting.

Americans have been “sold down the river” by politicians on both sides of the aisle – Democrats and Republicans. Democrats profess to support “blue collar workers” and unions, yet NAFTA and the WTO treaties were approved and went into effect under the presidency of Democrat Bill Clinton. Republicans profess to support business, yet they primarily support large, multinational corporations, rather than the small businesses that are the engine of economic growth in the U.S. and the foundation of the middle class.

In his 2008 book, “Where Have all the Leaders Gone” Lee Iacocca said, “Am I the only guy in this country who’s fed up with what’s happening? Where is our outrage? We should be screaming bloody murder. We’ve got corporate gangsters stealing us blind. The most famous business leaders aren’t the innovators, but the guys in handcuffs. And, don’t tell me it’s all the fault of right wing Republicans or liberal Democrats. That’s an intellectually lazy argument and it’s part of the reason that we’re in this stew. We’re not just a nation of factions. We’re a people and we rise and fall together.  We didn’t elect you to sit on your butts and do nothing and remain silent while our country is being hijacked and our greatness is being replaced with mediocrity.  What is everybody so afraid of?  Why don’t you guys in Congress show some spine for a change?”

In a poll asking Americans if they’ve ever contacted their elected representatives, eight out of ten said that they never had. It’s never been easier to contact members of Congress. All you have to do is click on www.house.gov or www.senate.gov and type in your zip code, and you’re automatically directed to your representative. A window automatically pops up where you can type a message to that representative.  It takes less than two minutes, on average.  Well, we now need to let our elected representatives know how we feel about the bad trade laws, bad tax laws, and over burdensome regulations on manufacturers. It’s time to shed apathy, become involved, and vote.

If people whose lives are affected by manufacturing would contact their legislators and tell them they want trade reform and tax reform and would follow up to watch to see how they voted, the results would be amazingly effective.

We cannot afford to export our wealth and be able to remain a first-world country. We cannot lose our manufacturing base and be able to remain a “superpower.” In fact, we may not be able to maintain our freedom as a country because it takes considerable wealth to protect our freedom. You can play a role as an individual in saving our country ? the company you save or the job you save by your actions may be your own.

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U. S. Lost 1.9 Million Manufacturing Jobs due to Trade Deficit with China

Tuesday, September 27th, 2011

According to a study released on September 20, 2011 by the Economic Policy Institute, the U.S.-China trade deficit has eliminated or displaced nearly 2.8 million jobs, of which 1.9 million or 70 percent were in manufacturing.

The study, “Growing U.S. trade deficit with China cost 2.8 million jobs between 2001 and 2010” by Robert Scott, EPI’s director of trade and manufacturing policy research, writes, “Since China entered the World Trade Organization in 2001, the extraordinary growth of U. S. trade has had a dramatic effect on U.S. workers and the domestic economy.”

The trade deficit with China grew from $84 billion in 2001, when China entered the WTO, to $278 billion in 2010.  It eliminated or displaced 2,790,100 jobs, or about 2 percent of total U.S. employment over that period. All 50 states, the District of Columbia and Puerto Rico suffered jobs lost or displaced as a result of the growing U.S.-China trade deficit.  The 10 states that suffered the biggest net losses were California (454,600 jobs), Texas (232,800), New York (161,400), Illinois (118,200), Florida (114,400), North Carolina (107,800), Pennsylvania (106,900), Ohio (103,500), Massachusetts (88,600) and Georgia (87,700). ).  These losses comprise more than 2.2 percent of total employment.

A total of 453,100 jobs were lost or displaced from 2008 to 2010 alone—even though imports from China and the rest of world collapsed in 2009 during the height of the global financial crisis.  In fact, the report notes the U.S. trade deficit with China increased $8 billion during the great recession, despite a collapse in world trade at that time.

The largest share of manufacturing jobs lost or displaced were in computer and electronic parts, accounting for more than 44 percent of the $194 billion increase in the U. S. trade deficit with China between 2001 and 2010.  In 2010, the total U.S. trade deficit with China was $278.3 billion, of which $124.3 billion was in computer and electronics parts.  This growth of the trade deficit resulted in the loss of 909,400 jobs in these industries.

Apparel and accessories lost 178, 700 jobs, textile fabrics and products lost 92,300 jobs, fabricated metal products lost 123,900 jobs, plastic and rubber products lost 62,000 jobs, motor vehicles and parts lost 49,300 jobs, and miscellaneous manufactured goods lost 119,700 jobs.   The job displacement estimates in the report are conservative and represent only the direct and indirect jobs displaced by trade and exclude jobs in domestic wholesale and retail trade and advertising.

“Global trade in advanced technology products—often discussed as a source of comparative advantage for the United States—is instead dominated by China,” the report concludes.  The U.S. had a new record $94.2 billion trade deficit in Advanced Technology Products (ATP) with China in 2010 compared to a $40.7 billion trade deficit in 2007, an increase of 45.5 percent in three years.  In contrast, the United States had a $13.3 billion surplus in ATP with the rest of the world in 2010.

The impact of the trade deficit with China extends beyond U.S. jobs lost or displaced, according to the Alliance for American Manufacturing (AAM). Competition with China and countries like it has resulted in lower wages and less bargaining power for U.S. workers in manufacturing and for all workers with less than a four-year college degree.

Cheap labor may well be the main reason for China’s manufacturing advantage, but the report cites illegal currency manipulation as a major cause of the rapidly growing U.S. trade deficit with China.  Unlike other currencies, the Chinese yuan does not fluctuate freely against the dollar, but is artificially pegged in order to boost China’s exports.  While the cost of labor affected China’s exports, the currency manipulation, which happened despite China joining the World Trade Organization in 2001, distorted its imports.

American policymakers have long assumed that as China’s huge middle class grew, U.S. companies’ sales to these new consumers would also grow.  But it did not work out that way, the EPI reports: “as a result of China’s currency manipulation and other trade distorting practices, including extensive subsidies, legal and illegal barriers to imports, dumping and suppression of wages and labor rights, the envisioned flow of U.S. exports to China did not occur.”  Added to its labor cost advantage, this currency manipulation has been devastating to many U.S. companies.

China’s currency manipulation, state-owned enterprises, heavy industrial subsidies, intellectual property theft and piracy, indigenous innovation policies, rare earth mineral export restrictions and other trade-distorting practices have caused China’s share of the total U.S. non-oil goods trade deficit to soar from 69.6 percent in 2008 to 78.3 percent in 2010.

“Unless China raises the real value of the yuan by at least 28.5 percent and eliminates other trade distortions,” the report concludes, “the U.S. trade deficit and job losses will continue to grow rapidly.”

“This report offers conclusive evidence that immediate action by the Administration is needed to curb China’s currency manipulation, which, along with China’s blatant trade violations, are having the same devastating impact on high-tech production that they’ve already had on the nation’s longstanding industrial base,” said Scott Paul, executive director of the Alliance for American Manufacturing (AAM), a partnership of America’s leading manufacturers and the United Steelworkers union.

“We urgently need a national strategy for restoring America’s global leadership in manufacturing,” he added. “Challenging China’s currency manipulation would be an important first step toward developing such a strategy.  It would not only cut unemployment, it would result in a much-needed increase in federal revenue.”

According to a blog notice by the Coalition for a Prosperous America today, Majority Leader Reid has filed for cloture on the Senate currency bill that was filed last week.  This bill is the Brown-Schumer-Graham-Snowe-Stabenow-Sessions-Casey-Burr Currency Exchange Rate Oversight Act of 2011 (S. 1619), which is the consensus bill negotiated among Senators to deal with Treasury’s oversight role as well as the Commerce Department’s role in countervailing duty investigations.  Reid’s announcement means that there will be vote on the cloture on Monday, October 3, 2011, followed by debate on the currency bill and a vote on the bill.  A similar bill, H.R.639, was introduced recently in the House and had 206 co-sponsors as of last week.

The EPI report cites Foreign Direct Investment (FDI) as another key factor in the job loss.  FDI is money invested in China by other countries, such as the United States.  It can take the form of American companies buying or building plants in China to move manufacturing operations to China.  When outsourcing to China first occurred in the mid 1990s, American companies just outsourced parts and assemblies to Chinese companies.   Then, it became the trend to outsource whole product lines to Chinese companies.  The next step was for American companies to buy or build new plants set up as subsidiaries in China to manufacture their products.  The report states that “China is the largest recipient of FDI of all developing countries and is the third largest recipient of FDI over the past three decades, trailing only the United Stated and the United Kingdom.  Foreign-invested enterprises (both joint ventures and wholly owned subsidiaries) were responsible for 55 percent of China’s exports and 68 percent of its trade surplus in 2010.  Outsourcing ? through foreign direct investment in factories that make goods for export to the United States ? has played a key role in the shift of manufacturing production and jobs from the Unites States to China since it entered the WTO in 2001.”

The EPI research does not make a forecast of how many more American jobs may be lost in the future due to China’s manufacturing cost advantages and questionable trade policies.  The damage, of course, did not suddenly end in 2010, and is almost certainly ongoing.  And, of course, “the U.S. is piling up foreign debt, losing export capacity, and faces a fragile macroeconomic environment.”

The report concludes that “the U. S. trade relationship needs a fundamental change.  Addressing the exchange rate policies and labor standards issue in the Chinese economy are important first steps.”

I think it’s high time that these issues are addressed by Congress.  I’ve watched one company after another outsource manufacturing to China in my sales territory in Southern California as a manufacturers’ sales rep for American companies.  I’ve personally witnessed my customers who are engineers and purchasing agents at these companies lose their jobs and have increasing difficulty finding replacement jobs. My career in manufacturing includes the major recessions we have experienced since 1980, and I have never known so many people out of work for so long.  The joblessness problem in the U.S. is so serious that any added erosion of employment opportunities from our trade deficits with China will make a recovery of the American economy all the more difficult.

According to a study released on September 20, 2011 by the Economic Policy Institute, the U.S.-China trade deficit has eliminated or displaced nearly 2.8 million jobs, of which 1.9 million or 70 percent were in manufacturing.

The study, “Growing U.S. trade deficit with China cost 2.8 million jobs between 2001 and 2010” by Robert Scott, EPI’s director of trade and manufacturing policy research, writes, “Since China entered the World Trade Organization in 2001, the extraordinary growth of U. S. trade has had a dramatic effect on U.S. workers and the domestic economy.”

The trade deficit with China grew from $84 billion in 2001, when China entered the WTO, to $278 billion in 2010.  It eliminated or displaced 2,790,100 jobs, or about 2 percent of total U.S. employment over that period. All 50 states, the District of Columbia and Puerto Rico suffered jobs lost or displaced as a result of the growing U.S.-China trade deficit.  The 10 states that suffered the biggest net losses were California (454,600 jobs), Texas (232,800), New York (161,400), Illinois (118,200), Florida (114,400), North Carolina (107,800), Pennsylvania (106,900), Ohio (103,500), Massachusetts (88,600) and Georgia (87,700). ).  These losses comprise more than 2.2 percent of total employment.

A total of 453,100 jobs were lost or displaced from 2008 to 2010 alone—even though imports from China and the rest of world collapsed in 2009 during the height of the global financial crisis.  In fact, the report notes the U.S. trade deficit with China increased $8 billion during the great recession, despite a collapse in world trade at that time.

The largest share of manufacturing jobs lost or displaced were in computer and electronic parts, accounting for more than 44 percent of the $194 billion increase in the U. S. trade deficit with China between 2001 and 2010.  In 2010, the total U.S. trade deficit with China was $278.3 billion, of which $124.3 billion was in computer and electronics parts.  This growth of the trade deficit resulted in the loss of 909,400 jobs in these industries.

Apparel and accessories lost 178, 700 jobs, textile fabrics and products lost 92,300 jobs, fabricated metal products lost 123,900 jobs, plastic and rubber products lost 62,000 jobs, motor vehicles and parts lost 49,300 jobs, and miscellaneous manufactured goods lost 119,700 jobs.   The job displacement estimates in the report are conservative and represent only the direct and indirect jobs displaced by trade and exclude jobs in domestic wholesale and retail trade and advertising.

“Global trade in advanced technology products—often discussed as a source of comparative advantage for the United States—is instead dominated by China,” the report concludes.  The U.S. had a new record $94.2 billion trade deficit in Advanced Technology Products (ATP) with China in 2010 compared to a $40.7 billion trade deficit in 2007, an increase of 45.5 percent in three years.  In contrast, the United States had a $13.3 billion surplus in ATP with the rest of the world in 2010.

The impact of the trade deficit with China extends beyond U.S. jobs lost or displaced, according to the Alliance for American Manufacturing (AAM). Competition with China and countries like it has resulted in lower wages and less bargaining power for U.S. workers in manufacturing and for all workers with less than a four-year college degree.

Cheap labor may well be the main reason for China’s manufacturing advantage, but the report cites illegal currency manipulation as a major cause of the rapidly growing U.S. trade deficit with China.  Unlike other currencies, the Chinese yuan does not fluctuate freely against the dollar, but is artificially pegged in order to boost China’s exports.  While the cost of labor affected China’s exports, the currency manipulation, which happened despite China joining the World Trade Organization in 2001, distorted its imports.

American policymakers have long assumed that as China’s huge middle class grew, U.S. companies’ sales to these new consumers would also grow.  But it did not work out that way, the EPI reports: “as a result of China’s currency manipulation and other trade distorting practices, including extensive subsidies, legal and illegal barriers to imports, dumping and suppression of wages and labor rights, the envisioned flow of U.S. exports to China did not occur.”  Added to its labor cost advantage, this currency manipulation has been devastating to many U.S. companies.

China’s currency manipulation, state-owned enterprises, heavy industrial subsidies, intellectual property theft and piracy, indigenous innovation policies, rare earth mineral export restrictions and other trade-distorting practices have caused China’s share of the total U.S. non-oil goods trade deficit to soar from 69.6 percent in 2008 to 78.3 percent in 2010.

“Unless China raises the real value of the yuan by at least 28.5 percent and eliminates other trade distortions,” the report concludes, “the U.S. trade deficit and job losses will continue to grow rapidly.”

“This report offers conclusive evidence that immediate action by the Administration is needed to curb China’s currency manipulation, which, along with China’s blatant trade violations, are having the same devastating impact on high-tech production that they’ve already had on the nation’s longstanding industrial base,” said Scott Paul, executive director of the Alliance for American Manufacturing (AAM), a partnership of America’s leading manufacturers and the United Steelworkers union.

“We urgently need a national strategy for restoring America’s global leadership in manufacturing,” he added. “Challenging China’s currency manipulation would be an important first step toward developing such a strategy.  It would not only cut unemployment, it would result in a much-needed increase in federal revenue.”

According to a blog notice by the Coalition for a Prosperous America today, Majority Leader Reid has filed for cloture on the Senate currency bill that was filed last week.  This bill is the Brown-Schumer-Graham-Snowe-Stabenow-Sessions-Casey-Burr Currency Exchange Rate Oversight Act of 2011 (S. 1619), which is the consensus bill negotiated among Senators to deal with Treasury’s oversight role as well as the Commerce Department’s role in countervailing duty investigations.  Reid’s announcement means that there will be vote on the cloture on Monday, October 3, 2011, followed by debate on the currency bill and a vote on the bill.  A similar bill, H.R.639, was introduced recently in the House and had 206 co-sponsors as of last week.

The EPI report cites Foreign Direct Investment (FDI) as another key factor in the job loss.  FDI is money invested in China by other countries, such as the United States.  It can take the form of American companies buying or building plants in China to move manufacturing operations to China.  When outsourcing to China first occurred in the mid 1990s, American companies just outsourced parts and assemblies to Chinese companies.   Then, it became the trend to outsource whole product lines to Chinese companies.  The next step was for American companies to buy or build new plants set up as subsidiaries in China to manufacture their products.  The report states that “China is the largest recipient of FDI of all developing countries and is the third largest recipient of FDI over the past three decades, trailing only the United Stated and the United Kingdom.  Foreign-invested enterprises (both joint ventures and wholly owned subsidiaries) were responsible for 55 percent of China’s exports and 68 percent of its trade surplus in 2010.  Outsourcing ? through foreign direct investment in factories that make goods for export to the United States ? has played a key role in the shift of manufacturing production and jobs from the Unites States to China since it entered the WTO in 2001.”

The EPI research does not make a forecast of how many more American jobs may be lost in the future due to China’s manufacturing cost advantages and questionable trade policies.  The damage, of course, did not suddenly end in 2010, and is almost certainly ongoing.  And, of course, “the U.S. is piling up foreign debt, losing export capacity, and faces a fragile macroeconomic environment.”

The report concludes that “the U. S. trade relationship needs a fundamental change.  Addressing the exchange rate policies and labor standards issue in the Chinese economy are important first steps.”

I think it’s high time that these issues are addressed by Congress.  I’ve watched one company after another outsource manufacturing to China in my sales territory in Southern California as a manufacturers’ sales rep for American companies.  I’ve personally witnessed my customers who are engineers and purchasing agents at these companies lose their jobs and have increasing difficulty finding replacement jobs. My career in manufacturing includes the major recessions we have experienced since 1980, and I have never known so many people out of work for so long.  The joblessness problem in the U.S. is so serious that any added erosion of employment opportunities from our trade deficits with China will make a recovery of the American economy all the more difficult.

 

 

 

 

 

 

Posted in Outsourcing, Trade Policy | 1 Comment »

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