[Senate Hearing 109-1088]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 109-1088
 
                  MANUFACTURING COMPETITIVENESS IN A 
                             HIGH-TECH ERA

=======================================================================

                                HEARING

                               before the

      SUBCOMMITTEE ON TECHNOLOGY, INNOVATION, AND COMPETITIVENESS

                                 OF THE

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                              JUNE 8, 2005

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation





                  U.S. GOVERNMENT PRINTING OFFICE
61-908                    WASHINGTON : 2010
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC 
20402-0001



       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                     TED STEVENS, Alaska, Chairman
JOHN McCAIN, Arizona                 DANIEL K. INOUYE, Hawaii, Co-
CONRAD BURNS, Montana                    Chairman
TRENT LOTT, Mississippi              JOHN D. ROCKEFELLER IV, West 
KAY BAILEY HUTCHISON, Texas              Virginia
OLYMPIA J. SNOWE, Maine              JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon              BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada                  BARBARA BOXER, California
GEORGE ALLEN, Virginia               BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire        MARIA CANTWELL, Washington
JIM DeMINT, South Carolina           FRANK R. LAUTENBERG, New Jersey
DAVID VITTER, Louisiana              E. BENJAMIN NELSON, Nebraska
                                     MARK PRYOR, Arkansas
             Lisa J. Sutherland, Republican Staff Director
        Christine Drager Kurth, Republican Deputy Staff Director
                David Russell, Republican Chief Counsel
   Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
   Samuel E. Whitehorn, Democratic Deputy Staff Director and General 
                                Counsel
             Lila Harper Helms, Democratic Policy Director
                                 ------                                

      SUBCOMMITTEE ON TECHNOLOGY, INNOVATION, AND COMPETITIVENESS

                     JOHN ENSIGN, Nevada, Chairman
TED STEVENS, Alaska                  JOHN F. KERRY, Massachusetts, 
CONRAD BURNS, Montana                    Ranking
TRENT LOTT, Mississippi              DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas          JOHN D. ROCKEFELLER IV, West 
GEORGE ALLEN, Virginia                   Virginia
JOHN E. SUNUNU, New Hampshire        BYRON L. DORGAN, North Dakota
JIM DeMINT, South Carolina           E. BENJAMIN NELSON, Nebraska
                                     MARK PRYOR, Arkansas


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 8, 2005.....................................     1
Statement of Senator Allen.......................................    14
Statement of Senator Ensign......................................     1
Statement of Senator Kerry.......................................    17
    Prepared statement of Senator Lautenberg.....................    26
Statement of Senator Pryor.......................................    22

                               Witnesses

Clough, Dr. G. Wayne, President, Georgia Institute of Technology.    27
    Prepared statement...........................................    29
Frink, Albert A., Assistant Secretary for Manufacturing and 
  Services, International Trade Administration, Department of 
  Commerce.......................................................     2
    Prepared statement...........................................     5
Howell, Thomas R., Partner, Dewey Ballantine LLP.................    34
    Prepared statement...........................................    37
Murray, Sebastian, President/CEO, FPI Thermoplastic Technologies.    33
    Prepared statement...........................................    34

                                Appendix

Inouye, Hon. Daniel K., U.S. Senator from Hawaii, prepared 
  statement......................................................    53
Murray, Sebastian, supplementary information.....................    54


            MANUFACTURING COMPETITIVENESS IN A HIGH-TECH ERA

                              ----------                              


                        WEDNESDAY, JUNE 8, 2005

                               U.S. Senate,
       Subcommittee on Technology, Innovation, and 
                                   Competitiveness,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:30 a.m. in 
room SR-253, Russell Senate Office Building, Hon. John Ensign, 
Chairman of the Subcommittee, presiding.

            OPENING STATEMENT OF HON. JOHN ENSIGN, 
                    U.S. SENATOR FROM NEVADA

    Senator Ensign. Welcome to the first hearing of the 
Subcommittee on Technology, Innovation, and Competitiveness. I 
want to thank Chairman Stevens for the opportunity to chair 
this important Subcommittee. I also want to thank Co-Chairman 
Inouye and Ranking Member Kerry for their participation in this 
Subcommittee, and for their interest in manufacturing 
competitiveness.
    Manufacturing competitiveness is a critically important 
issue to America in the 21st century. In today's economy, the 
global competitiveness of America's manufacturers is impacted 
by rapid improvements in computing, communications, and 
distribution technology, reductions in tariff and non-tariff 
barriers to trade, and litigation--for example, asbestos class-
action lawsuits with over 730,000 claimants have already 
bankrupted 73 American companies and cost nearly 60,000 jobs.
    Unreasonable medical malpractice liability jury awards 
increase healthcare costs. I hope that we can enact medical 
liability reform, which would result in significant savings to 
our entire healthcare system, and would help competitiveness in 
the United States.
    Frivolous lawsuits make it extremely difficult for 
manufacturers of all sizes to function. In 2002, litigation 
cost the U.S. economy $233 billion, which is greater than the 
gross domestic product of Greece.
    Taxation. The private sector pays $250 billion just to 
comply with our income tax laws.
    And on the regulation front, economists estimate that 
compliance costs of Federal, state, and local government 
regulatory mandates are $1.2 trillion, more than double the 
1988 level. Complying with Federal regulations, alone, costs 
manufacturers nearly $8,000 per employee, almost twice the 
average for all U.S. industries.
    Litigation, taxation, regulation, healthcare, and energy 
costs add approximately 22 percent costs to U.S. manufacturers, 
as compared to the rest of the world.
    American manufacturers are a cornerstone of our economy. 
The United States remains the world's top producer of 
manufactured goods. Making one dollar worth of goods generates 
an additional $1.50 in other economic activities. Nearly 15 
million manufacturing jobs create an additional eight million 
jobs in non-manufacturing sectors, including retail, wholesale, 
and finance.
    A healthy manufacturing sector is key to developing better 
jobs, fostering innovation, increasing productivity and 
obtaining higher standards of living in the United States. In 
addition, the United States cannot continue to grow and prosper 
in the new information economy if we cannot compete with 
countries like India and China. As private industry responds to 
dynamic market forces, the Federal Government should examine 
its appropriate role in this process.
    Today, we are pleased to have two panels of witnesses to 
testify on the challenges and opportunities that confront 
American manufacturers today. Before the testimony begins, 
we'll give the Ranking Member an opportunity to make an opening 
statement. Any of the other Senators can submit their 
statements for the record.
    In addition, we have received full written statements from 
all of our witnesses. We will include those statements in the 
record. But if the witnesses could summarize, so that we can 
have as much time for give and take questions, and make this 
more of a discussion this morning, I would greatly appreciate 
it. I'm here to learn, and I know that the Subcommittee is 
interested in hearing the views of the panels.
    Our first witness will be Al Frink. Mr. Frink is the 
Assistant Secretary of Commerce for Manufacturing and Services. 
Prior to joining the government, Mr. Frink worked for 30 years 
in private industry, building an internationally recognized 
carpet manufacturing company, Fabrica International.
    Mr. Frink, we receive your testimony.

     STATEMENT OF ALBERT A. FRINK, ASSISTANT SECRETARY FOR 
MANUFACTURING AND SERVICES, INTERNATIONAL TRADE ADMINISTRATION, 
                     DEPARTMENT OF COMMERCE

    Mr. Frink. Thank you, Mr. Chairman. And good morning to 
you, Ranking Member, and members of this Subcommittee.
    I'll begin by asking that my written testimony please be 
accepted into the record.
    Thank you for asking me to appear today and providing me 
with an opportunity to discuss the current state of 
manufacturing. Like the Chairman said, American manufacturers 
are a cornerstone of America's economy, and embody the best in 
American values. Manufacturers are full partners in the effort 
to build the future of the country, with a thirst for new 
products and new opportunities. Simply put, a healthy 
manufacturing sector is a key to better jobs--jobs that foster 
innovation and higher standards of living for our Nation.
    Strengthening American manufacturers is a top priority for 
the President, Secretary Gutierrez, and me. That said, the 
challenges facing U.S. manufacturers raise important questions 
for both industry and government. The President addressed these 
challenges by providing initiatives to help revive the economy. 
As a result, the manufacturing sector now has expanded for 24 
consecutive months. And, though that number is good, we will 
not be complacent. The domestic and global economies are 
fiercely competitive, and we need to work very hard to stay on 
top.
    Mr. Chairman, since taking office, I have made industry 
outreach a major priority. I have visited 71 manufacturing 
facilities, addressed 35 associations, chaired 57 manufacturing 
roundtables. In total, I've addressed over 14,000 
manufacturers. And, I am pleased to report there is a renewed 
optimism in the manufacturing sector, as a majority of these 
firms have plans to increase investments and hire new workers.
    The Manufacturing in America report was released in January 
2004 by former Secretary Evans, and it represents in effect, my 
marching orders. We are making great strides, in that we have 
implemented 21 of the 57 recommendations in that book. The 
22nd, and key, recommendation will be the establishment of an 
interagency workgroup on manufacturing. This is vitally 
important, because manufacturers' issues cut across numerous 
Federal agencies. As such, this group will provide a 
coordinated approach to challenges facing manufacturers. We 
expect to have this group in place within the next 2 weeks.
    Also, to enhance the government's focus on competitiveness, 
we established the first-ever manufacturing council. This 
council plays an integral role in identifying priority 
manufacturing issues and providing advice to the Secretary.
    With my newly created position and this council, along with 
industry associations, manufacturers now have the strongest 
voice they've ever had in Washington.
    One of the many issues the council will address is 
innovation. The U.S. must have a policy environment that 
promotes innovation and helps industry grow and prosper. 
President Bush's 2006 budget addresses that need. It includes a 
record $132 billion for research and development. This 
represents a 45 percent increase from the budget in 2001. The 
proposed 2006 budget also allocates 13.6 percent of its 
discretionary funds to conduct research and development. In 
total, this represents the highest percentage dedicated to R&D 
since the Apollo program 37 years ago. Furthermore, this 
investment does not include nearly $200 million invested by 
businesses, and $27 million provided by states, colleges, 
universities, and other entities.
    But, with that funding, we also need to work more 
intelligently with what we have. To address that, we have 
established an interagency working group on manufacturing R&D. 
This group will focus on the development and implementation of 
advanced manufacturing technologies.
    In the area of intellectual property rights and 
particularly in view of all the recent technical advancements, 
intellectual property protection must be provided, especially 
for small manufacturers. For this reason, the Commerce 
Department has appointed trade specialists committed to 
protecting U.S. intellectual property in China and all over the 
world. In total, we have increased intellectual property 
enforcement and compliance staff by 25 percent since 2001.
    On the important issue of maintaining competitiveness, we 
continue to work to lower the costs of manufacturing in the 
U.S. As you stated, Mr. Chairman, the United States faces a 
22.4 percent disadvantage, relative to our foreign competition. 
This advantage comes from burdensome high taxes, frivolous 
lawsuits, high energy costs, regulatory excesses, and 
healthcare costs--all the things you mentioned. This has its 
highest impact on small to medium-sized manufacturers, and they 
represent 98 percent of all manufacturing, and 70 percent of 
all new manufacturing jobs.
    To maintain our cutting edge of technology, our tax policy 
must support innovation and entrepreneurship. Simply stated, 
that's why we needed to make the President's tax cuts 
permanent.
    Streamlining regulations is another important component of 
our economic agenda. Manufacturing and Services (MAS) is now 
working closely with OMB to find ways to achieve regulatory 
objectives that minimize cost to U.S. manufacturers, while not 
compromising the spirit of those regulations.
    In May, we launched an intensive 5-day training seminar for 
our analysts to develop expertise in the Federal regulatory 
process, and we are recruiting skilled economists to support 
this new initiative.
    On standards and services, we have also engaged in an 
ongoing effort to address barriers associated with standards, 
which are now one of the greatest challenges in expanding 
exports. Our specialists are working diligently to address 
standards that affect competitiveness on both the domestic and 
the international fronts.
    CAFTA is another vital instrument for boosting exports. We 
strongly believe in free trade. Eighty percent of all the 
exports coming into this country right now from that region are 
tariff free, and 90 percent of all agriculture is coming in 
tariff free. Our U.S. manufacturers do not currently share 
these benefits, but they will after CAFTA.
    From my travels, I have seen firsthand why education and 
training are clearly critically essential to ensure our 
workforce is fully equipped to compete in the global 
marketplace. The President has a number of initiatives that 
will support education and workforce needs. One example is the 
$250 million in competitive community-based grants. And we at 
MAS are partnering with the Departments of Education and Labor 
to strengthen worker training in technical community colleges.
    Mr. Chairman, as you listen to my comments, you can see 
that we have considerable work to do. But I should mention I'm 
also an optimist. If we can lift the burdens from our 
manufacturers, we firmly believe that their creativity, their 
innovation, and their work ethic will continue to make our 
economy the marvel of the world. I am very committed to working 
closely with this Committee to advance our vital manufacturing 
sector. And I thank you very much.
    [The prepared statement of Mr. Frink follows:]

    Prepared Statement of Albert A. Frink, Assistant Secretary for 
    Manufacturing and Services, International Trade Administration, 
                         Department of Commerce
Introduction
    Good Morning, Mr. Chairman, Ranking Member and members of the 
Subcommittee. My name is Al Frink, Assistant Secretary for 
Manufacturing and Services in the International Trade Administration of 
the Department of Commerce. Thank you for inviting me to appear today 
to discuss the current state of manufacturing and solutions to 
strengthen manufacturing. I look forward to working closely with you 
and the other members in the months ahead.
    Let me begin by reviewing the state of our very vital manufacturing 
sector.
Current State of Manufacturing
    American manufacturers are a cornerstone of the American economy 
and embody the best in American values. They enhance U.S. 
competitiveness while improving lives domestically and internationally.
    Manufacturers are full partners in the effort to build the future 
of the country in the marketplace for new products and ideas. Simply 
put, a healthy manufacturing sector is key to better jobs, fostering 
innovation, rising productivity, and higher standards of living in the 
United States.
    The United States is the world's leading producer of manufactured 
goods. Standing alone, the U.S. manufacturing sector would represent 
the seventh-largest economy in the world--nearly equal to China's 
economy as a whole. The U.S. manufacturing sector also leads in 
innovation, accounting for more than 90 percent of all U.S. patents 
registered annually. Investments in technology create new industries 
and careers in manufacturing as U.S. firms introduce products and 
cutting-edge techniques. Perhaps most importantly, productivity in 
manufacturing has continued to rise significantly.
Strengthening American Manufacturing
    Strengthening American manufacturing is a top priority for 
President Bush, Secretary Gutierrez, and myself. We are taking 
definitive steps to ensure that U.S. manufacturers remain competitive 
in the global marketplace. Manufacturing is an integral part of the 
U.S. and global economies. It is part of the network of inter-industry 
relationships that creates a stronger economy and the conditions for 
growth. The sector currently accounts for roughly 13 percent of GDP \1\ 
and employs over 14 million workers. \2\ The United States is the 
world's largest economy and has the world's largest manufacturing 
sector.
---------------------------------------------------------------------------
    \1\ Bureau of Economic Analysis, Department of Commerce.
    \2\ Bureau of Labor Statistics, Department of Labor.
---------------------------------------------------------------------------
    That being said, the challenges facing U.S. manufacturers raise 
important questions for both industry and government. For industry, the 
question is how best to reinforce the sector's strengths and maintain 
its competitive edge in an increasingly competitive global economy. The 
competitive pressure on U.S. manufacturers has forced them to cut 
costs, to adopt lean manufacturing techniques, and to implement quality 
assurance programs that guarantee zero defects in production. 
Innovation in products, processes, and services has become a key 
determinant for success. The right policies in Washington, D.C.--and 
across the Nation--can unleash the great potential of the U.S. economy 
and create the conditions for growth, prosperity, and job creation.
    The President recognized this and responded quickly with an 
economic program of tax cuts and other initiatives soon after taking 
office. These initiatives are continuing to help revive the general 
economy, with expansion in the manufacturing sector beginning in mid 
2003. Let me give you a few economic indicators to describe the current 
state of play in manufacturing:

   Manufacturing output in April 2005 was 10 percent above the 
        levels in the fourth quarter of 2001.

   Manufacturing exports totaled $726 billion in 2004, which 
        represents 63 percent of all U.S. exports of goods and 
        services, and grew by 9.3 percent from a year ago.

   Manufacturing profits have continued their upward trend 
        since the recession low and rose by more than 57 percent in 
        2004 compared to 2003.

   Manufacturing wages and benefits have increased since the 
        fourth quarter 2001. Average hourly wages in manufacturing rose 
        in May 2005 to $16.52, up 2.7 percent from a year ago. Benefits 
        have increased 6.3 percent in the 12 months ending March 2005.

   Manufacturing productivity has increased 83 percent over the 
        past 15 years, while productivity in the total non-farm economy 
        has risen only 45 percent.

   Institute for Supply Management (ISM)--data indicates that 
        manufacturing has had 24 consecutive months of growth.

    At the Department of Commerce, we are confident that the outlook 
for manufacturing is good, but we cannot be complacent. The domestic 
and global economies are fiercely competitive and we will need to work 
very hard to stay on top. The Administration is committed to furthering 
conditions for economic growth and improving the overall competitive 
environment for U.S. manufacturers.
The President's Plan
    President Bush is committed to policies that create the business 
environment that encourages innovation, lowers the cost of doing 
business, makes our economy more flexible and promotes economic growth. 
For example, the President's plan:

   Allows families to plan for the future by making tax relief 
        permanent.

   Encourages investment and expansion by restraining Federal 
        spending and reducing regulation.

   Makes our country less dependent on foreign sources of 
        energy through a comprehensive national energy policy.

   Expands trade and levels the playing field to sell American 
        goods and services across the globe.

   Protects small business owners and workers from frivolous 
        lawsuits that threaten jobs across America.

   Lowers the cost of health care for small businesses and 
        working families through Association Health Plans, tax-free 
        Health Savings Accounts, and tax credits for employer 
        contributions to Health Savings Accounts, Medical Liability 
        Reform, and health information technology.

   Prepares workers for jobs of the 21st century by improving 
        school standards, reforming workforce training and increasing 
        the number of people served.

Implementing Recommendations From the Manufacturing in America 
        Report
    Mr. Chairman, in order to advocate more strongly for the interests 
of U.S. manufacturers, my first priority was to learn what was most 
important to them. As such, since taking office in September 2004, I 
have:

   Visited more than 71 manufacturing facilities;
   Chaired 53 roundtable discussions;
   Addressed 33 industry association groups;
   Participated in five President's Export Council meetings;
   Presided over three Manufacturing Council meetings;
   Attended 11 Chamber of Commerce meetings;
   Led an eight-day trade policy mission to China; and,
   Met with senior officials in Japan.

    In total, I have addressed over 14,000 manufacturers.
    I am pleased to report that there is a renewed optimism in the 
manufacturing sector as the majority has plans to increase investments 
and hire more workers.
    We are making great strides in supporting the President's plan 
through implementing the recommendations of the Manufacturing in 
America report released by Secretary Evans in January 2004. With over 
21 recommendations implemented thus far, the Department of Commerce 
will continue making progress to ensure the competitiveness of all U.S. 
industry. The recommendations are grouped in the following categories:

        1. Enhance Government's Focus on Manufacturing Competitiveness.

        2. Invest in Innovation.

        3. Create the Conditions for Economic Growth and Manufacturing 
        Investment.

        4. Lower the Cost of Manufacturing in the United States.

        5. Strengthen Education, Retraining, and Economic 
        Diversification.

        6. Promote Open Markets and a Level Playing Field.

    I would now like to discuss with you our progress in each of these 
areas.
1. Enhance Government's Focus on Manufacturing Competitiveness
Establishment of the Manufacturing Council
    Secretary Evans established the Manufacturing Council to provide 
oversight and advice on the implementation of the President's 
Manufacturing Initiative. Secretary Gutierrez is working with the 
Council and values its input. In fact, his first domestic trip as 
Secretary was to the Manufacturing Council's February 2005 meeting in 
Dearborn, Michigan. In addition, most recently, he hosted a Council 
meeting in Washington attended by Members of Congress.
    The Manufacturing Council plays an integral role in identifying 
priority manufacturing issues and advising the Secretary. We will 
continue to work very closely with the Council, which has prepared 
reports on workforce issues, tort reform and market access. These on-
going dialogues provide sound information regarding needs of U.S. 
manufacturing and the impact of Federal Government efforts.
Establishment of the Interagency Working Group on Manufacturing
    Because manufacturing issues cut across numerous Federal agencies, 
Secretary Gutierrez has asked fellow cabinet secretaries to name a 
manufacturing liaison to serve on an Interagency Working Group on 
Manufacturing. This Working Group will facilitate a coordinated Federal 
approach to the challenges facing this sector both domestically and 
internationally.
Establishment of the Office of Industry Analysis
    In January of 2004 the Administration launched the Office of 
Industry Analysis, which is responsible for assessing the cost 
competitiveness of American industry and evaluating the impact of 
domestic and international economic policy on U.S. competitiveness, 
particularly in the manufacturing sector.
2. Invest in Innovation
Introduction to Innovation Challenges
    The rapid advancement in technology has presented challenges and 
opportunities to U.S. industry. The United States must have a policy 
environment that promotes innovation, and allows industry to grow and 
prosper. Success or failure will depend on our ability to support 
technology investment, research and development, and create new 
industries, new processes, and important services--setting the stage 
for advancing innovation. A partnership between the Federal Government, 
industry, and academia can accomplish this through strong support of 
research and development (R&D).
Federal Research & Development
    President Bush's FY 2006 Budget request includes a record $132 
billion for Federal research and development.

   This represents a 45 percent increase compared to 2001's 
        $91.3 billion.

   President Bush's 2006 budget allocates 13.6 percent of total 
        discretionary outlays to the conduct of R&D--the highest level 
        in 37 years. Not since 1968 and the Apollo program have we seen 
        an investment in R&D of this magnitude.

   In FY 2006, the Networking and Information Technology 
        Research and Development (NITRD) program is budgeted for $2.2 
        billion, including research directly related to broadband 
        technology.

   Since 2001, funding for nanotechnology R&D under the 
        President's National Nanotechnology Initiative has more than 
        doubled to $1.1 billion.

    These investments are a reflection of the importance that President 
Bush assigns to science and technology to enhance U.S. competitiveness 
and our ability to solve challenges we face in health, defense, energy, 
and the environment.
    Even in an environment of tight budgets, President Bush recognizes 
that one of the best tools we have for ensuring that the United States 
remains the world's innovation headquarters is to lead the world in 
cutting-edge fundamental research that industry can apply to its 
processes.
    The Administration also recognizes that Federal R&D is just one 
part of the investment that keeps our Nation at the forefront of so 
many fields. Business and industry invests another $200 billion in 
research--the largest source of R&D funding in the U.S., providing 63 
percent of total 2003 R&D funding. State governments, universities and 
colleges, and nonprofit institutions invest an additional $27 billion.
Interagency Working Group on Manufacturing R&D
    The Interagency Working Group on Manufacturing Research and 
Development was established as a result of the President's 
Manufacturing Initiative in 2004. Participating agencies include 
Commerce, Agriculture, Defense, Education, Energy, Health and Human 
Services, Homeland Security, Labor, National Aeronautics and Space 
Administration, National Science Foundation, the Office of Management 
and Budget, the Office of Science and Technology Policy, 
Transportation, and the Small Business Administration.
    The goal of this multi-agency focus is to lead the development and 
promote the implementation of advanced manufacturing technologies for 
the benefit of the U.S. economy and the U.S. manufacturing sector, in 
particular. The Group will also improve planning, coordination, and 
collaboration among Federal agencies in these key technology areas and 
to increase the effectiveness and the visibility of the overall Federal 
manufacturing effort. The working group's objectives are to:

   Identify and integrate requirements;

   Conduct joint program planning; and,

   Develop strategies for the Federal Government's 
        manufacturing R&D programs.

    Its functions are to:

   Engage in interagency manufacturing R&D program planning and 
        budgeting;

   Identify opportunities for collaboration, coordination, and 
        leverage among agencies in specific technical areas related to 
        manufacturing R&D and,

   Identify agency priorities within these areas and gaps among 
        them.

Protection of Intellectual Property
    In such an age where competitiveness is increasingly determined by 
access to new ideas, rather than ownership of physical materials or 
fixed assets, an innovative society must have sound intellectual 
property rights (IPR) protection. This includes strong global 
enforcement, with faster processing of patents. This is of even greater 
importance today due to the convergence of nanotechnology, 
biotechnology, information technology, and cognitive technology that 
will create new industries and new jobs now and in the future.
    The Commerce Department, through the U.S. Patent and Trademark 
Office, has placed an expert IPR Attache in China to deal specifically 
with intellectual property rights abuses in that country. We have 
increased our intellectual property enforcement and compliance staff by 
25 percent since 2001.
    Secretary Gutierrez is committed to IPR protection and enforcement. 
He highlighted this commitment on his recent trips to Russia and China, 
where he sent a clear message that the gap between IPR laws and 
enforcement needs to be closed. He stated, ``Violators need to face 
prohibitive financial penalties and real jail time, and it's time to do 
away with small, insignificant slap-on-the-wrist suspended sentences 
that allow IPR violators to go back into business.''
    To meet these challenges, the Administration is committed to 
upgrading the U.S. Patent and Trademark Office. Policies underway will 
allow the hiring of several hundred new patent examiners. This, in 
turn, will help ensure that the intellectual property rights of U.S. 
companies and innovators are upheld across the globe.
Strategy Targeting Organized Piracy (STOP!) Initiative
    Commerce is a key member of the STOP! Initiative, which was 
announced in October 2004. The STOP! Initiative was created to 
coordinate government-wide activities to confront global piracy and 
counterfeiting. It seeks to:

   Secure and enforce intellectual property rights in overseas 
        markets;

   Stop fakes at U.S. borders;

   Keep global supply chains free of infringing goods;

   Dismantle criminal enterprises that steal America's 
        intellectual property; and

   Reach out to like-minded trading partners and build an 
        international coalition to stop piracy and counterfeiting 
        worldwide.

    In order to provide a one-stop shop, we have established a 
hotline--(866) 999-HALT--which has received 300 calls since its 
inception in October of 2004, and set up a website, www.StopFakes.gov.
    With this initiative, Federal agencies work with America's trading 
partners to crack down on global piracy and counterfeiting.
3. Create the Conditions for Economic Growth and Manufacturing 
        Investment
    If we wish to remain a nation of innovators, we do not want to 
over-tax industry and commerce and dampen the entrepreneurial spirit. 
There are key elements of the tax relief passed by Congress and signed 
into law by President Bush that will expire in a few years.
    The Administration has urged Congress to make these vital tax 
reductions permanent so American families and businesses can make 
better decisions for their financial futures.
    The President has proposed to make the Research and Experimentation 
(R&E) Tax Credit permanent. The R&E tax credit promotes private sector 
investment in research and the development of new advanced 
technologies.
4. Lower the Cost of Manufacturing in the United States
    The National Association of Manufacturers has claimed that United 
States manufacturers faced a 22.4 percent overall cost disadvantage 
relative to our chief foreign manufacturing competitors as of 2002.
    The cost disadvantage comes from:

   Higher corporate taxes;
   Frivolous lawsuits;
   Energy costs;
   Unreasonable and excessive regulatory burden, and
   Health care costs.

    This burden has had the highest impact on small to medium-size 
manufacturers--which represent 98 percent of all manufacturing firms, 
half of all the manufacturing jobs, and 70 percent of all new 
manufacturing jobs.
Cost of Regulations
    High regulatory costs have a negative impact on job creation. As 
mentioned previously, the U.S. manufacturing sector currently accounts 
for roughly 13 percent of U.S. GDP, employs over 14 million workers, 
and accounts for over 60 percent of U.S. exports. It is also still the 
largest in the world. However, the regulatory regime is substantial and 
compliance costs are rising.
    The Office of Management and Budget (OMB) estimated that the cost 
of regulations imposed over the last 10 years by the U.S. Government is 
$35 to $39 billion per year. \3\ A 2001 study by Crain and Hopkins 
found that manufacturing firms face a regulatory burden approximately 
six times greater than the average firm, and when adjusted for the 
number of employees, manufacturing firms face a regulatory burden per 
employee approximately two times greater than the average firm. \4\ In 
addition, technology advances at times outpace the legal and regulatory 
system. Regulators must support innovators by incorporating private 
sector input in rulemaking.
---------------------------------------------------------------------------
    \3\ Draft 2005 Report to Congress on the Costs and Benefits of 
Federal Regulation, available at: http://www.whitehouse.gov/omb/
inforeg/regpol-reports_Congress.html.
    \4\ Crain, W.M. and T.D. Hopkins 2001. ``The Impact of Regulatory 
Costs on Small Firms.'' Report prepared for the Office of Advocacy, 
U.S. Small Business Administration. Available at http://www.sba.gov.
---------------------------------------------------------------------------
    Government-mandated regulations are designed to influence business 
behavior in favor of the public interest and focus on areas such as 
environmental protection, health and worker safety, national security, 
individual privacy, and commercial competition. However, contributions 
to the public good must be balanced against especially unnecessarily 
burdensome regulations that increase business costs, reduce 
productivity, and hinder job creation.
    In addition, cost estimates often address only the direct expense 
of regulation compliance, such as reporting requirements and factory 
retrofitting, but these rules can also lead to increased prices, lower 
product quality, and other intangible costs like loss of business 
freedom. Most importantly, from a global competitiveness and economic 
growth standpoint, regulations can reduce innovation by inhibiting new 
ideas, constraining product development, restricting production process 
design, or encumbering marketing strategies.
    Streamlining regulation is an important component in the 
President's economic agenda. The Administration has taken several 
positive steps toward targeting burdensome regulations for reform. The 
Office of Management and Budget's Final 2004 Report to Congress on the 
Costs and Benefits of Federal Regulations outlined 189 regulations 
nominated for reform through private sector input.
    After a Federal agency review, including the Office of 
Manufacturing and Services, OMB published a list of 76 priority 
nominations. Manufacturing and Services (MAS) is now working with OMB 
to assess these regulations to find how any proposed changes might 
affect manufacturers. In MAS, we are focused on enhancing our 
regulatory expertise and will continue to work with OMB and other 
agencies.
Tort Reform
    We must also be mindful of the effect that higher levels of 
expected liability costs have on innovation. Due to the higher level of 
expected costs, firms often have to limit innovation, withhold a 
product from the market, or forgo hiring. If we are going to have an 
innovative society, we have to have a strong legal policy that supports 
innovation, entrepreneurship, and allows business to allocate risk in a 
transparent manner.
    The President has proposed measures that would support this goal. 
We took an important step when Congress passed and the President signed 
legislation aimed at bringing back fairness to our Federal class-action 
lawsuits. We need to keep working to address other important related 
issues such as asbestos reform and medical liability.
Health Care Costs
    Another aspect of competitiveness is health care costs. Healthcare 
costs represent the largest and fastest rising cost faced by U.S. 
businesses. In order to maintain a competitive and innovative 
environment where business and job-creation can flourish, we need to 
make health care more affordable and predictable.
    In response, the President has proposed Association Health Plans 
that would afford small businesses greater leverage in negotiating the 
cost of health insurance with providers. This proposal allows small 
businesses to pool together to purchase health coverage for workers at 
lower rates. The Administration also worked to establish health savings 
accounts to give workers more control over their health insurance and 
costs. The Administration believes it is important to also reduce 
frivolous lawsuits against doctors and hospitals that drive up 
insurance costs for workers and businesses. In addition, the 
President's Health IT Initiative is designed to reduce errors, cut 
waste, and lower costs. The President's goal is to make electronic 
medical records universally available for most Americans in the next 10 
years.
National Energy Policy
    Energy costs are a major concern for manufacturers. Manufacturers 
consume about one-third of the U.S. energy supply--including 40 percent 
of the natural gas and 30 percent of the electricity. That is why the 
President's energy policy is really a manufacturing jobs plan.
    President Bush believes the growing U.S. economy requires 
affordable, reliable, and secure supplies of energy. The President has 
outlined his broad vision to move America toward less energy dependence 
and urged Congress to enact a national energy policy.
5. Strengthen Education, Retraining, and Economic Diversification
    Increasingly, sophisticated education and training systems are 
essential to ensuring that our workforce is fully equipped to compete 
in a truly global marketplace. A talented and skilled workforce allows 
manufacturing companies to succeed and drive innovation. Innovation 
increases the role of high value-added work to sustain our economic 
prosperity.
    In order to stay competitive in the face of rapid technological 
change, we need to build the best skills and attract the best minds. 
Securing a high quality labor force requires an education system that 
is second-to-none and an effective worker training infrastructure that 
includes vocational training as well as worker retraining programs.
    To address these issues, the President has a number of initiatives 
that would support U.S. manufacturers' education and workforce needs.
    For example:

   The President has announced a new High School Initiative 
        that will allocate $1.5 billion in his Fiscal Year 2006 Budget 
        to ensure that every high school student graduates with the 
        skills needed to succeed in college and in a globally 
        competitive workforce.

   In the area of training, the President has provided $250 
        million in new competitive community-based grants under the 
        Jobs for the 21st Century Initiative to strengthen worker 
        training in technical and community colleges.

   He has also called for the creation of Innovation Training 
        Accounts under which workers would have more choices about 
        their training through increasing the use of personal job 
        training accounts focused on instruction in high-growth job 
        fields.

   Under the President's High Growth Job Training Initiative 
        for Advanced Manufacturing, we have invested more than $60 
        million to develop model partnerships between employers, 
        training providers, and the workforce investment system, in 
        order to identify and replicate best practices in workforce 
        development that help U.S. manufacturers retain and increase 
        their competitiveness in the global economy.

6. Promote Open Markets and a Level Playing Field
    Opening export markets and removing trade barriers are the key to 
U.S. manufacturing competitiveness. Free and fair trade provides U.S. 
companies with new markets and opportunities for our products and 
services.
Free Trade Agreements
    As an example of our approach to opening markets, the President has 
signed into law several new Free Trade Agreements (FTAs) that will 
enable U.S. manufacturers to compete on a level playing field in these 
markets for the first time.
    The Chile FTA, which became effective on January 1, 2004, boosted 
U.S. exports to Chile by almost a billion dollars, and increased U.S. 
market share of Chilean imports for the first time since 1995.
    Looking at another example--the U.S.-Australia FTA--more than 99 
percent of U.S. manufactured goods exports to Australia have 
immediately become duty free. Manufactured goods account for 93 percent 
of U.S. exports to Australia.
    CAFTA-DR is another vital instrument for leveling the playing 
field. Eighty percent of all exports from the CAFTA region enter the 
United States duty-free. U.S. manufacturers do not currently share in 
these benefits. However, they will under CAFTA. With this agreement, 
remaining tariffs will be phased out over the next 10 years.
    Bilateral and regional FTAs help us encourage integration to meet 
some of U.S. industry's most important goals--a level playing field for 
exports, intellectual property protection, and a single set of 
standards leading to a more cohesive, integrated trading environment 
for our exporters and investors in that region.
    The United States has concluded a total of ten FTAs--opening up the 
export markets of these countries to American industry and its workers. 
Of the ten agreements, the Bush Administration has entered into force 
FTAs with five countries--Jordan, Chile, Singapore, Australia, and 
Morocco (Morocco FTA in force as of July 1, 2005). New and pending FTA 
partners, taken together, would constitute America's third largest 
export market and the sixth largest economy in the world.
    These agreements are meaningful for the United States. They are 
comprehensive and in many cases carry immediate benefits. They contain 
broad commitments that provide a predictable environment for our 
exporters and investors.
Standards
    The Department of Commerce Standards Initiative launched by 
Secretary Evans in March 2003 underscores the need to have consistent 
technical standards worldwide. The initiative responds to strong U.S. 
industry concerns that barriers associated with implementation of 
foreign standards and technical regulations are now one of the greatest 
challenges to expanding exports.
    Increasingly, technical standards are being mandated around the 
world through government laws and regulations. This is becoming a 
critical issue for global competitiveness, since they can either 
facilitate or impede international trade. In the United States, 
technical standards are largely voluntary and market-driven, although 
with strong government participation and support.
    Many U.S. companies view discriminatory or unnecessarily trade 
restrictive standards as the primary trade barrier today, and it is 
estimated that standards issues impact 80 percent of world commodity 
trade. Major impediments to free trade include the establishment of 
standards specific to a nation or region, redundant testing and 
compliance procedures, and unilateral and non-transparent standard 
setting processes.
    Open and transparent standards adoption generally has a positive 
effect on fostering innovation. Vendors that adopt the standard 
determined by the marketplace are rewarded by greater sales and 
production efficiencies. This, in turn, provides additional funding for 
new rounds of research and innovation.
    The Department of Commerce supports the adoption of voluntary 
standards, whenever possible and the development of standards in an 
open and transparent manner with industry input. The Department also 
supports a policy of technology neutrality in government procurement 
and other public actions. Technology neutrality allows the market to 
decide which products are best and stimulates technology advancement.
Conclusion
    Prior to this job, I have spent my entire career in the business 
sector building a manufacturing company. One of the lessons I have 
learned is that business continually needs to innovate to grow, produce 
new and better products, and remain competitive. Many manufacturers are 
implementing lean production procedures to remain competitive. While 
improved means of production is important, I continue to convey that 
without innovation there is no life after lean. American leadership in 
innovation and the development of new ideas and technologies holds 
great promise for our generation and the next.
    There are no magic formulas. We realize there are many challenges 
facing U.S. manufacturing, and while we are making progress, there is 
much more to do. A strong and vibrant manufacturing sector is critical 
to providing jobs and maintaining a growing healthy economy.
    Like the President and the Secretary, I am an optimist. I know that 
when we lift the burdens from our manufacturers, their creativity, 
their innovation, and their work ethic will continue to make our 
economy the marvel of the world.
    I look forward to working with this Subcommittee to meet the 
challenges facing U.S. manufacturing and welcome any questions you may 
have. I am also very interested to listen to the views of the 
Subcommittee on how we at the Department of Commerce might best advance 
these efforts. Together we can work to ensure that the U.S. continues 
to remain the technological and economic power that it is well into the 
21st century.
    Thank you.

    Senator Ensign. Thank you, Mr. Frink. We appreciate your 
testimony. I have a number of questions for you this morning.
    You mention education. As I have gone around talking to 
various people, one of the statistics that comes out is the 
number of engineers that we are graduating in the United States 
versus the number of engineers that are graduating in China or 
in India. What specifically, does the President and his 
Administration plan to do to get more children to become 
interested in science and math? We have some of the finest 
colleges and universities in the world. I realize that the 
President believes passionately in improving K-through-12 
education, and that the No Child Left Behind Act is making a 
positive impact on K-through-12 education. But, specifically, 
what are the Administration's plans for getting children 
interested in science and math, and motivating them in science 
and math?
    Mr. Frink. Well, I agree with your concern, and, what I 
hear, with regard to having engineers, is that China is 
producing about five times as many as we are. I would say that, 
to put that in perspective, they also have five times the 
population. But that does not minimize, in my mind, the concern 
for, and the need for, engineers.
    The Administration has many programs that are in place to 
address this.
    Senator Ensign. By the way, they are not graduating fives 
times as many lawyers.
    [Laughter.]
    Mr. Frink. No. And I'm very----
    Senator Ensign. We're probably graduating five times as 
many lawyers as they are.
    Mr. Frink. I am very pleased to be a part of an 
Administration that's probably short on lawyers and very strong 
on business people.
    I can say what I'm doing in my area. I am very concerned 
about education. People who have gotten to know me from my 
speaking events know that if I have any legacy, it'll be 
driving education. I see a big concern with marketing of 
opportunities in manufacturing with regard to engineers--
mechanical engineers. As I was part of an awards ceremony on 
Saturday, one of the students accepting an award mentioned that 
his class will no longer be available, and that he will be the 
last graduate in mechanical engineering, which was a tragedy to 
hear. And I think that part of it is a bad marketing job. I'm a 
very big believer in marketing and what it can do. I don't 
think that it's been marketed effectively, in terms of 
academics knowing the opportunities that are there. I have 
found that there are so many job opportunities in the 
marketplace that it defies description. Of the 71 manufacturers 
I visited, almost all of them have ``help wanted'' signs 
hanging from their doors, but they need educated workers for 
the 21st century, workers with more advanced education, and 
they don't have the people. So, there's a demand, and there is 
a disconnect with the chain that creates the supply.
    So, one of the reasons I want to get together--well, I have 
gotten together, so far, with labor--Emily DeRocco, in the 
Department of Labor, and Labor Secretary Chau, and will with 
the Department of Education, as well--is to form a committee, 
or a group, under the interagency working group. I know 
committees are not exactly the best term to use, so we're going 
to create a group that will seriously try to get together with 
the best minds of academia and the business community to come 
up with solutions for how we can drive education, especially in 
engineering, because that is a critical concern. So, that's a 
big part of my focus.
    Senator Ensign. Well, thank you. I would love to hear any 
ideas that you all come up with, especially if any of the 
proposals that you put forward involve the Congress.
    I want to take you down a little different road, toward the 
National Science Foundation. The President had proposed--and 
we've doubled funding for NIH, and, for the life sciences, 
we've done a good job on increasing funding. Some of the 
complaints that I've heard from the private sector, though, is 
that we are not paying enough attention to the physical 
sciences. I realize we're in tight budget times, and I am 
certainly a fiscal conservative. But there are areas where it 
is important for the Federal Government to spend its money. One 
of the areas where I believe we get pretty good bang-for-the-
buck is investing in basic research. Investing in the National 
Science Foundation and the research it funds in the physical 
sciences helps our country to remain competitive in the global 
economy. Does the Administration think that we are adequately 
funding NSF?
    Mr. Frink. Well, I think what I would like to do is, rather 
than give you an inefficient answer, or a bad answer, I'd like 
to come back with that in the form of an educated answer.
    I know that the President, as I mentioned in my report, has 
allocated $132 billion to research and development. Where it's 
allocated and where it goes, I don't have the breakdown. I 
think, in general terms, that program, like others, that drive 
manufacturing at the high-tech level or other levels, has been 
addressed in budget cuts. And I don't have, always, the good 
answer for that. I know that in business you have to make 
difficult decisions. And sometimes, unless you're in the 
forefront of that decision process, you may have a reason for 
why that decision was made. And so, my sense is that we should 
put some trust and faith in the people that made those 
decisions for having had a reason, but I also believe that it's 
our job to question them.
    Senator Ensign. I would encourage the Administration--you 
know, I'm a big believer in using the dollars that we have 
effectively. While $132 billion is a lot of money, the 
necessary question is how is its usage prioritized. You know, 
up here in the Congress, we have a lot of defenders of NASA, 
but NASA is one of the most inefficient bureaucracies that we 
have in the Federal Government, and a lot of the money we spend 
on NASA development could be spent a lot better at the National 
Science Foundation in grants and research that encourage 
innovation. There is not a lot of innovation coming out of NASA 
these days. But we continue to spend a lot of money there.
    We ought to be looking at the dollars that we're spending, 
and using good metrics to find out where we're getting the bang 
for the buck. The Administration started doing that, and I 
realize, with the PAR, that they are about 60 percent through, 
of the dollars that they're measuring with metrics. But I would 
continue to encourage the Administration, in this area, 
especially when the dollars are so precious and when they can 
be stretched so far if we spend them correctly to use metrics 
in order to determine our return-on-investment.
    I have some additional questions, but I want to turn it 
over to Senator Allen.
    Senator Allen?
    Mr. Frink. Sure.

                STATEMENT OF HON. GEORGE ALLEN, 
                   U.S. SENATOR FROM VIRGINIA

    Senator Allen. Thank you, Mr. Chairman. I really want to 
commend you for holding this hearing. You and I both are very 
passionate about the technology, but competitiveness is 
absolutely essential for us, as a country. If we're going to 
compete and succeed, we need to embrace the advances of 
technology, particularly in manufacturing, for the 
manufacturing will be performed with greater efficiency, better 
quality, and less waste. It's the only way that we're going to 
compete and succeed. We're not going to be able to do it with 
lax environmental laws or low wages.
    And I was looking at your statement here, overall, on--Mr. 
Frink--on the President's plan, things that are important. Tax 
policies--absolutely important if we're going to get investment 
in this country. We can't have taxes that are so high that it 
prohibits investment here. Same with regulations. Regulations 
need to be based on sound science, not political science.
    What the Chairman talked about on education--a concern that 
I have, as well--is that the engineering graduates that we're 
matriculating in this country, they will be the ones, in the 
future, who will be designing and developing the new 
innovations, inventions, and intellectual property. And when 
you look at the numbers that we are matriculating, compared to 
China, compared to India, it is very worrisome. In fact, 40 
percent of our engineering graduates are from overseas. Now, I 
want this country to be the magnet for the world's best minds. 
I want them to come here. And we need to be the world capital 
of innovation, including manufacturing.
    So, most of the things you're saying here--make a great 
deal of sense. I keep this insourcing survey from the 
Organization for International Investment, and looking at their 
matrixes and things that are important for it. And I know my 
Chairman here, and I, worked together on repatriation of 
profits. If just U.S. companies get their money back in here to 
invest in this country, that's an important tax policy. Also, 
let's get companies from France, Germany, and Japan to invest 
in the United States to serve the North American market, rather 
than go to Brazil or somewhere else.
    I'm not going to ask any more than the Chairman did, on the 
students getting interested in science and technology and 
engineering, but it really is important for the security of our 
country. The energy bill that we're going to be passing in the 
next few weeks will be important for security and jobs, and 
also competitiveness of our country, because energy costs 
matter.
    Where we're behind, that are important issues, but we have 
a weak performance, are tax system, legal system, labor costs, 
and healthcare costs. So, those are important ones to address.
    One other thing on our trade agreements that I'd like to 
ask you, Mr. Frink, is that we have free trade agreements, but 
what is the Administration doing to level the playing field, as 
far as manufacturers, globally? China, in the past, for 
example, for the fabrication of semiconductor chips--they have 
a 17 percent value-added tax in China on microchips; however, 
if they're designed in China, they get a rebate. And, in fact, 
if they're designed and fabricated in China, they get a 14 
percent rebate. So, if you're a manufacturer assembling some 
product in China, and you get a choice between microchips, 
semiconductor chips, fabricated in the United States, or 
elsewhere, and it's a 17 percent tax, where it's a 3 percent 
tax if it's Chinese, it's not going to be too hard for--you 
know, a fourth-grader could figure this out, that, gosh, you're 
going to go with the cheaper chips. And so, it's important that 
we enforce trade agreements so there's a level playing field.
    Could you share with us what the Administration is doing to 
make sure that there is a level playing field, that other 
countries, insofar as manufacturing, are living up to their 
agreements?
    Mr. Frink. Well, thank you, first of all, Senator. I think 
we're so totally on the same page, especially with regard to 
education. I'm so very pleased that both of you feel so 
strongly about that. It is the single most important concern I 
have for the future of manufacturing. And that was addressed in 
my marching orders, but probably not with as much emphasis as 
I've learned from being in the forefront of manufacturers.
    As to the point about trade and what we can do to level the 
playing field, we provide, in our office, through the Office of 
Industry Analysis, most of the information that is used by our 
trade representatives, USTR. So, the input that we get, which 
will include what you just mentioned, is what we will provide 
USTR, in terms of the areas that we need to be addressing when 
we get in negotiations at WTO events, at the JCCT meeting, 
coming up in the Doha conferences. These are all the areas on 
which we provide information. And I think their arguing points 
are only as good as the information that we provide. And so, 
what we're trying to do is, not only provide the best 
information, but also quantify the impact so they can see what 
kind of impact they're having on our economy, on the 
businesses. And I think that is such an important area within 
my Department. It's Manufacturing and Services. We have Jack 
McDougall behind me. He is our new Deputy Assistant Secretary 
for Industry Analysis. Jack comes from the private sector. He's 
going to take that department and, I think, bring some creative 
ideas on how we can take the information we generate and make 
it more effective at the point where it will be delivered. We 
can't personally deliver that, but we can provide the 
information.
    And I think that Rob Portman, in this new position, is 
going to be an excellent choice to become the lead spokesman 
for our trade. And I think that the President's having put him 
in place is going to be a big factor in how we level the 
playing field as he leads our debates with regard to issues 
such as the one you mentioned.
    Senator Allen. Well, thank you. And I think that the 
evidence that you present is important, whether that's in 
bedroom furniture, whether it's in semiconductors, whether it's 
in textiles, whether it's in protecting our intellectual 
property, or other areas that might arise in the future.
    Let me finish, since my time's running out here. The other 
aspect, in addition to the tax and regulatory, energy, and 
education, which is important is research in key areas of the 
future. I actually do think that you're all misallocating a 
priority, insofar as NASA is concerned, and that's in 
aeronautics. The previous Administration cut aeronautics 
research and development by half. The proposals of this 
Administration are to cut it in half again. For the first time 
in history, our sales of aircraft in the United States were not 
first in the world; the Europeans were number one. The 
Europeans have a strategic plan to dominate by the year 2020 in 
aeronautics, and they're on their way to doing it. And I think 
it's shortsighted to--for our military capabilities, as well as 
civilian aviation and aircraft, to not have the next-generation 
or the new vehicle systems for lighter, faster, quieter, less-
polluting aircraft, or hypersonic flight, as well. And so, 
that's the normal differences I suppose one would have between 
an Administration and legislative branch, but there are those 
of us who think that that is an important aspect for the 
future.
    The other is nanotechnology. Senator Wyden was once a 
Member of this Committee, and I have moved forward, and the 
President signed, the Nanotechnology Research and Development 
Act. It is the largest increase, and I want to commend you all 
for following along with it, the largest increase in basic 
scientific research since the space program. And the 
nanotechnology area is a very multifaceted one. It'll affect 
life sciences, materials engineering, and microelectronics. And 
it is important that this country stay in the lead there. And I 
want to commend the Administration for, in a very tight and 
taut budget, making nanotechnology, which will affect 
manufacturing, particularly in materials engineering. 
Nanotechnology will affect everything we use, whether that's a 
vehicle or whether it's--especially the advancements in some of 
the biotechnology areas. So, I want to commend you all there. 
And, where you can, make sure that where we're investing in 
research and development, in coordination with the universities 
and the private sector, that we look at the competitiveness of 
this country, in comparison to what other countries are doing, 
whether it's in aeronautics or whether that's in 
nanotechnology.
    Mr. Frink. Thank you, Senator.
    I have been in this new position a little over 8 months, 
and I have to say I'm still in the learning curve. One of the 
benefits I will have to help my education process will be the 
fact that I'm going, in a couple of weeks, to the biennial 
Paris Air Show, where I will be interacting with all the 
leading individuals that drive aerospace, and speaking about 
every area you were just talking about. And I'll walk away with 
a better sense of where we need to be. I get much more 
passionate in how I promote anything when I get to learn how it 
affects our economy. And I look forward to that. I'm going to 
ask hard questions. I'm always dubious of trips and how much 
effect you get from those. I'm going to walk away, hopefully, 
with a strong sense of that trip being worthwhile, and that 
I'll have a better understanding of where our limited dollars 
are going. And if I see there's a need, I will not hesitate to 
speak up and provide my recommendations as to where I see the 
need.
    Part of my job is to provide advice--to take what I see 
from my front-line experience and move it up through the chain. 
So, I expect to do just that.
    Senator Allen. Thank you, Mr. Frink.
    Thank you, Mr. Chairman.
    Senator Ensign. Senator Kerry?

               STATEMENT OF HON. JOHN F. KERRY, 
                U.S. SENATOR FROM MASSACHUSETTS

    Senator Kerry. Mr. Chairman, thank you very much. I 
apologize to the witnesses, and to you, for not being able to 
be here earlier. I had a meeting off campus, so to speak, which 
took longer than I expected.
    I thank you for holding this hearing today. I think this is 
perhaps the most important topic before the nation, frankly. 
And the outcome of the subjects that we're talking about here 
today is really linked to a whole series of issues which aren't 
in the sole jurisdiction of this Committee, but which are 
critical to the Congress, itself--our tax policy, our budget, 
our fiscal policy, and our trade policy. They're all linked.
    But what disturbs me, candidly, Mr. Frink--and I say this 
to the Administration, in absentia, in a sense--is that we 
really don't have a national plan. We're, sort of, drifting 
around on this topic. In the last 4 or 5 years, we've lost one 
out of every six manufacturing jobs. We've lost 2.7 million, 
total. There still was not one net new job created under this 
Administration in the last four and a half years. And, again, 
last month I think it was something like 70,000 or so lost. 
I've forgotten the exact figures, but you have to create about 
300,000 just to stay even. And we're not.
    You guys are cutting at least 90 percent of the 
Manufacturing Extension Program, which is hard for me to 
believe. I don't understand the rationale of that. Ask any 
small enterprise that's been involved with the Manufacturing 
Extension Program, and they'll tell you it has helped them take 
products to market, it helps them take them from laboratory to 
shelf. There are all kinds of upside benefits. But it's being 
cut. Why? So we can give the wealthiest people in America 
another tax cut? You know, as a Senator you get the privilege 
of meeting with some of these wealthy people all the time, and, 
I'll tell you, I've sat with them, and not one of them has said 
to me, ``I need this cut,'' or, ``I want this cut.'' They'll 
take it. It'll put more cash in their pocket, and they'll sit 
there and tell you that, but it's not going to change their 
investment decisions. How they invest money, what they invest 
it in, is going to be the same, with or without the tax cut. 
It's going to be based on the prospect of a return-on-
investment. It's going to be based on how fast they will earn 
money, and how well the marketplace is working. And our 
marketplace is not working very well, for a lot of different 
reasons.
    Now, you know, astoundingly, when you measure, California 
lost 353,700 manufacturing jobs in the last 4 or 5 years; 
Michigan lost 210,000. My home state of Massachusetts lost 
about 110,000. And we're pretty good in our state, as they are 
in California and some other states in the country, at using 
technology to its advantage and making new jobs. There has been 
a slight upward tick in productivity. But, just this week, the 
Institute for Supply Management reported that the manufacturing 
sector is again losing momentum. That's their quote. They note 
that the rate of growth in new orders continues to decline, the 
employment index has failed to grow. And they openly question 
whether the manufacturing growth cycle is coming to an end. 
This economic slide has hurt businesses, investors, workers, 
and communities.
    Now, I'm not suggesting to you--and I would never suggest 
this--that the government can control, completely by itself, 
the direction of the slide. We all know it's much more 
complicated than that, and there are other things that play in 
it. But all of us understand that we set an overall framework 
within which private investors make choices and have the 
availability of making those choices.
    I had the President of Massachusetts Institute of 
Technology come to me the other day, the new president, and 
talk to me about their decline in the numbers of people of 
caliber who have been coming from abroad, partly because of 9/
11, but also other transition that's taken place, the lack of 
American students going into science, math, biology, 
technologies, and basic sciences, in addition to the lack of 
commitment of the Federal dollars that used to be there in many 
of those areas. And so, there's a just general decline.
    In Asia, they are catching up to us in areas of innovation 
where we have traditionally--in software and other things--been 
the leaders. They're turning out 300,000 engineers a year in 
China and India. We're going downwards.
    That's the future. That is the future. And, you know, when 
somebody like Bill Gates tells us that American schools, even 
sometimes when they're working very effectively, are obsolete, 
we'd better stop and worry. I honestly--I don't see the 
Administration grabbing onto this with the kind of urgency and 
energy that it ought to be. We have the PCAST but many of the 
Council's own recommendations have been ignored, certainly not 
implemented. I've heard from executives at mid-sized 
manufacturing firms who say they've cut costs dramatically, but 
they still can't compete. Healthcare costs are the biggest drag 
on our economy. The only proposal of this Administration are 
association health plans, which will affect, at maximum, maybe 
two million people. But we've got 47 million without 
healthcare, and we've got GM, Ford, with the equivalent of junk 
bonds. GM is now moving people to China for manufacturing. I 
mean, this is so much more serious than I think the 
Administration seems to grasp or be willing to deal with.
    Tom Howell is going to point out, in his testimony today, 
what Japan and the EU are doing in a large-scale, long-range 
R&D project that's aimed at developing all leading-edge 
technologies. And these projects that they're engaged in are 
way beyond what we're doing, or even thinking about.
    The fact is that the focus of some entities has been almost 
exclusively on tort reform, and, while all of us accept that we 
need some tort reform, and there's a reasonable place, with 
respect to tort reform, to wind up, it's such a larger playing 
field than just tort reform that it's, sort of, astonishing for 
me to see the lack of planning and implementation.
    So, maybe, Mr. Frink, you want to respond to some of what 
I've just said, but I specifically want to ask you why it is 
that the Administration is cutting funding to these essential 
technology incubator efforts, like the Manufacturing Extension 
Program or even some of the basic science and research 
programs.
    Mr. Frink. Thank you, Senator. There's a lot on the plate 
there.
    Senator Kerry. Yes, there is. But there is a lot on the 
plate.
    Mr. Frink. Yes, there is. Speaking to that specific 
program, there have been a lot of cuts in the budget, overall. 
I----
    Senator Kerry. Why?
    Mr. Frink. Well, this year's budget has required cuts. 
And----
    Senator Kerry. Why?
    Mr. Frink. I'm not the economist or the person who----
    Senator Kerry. What's the priority? What is the priority of 
this Administration? What's the top priority?
    Mr. Frink. Jobs.
    Senator Kerry. OK. And how are they going to create those 
jobs?
    Mr. Frink. Well, one of the things is my job, which itself 
was newly created. This is the first time in history that we've 
had a person, an individual, a lead advocate to help 
manufacturing. And I came from----
    Senator Kerry. It's the only manufacturing job created in 
America.
    Mr. Frink. Well, it's a good one. It has the potential to 
make a difference. And we also have a manufacturing council.
    Senator Kerry. But the top priority of this Administration, 
if you say it's jobs, why are they cutting the Manufacturing 
Extension Program? Why are they reducing investment in the 
sciences, in the grants? Why is it harder for kids to go to 
school? Pell Grants are down.
    Mr. Frink. I think, first, with regard----
    Senator Kerry. So we can have a tax cut? That's the 
priority--is a tax cut.
    Mr. Frink. Well, I'm not a politician. I can't speak to 
what you might view as a priority. I can only tell you that my 
firsthand experience in the front lines----
    Senator Kerry. But if you're going to come and tell me we 
don't have the money, why don't we have the money? It's a 
simple question.
    Mr. Frink. I don't know that we don't have sufficient money 
to meet our objectives. I think that a lot of what----
    Senator Kerry. Well, why are you cutting it, then?
    Mr. Frink. Well, if I can finish, I would like to just say 
that I think, to some degree, government may be learning what 
business learned a long time ago, and that is how to get by 
with less and still produce great results. I don't know that we 
didn't have fat in many of the programs we've had. I don't 
know.
    Senator Kerry. Fat in the Manufacturing Extension Program?
    Mr. Frink. I think that program was not intended to be 
disbanded. The support that was given was intended to keep all 
the centers up and running----
    Senator Kerry. It's a 90 percent cut, Mr. Frink.
    Mr. Frink. I----
    Senator Kerry. A 90 percent cut. That's----
    Mr. Frink.--believe the cut was 46 percent.
    Senator Kerry. It was 90 percent.
    Mr. Frink. Well, the numbers I have show otherwise.
    Senator Kerry. Well, what's the justification for 46 
percent? The money doesn't go to people; it goes to a project.
    Mr. Frink. That's one area with regard to a bigger picture 
of what's being done to support manufacturing. I never look at 
one targeted area. You could say, ``This is what we're not 
doing,'' but then there's also, ``What are we doing?'' I think 
the position that I have, the fact that we have a Manufacturing 
Council that's working at lowering the barrier costs for 
manufacturers around the country is a move forward.
    Senator Kerry. The Manufacturing Council's report deals 
entirely with tort reform.
    Mr. Frink. That's----
    Senator Kerry. That's what they've done.
    Mr. Frink. No, that's only one of the Subcommittee reports. 
The subcommittees have reported on tort reform, on the issue of 
healthcare. On energy, we're working on innovation. It provides 
advice. It just so happened that that one document was used by 
the President, almost verbatim, when he discussed the issue of 
tort reform, and the group, itself, felt very pleased that 
their work was responded to, which I think is----
    Senator Kerry. How was it responded to?
    Mr. Frink. Well, as----
    Senator Kerry. How has it been----
    Mr. Frink.--I said, the information that they put in their 
white paper, the President just about used their points in the 
white paper----
    Senator Kerry. How has it been translated into the budget 
and into policies?
    Mr. Frink. Well, in the policies, I think that's what drove 
that decision recently with regard to tort reform, the first 
step in tort reform, that took place--was it in January, 
February?
    Senator Kerry. I'm asking beyond tort reform.
    Mr. Frink. OK. We're on another subject. What was it--I'm 
sorry----
    Senator Kerry. Well, I'm saying, how has the Council 
contributed to the budget or to any policy that's been 
implemented or that we're working on today?
    Senator Ensign. Mr. Frink, after you answer this--I'm 
sorry, Senator Kerry--I'm going to have to go to Senator Pryor.
    Senator Kerry. Absolutely.
    Mr. Frink. One thing I can tell you is this. I learned a 
very good lesson from Senator DeMint when I spent some time 
with him in South Carolina. He said, ``Do not get discouraged 
with what you do and the fact that it doesn't show immediate 
results. Think of what you do as a big ship, and you move the 
wheel slightly, and perhaps the trajectory of how your 
decisions or what you influence moves down the line will show 
up, and, two secretaries from now, somebody might be taking the 
bows for what you accomplish.''
    I know that we are moving things in the right direction, 
and I have confidence that, down the line, a lot of what we do 
will show results. The Manufacturing Council is relatively new. 
It's less than a year old. It has just had its fourth meeting. 
It is still up and running. I am very optimistic. And the 
14,000 manufacturers that I have seen in the short time I've 
been in this position have been bursting with optimism over how 
they feel the economy is moving in their behalf. Certainly, 
some of them have had some issues and areas of concern, but 
part of my job is to work on those areas, and I intend to do 
that. And I do have a passionate concern for people.
    Senator Ensign. Go ahead, Senator Kerry.
    Senator Kerry. I thank the Chairman for his indulgence on 
this, but let me just say to you, Mr. Frink, I know you're new 
to the job, but what I'm trying to emphasize is, there's a lot 
of frustration in a lot of sectors of our economy. I'm not 
speaking for myself, and I'm certainly not putting a party 
label on this. I have talked to manufacturers, to business 
people all over the country, and to educators across the 
country. The 2006 budget, unfortunately, has 4 percent less 
than the 2005 level for Department of Labor's training 
programs. It has 89 percent less for the Department of 
Education's vocational and adult education program. It has $104 
million in cuts to the National Science Foundation's education 
and human resources account. I mean, I can go down a long list, 
where there's just a departure from the stated goals, or even 
the Council's findings, and what is really happening. And I 
think that's the frustration. And I ask you, take the time to 
go look at this, and be an advocate within the Administration 
for the reality here. Because the reality that most people feel 
out in the sector--I was just out in Silicon Valley, I was out 
talking to people--they're deeply frustrated and deeply 
concerned. And these are Republicans, Conservatives, Democrats, 
Independents, they're just business people trying to compete in 
an increasingly difficult world. And we've got to do a better 
job of helping create a framework for them to do it.
    Senator Ensign. Senator Pryor?

                 STATEMENT OF HON. MARK PRYOR, 
                   U.S. SENATOR FROM ARKANSAS

    Senator Pryor. Thank you, Mr. Chairman.
    Let me ask this, Mr. Frink, if I may. Your position was 
created as a response to the growing concern in this country 
that we've lost about 2 million manufacturing jobs in 4 years. 
My question for you is, what would you consider to be your 
accomplishments to date in your new post? What have you been 
able to accomplish?
    Mr. Frink. Well, as I mentioned in my opening statement, I 
have reached out to and visited a considerable amount of the 
industry that I will be serving. There is a report that was 
written, called ``Manufacturing in America,'' which represents 
my marching orders. That report has 57 recommendations. We 
have, to date, since I've been onboard, accomplished 21 of 
those recommendations. That report was a byproduct of 
roundtables that took place around the country, asking 
manufacturers what their concerns were about their ability to 
be competitive. And that report also included the 
recommendations to create my position, a manufacturing council, 
and many other recommendations, the total being 57. We have 21 
completed. We'll expect to make that 22 in the next couple of 
weeks, because we'll have an interagency group on 
manufacturing. We have also put in a new Deputy Assistant 
Secretary for Industry Analysis, and a Director for Economic 
Analysis. We're going to continue to build a team that will 
ensure that the concerns of manufacturers are heard and 
addressed. We established the fact that the Council will play 
an integral role in identifying priority manufacturing issues. 
They organized a task force addressing a lot of the issues.
    We're 8 months into this new position. I admit to the fact 
that I still have a lot to learn. But, I think that we have 
made progress. I've been on an 8-day trade mission, and I think 
that our best work is ahead of us, without a doubt.
    Senator Pryor. I will----
    Mr. Frink. And I think that for the period of time that 
we've been in place, we've made some measurable 
accomplishments.
    Senator Pryor. All right, well, let me ask that. You talk 
about measurable accomplishments. In the Manufacturing in 
America report that you cited a moment ago, it calls for you to 
lead a benchmark analysis to measure your progress. Have you 
done that yet? Have you done a benchmark analysis?
    Mr. Frink. We're working on that.
    Senator Pryor. OK. When will that be completed?
    Mr. Frink. Well, I think at the end of the first year. I 
think September 8th or 9th is when I was sworn in, so around 
the 8th or 9th, I think we should have that ready to show where 
we were and where we are now.
    Senator Pryor. And you said there's 57 recommendations in 
Manufacturing in America.
    Mr. Frink. Correct.
    Senator Pryor. And you've completed 21, soon to be 22.
    Mr. Frink. Implemented.
    Senator Pryor. Implemented.
    Mr. Frink. Yes.
    Senator Pryor. And does that mean those 21, soon to be 22, 
are done--right? They're done.
    Mr. Frink. Well, the work's started on those, for example, 
my position is not finished. I'm one of those 21 
recommendations, so there's a lot of work I will be continually 
doing----
    Senator Pryor. No, I guess that's what I'm asking you. You 
talk about these 21, soon to be 22. Does that mean that they 
are--you said implemented or done or completed--I mean, does 
that mean that they're done, or they're all, sort of, works in 
progress?
    Mr. Frink. Works in progress.
    Senator Pryor. OK. So, you still have 30-some-odd--35, 36 
recommendations to go. Do you have a timetable on those?
    Mr. Frink. No, sir.
    Senator Pryor. Will that be done----
    Mr. Frink. A lot of those require legislation. That's an 
area that I'm going to be working on. One of my targets right 
now is to get more familiar with the Hill and the people that 
will be able to make the decisions on a lot of the legislative 
parts of those recommendations so that I can advocate on behalf 
of manufacturers, where I view legislation needs to be moved.
    Senator Pryor. All right. One thing that Senator Kerry 
asked a few moments ago was about this Manufacturing Council 
Subcommittee on the U.S. Workforce. As I understand what you 
all said in that, and your response to that, was that--
basically, you were talking about one subcommittee report, 
right? Not the entire effort, but one subcommittee.
    Mr. Frink. No, we actually have three subcommittees, but I 
think he was referring to the one on tort reform.
    Senator Pryor. Right. And you mentioned the President had 
cited that----
    Mr. Frink. Yes.
    Senator Pryor.--correct?
    Mr. Frink. I think that in all councils there is a bit of 
frustration as to the work they do and whether or not it gets 
used, and I think it was a big triumph for our council to know 
that the President cited its report on tort reform, with many 
of the recommendations, and used a lot of the facts contained 
in it to build a case for tort reform.
    Senator Pryor. As I understand--maybe I'm wrong about 
this--as I understand the work of that subcommittee, you looked 
at issues facing manufacturers, and the focus was healthcare 
and rising healthcare costs. And I would say--and I wonder if 
you would agree--that there are more challenges facing the 
manufacturer than just healthcare and healthcare costs. Would 
you agree with that?
    Mr. Frink. Absolutely.
    Senator Pryor. And as part of the Subcommittee's work, they 
seemed to focus on medical liability and tort reform----
    Mr. Frink. And energy and innovation.
    Senator Pryor. Right, but they seemed to focus on these two 
as part of the--as the solution for healthcare and rising 
healthcare costs. And I would say--and I wonder if you would 
agree--that healthcare and rising healthcare costs is more 
complicated than simply tort reform and medical liability. 
Would you agree with me on that?
    Mr. Frink. I do. I would.
    Senator Pryor. What are--if you could list out the top--
say, the top five challenges that American manufacturers are 
facing today, what are their top five, or maybe ten--I know I'm 
about out of time here--but what are the top five, or maybe top 
ten, things that we, in the Congress, should be focusing on to 
try to help our manufacturers?
    Mr. Frink. There are the big concerns. Probably number one 
would be healthcare costs, when you know of the automobile 
industry having cited as much as $1,700 per car is what 
healthcare affects, in terms of a single automobile. Tort 
reform: the Chairman referred to the $230-some billion, I think 
it's almost 900-or-so dollars spent per person in the United 
States as a result of frivolous lawsuits. Energy is a big 
factor. The manufacturing industry uses about 30-35 percent of 
all energy, so the issue of affordable energy is huge, to the 
majority of the manufacturing world.
    We have, in America, a 22.4 percent higher cost of doing 
business than our foreign counterparts. These are the areas I 
have to work on. But the area that I have seen, the one that Al 
Frink has seen from his private-sector experience, is a 
critical concern for education. As I entered into this world 
and into a kind of very politically charged election--and a lot 
of it had to do with offshoring and jobs going away--I visited 
71 manufacturers in a relatively condensed period of time, and 
every one of those companies had help-wanted signs hanging from 
the door: ``Need help,'' ``Desperately need help.'' The first 
company I visited was Benson Trucks. They produce one of the 
finest truck beds in the business. They couldn't find welders. 
They would hire 50 tomorrow, the head of the company, Gary, 
said. Mack Truck, if it could, would hire 100 drivers tomorrow. 
Can't even find qualified drivers. And he said, ``Twenty-five 
percent of our drivers are women.'' I said, ``What did the job 
pay?'' He said, ``It starts around $45,000. In a couple of 
years, with a good route, you could make $100,000.'' There's a 
tremendous shortage of qualified, educated help. Jobs are 
plentiful, but there's an insufficient number of trained people 
out there. So, I think education is probably the single most 
important area that manufacturing faces, moving forward.
    Second is innovation. As I work on trying to lower the 
barrier costs for companies around the country, I think there's 
such emphasis placed on lowering barrier costs. I'm concerned 
about raising value. Manufacturing Extension Partnership 
teaches Lean and, perhaps, Six Sigma. That's important. But 
what I say is, what about life after Lean? What if that isn't 
enough? My answer to that is, without innovation, there is no 
life after Lean. We need to drive innovation to raise value.
    And then, last, there are companies that can build a good 
product, that have innovation, but that don't know how to get 
that product on the market. The issue that doesn't get 
discussed--and it probably wasn't in the report on 
manufacturing initiatives--is marketing. It's part of what 
allowed me and my company in California to be successful. We 
built a marketing story. We created a value such that people 
paid more for our products due to the fact that we were 
innovative, due to the fact we differentiated, due to the fact 
we had a great marketing brand, due to the fact that we didn't 
sell to one or two markets, we sold to seven, so we weren't 
affected such as a company, for example, that supplies the auto 
industry and loses a big customer, and now they're crippled. 
They need greater marketing--that needs to be taught. Small 
companies need to be taught, not just to lower their costs, but 
how to raise their value. How we get there, I haven't quite 
figured out, but I know it's a desperate need. So many problems 
can be solved by good marketing, for example, education, and 
the fact that we don't have people getting into engineering in 
the schools, and the schools are cutting classes that used to 
help drive our manufacturing educational needs. They don't see 
the need. Manufacturing hasn't done a good job in conveying the 
needs. Education is disconnected with manufacturing. I want to 
work to connect those dots, to drive education, and try to see 
if we can fill the educational needs for the future. I am 
desperately concerned about that.
    Those are the areas where I see a tremendous need for 
government to provide help. I know education. I know 
innovation. I know how we can drive marketing, and the skills 
required for great marketing strategies. I think MEP possibly 
should be doing a job. I'm going to look into finding out more 
of what they do, and see if they have a good marketing 
strategy. I know that good marketing can overcome a lot of 
barrier costs.
    China does not have a brand. Their brand is, ``Made in 
China.'' We have brands in America. We can drive these brands. 
And I want to push American companies to recognize who they 
are, and not be afraid to compete.
    Senator Ensign. Thank you, Mr. Frink. We appreciate your 
testimony. I want to call the second panel to the table. And, 
as they're coming forward, let me reiterate that it was very 
helpful to us to receive your testimony. I know you're new in 
this job, and it is difficult coming to Capitol Hill. So I 
appreciate what you went through.
    Just as the next panel is coming forward, Senator Kerry 
mentioned that he has visited--he has gone out to Silicon 
Valley. And, you know, depending on our audiences, we all hear 
different things, and one of the top concerns that I hear from 
people is litigation. I mean, from almost every business sector 
I hear that the cost of litigation, the frivolous lawsuits, and 
the number of lawsuits are major problems that hinder the 
ability of American manufacturers to remain competitive in the 
global economy. But of the other issues that we talked about 
today, education is a major concern, huge to our industries out 
there, whether they are manufacturing or not manufacturing. 
It's a huge problem.
    On taxation, the way that we treat our companies--
especially if they are investing overseas--compared to the way 
the other governments treat their companies is problematic. 
Ireland fostered its entire high-tech industry by setting up a 
business-friendly tax code and regulations. In the United 
States, by contrast, excessive regulation is maybe the biggest 
tax that we impose on corporations. I don't know how many of 
you have been hearing about section 404 of Sarbanes-Oxley, but 
a lot of public companies are now talking about going private. 
The cost of compliance with Sarbanes-Oxley is huge, especially 
for small and mid-sized companies.
    In addition, healthcare is another major concern for 
companies and their employees. All the things that we are 
talking about today are very important topics to discuss in 
this Subcommittee. The last word in the title of this 
Subcommittee is ``competitiveness,'' and one of the reasons 
that I was really happy that we got that word on there is 
because all of these things affect how we're going to keep jobs 
in America. And I know Republicans and Democrats, alike, want 
to do that, and that is one of the reasons for the hearing 
today.
    Senator Kerry. Mr. Chairman, I'd ask unanimous consent that 
Senator Lautenberg's statement be put in the record, since he 
was not able to be here.
    Senator Ensign. Without objection.
    [The prepared statement of Senator Lautenberg follows:]

            Prepared Statement of Hon. Frank R. Lautenberg, 
                      U.S. Senator from New Jersey
    Mr. Chairman:
     I am sorry I am not able to attend today's hearing. But, I want to 
acknowledge one of my constituents, FPI Thermoplastics, and this 
company's extraordinary story.
    Just 5 years ago, FPI lost a major client to a Chinese supplier 
that could provide its product more cheaply. FPI was threatened with 
bankruptcy, with dozens of jobs on the line.
    In order to compete with the low-cost, Chinese supplies, FPI needed 
to modernize. FPI had the will and the work ethic to change, but it 
lacked the expertise to transform its operations.
    Working with Robert Loderstedt, President of New Jersey's 
Manufacturing Extension Partnership (MEP) program, FPI was able to find 
savings it never thought possible--MEP showed FPI how it could use 
acquisitions to diversify its client base, save money by closing an 
offsite warehouse, find unneeded assets it could sell off, implement 
lean manufacturing techniques, and reduce its cost of debt.
    Today, FPI is competing with China and winning, and it is growing 
rapidly. By investing about $210,000 in FPI, the MEP program helped FPI 
to produce millions of dollars in economic growth and dozens of 
manufacturing jobs that allow middle-class New Jerseyans to provide a 
good, stable and healthy living for their families.
    FPI is just one of MEP's success stories. It is a shining example 
of the important role an active government can play in improving our 
manufacturing competitiveness and strengthening our economy. We must 
preserve vital programs like MEP that give businesses the tools they 
need to be competitive.

    Senator Ensign. Now, I will introduce the second panel of 
witnesses. Dr. G. Wayne Clough is the President of the Georgia 
Institute of Technology. Dr. Clough is also a member of the 
President's Council of Advisors on Science and Technology. Dr. 
Clough is the Co-Chair of the National Innovation Initiative. 
Sebastian Murray is the President and CEO of FPI Thermoplastic 
Technologies. His company provides injection molded plastic 
products to companies like McDonald's and Bed Bath & Beyond. 
Thomas R. Howell is a partner at Dewey Ballantine, LLP. He has 
specialized in international trade matters for more than 20 
years. In that capacity, he has represented several clients 
from the semiconductor industry.
    Dr. Clough, we'll start with you.

         STATEMENT OF DR. G. WAYNE CLOUGH, PRESIDENT, 
                GEORGIA INSTITUTE OF TECHNOLOGY

    Dr. Clough. Thank you, Chairman Ensign and other Committee 
Members. It's a pleasure to be with you to talk about a very 
important subject. And I would like my written testimony 
entered into the record.
    Senator Ensign. All of your written testimonies will be 
entered in the----
    Dr. Clough. Thank you.
    Senator Ensign.--record. If you could summarize in 5 
minutes or less, we'd appreciate it.
    Dr. Clough. Will do.
    The ability of our high-tech manufacturing sector to 
compete in a rapidly-evolving world economy is linked to 
broader issues of competitiveness of our businesses and 
industries at large.
    Senator Ensign. If you could just pull that microphone a 
little closer to you, it would be appreciated.
    Dr. Clough. Manufacturing is a special case within a larger 
context, where all our businesses will have to be willing to 
compete in the landscape that has changed as other nations 
target our technology-based economic sector with greater vigor 
and resources than ever before.
    I've been fortunate to serve in a number of leadership 
positions in national and regional efforts. Some of these the 
Chairman mentioned, such as the National Innovation Initiative, 
which just issued a report in December on this broad topic. And 
I've had the chance to chair the Engineer 2020 Project for the 
National Academy of Engineering and serve on PCAST and as a 
member of the National Science Board.
    I also have the great good fortune to be President of 
Georgia Tech, which is one of the top-rated manufacturing 
programs in the country, and also operates a statewide business 
incubator, as well as a manufacturing technology extension 
program that assists local manufacturing companies and is, in 
part, funded by the MEP program. Our activities range from 
those found in traditional industries, where we're trying to 
help our food processing and pulp and paper industries, as well 
as introducing new areas, such as nanotechnology, into what 
we're doing in manufacturing.
    Now, we're all aware of the issues facing the manufacturing 
sector, in terms of growing global competition with nations 
that have significantly lower wages than ours. We're also 
learning to appreciate that, as we improve productivity and 
mature the manufacturing sector, this can lead to a decline in 
employment, even as the business is succeeding.
    The key to employment seems to be a combination approach 
that seeks to keep the high-end jobs, where productivity is 
increased, but creates new manufacturing sectors or value-added 
propositions with it. So new jobs come and create jobs related 
to service and support for the manufacturing sector, such as 
logistics.
    Every 3 or 4 years, Georgia Tech conducts a survey of 
manufacturers in Georgia, and I'll give you a few points that 
we've learned from our most recent survey.
    Those companies that are successful exhibit a willingness 
to adapt and improve their customer focus. They need to work on 
new product development. They have to have a record, typically, 
of filing patent applications. They need to sustain innovation 
as part of their culture, utilize upgraded computing and 
communications technologies, and have access to information 
resources and assistance in training their employees. And, 
obviously, these characteristics are likely to become more, not 
less, important in the future.
    Because small-to-medium manufacturing-sized companies are 
often unable to afford some of the technical advice that the 
bigger companies would get, that they need to innovate. 
Initiatives like the Manufacturing Extension Program, we think, 
are important.
    Now, the National Innovation Initiative looks at this issue 
at a much higher level, and it looks to the future health of 
all of our high-tech industry sector. These are some of the 
findings in the report, which is now on the website of the 
Council on Competitiveness. Some 200,000 copies of it now have 
been downloaded since it was published.
    We need to find a balance in the Federal funding for R&D 
areas, like engineering and the physical sciences, to help form 
the ideas that will form the basis for new products and 
businesses. These areas have seen flat funding, or even a 
decline in the past decade. And we need to balance that 
portfolio in the future if we're going to succeed, even in 
areas like health.
    Second, we need initiatives to encourage U.S. students to 
major in engineering and sciences to address workforce needs. 
And I'm very pleased to hear everyone express their concerns 
about these issues, because, in fact, our graduation numbers in 
science and engineering peaked in the 1980s, declined, more or 
less holding steady today, but certainly the competing nations 
that we're looking at are outproducing us, including the 
European Union, as well as China, India and others. And this 
gap will continue to grow if we don't do something to 
intervene. Added to this, recent studies show international 
students coming to work in our companies--or to get degrees at 
places like Georgia Tech have declined substantially in the 
past couple of years.
    Also, we need programs for workforce training and support 
for transportable benefits for workers who are displaced by 
changes in technology. As you know, technology is changing at a 
very rapid pace, and we need to help those adjust as the job 
needs change.
    And, finally, I would also encourage my fellow university 
presidents and university faculty members that it's time for 
universities to do this--to undertake innovation, to help our 
graduates better understand the new culture that they will be 
involved in.
    Other recommendations also are included in the report that 
was published at the Summit for the National Innovation 
Initiative. They are important, but in the interest of time I 
won't go through them here.
    We've decided that there's no way one entity can get this 
done. Multiple approaches to improving the innovation sector 
are needed if we're going to succeed. And the National 
Association of Manufacturers is one of our significant allies 
in this.
    We're going to have a number of regional meetings, that are 
starting almost as we speak, to talk about local innovation 
strategies, talk about local conditions in different states, 
and about how we move forward. And, in addition, in October 
we're going to have a national meeting with the Business 
Roundtable, the National Association of Manufacturers, the 
American Association of Electronics, and the Council on 
Competitiveness.
    We're also working with the Departments of Commerce, Labor, 
and Energy, and with businesses, like IBM, who are taking 
leadership positions as we move forward. It has to be a public/
private partnership, I think, if we're going to succeed.
    So, in summary, the future for manufacturing in high-tech 
industries is not going to be secured by doing things the same 
old way. Competition for high-tech manufacturing is increasing 
rapidly as nations like China, India, and Korea build and 
invest in their educational and R&D programs. To succeed--and 
we are still in the position to succeed--we need to sharpen and 
support a national strategy for innovation that will allow us 
to maintain our share of this important market segment.
    Thank you.
    [The prepared statement of Dr. Clough follows:]

         Prepared Statement of Dr. G. Wayne Clough, President, 
                    Georgia Institute of Technology
    Manufacturing is an essential part of our economy. Not only are 
manufactured goods the currency of world trade, but manufacturing is 
what creates wealth. It adds value to resources by making them do 
something more, which is something that services cannot do.
    For most of the 20th century, manufacturing was based on the Henry 
Ford assembly line model. Each worker carried out the same small task 
over and over, and a standardized product rolled off the end of the 
line, each one identical to the one before. Few of the workers in those 
manufacturing plants had more than a high school diploma--if they even 
had that. Then, about three decades ago, global competition for 
manufacturing jobs began to heat up. Many companies realized that large 
pools of unskilled labor willing to work for much lower wages than 
those in the U.S. could be accessed by moving plants overseas. This led 
to a large scale shift of jobs out of our country. In part due to this 
out-migration of jobs, manufacturing accounted for only 14 percent of 
the U.S. Gross Domestic Product in 2001, down from 27 percent in the 
middle of the twentieth century. Manufacturing jobs declined from 30 
percent of our workforce to less than 15 percent.
    However, these numbers mask a second major shift that occurred in 
the manufacturing industry in the 1980s and 1990s. The manufacturing 
processes themselves began to be fundamentally changed with advances in 
technology, and this was accelerated with the invention of the 
microchip. Manufacturers rapidly adopted new technology that reduced 
the need for manpower while at the same time they integrated new 
management techniques that called for more sophisticated and adaptable 
workers. This led to a vast family of production tools that offer 
unmatched precision, quality, and efficiency--rom CAD-CAM to ``just in 
time'' and ``demand-pull'' manufacturing. The new technology that has 
infused manufacturing is capital intensive rather than labor intensive. 
Robotic arms now assemble products. Automated guided vehicles (AVGs) 
move supplies and products around the plant. Real-time communication 
feeds information back into the process in time to reduce the margin of 
defects to virtually zero. Salespeople with cell phones and laptop 
computers cover more territory in less time, and sophisticated 
logistics systems speed the products on their way. The entire process, 
from designing the product to shipping it, has been computerized. The 
skill levels expected of workers are now far beyond that of the earlier 
era.
    The remarkable changes brought about by new technology have enabled 
manufacturing to outpace other sectors of the U.S. economy in 
productivity. Between 1977 and 2001, overall U.S. manufacturing output, 
measured in constant 1996 dollars, almost doubled. While productivity 
for the U.S. economy as a whole increased by 53 percent, manufacturing 
productivity rose 109 percent. Over the course of the past 25 years, 
overall prices rose by 140 percent, but productivity increases held the 
increase in the cost of manufactured goods to 60 percent.
    The combination of increased automation and greater productivity 
meant manufacturers could meet market demand with fewer employees, so 
that instead of moving overseas as they had during the 1970s and 1980s, 
many manufacturing jobs actually began to disappear entirely. What has 
been happening in manufacturing is analogous to what happened 
previously in agriculture, which saw an ever-shrinking number of 
farmers feed an ever-growing world population. Backing this theory up, 
manufacturing has been shrinking not just in the United States but 
everywhere. Estimates are that 22 million manufacturing jobs 
disappeared worldwide between 1995 and 2002. A new buzzword appeared in 
the manufacturing community--``lights-out'' plants--referring to 
facilities that are so automated that there is no one around who needs 
to see what they are doing. Even though advanced technology caused them 
to shed jobs, recent research indicates that had American manufacturers 
not moved rapidly to incorporate new technology and improve their 
competitive posture, the U.S. manufacturing sector would have lost even 
more jobs as more manufacturers closed their doors entirely.
    At Georgia Tech, we see these factors reflected in the detailed 
survey of the state's manufacturers that we conduct every few years. We 
are presently in the middle of the 2005 survey, so 2002 is the latest 
for which we have final data. However, when you compare the 2002 data 
with the 1999 data, about half of Georgia's manufacturers underwent 
major changes in strategy or structure during that three-year 
timeframe. Most of these changes involved innovation and/or technology, 
and were aimed at quick delivery, adapting to customers, and providing 
value-added services.
    The 2002 survey showed that companies with new-to-the-industry 
products, value-added service offerings, and substantial employee use 
of computers had significantly higher growth, profitability, and 
productivity than those who did not engage in these practices. About 60 
percent of Georgia's manufacturers do some type of new product 
development, and more than one in five are developing products that are 
new to their industry. These companies who are innovating have 
significantly higher growth, profitability and productivity rates. 
Manufacturers filing patent applications--another measure of 
innovation--also had significantly higher return on sales. Those who 
introduced new processes experienced significantly higher return on 
sales and growth in value-added per employee, and firms with Web-based 
customer/supplier linkages or ordering capabilities had significantly 
higher returns on sales.
    We have traditionally thought of factories as dusty, greasy, and 
full of rows of people operating clanking machinery. However, while 
manufacturing of that sort may still be needed to make some products, 
it will fall at the lower end of the economic spectrum, which we will 
cede to others. American manufacturing of the future will need to be 
focused on the high end of the economic spectrum if we want to maintain 
our standard of living. We will need to pioneer new manufacturing 
techniques and focus on the highest-possible leading-edge precision 
technological work that it is not possible to do in other parts of the 
world. The strategies even of the latter part of the last century--cost 
control, ``total quality,'' and continuous productivity improvement--
will not be enough. To win in the 21st century will require 
flexibility, collaboration, customization, precision, global market 
savvy and speed. To quote a recent statement on ``Ensuring 
Manufacturing Strength through Bold Vision'' by the leaders of the 
National Science Foundation, ``The big winners in the increasingly 
fierce global scramble for supremacy will not be those who simply make 
commodities faster and cheaper than the competition. They will be those 
who develop talent, techniques, and tools so advanced that there is no 
competition.''
    During 2004, I was privileged to serve as co-chair, together with 
IBM CEO Sam Palmisano, of the National Innovation Initiative, sponsored 
by the U.S. Council on Competitiveness. We involved 400 of the Nation's 
best minds from academia, industry, and government in developing an 
action agenda designed to help the United States create an economy 
based on innovation. The National Innovation Initiative generated 30 
recommendations that we grouped under three broad topics: talent, which 
is the human dimension of innovation; investment, which is the 
financial dimension of innovation; and infrastructure, which provides 
the enabling framework for innovation. All three of these have a 
bearing on the competitiveness of American manufacturing, so I will 
touch briefly on each one.
    High-tech manufacturing operations require employees with a much 
higher level of skills. For example, technology and processes at the 
Timken Company, which is the world's leading manufacturer of roller 
bearings, have become so sophisticated that the company now looks for 
workers with bachelor's degrees for many of its entry-level positions. 
Georgia Tech's survey of Georgia manufacturers has identified human 
resource problems as their foremost worry. Yet the United States is 
falling behind in the education of technology workers. China, India, 
and the European Union each graduate more engineers than the United 
States and the gap will continue to grow based on present trends. Also, 
our past ability to rely on ample supplies of international science and 
engineering graduates will be tested as more of these students are 
enticed to take jobs in the growing technology businesses at home, and 
as increasing numbers simply choose not to study here because of 
concerns about post-9/11 visa and export control policies.
    One of the primary investments in innovation is R&D. In January of 
2004, the Department of Commerce released the results of a series of 
roundtable discussions held with manufacturers around the Nation. Among 
the areas that manufacturers believe require immediate attention is a 
commitment to sustained and balanced R&D to ensure that the Federal 
Government reinforces rather than hinders innovation and bringing new 
ideas to market.
    About the same time the Department of Commerce published its 
report, another report was released by the Subcommittee on Information 
Technology Manufacturing and Competitiveness of the President's Council 
of Advisors on Science and Technology (PCAST), chaired by George 
Scalise, President of the Semiconductor Industry Association. The PCAST 
report pointed out that as the speed of technology development 
accelerates, the linkage between research and manufacturing becomes 
much closer. Locating a manufacturing plant close to an R&D operation 
that is generating new process and product ideas facilitates the human 
interchange that speeds ideas from the lab to the marketplace. As a 
result, places with both strong R&D centers and manufacturing 
capabilities have a competitive edge. The good news is that some 
semiconductor manufacturers have remained in the United States rather 
than moving overseas despite the cost benefits of off-shoring, because 
they want to be close to the university R&D that is driving new 
developments. The not-so-good news is that the level of R&D being 
conducted in countries like China and India is improving and many U.S. 
and global companies are building R&D facilities in these countries. 
This means competition may increase for more sophisticated 
manufacturing jobs as well and if this is so, the United States may end 
up with a security problem as well as an economic problem.
    The present technological superiority of the United States has 
flowed from the strong investments we made in scientific research since 
World War II, and that lesson has not been lost on those who aspire to 
compete with us. We need to not only consider improving investment 
levels in R&D, but also how they are distributed. A recent PCAST report 
showed that funding for research in key areas of engineering and 
physical sciences have declined while levels in other areas increased. 
In a world where future manufacturing developments will come from 
interdisciplinary research, care must be taken to support an 
appropriate funding portfolio.
    As a part of the third topic, infrastructure, the National 
Innovation Initiative looked specifically at strengthening America's 
manufacturing capacity. We were concerned because while the United 
States remains the world's leading nation in the production of 
manufactured goods, our rate of growth in manufacturing production has 
remained virtually flat over the past 4 years. During the same time 
frame, 2000-2004, Asia (excluding Japan), Central Europe and the 
Balkans, and Latin America experienced strong growth in manufacturing 
production. Our high-end competitors--Western Europe and Japan--also 
outperformed us.
    The National Innovation Initiative calls for the United States to 
design and implement a new foundation for high-performance 
manufacturing production. That means new human, organizational, 
financial, and policy models must be developed. New designs, processes, 
and materials need to be introduced and new manufacturing technologies 
should more rapidly be brought to the production cycle. We are moving 
in that direction, with flexible automation, complex numerically 
controlled tooling, precision engineering, distributed manufacturing, 
e-commerce to connect and manage supply chains, materials databases, 
and shared-use facilities for R&D and pilot production, which lowers 
the risks and barriers to entry. Technologies like these will not only 
increase productivity even further, but will also help to offset lower 
wages in other countries.
    As a technological university, Georgia Tech has a wide range of 
experts devoted to evaluating what is happening in manufacturing, 
divining future opportunities for this core industrial sector, and 
developing the manufacturing technologies and methodology of the 
future. Several important themes are emerging from their work.
    First, manufacturing technologies of the future will include 
molecular and nano-manufacturing, bio-materials and bio-processing, 
micro-electro-mechanical systems (MEMS), free-form fabrication, and new 
software control technologies. Ideas that will come more strongly to 
the fore include innovation, knowledge management, customer 
relationships, and waste reduction--not only in the manufacturing 
process, but also over the life of the product.
    These technologies and ideas are expected to be expressed in the 
context of several inter-related trends, including movement away from 
mass production toward semi-customization; shifts away from centralized 
production locations to distributed sites; and the transformation of 
centralized business control toward collaborative relationships between 
distributed sites.
    We can already see the trend toward customized manufacturing in the 
ability to order customized clothing from manufacturers like Land's End 
or L.L. Bean, and the opportunity for customers buying a car to send 
their specifications to the factory online rather than compromising on 
what a dealer happens to have on the lot. The next stage is expected to 
be ``additive manufacturing,'' which enables end-users to participate 
in the design of more sophisticated products like hearing aids, dental 
restorations, eye glasses, and joint replacements. Additive 
manufacturing holds potential to embody an entire manufacturing system 
within a single, small machine. That has led some to predict that 
additive manufacturing machines for certain purposes will be introduced 
for use in the home within the next decade or two.
    Even as manufacturing machines become smaller, so will the scale on 
which manufacturing takes place. Already the United States has seen a 
significant drop in machine tool production, which paralleled a 
significant decline in R&D spending in this area, as attention has 
shifted to microscale tools and machining. Nano-manufacturing is the 
place where nanotechnology will transform from an exotic research field 
to something that reaches out to touch all human civilization. Nano-
manufacturing addresses not only work on the nano-scale, which is one-
billionth of a meter, but also the engineering of new materials at the 
atomic and molecular level that have novel, unique, and improved 
physical, chemical, and biological properties. Nanoscale engineering 
can greatly expand the range of performance of materials and chemicals, 
as well as creating microscopic machines and systems.
    Nano-manufacturing has the potential to impact virtually every 
human-made object, from automobiles to electronics, from advanced 
medicine to energy production. Three specific areas where we are 
working at Georgia Tech are nano-computers that utilize nanotubes as 
interconnections instead of transistors; disease diagnosis and 
controlled drug delivery; and optoelectronic materials. But successful 
implementation of nano-manufacturing will require standard measurements 
at the atomic level, special manufacturing environments, and micro-
scale technologies and quality control mechanisms. It will also require 
the involvement of experts in a much wider range of disciplines than 
traditional manufacturing--including electrical engineers, physicists, 
chemists, biologists, and biomedical engineers.
    Even as the leading edge of American manufacturing moves to 
unprecedented levels of sophistication, there are segments of the 
industry that cannot and should not be left behind. America's 
traditional manufacturing industries still have a relatively strong 
presence in our Nation's economy, and attention must be given to their 
competitiveness. The U.S. pulp and paper industry, for example, 
generates $100 billion of shipments a year--30 percent of the world's 
production. Technological innovation is important to keep such 
traditional industries competitive.
    The growing need for the rapid development and deployment of very 
sophisticated manufacturing technology and techniques is particularly 
challenging for the Nation's 350,000 small and mid-sized manufacturers, 
who employ more than seven million people and comprise nearly half of 
the U.S. manufacturing base. These companies often lack the 
information, expertise, time, and money required to engage in the 
constant innovation and upgrading required to do well in today's 
competitive marketplace. However, with some timely assistance, they can 
also succeed. For the past 40 years, Georgia Tech has operated a state-
supported network of industrial extension offices that serve Georgia's 
small and mid-sized manufacturers, and as part of our surveys of 
Georgia manufacturers we have tried to assess the benefits of that 
service. What the 2002 survey showed was that companies assisted by 
Georgia Tech had comparatively higher productivity--an average value-
added increase of $3,000 per employee.
    Finally, changes in manufacturing processes have significant 
logistics implications. The U.S. trucking industry transports more than 
three-quarters of the freight in the country, and changes in the 
manufacturing process have major consequences for the logistics of 
moving those loads. The trucking industry has already had to make 
significant adjustments to facilitate the implementation of just-in-
time manufacturing, which requires greater load and time precision and 
more recently just-in-case policies designed to prevent and address 
unexpected disruptions in the increasingly tightly engineered supply 
chain. Future changes will require even more logistical sophistication.
    The competition for manufacturing jobs and new applications and 
technology is going to grow in the future. We have to adjust to a 
changed landscape, and re-commit ourselves if we are to compete with 
nations that will have larger technological workforces and wage 
advantages for some time to come. Fortunately, the U.S. still has an 
edge and our society supports entrepreneurism and risk taking. However, 
the window of opportunity will be open only so long and we need to take 
action now if we are to succeed.

    Senator Ensign. Thank you.
    Mr. Murray?

         STATEMENT OF SEBASTIAN MURRAY, PRESIDENT/CEO, 
                 FPI THERMOPLASTIC TECHNOLOGIES

    Mr. Murray. Thank you for the opportunity to speak, Mr. 
Chairman and Senators.
    A quick background on FPI Thermoplastic Technologies. We're 
a plastic injection molding company. We serve three primary 
markets: fire, safety, and security--our major account is 
Siemens; point-of-purchase display--our major account is 
Revlon; and food service--our major account is McDonald's. We 
have 120 employees, presently, and we are now adding 40 more 
jobs, to increase our employee count to 160. Our sales volume 
is $15 million in sales, and our sales are increasing to $25 
million in 2006, which is a 66 percent increase. Our major 
competition is Asia, primarily. We also have competitors in 
Canada and the United States. FPI's competitive advantages are 
low-cost production, presently, superior design capabilities, 
and time to market.
    A critical threat to U.S. manufacturing is low-cost 
competition from Asia, as we all know. Solutions for 
strengthening U.S. manufacturing are the MEP program, number 
one, and low-cost loans, through the SBA, for example, to help 
companies like ``myselve's'' invest in technology.
    FPI faced dire financial circumstances in the year 2000. We 
lost a third of our sales with a major U.S. retailer to Chinese 
competitors. FPI was introduced to the MEP program regional 
office, NJ, New Jersey, MEP, and to Robert Loderstedt, its 
President, in the year 2000. The MEP program helped us develop 
a multi-pronged turnaround strategy. MEP implemented an 
acquisition strategy, which helped us add $3 million in annual 
sales volume, with two acquisitions. MEP helped us implement 
inventory management and control methods, which saved our 
company $480,000 per year in distribution expenses, and freed a 
million dollars in cash-flow. MEP implemented a lean 
manufacturing program, where we invested in automation and 
robots. We now have a robot at each of our 30 machines, with 
three- to six-months paybacks, and yielding dramatic gross 
margin increases. And MEP, last, helped us refinance our debt, 
and we reduced our annual interest expenses by about $100,000 
per year.
    In terms of the future of U.S. manufacturing, the future of 
FPI. Today, FPI is profitable and growing. We are securing new 
business through Internet auctions that include global 
competitors. Consequently, we are a low-cost global competitor 
successfully competing with Asian sources. We owe our survival 
and our success directly and completely to MEP. And we believe 
it is critically important that the U.S. Senate continue its 
support of MEP.
    Thank you very much.
    [The prepared statement of Mr. Murray follows:]

        Prepared Statement of Sebastian Murray, President/CEO, 
                     FPI Thermoplastic Technologies
    Samuel Murray and I are 50/50 owners of a plastic manufacturing 
business located in Morristown, NJ. We employ 120 people and we have 
sales revenue of approximately $15,000,000.
    Five years ago our business was on the verge of bankruptcy. A major 
U.S. retailer that accounted for a third of our sales changed its 
source of supply from FPI to a Chinese supplier. Since our sales had 
plummeted literally overnight and without warning we were in dire 
financial circumstances. We began to lose money and our cash-flow was 
hemorrhaging. Shortly thereafter our bank placed us in the work out 
group and we were heading down a path to liquidation.
    We are a successful enterprise today primarily due to NJMEP, the 
New Jersey unit of the Manufacturing Extension Partnership (MEP) of 
NIST. In our hour of need we were introduced to NJMEP by the Morris 
County Chamber of Commerce.
    Together with Robert Loderstedt, President of NJMEP, we implemented 
a multi pronged turnaround strategy to revitalize FPI including;

        1. Acquisitions--NJMEP worked with us to roll up and acquire 2 
        smaller plastic injection molding companies to replace lost 
        sales and to diversify our customer base.

        2. Inventory Management and Control--NJMEP suggested we close 
        an outside warehouse, which we did that saved us the $40,000 
        dollar monthly operating costs which resulted in a $480,000 
        annual savings which we used to implement the other phases of 
        the turnaround strategy. Additionally, we sold excess inventory 
        totaling approximately $1,000,000 improving cash-flow. Plus we 
        implemented an MRP/MPS system and cycle counts to improve 
        inventory management and control.

        3. Lean Manufacturing--We engaged NJMEP to implement lean 
        manufacturing techniques which lower our costs of production 
        and increased our manufacturing efficiencies through the use 
        process changes and automation, using robotics. Consequently we 
        have raised our sales per employee from $80,000 in 2000 to 
        $125,000 in 2005. Our goal for 2006 is $150,000 per employee.

        4. Banking Relationship--NJMEP worked with us to refinance our 
        debt by changing banks and lowering our interest expense with 
        reduced rates and an extended term.

    Today FPI is profitable and growing. Our sales volume is over 30 
percent ahead of last year. In 2006 we expect our sales to exceed 
$25,000,000 an increase of 60 percent over 2005.
    We are no longer intimidated by Asian competition. We have used 
this threat to spur FPI to become a global low-cost producer. None of 
this would have been attainable without MEP.
    MEP is an essential asset and lifeline for American manufacturing. 
It is vitally important that the U.S. Senate continues its support of 
programs such as MEP that aid and strengthen American manufacturing 
companies.
    Thank you for your time.

    Senator Ensign. Thank you.
    Mr. Howell?

            STATEMENT OF THOMAS R. HOWELL, PARTNER, 
                      DEWEY BALLANTINE LLP

    Mr. Howell. Thank you, Mr. Chairman and Senators.
    I'd like to devote my remarks to one topic I've raised in 
my testimony, which is the factors that are driving the 
offshore movement of the semiconductor industry from the United 
States.
    From where we stand now, the U.S. semiconductor industry is 
the world leader. We have about 50 percent of total global 
sales. Technologically, we lead in most areas. And we're in a 
very strong position. And at the moment, about 77 percent of 
all the manufacturing in the industry is still here in the 
United States.
    The thing is that most of those wafer fabrication 
facilities, or fabs, as they're called, are current generation, 
which will become obsolete in the next 5 to 7 years, and that 
with respect to the next generation that's planned, the ratios 
are much different. We heard recently from an executive at 
Applied Materials, which is one of the companies that supplies 
the equipment for fabs, that forecast that there will be 30 
fabs built in China in the next 3 years. During the same time 
frame, 6 new fabs will be started in the United States. So, 
there's an enormous proportional shift in the direction of 
investment that's underway right now.
    That's often seen as just a reflection of the fact that the 
market is growing for semiconductors in Asia, that the devices 
are being consumed in increasing proportion there. That doesn't 
explain the entire shift. There is a need to locate some 
production near a market, but, in fact, a country like Taiwan 
can serve markets all over the world with fabs built in Taiwan. 
So, just the fact that the market is moving to Asia to some 
extent does not explain the shift.
    The most common explanation is, there's a cost advantage in 
Asia. And, in fact, if you take the effective government 
measures away and set that aside and look at just the cost of 
building a fab and operating a fab, the fact is, there isn't 
much cost difference between the United States, on the one 
hand, and Taiwan/China, on the other hand. Most of the costs 
are associated with equipment. It's an automated process. The 
equipment is the same equipment used in every area. It's 
produced by the same companies, and it costs the same. The 
input cost differentials--there are some, but there are not 
that many--are not that great. The labor costs are 
substantially lower in China and Taiwan, but they don't make up 
a very large portion of the total manufacturing costs. With a 
300 millimeter fab--that is the current state-of-the-art--if 
the United States' costs were seen as a factor of a hundred, 
Taiwan might be 93; China, 90--which is really not enough to 
warrant a shift of all your production base from one region to 
another.
    When you factor in the effect of government measures, 
however, the picture changes. And consider that we're talking 
about investments now that are $3 billion for a single fab, and 
moving to $6-to-$10 billion in the next generation. A company 
has to think very carefully about making those kinds of 
investments, and where they're going to make them, and where 
they're going to pay off the best.
    One differential between China, Taiwan, and the United 
States is that a fab built in those areas will not pay any 
taxes. A company that operates a fab there is operating in, 
essentially, a tax-free environment--a permanent tax-free 
environment.
    Another factor is that the land and structures are located, 
typically, in high-tech industrial parks that have been built 
there. We have them here, too, but the fact is, the incentives 
in the parks over there are more dramatic. A company building a 
fab in China right now, many of them are reportedly getting 
their land and structures provided for free. There are also the 
utilities, which are things like high-purity water, specialty 
gases, electricity, that sort of thing, are provided at 
concessional rates. And all that has a downward effect on 
operating costs.
    Then you look at--there are also tax incentives for 
individuals. An individual who is a very talented engineer or 
production worker can get rich very quickly working in one of 
these countries, based on the tax structures. And I could 
explain that more in detail, maybe, if there's an interest in 
it.
    Then, finally, there's the phenomenon of the foundry, which 
has developed, really, in East Asia. And the notion there is, 
given the rising costs and risks associated with building a 
fab, countries, beginning with Taiwan and now moving to 
Singapore and China, have said, essentially, ``Don't bother. 
We'll build the fab here. We'll take the risk. We'll absorb all 
the costs and risks of building that. Send us your designs, 
American companies. We'll make them here for a service fee, and 
you can sell them under your own label.'' And that's turned out 
to be a very dramatically successful business model. A lot of 
U.S. companies have become fabless and essentially have gotten 
out of the business of making semiconductors. They just design 
them. The designs go to Asia, where they're manufactured in 
foundries that are located there.
    The upside of that is that the U.S. producer no longer has 
the cost or risks and all the other messy stuff that's 
associated with manufacturing. The downside is, the 
manufacturing, the skills, and the jobs are not in the United 
States anymore, they're on the other side of the world.
    The first foundry was built with a large investment from 
the Government of Taiwan. It was considered too risky for the 
private sector to undertake that. Most foundries, if not all 
foundries operating in Asia, that I'm aware of, receive 
substantial government support. Essentially, the risk has been 
socialized in Asia. And so, what we see is a long-term trend 
toward more and more foundries. Most of these 30 fabs that I 
referred to that are being built in China will be foundries, 
and they will essentially be looking to take over the 
manufacturing functions of semiconductor companies outside the 
United States.
    Senator Allen referenced the VAT tax, which China used very 
successfully to capture inward investment from other countries, 
particularly Taiwan. That was, essentially a violation of 
international trade rules used very successfully to capture 
inward investment from other countries that would have occurred 
elsewhere, but for the tax. The Administration has successfully 
challenged that tax. It has been revoked, as of, I think, this 
April. And it's a good model for dealing with other kinds of 
distortions like that, that distort investment patterns. 
However, we have to recognize that many of the measures that I 
have described are not clearly inconsistent with international 
trade rules; and so, those rules have got to be strengthened if 
we're going to get a handle on this problem.
    Two other recommendations I would make: One is that there's 
a need to study differentials in tax policy between various 
markets and how they affect investment patterns. That issue is 
not well understood, and it is driving a lot of these 
investments.
    Finally, there is a need for greater Federal spending on 
R&D. Senator Kerry referenced the large programs that are 
underway in Japan and the EU, in terms of spending. They dwarf 
anything that's underway here. And we're cutting back, and some 
of our programs, like the advanced technology program, are 
being zeroed out.
    So, I think all those things would be excellent points of 
departure if we're going to try to address this problem.
    [The prepared statement of Mr. Howell follows:]

 Prepared Statement of Thomas R. Howell, Partner, Dewey Ballantine LLP
    Mr. Chairman and members of the Subcommittee, my name is Thomas R. 
Howell. I am a Partner in the Washington D.C. law office of Dewey 
Ballantine LLP, where I specialize in international trade matters. Over 
the past 20 years I have represented a number of organizations 
representing U.S. semiconductor manufacturers, and in the course of 
that work I have prepared a series of studies of foreign industrial and 
R&D policies and their effects on international competition in 
microelectronics. The most recent of these, which I have provided to 
the Subcommittee, addresses China's emerging semiconductor industry. I 
am also a contributing author to a study recently published by the 
National Academy of Sciences, Securing the Future: Regional and 
National Programs to Support the Semiconductor Industry. My testimony 
today is my own and not presented on behalf of any client or 
organization. I appreciate the opportunity to appear before you today.
    The semiconductor industry plays a vital role in the U.S. economy 
and national defense. In terms of value-added it may be the largest 
U.S. manufacturing industry, and semiconductors are a key enabling 
technology for a broad range of other industries, including computers, 
consumer electronics, motor vehicles, telecommunications, and aviation. 
The U.S. semiconductor industry is currently the world leader both in 
terms of level of technology and market share, with about 50 percent of 
world sales. However, it faces significant challenges to its leadership 
which arise out of foreign government policies that are designed to 
alter the terms of competition. These policies represent promotional 
strategies that fall into two broad categories, ``leadership'' and 
``close followership.''
    Leadership strategies. Japan and the European Union, the 
longstanding rivals of the U.S. in microelectronics, are pursuing 
promotional strategies designed to capture the leadership position from 
the United States with respect to market share and level of technology.

   Japan and the EU are implementing large scale, long range, 
        industry-government R&D projects aimed at developing leading 
        edge commercial technologies and state-of-the-art manufacturing 
        facilities. Commonly these projects involve hundreds of 
        millions of dollars in government funding, more than anything 
        we currently see in the United States.

   The strategy in both Japan and Europe is to build on a 
        perceived leadership position in cell-phone technologies and 
        develop leading edge semiconductors with cell phone 
        applications, as opposed to PC-based chips in which the U.S. 
        holds the lead. The Japanese and European strategy is based on 
        the belief that in the 21st century, most people, particularly 
        in the developing world, will access the Internet through cell 
        phones and similar hand-held devices, not desktop PCs.

    It is unclear that these foreign efforts will result in a loss of 
U.S. market or technological leadership--in the past many large-scale 
government-funded R&D projects in microelectronics have fallen short of 
their goals or failed completely. But others have significantly 
affected the competitive balance. The EU's JESSI project, for example 
(1988-1996), is widely credited with contributing substantially to 
Europe's current strong position in cell phone technology. Japan's 
joint R&D projects have played a major role in establishing the 
Japanese industry's strong competitive position in microelectronics. 
And while Japan and the EU have substantially increased the level of 
government spending on microelectronics R&D, in pursuit of this 
strategy, the U.S. is moving in the opposite direction. U.S. Government 
funding of microelectronics R&D has been declining for a number of 
years and is projected to decline further in the coming decade. But the 
most complex challenge confronting the U.S. in microelectronics is not 
coming from Japan or the EU, but from China/Taiwan, who are pursuing a 
``close followership'' strategy.
    ``Close followership'' strategies. Under ``close followership'' 
strategies governments do not seek to achieve market or technological 
leadership but rather to integrate the operations of their own 
industries with those of U.S. companies, and, by so doing, not only 
remain one step behind the leaders but also capture high value-added 
technology-intensive industrial and research functions for their own 
economies. Taiwan has been the most successful practitioner of this 
strategy but it is now being emulated in countries such as Malaysia, 
Singapore, Thailand, Israel, and most significantly, China.
    The ``close followership'' strategy actually enhances the 
competitiveness of individual U.S. companies by providing low cost, 
high quality production and design services to them. But it may pose a 
greater challenge to U.S. leadership over the long run because it is 
drawing offshore important parts of the U.S. microelectronics 
infrastructure, particularly in the area of semiconductor 
manufacturing. The danger is that over the longer term other key 
functions associated with semiconductor production, such as R&D and 
design, will follow the manufacturing functions to East Asia. At some 
point a substantial part of the education infrastructure that supports 
the industry could migrate there as well.
    At present, roughly 77 percent of U.S.-owned semiconductor 
manufacturing is still located here in the United States. But much of 
this capacity is or will become obsolete over the next several years, 
and the trend is toward establishment of a larger proportion of the 
next generation of fabs outside the U.S. Earlier this year an executive 
at Applied Materials, one of the most important producers of 
semiconductor manufacturing equipment, indicated that 30 new fabs will 
be built in China in the next 3 years. During the same time frame, the 
same executive stated that there will be 6 built in the United States. 
In part this trend reflects the fact that China is the fastest-growing 
market for semiconductors in the world, with an estimated compound 
annual growth rate of 20-27 percent in 2002-2008, versus about 7 
percent for the U.S. But relative regional market growth does not 
explain investment trends.
    Nor do comparative costs explain current investment trends. The 
migration of some types of high tech manufacturing to Asia, such as 
assembly of electronics products incorporating semiconductors, reflects 
comparative cost advantages attainable by manufacturing in certain 
Asian countries. But the movement of semiconductor manufacturing to 
Asia is not being driven by comparative costs--that is, if government 
measures taken to modify those costs are removed from the equation. The 
same equipment and processes are used everywhere to make 
semiconductors. Materials and other costs do not vary greatly from 
region to region. Direct and indirect labor costs are much lower in 
China and Taiwan than in the U.S., but because labor costs are such a 
small proportion of manufacturing cost, the total cost differentials 
are not that great. If the manufacturing costs for a 90nm, 300mm wafer 
fab in the U.S. is given a factor of 100, the comparable cost in Taiwan 
would be 93 and in China, 90. But the picture changes when the impact 
of government policy measures is factored in.
    To begin with, consider the size of the investment required to 
establish a single state-of-the-art wafer fab--currently between $2 and 
$3 billion for a facility that may be obsolete in 3-4 years. Only a 
handful of companies are in a position to undertake such investments, 
and given the volatility of the industry, an increasing number of 
companies understandably have reached the conclusion that risks 
associated with such large investments outweigh any potential for gain. 
How do governments affect this equation? In some countries governments 
have put up a substantial part of the total investment cost to 
establish a state-of-the-art fab. The world's first 300mm fab, for 
example, was built in Dresden, Germany with substantial funding from 
regional governments. But other forms of government support are 
probably more important than direct funding.
    One of the most important forms of government measure has been 
support for the establishment of semiconductor foundries, a phenomenon 
that occurred first in Taiwan but has spread to Singapore, Malaysia, 
Israel, and, most importantly, China. Under the foundry model foreign 
producers, usually with substantial government backing, in effect say 
``we'll assume the costs and risks of building a fab. Give us your 
designs, and we'll make them for you, in return for a service fee.'' 
This is a very attractive proposition for a company trying to decide 
whether or not it can make a $3 billion investment to manufacture its 
designs. An increasing number of U.S. semiconductor firms are 
``fabless'' and outsource all of their designs to foundries, while 
others are ``fab-lite,'' outsourcing a significant part of their total 
production. In other words, the chip is designed here in the U.S., 
manufactured in China or Taiwan, and in many cases incorporated into an 
end product somewhere in Asia. The U.S. ``fabless'' company does not 
take any of the risks normally associated with building a $2-$3 billion 
facility. But the facilities themselves, and the skills to run them, 
increasingly reside elsewhere.
    The first pure play foundry in the world, TSMC, was established on 
the basis of an equity investment by a special fund administered by the 
government of Taiwan. The investment would not have been attempted by 
the private sector because it was seen as too risky. Today I am not 
aware of a foundry anywhere in Asia that does not enjoy significant 
government support. In a number of cases governments have taken equity 
shares in foundries. Because the number of purely private, unsubsidized 
companies in the U.S. or anywhere else that are willing to invest $2-$3 
billion in a fab is declining, government-supported foundries are 
accounting for an increasing share of global semiconductor production. 
Most of the new fabs being built in China will operate as foundries.
    Tax policy is another particularly important form of government 
support. The world's most successful foundries are TSMC and UMC, both 
located in Taiwan. They control nearly two-thirds of world 
semiconductor foundry manufacturing. The government of Taiwan has 
implemented policies which ensure that these and other similar Taiwan-
based semiconductor enterprises pay no taxes, year after year. In fact, 
in a number of recent years, TSMC's after-tax income has been higher 
than its pre-tax income, reflecting the application of accumulated tax 
credits. China has now replicated Taiwan's tax holidays. Paying taxes, 
in jurisdictions like the United States, and paying no taxes in China 
and Taiwan, can have an enormous bottom-line impact and may constitute 
a very significant decisional factor in determining where to open a new 
fab.
    Then there is infrastructure. The Silicon Valley phenomenon has 
been intensively studied abroad, and foreign governments have created 
their own versions of the Valley in many countries. These seek to 
integrate research universities, high tech manufacturing, and venture 
capitalists into a dynamic relationship that promotes innovation and 
entrepreneurialism. Perhaps the most successful version has been 
Taiwan's Hsinchu Science-Based Industrial Park, which has become a 
magnet for foreign and domestic semiconductor investment. In addition 
to tax-free status, soft loans, grants and other forms of financial 
support, enterprises located in the Park enjoy extensive 
infrastructural support, nearby research universities, and superb 
institutes of applied industrial research. China is now creating its 
own versions of Hsinchu, and in some of the Chinese parks, 
semiconductor producers are reportedly receiving free land and free 
structures from regional and municipal governments. They also receive 
preferential rates on electricity, water, and specialty gases, all of 
which lower their operating costs.
    Then there are government incentives to individuals. One of the key 
advantages enjoyed by TSMC and UMC has been their ability to attract 
and hold many of the highest quality managers and engineers in the 
industry--it said that ``they get the best people.'' A key factor in 
the competition for such talent is Taiwan's tax treatment of company 
stock and stock options given as compensation to individuals. Shares 
are taxed on their par value rather than on their actual market value 
at the time received, which may be many times par value. In addition, 
when the shares are sold, there is no tax on the income received (apart 
from a nominal transaction tax) because Taiwan has no capital gains 
tax. As a result, Taiwanese companies have been able to offer highly 
talented Taiwanese and foreign engineers the prospect of rapid accrual 
of substantial personal wealth. Taiwan has become a ``talent magnet.'' 
Chinese tax policy, while not identical, seeks to replicate such 
incentives to individuals.
    Finally the location of new investments can be driven by government 
investment incentives such as China's preferential value-added tax 
(VAT), which was revoked in April of this year after strong objections 
from the U.S. Government, Japan, the EU and Mexico. In 2000, the 
Chinese government established a preferential rate of value-added 
taxation (VAT) for domestically based semiconductor design and 
manufacture. While all imported devices are subject to a 17 percent 
VAT, under the new policy domestic designers and manufacturers of 
semiconductors received a rebate, resulting in an effective VAT rate of 
3 percent. The preferential VAT policy effectively enabled China to 
``capture'' a portion of Taiwan's semiconductor capability. Foreign 
investors, predominantly Taiwanese, rushed to the mainland and 
established new wafer fabs in order to benefit from the VAT preference. 
A talent rush to the mainland of experienced Taiwanese managers and 
engineers occurred. By 2003 roughly 20 new Taiwanese-owned fabs had 
begun operations on the mainland, were under construction, or were 
planned to become operational by 2008, all of them foundries. 
Executives at these new foundries cited the VAT preference, which gave 
them an ``unbeatable'' edge over imported devices, as the principal 
factor underlying their new operations. While China's preferential VAT 
has been revoked, it has arguably already achieved its objective of a 
massive drawing in of capital, technology and talent, enabling China to 
establish a modern semiconductor industry.
    It has been suggested by some that the migration of semiconductor 
manufacturing to Asia represents a natural division of labor with more 
advanced countries, and that the high-end functions--R&D and design--
will remain in the United States, Europe and Japan. But over the long 
term the design functions are likely to migrate to where the action is, 
which is where the manufacturing is located. This is happening already 
in Taiwan, in particular, which is now using its strength in 
manufacturing to build a strong design industry, with extensive 
government support. China, too, is following this path, although it is 
at an earlier stage of development. The long run danger is that so 
large a proportion of leading edge semiconductor manufacturing and 
design functions come to reside outside the United States that the top 
graduates from engineering schools see their future not in the U.S., 
but in China and Taiwan and other parts of the world. They will seek to 
build their careers there, not here. At that point, it would be very 
difficult to reestablish U.S. leadership.
    It is not in our national interest to see the entire infrastructure 
for the design and manufacture of semiconductors to migrate outside of 
the United States. A recent report by a Defense Science Board task 
force concluded that the migration of U.S. capabilities in 
semiconductors outside the U.S. posed ``long term national economic 
concerns.'' Given that semiconductors are at the core of virtually all 
critical defense systems, the national security concerns are obvious. 
The problem we confront is that the commercial realities of the 
semiconductor business are leading to a relocation of design and 
manufacturing functions outside of the United States.
    Identifying a comprehensive set of recommendations for addressing 
this problem effectively would take a sustained industry-government 
dialogue of the kind we saw in the 1980s in connection with the 
challenge from Japan. I would like to offer several preliminary 
suggestions:
    First, it should be recognized that the present offshore movement 
of semiconductor production is being driven by deliberate government 
measures as well as by commercial imperatives. Therefore, the U.S. 
Government should continue to place a priority on the elimination of 
trade and investment distorting measures like China's preferential 
value added tax that violate international rules. China's use of a WTO-
inconsistent measure to attract inward investment that would not have 
otherwise occurred was a serious market distortion in a strategic 
industry. The U.S. acted properly in placing a priority on the 
elimination of this measure. At the same time it should be recognized 
that many of the incentives used by governments to attract high 
technology investment do not clearly violate any WTO or other 
international rules, so there is a limit to what can be achieved by 
invoking existing rules. Over the longer term it will be necessary to 
negotiate the establishment of international norms on the use of 
government incentives for high tech investment.
    Second, the U.S. Government needs to examine domestic tax polices 
that affect U.S.-based manufacturing in light of foreign tax policies 
that are functioning like a magnet for manufacturing investment. While 
I do not recommend any particular tax measure, the fact is that U.S. 
measures are needed to offset the effects of foreign tax holidays in 
some way.
    Finally, we must recognize that competition in this industry is 
increasingly a competition for a limited pool of talented people, 
whether U.S. or foreign born. The U.S. has the lead in this area, and 
we shouldn't allow ourselves to lose it. This means above all 
maintaining our excellent system of research universities and ensuring 
that the world's leading edge R&D continues to take place here in the 
United States. Specifically we should increase, not curtail Federal 
spending on university-based, leading-edge R&D and other forms of 
support for U.S. research universities.

    Senator Ensign. Well, I thank the panel. I think this panel 
of witnesses, along with our first witness, is raising some 
very, very important points that we, as policymakers, need to 
consider as we go forward.
    I want to start my questions with Dr. Clough, especially 
with your experience in education. Education was--you know, 
we've heard so much about education. From your perspective at 
Georgia Tech, what can we do to get more people to pursue 
careers in engineering? Virtually every high-tech company tells 
me that they have job openings for computer software engineers. 
They just don't have enough engineers to hire out there. Should 
we give more financial incentives to those who pursue careers 
in engineering, math and science, to make it easier for people 
to select such careers? Obviously, I mentioned in my 
questioning of Assistant Secretary Frink, kind of, jokingly, 
that the United States graduates a lot more lawyers than China, 
but we graduate a lot fewer engineers. I mean, do we need to 
create more incentives and direct those dollars that we have to 
those who are becoming engineers? We're in tight budget times, 
but do we need to direct the dollars more toward those types of 
people and incentivize them?
    Dr. Clough. Good point. I think, first, we need to 
recognize we're in a different environment today. We are in an 
environment where we need to recruit from all segments of our 
population. And, frankly, engineering and science were probably 
at fault for not being aggressive about including women and 
minorities. Because that's the majority of the population. So, 
we need to be able to recruit from that sector.
    We need to do a better job, as was mentioned earlier, of 
marketing that and letting them know--I think universities have 
a stake in this. In other words, we have a role to play----
    Senator Ensign. When you say ``we,'' who's ``we''?
    Dr. Clough. I'm thinking of universities, for the moment.
    Senator Ensign. OK.
    Dr. Clough. In the sense that about--if you look at the 
national statistics, 50 percent of the students who start in 
engineering drop out. That's not an acceptable number. We've 
worked hard at Georgia Tech, and we've gotten it now up to 75 
percent now graduate, who start. We believe we can do a better 
job of that.
    So, I think we need to make engineering a more interesting 
field. That's what this program that I described briefly at the 
National Academy of Engineering was about, the Engineer 2020. 
How can you make engineering an attractive field for young 
people to go into, given that they have lots of alternatives? 
And so, I think we need to work on that, as well.
    There are financial issues, clearly. Engineering is not--or 
science--is not a simple area to go into, and not a cheap area 
to offer the education in that area. I think Representatives 
Wolf, Boehlert, and Ehlers, for example, have offered a 
program, or proposed a program, of forgivable loans to young 
people who will undertake the curricula that are necessary to 
get degrees in this area, both, perhaps, in high school, as 
well as at the university level. And I think we should consider 
that.
    In my day, when we started out in engineering--and I'm a 
first-generation college graduate; my parents were not able to 
go to college, because of the Depression and the times in South 
Georgia, where I grew up--we had the National Defense Education 
Act, and it was a wonderful program that encouraged young 
people, not only at the bachelor level--to take bachelors-level 
studies, but also master's- and Ph.D.-level studies. That 
program went away. Some of the reports that we've referenced 
out of PCAST, as well as out of the National Innovation 
Initiative, refer to the possibility of restoring that. It's 
not a terribly expensive program, but one, I think, that would 
be very crucial. I think you've got to address it all the way 
from high school straight all the way through to Ph.D.
    Senator Ensign. Could you repeat that?
    Senator Allen. What was that one, again?
    Dr. Clough. The National Defense Education Act. And you'll 
find many of the people who are working in government today, or 
nonprofits or at universities or in industry, had the benefit 
of that kind of support. And it makes a statement about the 
Federal Government's interest in this area.
    I think the notion of balance in this portfolio--and our 
research portfolio is very important, because support for 
engineering and the physical sciences has been flat or has 
declined, while other areas have gone up. Now, there are good 
reasons for NIH funding to go up, so I'm not begrudging them 
that increase, but the signal, very clearly, to engineering and 
the physical sciences, and students who might consider those 
areas, not as important. There's not many research 
assistanceships in that area. And Senator Allen talked about 
NASA; that's another good example where there have been some 
cutbacks in the kind of basic support that we need. And, as you 
may know, we participate in several of the things at Langley, 
with Virginia Tech--I taught at Virginia Tech for a number of 
years. So, I think we need to look at areas where we can, in 
fact, balance that portfolio, and, in doing so, make a 
statement, again, that these areas are important to the future 
of our country.
    Senator Ensign. Great.
    Mr. Murray, just really quickly on the Manufacturing 
Extension Partnership. I think it's great to hear how the New 
Jersey Manufacturing Extension Partnership program has worked 
for you. Similar programs may be working in other places around 
the country. What I would ask of you--and you don't have to 
answer it today--but, could you provide specifics on how it 
worked for you. One of the things that we have to do up here, 
as policymakers, is assess the success or failure of the 
programs that we fund. The MEP may have worked for you in New 
Jersey, but it may not be working in other parts of the 
country. I mentioned the word ``metrics'' before, and, we need 
to have good metrics to determine if we are having successes 
some places, and not others. We should never legislate by 
anecdote. It is a nice anecdote that we have of your company 
today, but we need to have verifiable statistics to show what 
it costs and what the benefits are. We do that cost-benefit 
analysis, because we are the stewards of the taxpayer dollars. 
So, if I could get from you, in writing, specifically how the 
MEP benefited your company. You mentioned some of the benefits 
of MEP, briefly today, but if we could obtain a more detailed 
account of your experience, we could then ask some of the other 
MEPs across the country if they are doing the same kinds of 
things that actually worked in a real-life situation.
    Mr. Murray. Oh, absolutely.
    Senator Ensign. Thank you.
    Mr. Murray. I'll be happy to put that in writing to you, 
Mr. Chairman.* But, just briefly, we would be out of 
business today.
---------------------------------------------------------------------------
    * The information referred to can be found in the Appendix of this 
hearing.
---------------------------------------------------------------------------
    Senator Ensign. Right.
    Mr. Murray. 150-160 jobs would be lost to Asia if MEP 
didn't exist. And people have said to us, ``Well, why MEP? Why 
not turn to a private-industry group? Why not turn to a turn-
around management group?'' And the reason is, first of all, it 
would have cost us much, much more. The MEP cost to us was 
about $140-$150,000. It would have cost us three or four times 
that if we had turned to private industry. Plus, during our 
most dire times, we--the banks and our vendors worked with us, 
because they knew we were working with an agency like MEP, and 
they knew that MEP is a government organization. And, plus, the 
individuals that we worked with at MEP, many of them are former 
business owners and have gone through the same kind of troubles 
and problems that we faced.
    So, our company would not exist if it weren't for MEP. MEP 
forced us to change how we thought and how we ran our business. 
We questioned every purchase, every cost, and we established 
very, very--you mentioned ``metrics,'' Mr. Chairman--we 
established very specific metrics on how to guide us and how to 
help us restore our company to profitability and increase our 
sales.
    Senator Ensign. Great.
    Mr. Howell, I'm going to call on Senator Allen next, and 
it's--I've heard the same thing from the chip manufacturers, 
exactly the same kind of experiences. Texas Instruments, 
because of our Invest in the USA Act last year, they're 
actually going to be building a plant in Texas, simply because 
of that. We always hear the difference in labor costs. Well, 
with chip manufacturers, that's not the biggest determining 
factor. So, we have to examine all of these other factors when 
we are looking at competitiveness issues.
    Senator Allen?
    Senator Allen. Thank you, Mr. Chairman. You asked most of 
the questions of Dr. Clough that I was going to ask, and I was 
taking notes. Please stay in touch with me, because I think one 
of the greatest future challenges of this country is to make 
sure we have the best minds who are capable to design the 
innovations and inventions of the future. And I appreciate your 
comments.
    Senator Ensign. Senator Allen, I'm going to have to excuse 
myself. I have to attend a press conference over on the House 
side. Please take over, and then just turn it over to Senator 
Kerry.
    Thank you.
    Senator Allen. [presiding] Fine. Got it.
    Let me ask you just one thing. On nanotechnology, the 
Nanotechnology Initiative that I mentioned earlier, sponsored 
with Senator Wyden. We have the Nanotech Caucus here--one of 
the key areas of it is to work with universities--colleges and 
universities, as well as the private sector and a number of 
Federal agencies involved in nanotech, everyone from Energy to 
Defense and others. Do you have any specific suggestions on how 
we can better help? Have you seen this initiative? It's fairly 
new since the President signed the bill, in 2003. Do you have 
any specific recommendations----
    Dr. Clough. I'll be glad to comment on it. And I was there 
when the President signed the bill. And, of course, it's 
essentially a $4 billion investment, significant investment--I 
think, a very important one. On PCAST, Congress actually 
granted PCAST the challenge, if you will, of oversight for the 
expenditures to gather intelligence, so we could get the sense 
that we're making a balanced investment in nanotechnology in 
the many different areas. There's also an interagency group 
that's looking at that, as well, and we just issued a report to 
Congress on that. I think it was to the Science Committee, on 
the House side. It's an excellent report. It's on their 
website. I think it documents very clearly where we are 
relative to our competition. And, in this field, the evidence 
is that we are staying on a level playing field with the 
competition in Japan, the European Union, and others. We are 
making at least similar investments, if not larger investments 
to those countries.
    So, I feel very positive about the National Nanotechnology 
Initiative. I think it was a stroke of genius to go into this 
area, because it's so broad-based. We, at Georgia Tech, are 
very active in this area, and it's exciting. And Senator Kerry 
talked about the many ways that it can impact the world. And 
you've talked about it. And it's all very true.
    Senator Allen. All right. Thank you.
    Now, Mr. Howell, when I was Governor of Virginia, I worked 
very hard to attract semiconductor investment fabs into 
Virginia. In fact, I've got a change to the name, according to 
U.S. News & World Report, to the Silicon Dominion, where 
Siemens and Motorola invested at White Oak, and Toshiba and 
IBM, up at Manassas. They're now owned by Infineon and Micron. 
And so, I really do think the semiconductor industry, just for 
jobs, when you look at the indirect jobs--the suppliers, the 
vendors, the contractors, the toolmakers. I always liked to see 
what Applied Materials was doing, because you can determine 
what the next fabs will be. Once they can develop the 300 
millimeters wafers, they can then determine whether they want 
to invest billions of dollars to upgrade from the 200-
millimeter wafers. And, in fact, there's probably no--other 
than the automotive industry, there's no other kind of 
manufacturing that creates so many additional jobs from all 
those suppliers and vendors and contractors. And I'm glad the 
Administration eventually got around to getting after China on 
the VAT tax.
    Another thing that happened was, with Hynix--and you're 
talking about countries subsidizing--and to the extent we can--
and any recommendations you may have, where countries are 
subsidizing in an illegal way, we need to crack down on them. 
Hynix was subsidized unfairly and illegally by the South Korean 
Government. They were focused on DRAMs, or dynamic random 
access memory chips. And that's exactly what's fabricated in 
these two facilities in Virginia. And, by doing that, they're 
just dumping on the world market--and, in fact, in not just the 
U.S., but the rest of the world--and countervailing duties were 
imposed upon them.
    As far as incentives, the way I see this country--and I see 
this, again, from my days as Governor--what we did was, created 
a Performance Grant Incentive Program to get those fabs--
German, Japanese, U.S.--partnerships together, and they would 
get credits based upon the number--the amount of their 
production. It was a good business approach, that if they did 
not invest and produce the chips, they wouldn't be getting 
these performance grants. And all that's legal. And it's one 
way that at least Virginia became attractive and beat out 
California or Texas or other states for these investments.
    You're saying that what Taiwan's doing, what China's doing, 
it's not--in some cases, it's not a violation of WTO rules. 
Therefore, what should we do--and you did not specify this 
specifically--what should we do, as the United States, as far 
as our tax policies--or should it be just left to the states to 
come up with these approaches so that we can compete? When you 
look at the number of fabs, in your testimony, being proposed 
in China, compared to this country, it's 20 to 1, almost, or 
maybe it's 10 to 1. And it's not just because of those costs, 
as you said, as far as labor costs; it's because of the land, 
it's because of the industrial parks, tax-free for the worker 
somehow, building these fabs as foundries for them. What can we 
do, as a country, as far as our policies--tax policies or 
otherwise--so that those fabs are built here? And I agree with 
you, it's a national security issue, as well. So, I'd like to 
hear your views, Counselor, on that.
    Mr. Howell. Senator, first, I think that Virginia is a good 
example of state programs that are actually very dynamic, 
designed to attract semiconductor investment to the states. And 
I think you'll find that most semiconductor fabs are located in 
states that have sought them through proactive programs--
California, North Carolina, Massachusetts--probably ten states 
where most of the manufacturing is. And you see the same thing 
internationally, that countries that have not sought to create 
the semiconductor industry within their borders don't typically 
have one--Australia, Canada, those countries that have not 
pursued them. Abroad, they've been essentially created by 
governments.
    States can do so much, in terms of providing incentives. 
They can provide tax exemptions and a variety of other things 
to industries. And I think most of those things do not violate 
international trade rules. As subunits of a Federal system they 
cannot close the border the way China did with its VAT--or they 
didn't close the border, but they raised a border restriction. 
A state can't do that. States can't affect Federal tax policy, 
either, so there's a limit to what they can do. They can do a 
lot, but they can't do everything.
    The first question is a threshold question, before one 
looks at solutions to the differentials in taxes. What's the 
actual impact on locational decisions between, say, the U.S. 
and China or Taiwan, of the various Federal-level tax 
differentials? It has never really been studied. You can't 
apply the tax differentials to ten companies and say, ``Here's 
the impact.'' It's definitely a dramatic impact on some 
companies. I think there's one U.S. company that said about a 
billion dollars per fab, in terms of cost savings, is 
attributable to that tax differential.
    The first question, then, is, what's the real impact, and 
who is impacted by it? And then, I don't think it's necessary 
to say that we've got to replicate everything that's being done 
in China or Taiwan. I don't think it's feasible. There are 
equity issues, or fairness issues, as well, that have to be 
considered. And, in fact, the tax holidays are very 
controversial in Taiwan. Other industries think they're unfair. 
But I think if we knew the impact a little more, or had a 
better metric, as it were, on the impact of the tax 
differentials, it would be possible, then, to devise measures 
that would at least bring us to within a level of 
competitiveness as a location with those countries that is 
closer than it is now.
    Senator Allen. Let me try to distill what you've said. 
Granted, the states can do things. Obviously, you work with the 
localities on the land, and prompt permitting, air permits 
matter, to get those. In fact, the folks with--what was White 
Oak, now Infineon, were very pleased that they got their air 
permit in 28 days, which was a third better than in Texas, and 
monumentally better than California, from their testimony, or 
their speeches. And I think the states also--we created a new 
engineering school, and I made sure that they had a focus in 
the engineering school at VCU in microelectronics, and they 
have a state-of-the-art clean room. That's important for 
training. That's something, all that we did as a state.
    We can analyze various things of what other governments are 
doing. And I still need to--for us--I'm not at the Federal 
level--I'm trying to figure out, all right, what can we do, as 
a nation, to make sure that we recognize that competition? I'm 
not saying the Federal Government goes and condemns land in 
Georgia or Massachusetts and says, ``Here, you can have this 
land free, because this is in our national interest.'' We, 
obviously, have a different form of government than those 
countries. But if there's any tax policy that we may have on 
research and development, or investment, or, in some cases, 
say, earnings stripping, which is forced on foreign investors 
into this country--if a company from Great Britain or Germany 
or Japan invests in this country, they get a different tax 
treatment for their capital investment than does a U.S.-based 
company--are any of those sort of ideas worthy of 
consideration?
    Mr. Howell. Well, I'd say, yes, they are. It's not just a 
question of comparative tax policies. I think that there are 
reasons that the United States is superior to either China or 
any other Asian locations for building a semiconductor fab. And 
they include better protection of intellectual property here, 
less likely to lose your designs or secrets than over there, 
political stability. It's also that people want to live here, 
and you can attract people here now from all over the world, 
still, to work in the fabs and in the research units, and so 
on.
    So, it's not a question of being able to match them dollar 
for dollar, in terms of tax benefits. The idea, I think, would 
be to narrow the differential in that area and build on our 
strengths. One of the ways to do that is to make sure that the 
leading-edge R&D continues to be done here, and not there. And 
a way that can be promoted, both at the state and the Federal 
level, is by increasing spending on basic R&D in the 
universities. The smartest people want to come to where the 
cutting-edge work is being done. Right now, that's here. But 
that will change over time if we don't do anything about it. 
Right now, we are cutting back on that kind of spending, and 
it's being increased--not just in the Far East, but in Europe. 
The governments are saying, ``We'd like to have that 
infrastructure of learning and spinoffs of commercial 
companies, building on the learning, to happen there.'' And 
that's something that probably doesn't have as big of a fiscal 
impact, as a tax holiday, or whatever, but has a dramatic 
impact on where people want to live and work, and especially 
the best people.
    It is, to some extent, a zero-sum competition worldwide for 
getting those best people. Those help-wanted signs exist, 
certainly, in the high-tech area. There's a competition for the 
best, most-talented people, and one way for us to compete with 
that is by building on our excellent university system, and 
spending more.
    Senator Allen. Thank you, Mr. Howell. That fits right in 
the beginning of my questions.
    And I'll turn it over to Senator Kerry.
    Senator Kerry. Thank you, Senator. Thank you very much.
    Dr. Clough, a lot of people argue that trying to keep low-
wage manufacturing jobs in our country is, sort of, a losing 
proposition, unless you can out-compete, which means 
innovating. Would you agree with that?
    Dr. Clough. Yes.
    Senator Kerry. OK. I do, too. So, you've got to innovate. 
The key to innovation, obviously, to staying ahead, is basic 
research. Is that correct?
    Dr. Clough. That's correct. That's one of the elements.
    Senator Kerry. And basic research depends on a commitment 
of the Federal Government, in this case, because the private-
sector has, in many cases, either refused to or pulled out of 
it, isn't that accurate?
    Dr. Clough. They're short-term oriented.
    Senator Kerry. So, the key is the Federal Government's 
commitment to NSF, to NASA, to the Department of Energy, Office 
of Science, and so forth. Right?
    Dr. Clough. Correct.
    Senator Kerry. In your testimony, you said, ``We need to 
find a balance in funding.''
    Dr. Clough. Yes.
    Senator Kerry. I would presume, therefore, we do not have 
that balance today. Is that accurate?
    Dr. Clough. Yes, that's true.
    Senator Kerry. OK. And that is because the Federal 
Government is making other choices.
    Dr. Clough. That's correct.
    Senator Kerry. And the choice is to use its revenue in 
other forms, correct?
    Dr. Clough. I presume so.
    Senator Kerry. Well, a tax cut, a tax expenditure, is an 
expenditure. We have X amount of revenue; we can put it here in 
a spending or investment program, or we can put it here in a 
tax expenditure, which is revenue foregone. Accurate?
    Dr. Clough. I assume so. I assume Congress also could make 
decisions within the existing budget to make some of these 
adjustments.
    Senator Kerry. Well, we could. For instance--Mr. Frink is 
gone, but--I didn't get a chance to go back to him on it, but 
he pointed out in his testimony--I don't have it in front of me 
now. Do you have his statement? He pointed out, in his 
testimony, that we've increased significantly--I think it was a 
45 percent increase, if I recall--yes, here it is. ``This 
represents a 45--the Federal budget is--includes a record $132 
billion for Federal research and development, a 45 percent 
increase, compared to 2001's $91.3 billion.'' But when you look 
inside of that, that money is not going to competitiveness or 
job creation research, it's going largely to weapons--defense 
research, very specifically, the Defense Department research. 
So, again, these are choices that we're making: Where are we 
going to put our money?
    If we're going to compete effectively, which we all want to 
do--and, I mean, the long-term health of our country, the 
national security our country, will depend on the health of our 
economy.
    Dr. Clough. Right.
    Senator Kerry. And if we're not able to create the next 
wave of jobs, and the next wave of high-value-added sector, 
we're going to be in trouble.
    So, let me ask you: What is the most important thing that 
you think we can do, in your judgment, that will have a direct 
impact on what you're struggling with at Georgia Tech, and what 
they're struggling with at MIT and Carnegie Mellon, and all 
these other great universities and colleges--what do we need to 
do in our spending choices here to have the greatest impact on 
what you're trying to do?
    Dr. Clough. Well, I think we need to look at the research 
portfolio as an entity. And it tends to be hard to do, because 
a lot of it comes out of agencies. In other words, we know--and 
you well know--that DOE, for example, funds about 40 percent of 
the basic science research in the country, not the National 
Science Foundation. The National Science Foundation clearly 
funds a lot of science research, but DOE does, as well. The 
Department of Defense--it's not well understood, I think--in 
many cases, has, for many years, been the primary funder for 
electrical engineering, mechanical engineering and chemical 
engineering in this country. And, as they have had to cut back 
on 6.1/6.2 research, that funding has gone down, and that's 
where we've lost some significant funding, long-term funding 
for those critical areas in engineering.
    Similarly, in some of the other areas, where, again, it's 
spread across a spectrum. So, that makes it a little bit more 
difficult than saying, for example, ``We're going to improve 
health research, and so we'll double NIH's budget,'' which was 
a simpler proposition than it was. Some of the increase you 
referred to did, indeed, go to NIH; and that was a positive 
thing, in my personal perspective, because that's a big 
economic driver, I believe, in the future.
    Senator Kerry. Well, again, that was a conscious decision 
that we did make.
    Dr. Clough. It was. And it was a good one.
    Senator Kerry. We said, ``We're going to put X amount more 
into NIH,'' and so we grew that.
    Dr. Clough. But I think we--I think you, in Congress, need 
to get very serious about watching how the flow of these funds 
comes from the different agencies, so that the portfolio is 
balanced. Clearly--and this is not just PCAST, or it's not just 
other--there are a number of entities that have commented on 
this, with clear statistics that the funding for engineering 
and the physical sciences, if not flat, has gone down at a time 
when that big budget for R&D was going up. And that's not good 
balance.
    Senator Kerry. What's the long-term implication of, as you 
said, our competitor nations out-competing us at the moment, in 
terms of production of engineers and basic science?
    Dr. Clough. The long-term implication is that, obviously, 
we won't be competitive in that part of the economic spectrum 
that actually has generated 50 percent of the economic growth 
in the last decade. And that's what's frightening. We need to 
be in that space. We need to give all the young people in this 
country an opportunity to share in the possibilities that are 
in that space.
    Senator Kerry. Would you say there is both a national-
security and national-priority urgency in the fact that, in 
1975, 70 percent of America's economic base was manufacturing 
and 30 percent was service. Today, it is reversed--70 percent 
is service, and 30 percent is manufacturing, and declining.
    Dr. Clough. Right.
    Senator Kerry. What are the long-term security implications 
of that?
    Dr. Clough. Well, there are certain areas in manufacturing, 
clearly, we need to maintain in this country, regardless of all 
the competitiveness issues that we have. For example, 
semiconductors or nanotechnology, some of the areas are going 
to underline our--underlie our ability to be secure, as a 
nation, in a threatening world. In addition, it will also 
affect economic competitiveness.
    So, we need to decide, I think, as a country, where we 
really want to maintain a capability, under any circumstance.
    Senator Kerry. And you also cited the workforce training 
component of this, which everybody understands is critical. 
There again, we're cutting, we're not growing, correct?
    Dr. Clough. Yes, that's true.
    Senator Kerry. So, it's another wrong choice.
    Dr. Clough. Well, I think it's a choice we need to think 
very seriously about today.
    Senator Kerry. Well, if we're cutting, and you think we 
shouldn't be cutting, we're not doing the right thing, correct?
    Dr. Clough. True.
    Senator Kerry. Mr. Howell, your comments about the 90 
percent, versus 93 percent and 100 percent, seem to be stating 
the case that wages, per se, are not the biggest factor in the 
noncompetitiveness of our playing field. Is that correct?
    Mr. Howell. That's correct. At least in semiconductors.
    Senator Kerry. Does that apply to other sectors, would you 
say?
    Mr. Howell. The higher the technology level, and the more 
automated the production process, the more applicable that same 
logic is.
    Senator Kerry. Well, now, we all understand that other 
countries are engaging in illegal trade practices, and that 
puts us at a significant disadvantage, in intellectual 
property. For instance, I think we're losing something like 24 
billion bucks a year that we can measure, and that's obviously 
unmeasurable, just as an example. So, in order to level the 
playing field, you've got to enforce the WTO rules and use the 
rules available to you. And yet, the Import Administration, or 
the Commerce Department, International Trade Administration, 
which investigates dumping and countervailing duty cases, is 
going to be cut by 5 percent under the President's budget. The 
U.S. Trade Representative, who is responsible for representing 
the United States in cases brought to the WTO, is going to see 
a 7 percent cut. How are these cuts going to affect our ability 
to be able to create a fair playing field for our companies and 
stand up, since we're already behind the curve in that?
    Mr. Howell. Well, they're going to hurt, obviously. And let 
me take USTR, for example. They are the agency that enforces 
the WTO rules. They bring the dispute settlement cases to 
Geneva. They are--and some former people that used to work for 
me are over there now--in my opinion, they are understaffed 
already. They haven't got enough lawyers, and they haven't got 
enough senior lawyers to bring the number of cases that need to 
be brought. And they, in most cases, are up against litigators 
on the other side who have got more people, more senior people, 
more expertise, and so on. And they ought to be expanding that 
capability, adding funding, adding people, building, if you 
will--in the same way that the antitrust division was expanded 
in the 1930s to make it a really effective enforcement agency. 
We ought to be building USTR, not cutting it. And I would say 
the same applies for the Import Administration. That's a very 
important part of our overall trade policy structure, the 
ability to bring those cases. And if that's eroded, it's going 
to affect manufacturing. There's no question about that.
    Senator Kerry. Let me just summarize by making a point that 
is fairly obvious. I led off with it in my early questioning, 
but budgeting is a zero-sum game. And these choices are staring 
us in the face, and they have been for years now. I've been 
here 22 years, and I am tired of listening to the same old 
arguments. It's the same-old/same-old every year. And the fact 
is that we are locked into a paradigm on the budget, where 43 
percent of the deficit is due to a choice Congress has made to 
forego revenue, to have a tax cut. The average American is 
seeing their costs go up, and their total tax burden has gone 
up. I don't know anybody who has been reading, but they should 
be, the New York Times and Wall Street Journal series on what's 
happening in America to this have and have-not divide that's 
growing. It is deadly serious, in terms of the policy choices 
we're making here.
    And I'd say to my friends on the other side of the aisle, 
if we're going to give meaning to these words and these 
hearings and these efforts by people--after all, here's a 
person, Mr. Murray, who has just told us that, if it weren't 
for the MEP, his company wouldn't be in existence today. We 
would have lost another 160 manufacturing jobs. That's repeated 
all over the country. And yet, here we are with a budget that 
wants to cut it. I don't get it, just as a matter of good old 
American common sense and, sort of, basic values. So, we can 
cut off our nose to spite our face, and it will do a lot more 
than that, the way we're heading, in terms of these budget 
choices that we're making, or we can take this to heart.
    So, I regret that I've got a meeting that I'm already late 
for, and I would like to have drawn this record out a little 
more. And, again, I hope that, as a Committee, we can try to 
force some of these better choices here. And I thank each of 
you for taking time to be here.
    Senator Allen. The record will remain open for 7 days for 
Members to submit statements, or they may ask you questions.
    Let me say, in concluding this hearing, this is one I care 
a great deal about. There are dynamics, there are impacts, to 
the decisions we make. Tax policy matters. And having lower 
taxes will help spur investment in this country. And, in fact, 
a strong economy will get more revenues in. Then one needs to 
determine, what are the priorities in spending? And I think 
mostly in this proposed budget from the President, clearly 
homeland security and national defense are important. There 
will be differences, insofar as some of the other budgetary 
matters. And I think that we do need to spend money. It's a 
wise investment in aeronautics, in nanotechnology, in research 
and development. And we can look at probably the greatest 
invention, in my view, since the Gutenberg press, which is the 
Internet, as an example, a real objective lesson for us all. 
The Internet was developed--Federal program, DARPA--then it got 
applied to the private sector. It is a great vehicle for 
individual empowerment. It's an individualized empowerment 
zone, so to speak. And it is the best since the Gutenberg 
press. If it wasn't the Gutenberg press, Martin Luther's 95 
theses on the Church of Wittenberg would have been read by very 
few people. And look at how broadband has expanded 
opportunities for people all across this country. The policy of 
this country is to leave the Internet free of taxation. I've 
worked to make sure that avaricious state and local tax 
commissars don't impose 18 percent access taxes on the 
Internet, to help bridge that economic digital divide and make 
sure that there's investment for the Internet or broadband into 
small towns and rural areas. And whether that's by cable or 
telephone lines or even--now they're talking about over power 
lines, and eventually on Super WiMax, as well, wireless, and 
satellites, eventually.
    So, you know, Ronald Reagan said there was a policy of the 
Federal Government, if it moved, tax it; if it kept moving, 
regulate it; and if it stopped moving, subsidize it. Well, in 
the Internet, we left that free, and look at how that's 
improved our lives for information and for communications, 
allowing Mr. Murray to have his business communicate all over 
the world. It is important for telemedicine. It is important 
for education. You undoubtedly have distance learning at 
Virginia Tech--or, excuse me, at Georgia Tech, as does Old 
Dominion and other universities across the country. So, these 
decisions, leaving investors to keep more of what they earn, 
does have a positive impact, but we do have to remember to make 
the right decisions in budgeting.
    And from the President of Georgia Tech--and I know you're a 
good ACC school--you know what--one of the things you 
mentioned, as far as what we need to do in recruiting women and 
minorities, more minorities, into engineering and science 
technology, the analogy I give is that if you were a head coach 
and a general manager looking to the NFL draft, and you said, 
``We're only going to draft players from 40 percent of the 
country,'' and you'd only draft them from the Ivy League and 
the Big Ten, the result would be, you'd lose, and you'd get 
fired. And, as a practical matter, when you see women being a 
little over 10 percent of the engineering schools--Latinos, the 
fastest-growing group in this country, in single digits, are 
around 10 percent, 10 percent for African Americans--we really 
are only recruiting or incenting or enticing 40 percent or less 
of our country to get interested in engineering. So, we need to 
make sure all Americans recognize the great opportunities for 
jobs, good-paying jobs in this country. It's good for them, a 
fulfilling life for them and their families, but it's also 
important for the competitiveness of our country.
    So, I want to thank all our witnesses here today for 
appearing, and for your insight. Your commentary and views will 
be used by many of us as bolstering our arguments. And I very 
much appreciate your shared concern, not just for your own 
institutions--your firm, your company, your wonderful 
university--but also for your care for the future of this 
country.
    So, I thank you all, and this hearing is adjourned.
    [Whereupon, at 11:25 a.m., the hearing was adjourned.]
                            A P P E N D I X

 Prepared Statement of Hon. Daniel K. Inouye, U.S. Senator from Hawaii
    Manufacturing is a critical component of this country's economic 
security. It drives growth and accounted for over 77 percent of the 
Nation's exports since 2000. However, our manufacturing base is quickly 
eroding. The recession took its toll on the economy as a whole, yet 
while other sectors have rebounded, manufacturing jobs have not 
recovered.
    Some economists cite the country's strong productivity numbers as 
proof that the United States continues to maintain its manufacturing 
competitiveness, but the fact of the matter is that we have lost over 2 
million manufacturing jobs in the past 4 years. And these are high 
paying jobs that average over $63,000 per year.
    The trade situation is an even greater dilemma. The United States 
experienced the largest monthly trade deficit this past February as we 
imported over $161 billion worth of goods and services while exporting 
$101 billion. This left us with a monthly trade deficit of over $60 
billion, the highest in history. Furthermore, this year's first quarter 
deficit was $174 billion, well ahead of last year's first quarter 
deficit of $139 billion, which ultimately resulted in a new record 
annual deficit of $617 billion. These are not the kind of dubious 
records we want to be setting.
    Instead we should be setting new records in innovation and 
advancing the state-of-the-art with our research and development 
capability. In order for this country to compete economically, we need 
to make the necessary investments in basic research. Basic research is 
the foundation upon which entrepreneurs build the next great products 
that enrich our lives, improve our health, and provide for our 
security. Given this need, I find it perplexing that the President has 
provided such anemic funding for the National Science Foundation, the 
Nation's pre-eminent science research agency.
    Other countries understand that R&D is the fuel that propels 
economic growth. Our industries are facing competition from both 
shores. The aerospace industry, one of our few leading export 
industries, is under attack from Airbus as market share has fallen from 
over 70 percent in the mid-1980s to slightly more than half today. In 
their European Aeronautics 2020 report, the European Commission is 
calling for an investment of 100 billion Euros. From the other side of 
the Pacific, our hi-tech industries are being enticed to build new 
multi-billion dollar facilities in China, India, and Malaysia. U.S. 
manufacturers are facing increasing pressure from global competitors 
who are able to win business through lower operating costs and 
discriminating trade practices. I know that I am not alone on this 
Committee, or in the Senate, when I call for greater enforcement of our 
trade agreements.
    The government needs to take action and respond to the challenge to 
our economic livelihood. I applaud the President for creating a new 
position within the Department of Commerce to deal with some of these 
issues. Mr. Al Frink, who is before us today, was confirmed as the 
first Assistant Secretary for Manufacturing and Services. I look 
forward to hearing about what he has been doing over the past year and 
learning about what steps the Administration is taking to improve the 
outlook for this country's manufacturing capability.
    I also look forward to hearing more about the Hollings 
Manufacturing Extension Partnership. MEP is one of the few programs 
that we have to assist small and medium-sized companies to better 
compete in today's global economy. In fact last year alone, MEP helped 
companies retain or create fifty thousand manufacturing jobs.
    However, MEP, even with its track record of success, has not seen 
the Administration's support. This is particularly disturbing given 
that now is when these companies need assistance the most. In Fiscal 
Years 2003 and 2004, the Administration requested only $13 million each 
year for a $107 million program. This fiscal year's request is $46.8 
million, which is still less than half the amount required to support 
the network of centers. I hope we can work to correct this imbalance.
    The government can, and must, take positive action toward 
addressing the concerns I have outlined thus far. Other foreign 
governments are making the necessary investments in their 
infrastructure and workforce. If we continue to ignore the great 
capabilities that have so far been the heart of America's competitive 
advantage, we risk falling behind.
                                 ______
                                 
                             FPI Thermoplastic Technologies
                                                     Morristown, NJ
Hon. John Ensign,
Chairman,
Senate Subcommittee on Technology, Innovation, and Competitiveness,
Committee on Commerce, Science, and Transportation,
Washington, DC.

    Dear Senator:

    Thank you for the opportunity to testify before the U.S. Senate 
Committee on Science, Commerce, and Transportation, Subcommittee on 
Technology Innovation and Competitiveness at the recent hearing on 
Manufacturing Competitiveness in the High-Tech Era. Not only did I 
enjoy sharing my experience with the Committee, I welcomed your 
comments and questions on the Manufacturing Extension Partnership (MEP) 
which I spoke so highly about.
    As you know, the NIST Manufacturing Extension Partnership is a 
nationwide network of resources helping small manufacturers become more 
competitive. At the heart of the MEP are manufacturing extension 
centers locally positioned throughout the U.S. to address the critical 
and often unique needs of small manufacturers. Although my experience 
has only been with my local center, the New Jersey MEP, all MEP centers 
create significant impact for their local small manufacturers. In my 
testimony, I stated the incredible impact my local center has had on 
the manufacturers of New Jersey and more specifically, FPI. In your 
comments and questions, you had requested more information on the 
impact that other MEP Centers have had on their local manufacturers. I 
have since contacted NIST MEP and obtained the enclosed information 
regarding the impact of their services on their clients. As you will 
see, the program is not only a success in New Jersey, but is creating 
significant impact on the manufacturers nationwide.
    Please let me know if you have any additional questions regarding 
the program or its impact following your review of the enclosed 
materials. Thank you again for the opportunity to testify and for your 
continued support of the American manufacturing industrial base. 
Manufacturers such as myself, would not be in existence if not for your 
support of programs such as MEP.
            Respectfully,
                                          Sebastian Murray,
                                                 President and CEO.
                                 ______
                                 
                                 
                                 
Manufacturing Extension Partnership--Making a Difference For America's 
                             Manufacturers
                  Manufacturing Extension Partnership
        ``. . . an important resource for helping small manufacturers 
        achieve the kinds of world-class gains formerly limited to 
        larger companies. Their focus on value-adding activity on the 
        shop floor is exactly right. The MEP network gets results--
        quickly and affordably.''--Richard Schonberger, author, World 
        Class Manufacturing: The Next Decade.
Small Manufacturers: The Foundation of American Industry
    Manufacturing creates wealth for our Nation: wealth in the form of 
economic growth, increased jobs and robust trade in world markets. 
Productivity improvements by U.S. manufacturers are leading the Nation. 
Between 1992 and 2001, manufacturing productivity grew at double the 
rate of the entire economy: manufacturing productivity rose by nearly 
36 percent compared to a 18 percent increase for the non-farm business 
sector. Approximately 350,000, small manufacturers account for over 
half the total value of U.S. production and represent 98.6 percent of 
all manufacturing establishments. They employ nearly 11 million people 
and account for two-thirds of all U.S. manufacturing employment. These 
jobs are high-skilled and high-wage, with production employees earning 
50 percent more than retail employees per hour.
The Challenge for Small Manufacturers: Bridging the Productivity Gap
    As critical as small manufacturers are to the economy, the 
productivity gap between large and small firms is widening. Between 
1992 and 1997, productivity for large manufacturers grew by 22.6 
percent versus 15.5 percent for small manufacturers. And as large 
manufacturers increase their dependence on suppliers for parts and 
services, the performance and capabilities of small manufacturers 
become even more critical to the competitiveness of all manufacturers 
and to the health of the U.S. economy. Yet, according to a National 
Research Council report, ``Many of these smaller firms, however, are 
operating far below their potential. Their use of modern manufacturing 
equipment, methodologies and management practices is inadequate to 
ensure that American manufacturing will be globally competitive.''
    Limited budgets, lack of in-house expertise, and lack of access to 
the newest technologies are but a few of the significant barriers faced 
by small manufacturers--barriers that MEP aims to help them overcome.
How MEP Is Making a Difference
Manufacturing Extension Centers
    MEP is a national network of affiliated manufacturing extension 
centers and field offices located throughout all 50 states and Puerto 
Rico. Created in 1988, today's network delivers services to firms 
across the country and in Puerto Rico. Centers are funded by Federal, 
state, local and private resources to serve small manufacturers.
    Each center works directly with area manufacturers to provide 
expertise and services tailored to their most critical needs, which 
range from process improvements and worker training to business 
practices and information technology applications. Solutions are 
offered through a combination of direct assistance from center staff 
and assistance from outside consultants. Centers often help small firms 
overcome barriers in locating and obtaining private-sector resources.
Partnerships
    MEP provides small and mid-sized manufacturers with access to a 
wealth of tools, techniques and other resources through thousands of 
public and private affiliations. Initiatives with the U.S. Departments 
of Labor, EPA, National Association of State Development Agencies, the 
State Science and Technology Institute, the National Association of 
Manufacturers, state and local employment training organizations and 
hundreds of universities and community colleges are a few examples of 
how MEP leverages public and private resources to make a comprehensive 
range of technical services and assistance available to small 
manufacturers.
    Each year, MEP helps thousands of manufacturers solve problems, 
increase productivity and achieve higher profits. Through continuous 
assessment and improvement of our products, services and service-
delivery approaches, MEP is committed to meeting the strategic needs of 
small and mid-sized manufacturers as they negotiate the New Economy of 
the 21st century.
For More Information
    For a list of centers and other information about MEP, contact:

        Manufacturing Extension Partnership
        100 Bureau Drive, Stop 4800
        Building 301, Suite C100
        National Institute of Standards and Technology
        Gaithersburg, MD 20899-4800

        E-mail: [email protected] visit our website at 
        www.mep.nist.gov
                      Results: What the Data Shows
    FY 2004 MEP Activities
    
    
                      Impact: Independent Studies
        ``Systematic evaluation studies have confirmed that the MEP is 
        having a positive effect on businesses and the economy . . . 
        has achieved national coverage and established local service 
        partnerships . . . and most important . . . MEP services are 
        leading to desired business and economic goals . . . ''--Philip 
        Shapira, Ph.D., Issues in Science and Technology, Spring, 1998, 
        ``Extending Manufacturing Extension''
Benefits to GA Manufacturers
    Georgia MEP clients surveyed reported manufacturing benefits in the 
following areas:

   improvements to an existing process
   improvements in management skills
   improvements in employee skills
   improvements in an existing product or service

    Furthermore, comparing Georgia MEP clients with nonclients found 
that assistance from the Georgia MEP increased the value-added of the 
average client plant by up to $443,000 between 1999 and 2001. \1\
---------------------------------------------------------------------------
    \1\ Georgia Tech Policy Project on Industrial Modernization. 
December 2002.
---------------------------------------------------------------------------
PA Manufacturers Post Positive Productivity Gains
    A study of Pennsylvania's Industrial Resource Centers (IRC) found 
that the program boosted the labor productivity of IRC clients by an 
average of between 3.6 and 5.0 percentage points per year. The study 
found that these productivity gains raised gross state product by about 
$1.9 billion. Finally, the study found that for every state dollar 
invested in the program, the program generated almost $22 of additional 
income to the state economy. \2\
---------------------------------------------------------------------------
    \2\ ``The Pennsylvania Industrial Resource Center: Assessing The 
Record and Charting the Future,'' By Nexus Association for the Ben 
Franklin/IRC Partnership Board. October 1999.
---------------------------------------------------------------------------
Higher Productivity Growth for MEP Clients
    Researchers at The Center for Economic Studies, U.S. Census Bureau, 
found that manufacturing extension clients experienced between 3.4 and 
16 percent more growth in labor productivity over a five-year period 
than similar non-client firms. The productivity growth of the 1,559 
firms studied translates into $484 million in additional value-added at 
client firms. \3\
---------------------------------------------------------------------------
    \3\ Journal of Policy Analysis and Management, ``Evaluating the 
Impact of Manufacturing Extension on Productivity Growth,'' by Ronald 
S. Jarmin, Winter 1999.
---------------------------------------------------------------------------
    Based on these results, a second study estimated that this value-
added increase translates into $1.3 billion in additional economic 
output over 5 years, leading to $213 million in additional Federal 
revenues and a $4.47 increase in real disposable income per capita. \4\
---------------------------------------------------------------------------
    \4\ ``Estimating Economic Impacts of Government Technology 
Programs: Manufacturing Studies Using the REMI Model,'' by M.A. Ehlen 
and S.F. Weber, economists for the National Institute of Standards and 
Technology, 1997.
---------------------------------------------------------------------------
Value-Added Income and Jobs for NY
    A New York Manufacturing Extension Partnership study found that the 
state's $5.3 million investment in the program between July 1995 and 
March 1997, combined with the Federal investment, generated an 
additional $227 million of value-added income in New York State. This 
growth, in turn, led to the creation of 2,600 jobs. \5\
---------------------------------------------------------------------------
    \5\ ``Evaluation of the New York Manufacturing Extension 
Partnership,'' by Nexus Associates for New York State Science and 
Technology Foundation/Empire State Development, 1997.
---------------------------------------------------------------------------
GAO Survey Positive
    An independent survey of MEP clients by the General Accounting 
Office found MEP had a positive effect on a firms performance in the 
areas of: \6\
---------------------------------------------------------------------------
    \6\ ``Manufacturing Extension Programs: Manufacturers' Views of 
Services,'' U.S. General Accounting Office, Report GAO/GGK-95-216BR, 
August, 1995.

   profits
   sales
   product quality
   workplace technology
   worker productivity
   customer satisfaction

                                  
