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MADE IN THE USA: MANUFACTURING POLICY, THE DEFENSE INDUSTRIAL BASE AND 
                         U.S. NATIONAL SECURITY

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

                                HEARING

                               before the

                   SUBCOMMITTEE ON NATIONAL SECURITY
                          AND FOREIGN AFFAIRS

                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 22, 2010

                               __________

                           Serial No. 111-153

                               __________

Printed for the use of the Committee on Oversight and Government Reform


         Available via the World Wide Web: http://www.fdsys.gov
                      http://www.house.gov/reform
              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                   EDOLPHUS TOWNS, New York, Chairman
PAUL E. KANJORSKI, Pennsylvania      DARRELL E. ISSA, California
CAROLYN B. MALONEY, New York         DAN BURTON, Indiana
ELIJAH E. CUMMINGS, Maryland         JOHN L. MICA, Florida
DENNIS J. KUCINICH, Ohio             JOHN J. DUNCAN, Jr., Tennessee
JOHN F. TIERNEY, Massachusetts       MICHAEL R. TURNER, Ohio
WM. LACY CLAY, Missouri              LYNN A. WESTMORELAND, Georgia
DIANE E. WATSON, California          PATRICK T. McHENRY, North Carolina
STEPHEN F. LYNCH, Massachusetts      BRIAN P. BILBRAY, California
JIM COOPER, Tennessee                JIM JORDAN, Ohio
GERALD E. CONNOLLY, Virginia         JEFF FLAKE, Arizona
MIKE QUIGLEY, Illinois               JEFF FORTENBERRY, Nebraska
MARCY KAPTUR, Ohio                   JASON CHAFFETZ, Utah
ELEANOR HOLMES NORTON, District of   AARON SCHOCK, Illinois
    Columbia                         BLAINE LUETKEMEYER, Missouri
PATRICK J. KENNEDY, Rhode Island     ANH ``JOSEPH'' CAO, Louisiana
DANNY K. DAVIS, Illinois             BILL SHUSTER, Pennsylvania
CHRIS VAN HOLLEN, Maryland
HENRY CUELLAR, Texas
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
PETER WELCH, Vermont
BILL FOSTER, Illinois
JACKIE SPEIER, California
STEVE DRIEHAUS, Ohio
JUDY CHU, California

                      Ron Stroman, Staff Director
                Michael McCarthy, Deputy Staff Director
                      Carla Hultberg, Chief Clerk
                  Larry Brady, Minority Staff Director

         Subcommittee on National Security and Foreign Affairs

                JOHN F. TIERNEY, Massachusetts, Chairman
CAROLYN B. MALONEY, New York         JEFF FLAKE, Arizona
PATRICK J. KENNEDY, Rhode Island     DAN BURTON, Indiana
CHRIS VAN HOLLEN, Maryland           JOHN L. MICA, Florida
PAUL W. HODES, New Hampshire         JOHN J. DUNCAN, Jr., Tennessee
CHRISTOPHER S. MURPHY, Connecticut   MICHAEL R. TURNER, Ohio
PETER WELCH, Vermont                 LYNN A. WESTMORELAND, Georgia
BILL FOSTER, Illinois                PATRICK T. McHENRY, North Carolina
STEVE DRIEHAUS, Ohio                 JIM JORDAN, Ohio
STEPHEN F. LYNCH, Massachusetts      JEFF FORTENBERRY, Nebraska
MIKE QUIGLEY, Illinois               BLAINE LUETKEMEYER, Missouri
JUDY CHU, California
                     Andrew Wright, Staff Director
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on September 22, 2010...............................     1
Statement of:
    Faux, Jeff, founding president and distinguished fellow, the 
      Economic Policy Institute; Robert Baugh, executive 
      director, Industrial Union Council, the American Federation 
      of Labor and Congress of Industrial Organizations; Mark 
      Gordon, executive committee, the National Defense 
      Association; and Michael Wessel, president, the Wessel 
      Group, commissioner, U.S.-China Economic and Security 
      Review Commission, and senior advisor, the Alliance for 
      American Manufacturing.....................................    10
        Baugh, Robert............................................    22
        Faux, Jeff...............................................    10
        Gordon, Mark.............................................    66
        Wessel, Michael..........................................   109
Letters, statements, etc., submitted for the record by:
    Baugh, Robert, executive director, Industrial Union Council, 
      the American Federation of Labor and Congress of Industrial 
      Organizations, prepared statement of.......................    25
    Faux, Jeff, founding president and distinguished fellow, the 
      Economic Policy Institute, prepared statement of...........    12
    Foster, Hon. Bill, a Representative in Congress from the 
      State of Illinois, information concerning U.S. 
      manufacturing job loss.....................................     7
    Gordon, Mark, executive committee, the National Defense 
      Association, prepared statement of.........................    68
    Tierney, Hon. John F., a Representative in Congress from the 
      State of Massachusetts, prepared statement of..............     4
    Wessel, Michael, president, the Wessel Group, commissioner, 
      U.S.-China Economic and Security Review Commission, and 
      senior advisor, the Alliance for American Manufacturing, 
      prepared statement of......................................   110

 
MADE IN THE USA: MANUFACTURING POLICY, THE DEFENSE INDUSTRIAL BASE AND 
                         U.S. NATIONAL SECURITY

                              ----------                              


                     WEDNESDAY, SEPTEMBER 22, 2010

                  House of Representatives,
     Subcommittee on National Security and Foreign 
                                           Affairs,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:05 a.m., in 
room HVC-210, the Capitol, Hon. John F. Tierney (chairman of 
the subcommittee) presiding.
    Present: Representatives Tierney, Murphy, Welch, Foster, 
and Luetkemeyer.
    Staff present: Andy Wright, staff director; Talia Dubovi, 
counsel; LaToya King, professional staff; Boris Maguire, clerk; 
Matt Donaldson, legal fellow; Ian Churchill and Eric Inafuku, 
interns; Kathryn Prael, communications director; Laura Keiter, 
press assistant; Justin LoFranco, minority press assistant and 
clerk; Tom Alexander, minority senior counsel; and Christopher 
Bright, minority senior professional staff member.
    Mr. Tierney. A quorum being present, the Subcommittee on 
National Security and Foreign Affairs' hearing entitled, ``Made 
in the USA: Manufacturing Policy, the Defense Industrial Base, 
and the U.S. National Security'' will come to order.
    I ask unanimous consent that only the chairman and ranking 
member and Mr. Foster of the subcommittee be allowed to make 
opening statements. Without objection, so ordered. I ask 
unanimous consent that the hearing record be kept open for 5 
business days so that all members of the subcommittee will be 
allowed to submit a written statement for the record. Without 
objection, that is so ordered as well.
    So again, good morning and thanks to all our witnesses for 
being here. Today the subcommittee turns its attention to a 
matter that has far-reaching consequences for both our economy 
and our national security: The U.S. manufacturing and defense 
industrial base.
    For decades manufacturing has been the backbone of the 
American economy. The United States has been known as the land 
of innovation, the home of the car, the computer and the jet 
plane. These innovations lead to good jobs for hard working 
Americans.
    American manufacturing is also a bastion of quality where 
the words ``Made in America'' signifies superior craftsmanship, 
durability and value. However, despite the importance of 
innovation and manufacturing to our national economy, 
manufacturing jobs have been dropping steadily over the last 
several decades. Right after World War II, manufacturing 
accounted for 40 percent of the American jobs; today that 
number is closer to 11 percent. While the decrease in 
manufacturing affects many aspects of U.S. economy, today we 
will focus on one area in particular, the defense industrial 
base.
    The decrease in manufacturing at home has forced the 
Department of Defense to look abroad to acquire the tools it 
needs to arm our forces and provide for our national security. 
Outsourcing takes control of our supply chain out of our hands, 
and when foreign companies or governments control the 
production of necessary parts our critical defense needs are 
subject to geopolitical forces that are beyond our control.
    Now as far back as May 2003 and the 108th Congress I was 
focusing on this issue, and I remember that during 
consideration of the fiscal year 2004 defense authorization 
bill I offered an amendment that sought to expand the scope of 
the Defense Industrial Base Assessment Program, and it was 
included in the committee-approved bill. It required additional 
information on why contracts are transferred outside this 
country, it would have mandated an action plan on how our 
defense manufacturing sector could be revitalized and restored. 
In fact, the amendment was approved by a voice vote and it had 
the support of the then chairman of the Armed Services 
Committee, Republican Duncan Hunter. But opposition from the 
Bush administration caused it to be stripped from the final 
version, and the regrettable effect of that was that the 
Defense Industrial Base Assessment Program wasn't nearly as 
effective as I think it should have been.
    The following year I went a step further and I offered an 
amendment to the fiscal year 2005 defense authorization bill 
that was aimed at keeping taxpayer support of defense jobs here 
in this country. My amendment would have required the Secretary 
of Defense as a condition of any defense-related manufacturing 
contract to mandate that the contract performed substantially 
all or in no event less than 65 percent of defense-related 
manufacturing services in the United States. The provision 
allowed the Secretary of Defense to waive that requirement in 
cases where the products and services were not available in the 
United States or if national security concerns necessitated a 
waiver. Unfortunately, the then Republican-led Rules Committee 
prevented the amendment from receiving a vote on the House 
floor.
    But we have had a number of examples where relying on 
foreign companies has been detrimental. For example, in 2003 a 
Swiss company decided to delay delivery of essential parts of 
the Pentagon's Joint Direct Attack Munitions [JDAMs], commonly 
known as smart bombs due to their ability to pinpoint targets, 
because of the Swiss Government's opposition to the Iraq war. 
Not only did this force the Defense Department to acquire these 
parts at a higher price, it was a significant delay in getting 
these munitions to our forces overseas.
    Further, it is only when critical parts are made in America 
that we can be sure that the quality meets our needs. There 
have been countless situations where the Department of Defense 
has received foreign parts that did not meet its quality 
standards, including substandard and counterfeit materials. In 
one example seatbelt clasps purchased by the U.S. Army would 
break when they were accidentally dropped because they were 
fabricated from a substandard grade of aluminum.
    One particularly salient example of our dependence on 
foreign countries to supply us with essential materials used 
for defense is our need for rare earth materials. These metals 
are used for making a wide range of commercial and defense 
applications, including the engines of the F-14, F-15, F-16 
fighter jets. Such materials are also critical components of 
high tech computer chips, cell phones, and smart bombs that are 
hallmarks of warfighting in the Information Age. China produces 
and therefore controls 97 percent of rare earth oxides. It 
would take about 15 years to establish a domestic supply chain, 
and the national security implications of this imbalance are 
impossible to ignore.
    We also face significant work force training and capacity 
issues. The Government Accountability Office has consistently 
reported that there are not enough highly skilled workers to 
perform the critical tasks needed to sustain our industrial 
base. We have more people retiring than entering the work 
force, which means companies that want to build in America 
cannot find workers with the right skills to do so. As such, we 
will have to invest in our education system as well as our 
training programs.
    We must also look at our manufacturing capacity and ensure 
that we have modern, technologically advanced facilities that 
can respond to both civilian and defense needs. We need smart 
policies that assure that a skilled manufacturing work force 
has the flexible capacity to shift between defense, public 
works, and commercial activity as the times demand.
    Creating a robust manufacturing sector also requires 
careful consideration of tax, trade, innovation and regulatory 
policies. I want to stress that this is not about protectionism 
or stifling free trade; it is about being competitive.
    I applaud the House for passing H.R. 4692, which would 
require each President to develop a national manufacturing 
strategy and assess progress. I encourage the Senate to do the 
same. We can no longer afford to jeopardize our economy, the 
livelihood of Americans, or our national security by ignoring 
the manufacturing sector. Modernizing and improving our 
industrial base will ultimately improve our economy, provide 
better employment opportunities to Americans, and strengthen 
national security. We have to start to think strategically 
about the industrial challenges we face and take aggressive 
action to fully address them. Our economic and national 
security demand it.
    With that, I would like to ask Mr. Luetkemeyer for his 
opening statement.
    [The prepared statement of Hon. John F. Tierney follows:]
    [GRAPHIC] [TIFF OMITTED] T5560.001
    
    [GRAPHIC] [TIFF OMITTED] T5560.002
    
    Mr. Luetkemeyer. Thank you, Mr. Chairman, and I welcome our 
panelists today.
    The debate today raises important questions about how 
traditional free market principles coincide with national 
security concerns. While the United States sometimes relies on 
foreign labor and equipment because they can provide cheaper 
alternatives to domestic sources, the result at times can be 
less than ideal. The sensitivity and quality of foreign made 
equipment are valid concerns. Does this mean that all military 
equipment should be produced in the United States? We should 
consider whether a logical balance can be struck. Sensitive 
equipment should be made in the United States or in 
collaboration with our closest allies. For non-sensitive 
equipment we should employ greater quality controls and more 
stringent oversight of foreign products.
    I believe we should go a step further and examine the 
policies that drive business offshore to begin with. We should 
examine whether Congress and the administration need to reform 
corporate tax rates, labor policies and environmental 
regulations so that they are conducive to domestic industrial 
growth. Creating an environment in which businesses will 
financially thrive will go a long way toward bolstering the 
domestic industrial base. Whichever path we take we must also 
be mindful of likely retaliation as a factor if we choose a 
path that many of our trading partners will construe as 
protectionist and in violation of international trade 
agreements.
    Mr. Chairman, I thank you for convening this hearing and 
look forward to today's testimony.
    Mr. Tierney. Thank you. The subcommittee will now receive 
testimony from the panel before us today. Oh, before we do that 
even, Mr. Foster has an opening statement. Mr. Foster, we 
invite you to present that.
    Mr. Foster. I would like to thank the chairman and I would 
also like to introduce a graph, which I think often a picture 
is worth tens of thousands of words and this graph, which I 
hope will be visible to our panel.
    Mr. Tierney. Without objection, it's entered into the 
record.
    [The information referred to follows:]
    [GRAPHIC] [TIFF OMITTED] T5560.003
    
    Mr. Foster. This is simply a plot of manufacturing 
employment in the United States from 1973 until today. And it 
was remarkably constant for 30 years, from the early seventies 
until early 2001. It was basically 17 to 18 million. It didn't 
matter who was in charge, good times and bad, Democrats and 
Republicans, it was relatively healthy. During this period of 
course industrial output more than doubles because of increases 
in productivity and technology. But in early 2001 a cataclysm 
overtook us and more than a third of our manufacturing jobs 
have been lost. This is not and should not be a partisan issue. 
We are able--we were able for decades to keep healthy 
manufacturing going in the United States. Of course businesses 
grew, businesses failed, sectors increased and decreased. But 
overall we stayed relatively healthy. But something very bad 
happened starting in early 2001 and as a country we have to 
understand what it was that did that. It wasn't a single cause; 
it was a number of things. We have to understand how to reverse 
this.
    And I am someone who started a manufacturing company when I 
was 19, actually, back right around 1973. I started a company 
that now provides hundreds of manufacturing jobs in the Midwest 
and has competed and exported a very high fraction of our 
production. And we are faced, every single trade show we go to, 
we are worried that one of our competitors will have offshored 
their production and be undercutting us. And so we have to 
understand things like currency manipulation that we ought to 
be able to fix, and things like labor arbitrage which are going 
to be very tough. And so we have to have an honest national 
discussion about this and we have to decide what fraction of 
things like national defense frankly trump mindless free trade 
points of view, and that there be certain things we are going 
to have to be able to do. It has to be a national goal that 
after an electromagnetic pulse event that wipes out all of our 
electronics that we have the ability, by ourselves, to recover 
our capacity to communicate in this country. And things like 
that have to be thought out and very consciously separated.
    Anyway, this is a wonderful hearing and I thank the 
chairman for having it.
    Mr. Tierney. Thanks, Mr. Foster.
    Now the subcommittee will receive testimony from the panel 
before us today. First I will introduce the panel.
    Mr. Jeff Faux, is the founding president and distinguished 
fellow at the Economic Policy Institute. Mr. Faux has studied, 
taught, and published on a wide variety of economic and 
political issues, is the author or coauthor of five books. He 
also has worked as an economist for the Departments of State, 
Labor and Commerce, as a manager of the finance industry, as a 
blueberry farmer, and as a member of the Municipal Planning 
Board in the State of Maine. He sits on the boards of several 
nonprofit institutions and magazines, has written articles for 
numerous newspapers and journals, and regularly appears on 
television and radio. Mr. Faux holds a B.A. from Queens 
College, an M.A. from George Washington University, and an 
honorary degree from the University of New England.
    Mr. Robert Baugh is the executive director of the 
Industrial Union Council of the American Federation of Labor 
and Congress of Industrial Organizations [AFL-CIO]. The Council 
is comprised of the Nation's leading industrial unions and is 
chaired by the AFL-CIO president, is the coordinating body for 
the AFL-CIO's manufacturing policy and legislative initiatives. 
Mr. Baugh is also the cochair of the AFL-CIO Energy Task Force 
and served as a leader as the U.S. Labor Delegation to the U.N. 
Climate Change Conference Negotiations in Bali, Posman, and 
Copenhagen. Mr. Baugh is also the author of several 
publications on issues ranging from economic development to 
manufacturing and climate change. He holds a B.A. from the 
University of Detroit and an M.A. in industrial and labor 
relations from the University of Oregon.
    Mr. Mark Gordon, serves on the Executive Committee of the 
National Defense Industrial Association and is the director for 
defense programs at the National Center for Advanced 
Technologies, where he covers all technology, manufacturing, 
and research and development policy topics. He also heads the 
Evolutionary Acquisition Training Team, which provides industry 
perspective to the Department of Defense technical and policy 
groups on acquisition policy. Additionally, Mr. Gordon sits on 
the Joint Defense Manufacturing Technology Panel as a defense 
industry representative and as a member of the Diminishing 
Manufacturing Sources of Materials Shortages Working Group of 
the Department of Defense. He is a board member of National 
Center for the Defense Manufacturing and Machining and a member 
of the National Defense Industry Association Manufacturing 
Division Executive Committee. For the purposes of full 
disclosure, Mr. Gordon is also under government contract as an 
industry liaison for strategic planning initiatives involving 
technology transition mechanisms within the Department of 
Defense. He holds a B.A. from the University of Rochester and 
an M.A. from the Georgia Institute of Technology.
    Mr. Michael Wessel is a member of the U.S.-China Economic 
and Security Review Commission, a senior advisor at the 
Alliance for American Manufacturing and president of the Wessel 
Group, a public affairs consulting firm. He is also a member of 
the Council on Foreign Relations, staff advisor to the Labor 
Advisory Committee to the U.S. Trade Representative and 
previously served on the U.S. Trade Deficit Review Commission 
from 1999 to 2000. Mr. Wessel worked for House Majority Leader 
Richard Gephardt for more than 20 years. In addition to serving 
as general counsel he also served as Mr. Gephardt's principal 
Ways and Means aide, participating in the enactment of major 
trade policy initiatives, and as the executive director of the 
House Trade and Competitive Task Force. Mr. Wessel holds a B.A. 
and a J.D. from George Washington University.
    So thank you to all of our witnesses for making yourselves 
available today, for sharing your substantial expertise. It is 
the policy of this committee to swear you in before you 
testify, so I ask that you please stand and raise your right 
hands.
    [Witnesses sworn.]
    Mr. Tierney. The record will please reflect that all the 
witnesses answered in the affirmative. We can advise you that 
your full written statement will be entered into the record. I 
thank all of you for substantial witness statements that were 
very informative and ask that you might keep your opening 
remarks to approximately 5 minutes so we can get a good series 
of rounds of questions and answers on that.
    Mr. Faux, we will start with you, please.

 STATEMENTS OF JEFF FAUX, FOUNDING PRESIDENT AND DISTINGUISHED 
FELLOW, THE ECONOMIC POLICY INSTITUTE; ROBERT BAUGH, EXECUTIVE 
DIRECTOR, INDUSTRIAL UNION COUNCIL, THE AMERICAN FEDERATION OF 
 LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS; MARK GORDON, 
  EXECUTIVE COMMITTEE, THE NATIONAL DEFENSE ASSOCIATION; AND 
  MICHAEL WESSEL, PRESIDENT, THE WESSEL GROUP, COMMISSIONER, 
U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION, AND SENIOR 
        ADVISOR, THE ALLIANCE FOR AMERICAN MANUFACTURING

                     STATEMENT OF JEFF FAUX

    Mr. Faux. Well, thank you, Mr. Chairman, for holding this 
hearing on such a vital and often ignored national issue, and 
Mr. Foster and Mr. Luetkemeyer and the rest of the subcommittee 
for inviting me to share my thoughts and concerns.
    It seems self-evident to many people, most people I think, 
that a healthy industrial base is essential to our national 
defense. Yet over the last several decades we have followed the 
national policy of allowing that base to deteriorate with 
little regard for our future. As a result, our supply lines for 
strategic parts and materials are stretched around the world, 
the pool of domestic workers with high-tech industrial skills 
needed in future national emergencies has been allowed to 
drain. We've accumulated massive overseas debt to China because 
of our trade deficit and other creditor nations, which is a 
potential economic and national security threat. And many 
American manufacturing corporations, including those producing 
advanced technology products, now see their future and, 
disturbingly, perhaps in the future their corporate loyalties 
elsewhere.
    Now in this country we have a long successful history 
dating to the beginning of the republic of government 
encouraging and guiding the private sector to build and 
maintain a strong manufacturing base in support of national 
goals. But beginning in the 1980's administrations headed by 
both parties have slowly adopted the posture that a strong 
industrial base is in effect not the public's business. Leave 
it all to the market.
    The problem is that the market is essentially indifferent 
to our country's national security. And the global market, 
subject to currency manipulation, mercantilist trade policies 
and similar practices by potentially rival states, can be 
hostile. To its credit the current administration and Congress 
recognize some of this and are beginning to make important 
initiatives, but there's still in the country and in the 
government and in our political discussions that we listen to 
every day on television and radio, there's a lack of sense of 
urgency about this.
    Ironically, we have had a sort of industrial policy over 
the last several decades, but the favored industry has not been 
manufacturing but finance. So it's no surprise that while our 
goods markets have shrunk, we lead the world in the finance 
sector's major product, debt. Offshoring and downsizing 
manufacturing may often be in the short run financial interest 
of the average investor, but at a heavy cost to the long-term 
interest of the average American citizen.
    One result of these imbalanced policies has been a 
continuous trade deficit for 30 years, after having 100 years 
of trade surpluses and balance, and a growing deficit in high-
technology products for the last 12. Yes, we have a trade 
surplus in high-technology services, but that is not 
necessarily good news. It represents the relentless transfer of 
advanced skills and knowledge to other nations.
    This experience as well as economic common sense tells us 
that without government leadership, private investors will not 
largely make the long-term commitment necessary to rebuild and 
retool a competitive manufacturing sector. There is no one 
single magic bullet that will solve this problem. We need a 
variety of mutually reinforcing trade, tax procurement, 
currency adjustment and other policies. But today our economic 
and national security policies are too often made in separate 
multiple unconnected silos.
    For example, there is now wide agreement that government 
should finance more high-tech research and development. But 
without a policy to assure that the products that are generated 
are made in the United States, it will end up subsidizing the 
future economies and strengthening the global power of other 
nations at our taxpayers' expense.
    Another set of silos are our policies toward China. For 20 
years one part of the government has been helping buildup 
China's high-tech industrial capacity while another part of the 
government is practicing for future conflict. Taken separately, 
each policy might be rationalized, but taken together they make 
no sense at all.
    My testimony outlines a few suggestions on how we might 
begin to organize for more integration of our policies, 
including a Presidential commission on linking the two areas 
and the appointment of select committees in Congress to deal 
with integrated global strategies. But whatever the most 
effective organizational structure, the most important point is 
that we urgently need an integrated national industrial 
strategy to promote a future for Americans that is both 
prosperous and secure. And my fear, Mr. Chairman, is that the 
time may be running out.
    Thank you again for taking the leadership on this, and I'll 
be happy to answer any questions.
    [The prepared statement of Mr. Faux follows:]
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    [GRAPHIC] [TIFF OMITTED] T5560.013
    
    Mr. Tierney. Well, thank you, Mr. Faux. I appreciate it.
    Mr. Baugh.

                   STATEMENT OF ROBERT BAUGH

    Mr. Baugh. Thank you, Chairman Tierney and members of the 
committee, for inviting me here this morning to testify on this 
important subject.
    We believe the decade long decline in the American 
manufacturing base is a crisis that has undermined our economic 
security, national security, and I subscribe to all the 
comments that were made by members of the panel this morning.
    The question before us is what has happened to that 
prosperity and security and what must we do to strengthen the 
Nation's industrial base. I would like to make three main 
points in this testimony. One, the health of our manufacturing 
base and the health of our defense industrial base are one and 
the same, and the diagnosis is critical. No. 2, our own trade, 
tax, and investment procurement policies and the globalization 
of production has helped create this situation. And three, it 
simply doesn't have to be this way. There are steps we can and 
we must take to revitalize our manufacturing base and our 
national security with policies, investments and incentives we 
enact that must be both strategic and employment linked. To 
Jeff's point a moment ago on research and development policy.
    For the American manufacturing communities this recession 
has just been one more big wave in a decade of economic 
tsunamis. Mr. Foster, your chart says it all. In little more 
than a decade we lost 6 million manufacturing jobs, one-third 
of our manufacturing jobs, 57,000 facilities closed. And I 
would make note I'm not just speaking for the front line 
skilled workers but I'm talking about a million of those jobs 
that were engineers, designers, developers, scientists, the 
very core of our professional and technical capacity for 
innovation in this Nation lost their jobs. They are out of that 
market. That is part of our future and we have been wasting it 
away.
    It is a myth to think that the manufacturing base and the 
defense industrial base are somehow separate and independent. 
The National Research Council has made this point over and 
over, and it is in the other papers we have submitted as part 
of our testimony, the manufacturing and security paper that 
documents critical industries, critical technologies that are 
fading away from our economy and our expertise. And your point 
that was made about the metals is absolutely correct and 
straightforward, and something is very serious and strategic 
consequences when China controls 90 percent of the world market 
for those rare earth metals.
    Import penetration studies by the U.S. Business and 
Industry Council parallel this and show the degree of import 
penetration into the U.S. economy. It's dominated. In 27 of 114 
sectors, over 50 percent of our consumption is of imports in 
manufactured materials, and this shows up. These are global 
trends and these are economic trends that are a disaster for 
this country.
    The military policies of dual use have helped do this 
because we seek the cheapest vendor, the cheapest product. We 
find decisions made by the Navy to lease vessels rather than 
make them, the Coast Guard to make ship parts over in Korea and 
just assemble them here. It diminishes our capacity to address 
these things in the future. The threatened closures of Avondale 
and Ingalls Shipyards are a case in point.
    While we've had these warnings from the National Research 
Council, I think more poignant is watching how research and 
development innovation has been offshored, and nothing is more 
striking than the recent announcement by Intel and Applied 
Materials and other major technological innovators in our 
economy that have gotten billions of dollars of illegal 
subsidies and have opened major facilities in China. These are 
the same products that will come back to haunt us as they 
already do in so many other fields.
    Our trade deficits, as Jeff has pointed out, are 
symptomatic of the rot eating away at our industrial base. The 
Economic Policy Institute estimates that we have lost up to 
$2.4 million to China alone from this. And what do we do with 
about China's strategy? Will they target industries, target 
technologies? They back it with a whole series of illegal trade 
practices, the leading one of which we are talking about in 
this Congress. That is currency manipulation. It is time we do 
something about it. A 40 percent subsidy goes a long way. It 
not only subsidizes the issue of things that are imported into 
our economy; more importantly, it subsidizes the research and 
development that's going into their economy from American firms 
and other international corporations.
    We need to take action to end currency manipulation, and 
House bill 2378 does that, and this Congress should move on it 
immediately. The Ways and Means Committee has had it under 
consideration, and we had a hearing on it just this last week.
    The Congress has made important steps, and this was noted 
in the chairman's testimony, of the idea that we actually need 
a national manufacturing strategy, that we need a trade deficit 
commission, that we need to take the steps forward to address a 
manufacturing strategy for the Nation. Every other country in 
the world has one, and it's focused on employment and income. 
We do not. Shame on us, shame on us. It is part of our problem.
    What you have done so far is a start, but we need to do 
much, much more. And we need policies in the Senate, as I said 
before, that are strategic and employment linked. And we don't 
necessarily have that in this case. It is the silo effect that 
Dr. Faux was talking about, it is the idea that the one hand 
doesn't see what the other is doing here as we move on these 
things. We put a good policy in place around energy, for clean 
energy production, but it's not employment linked, and 
therefore we stand to spend a good portion of that resource on 
foreign corporations producing these things. We have to be more 
strategic in how we do this.
    There are six things we need to do. One is about bringing 
fairness to the global economy. That strengthens our laws 
practiced by America, but it means we enforce our trade laws 
and we do something about currency. We must invest massively in 
this Nation's infrastructure, not just to bring it up to speed 
but for the future. We should do that strategically with 
employment linked policies that in fact make the technologies 
and the things that we are going to build our country with. And 
the same thing needs to happen in the field of energy and our 
infrastructure. Again, 48(c), section 136 for autos, the idea 
that we are going to have loan guarantees, and these things 
that invest in the American economy are technologies that we 
used to lead the world in and we no longer do. And we need to 
reinvest in these things and recapture that. It is about 
revitalizing the manufacturing base that protects our defense 
industrial base. We need tax policies that encourage 
investment, as Mr. Luetkemeyer talked about. We agree with you 
on that. We also need to get rid of the tax policies that are 
incentives for offshoring work. I think we have conflicting 
ideologies on this, that we need to fix and address in terms of 
a strategy. And we must protect innovation and we must invest 
in our R&D so that things are made here.
    And finally, we absolutely have to have a skilled and 
trained work force for our future. As I said in the beginning, 
the health of our economy and our national security are 
inextricably tied together, and we must have a vibrant 
manufacturing sector to make sure it works. We must revive 
manufacturing as a clear centerpiece for our Nation's economic 
and national security strategy.
    Thank you.
    [The prepared statement of Mr. Baugh follows:]
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    Mr. Tierney. Thank you, Mr. Baugh.
    Mr. Gordon.

                    STATEMENT OF MARK GORDON

    Mr. Gordon. Chairman Tierney and members of the committee, 
on behalf of our members, 1,700 corporate and 83,000 individual 
members, I am pleased to appear before the House Subcommittee 
on National Security and Foreign Affairs today to discuss the 
national security implications of the U.S. manufacturing policy 
and to present some recommendations to improve that policy.
    Succinctly, the U.S. manufacturing sector is of vital 
importance to our country, given its enormous impact across the 
fundamental underpinnings of our Nation's security, both 
economic and defense related. Manufacturing remains the largest 
productive center--sector in the overall economy at 12 percent 
and the U.S. produces more goods than any another country, 
although it is close. Manufactured goods also represent 50 
percent of country's exports, limiting the deficit and our 
balance of trade. And to further bolster its importance, 
manufacturing generates a substantial benefit from other 
economic sectors, multiplying each dollar spent within the 
sector of manufacturing into an additional $1.41 in other 
sectors, higher than any other one. This raises the complete 
impact from the manufacturing sector to one-quarter of our GDP.
    An often overlooked aspect of manufacturing is not simply 
the size of the sector, but the fact that manufacturing creates 
wealth within the United States by producing something of 
higher value from materials or components. There is only three 
ways of creating wealth--dig it up, grow it or make it. And 
unlike other wealth creating sectors, manufacturing jobs are 
generally high paying and represent an entry into the middle 
class for a large portion of the work force.
    Our national security depends heavily upon our domestic 
manufacturing capabilities. The DOD relies upon the industrial 
base for leap-ahead, innovative technologies to provide combat 
equipment for our warfighters, and upon trusted domestic 
suppliers to deliver on time and at quality.
    In my testimony today I would like to discuss four main 
things vital to manufacturing policy--leadership, research and 
development, strategic capabilities, and then work force and 
infrastructure.
    The defense manufacturing capabilities have to be elevated 
to a higher level in the scope of U.S. policy considerations, 
and this requires active and senior leadership. To crystallize 
this point, let me make a simple comparison. The agriculture 
sector represents 1 percent of GDP, employs 1 percent of the 
work force, and is represented by a Cabinet Secretary. The 
manufacturing sector is 10 times larger and is represented by 
an Assistant Secretary for Manufacturing and Services within 
the International Trade Administration of the Department of 
Commerce.
    In turn, defense manufacturing issues need more senior 
leadership within the Department of Defense to unite policy, 
strategy, investment, and implementation. This is a strategic 
requirement above all others, and I have recently seen 
congressional language on this topic.
    Manufacturing research and development is literally the 
core of our national engine. Seventy percent of R&D in the 
United States is performed by manufacturing companies, and the 
technology and innovation results will make the United States 
more competitive, but only if the results of the R&D stay in 
the United States and add to the GDP. But simply, if R&D stays 
within the United States it represents an investment for us. If 
it goes offshore it represents simply a cost and the country 
gains little benefit from the R&D.
    Turning to R&D for national security, DOD has a single 
program that is chartered under USC Title 10 to develop and 
transition manufacturing capabilities for defense systems. The 
DOD ManTech program. This program has recently delivered to 
Congress a strategic plan titled ``Delivering Defense 
Affordability,'' with four strategic thrusts, and I have 
referenced the executive summary with my testimony today. 
However, more investment is needed. A Defense Science Board 
study recently concluded that the proper investment level for 
ManTech should be 1 percent of RDT&E, a 3 times increase.
    Now for strategic considerations one of the most critical 
balancing acts that we've heard today with an industrial policy 
is between open competition and active support or subsidy of an 
industry capability. Industrial capabilities and manufacturing 
processes, raw materials components and technologies are 
disappearing from United States every day, and while some can 
be replaced with overseas suppliers, this is not possible for 
defense essential needs where access to domestic sources is a 
national security requirement. Therefore, when absolutely 
necessary the department will intervene to create or sustain 
essential manufacturing capabilities. There is a program that 
is part of the Defense Production Act, that needs to be 
adequately funded and fully utilized across the whole of 
government in order to help this.
    Other strategic needs, the need for steady long-term access 
to affordable raw materials, counterfeit parts, environmental 
regulations and visibility into the lower levels of the supply 
chain. An NDIA white paper titled ``Maintaining a Viable 
Defense Industrial Base'' lays out the technical challenges and 
policy opportunities for each of these issues.
    Finally, advance manufacturing technologies require a work 
force with core technology, skills, and an updated industrial 
infrastructure that is highly connected and enterprise driven 
for the future of the United States. An effective role for the 
defense industry would be as a first adopter for many of these 
enterprise level, advance manufacturing practices which would 
then transition to the domestic manufacturing base and help 
strategically position the United States in the increasingly 
hypercompetitive global economy.
    Chairman Tierney, I'm honored to have this opportunity to 
provide with you an industry perspective on the critical nature 
of manufacturing and would be available to answer your 
questions.
    [The prepared statement of Mr. Gordon follows:]
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    Mr. Tierney. Thank you, Mr. Gordon.
    Mr. Wessel, your remarks, please.

                  STATEMENT OF MICHAEL WESSEL

    Mr. Wessel. Thank you, Mr. Chairman, Mr. Luetkemeyer, other 
members of the committee, for the invitation to be here this 
morning, and I want to testify on this important topic. First, 
the general disclaimer. I'm here today in my individual 
capacity, and any views I express are my own. But as a 
Commissioner on the U.S.-China Economic and Security Review 
Commission, let me highlight that most of the past several 
years we have issued unanimous reports by the six Democratic 
and six Republican commissioners. Confronting our national and 
economic security does not have to divide us and can unite us 
in terms of moving forward.
    Our national security interests have changed dramatically 
over the years. But while cyberspace and electronic spectrum 
are increasingly important to our national security interests, 
there will still be a need for a U.S. presence around the 
globe. The requirement for actual boots on the ground will not 
disappear. ``Made in the USA'' may be more important than it 
has ever been. The globalization of supply chains and 
decimation of our manufacturing base have already put our 
interests at risk. We no longer produce enough ammunition for 
our troops and law enforcement. Reports are that there is no 
longer a domestic supplier for the propellant used in Hellfire 
missiles. As you noted, Mr. Chairman, we are dramatically 
undermined by Chinese policies regarding the rare earth 
minerals that we need in JDAMs and smart bombs.
    And as you also noted, Mr. Chairman, as we look at how 
other countries approach these issues, you mentioned the 
Switzerland example, but also France refused to grant the U.S. 
overflight rights for the bombing run on Libya. Turkey denied 
U.S. combat troops access to a northern invasion route in the 
run-up to the Iraq war. What would happen on a broader and 
longer term basis if other countries followed their example and 
limited our supply of spare parts, basic components, or full 
weapons systems?
    The risks to our national security run far deeper. The 
first salvos in our next conflict may be lobbed in bits, bytes 
and bots. The electronic spectrum is key to everything we do 
and technology must be part of a secure and reliable supply 
chain. The growing risk that results from too many of our 
countries and our military abandoning the ``Made in America'' 
logo have increased dramatically.
    As the United States has outsourced and offshored its 
production, we are increasing our security risks. We aren't 
just letting the fox guard the hen house. We are inviting the 
fox to the dinner table.
    Several years ago there was a plan to procure Chinese 
produced Lenovo computers for our classified systems. This 
would have been a huge opportunity for their intelligence 
services. Our procurement officials weren't originally even 
cognizant of the original problem. Afterwards promises were 
made to update GSA's procurement regs, but to date I'm unaware 
of any real change in that area. Indeed, one government entity 
that I'm aware of that has to go unnamed recently had to seek a 
specific clause in a contract with a previously cleared 
government contractor to ensure that equipment by the Chinese 
state-owned telecommunications firm Huawei was excluded from 
its systems. Despite ongoing and increasing concerns about 
Huawei's activities, the Chinese technology giant continues to 
supply telecommunications equipment across the country for 
networks that could carry U.S. Government traffic or other 
critical traffic.
    The risk from the globalization of supply chains in the 
technology area are clear.
    Our military and our Nation's critical infrastructure are 
completely dependent on computers and the Internet, and they 
are vulnerable.
    As manufacturing capabilities move offshore, the basic 
skills of our workers are put at risk. The skills of such 
workers are too often taken for granted. And the decimation of 
our manufacturing base has an enormous impact on the strength 
of our economy, which is directly related to our national 
security.
    Let me quickly highlight three areas for action. First, in 
the trade area, we need to update and reform our Nation's trade 
policies to make them results oriented. We cannot afford to 
look the other way when our rights and the commitments that our 
trading partners have made are violated.
    As has been already noted, the failure to deal with China's 
manipulation of its currency is a perfect example of this 
problem. It is a much as a 40 percent subsidy for their exports 
and a 40 percent tax on our goods going there. How can U.S. 
manufacturers compete against those margins, not to mention 
other subsidies and predatory practices?
    The resulting shift in production poses risks to our 
national security, but by failing to address China's currency 
manipulation we are also helping to fund China's massive 
buildup in advanced weaponry and strengthening its leadership.
    In procurement, we should use the leverage of our 
procurement dollars to support the revitalization of our 
manufacturing sector and defense industrial base. ``Buy 
American'' policies are consistent with our international 
commitments and should be aggressively pursued as part of our 
procurement efforts, not only to help revitalize our 
manufacturing and defense industrial base but to advance our 
security interests.
    We also need an assessment of where defense dollars are 
actually going and how the globalization of supply chains may 
threaten our interests.
    We need to do a better job of focusing our tax and economic 
policies on revitalizing our Nation's manufacturing industrial 
base to R&D. We should extend the R&D credit to first stage 
deployment in domestic facilities so that produced with 
taxpayer-subsidized research are actually produced here. As 
well, we need to examine what the migration overseas of 
American R&D and production by some of our companies is doing 
to undermine our manufacturing and defense industrial base here 
and enhancing the capabilities of others.
    Mr. Chairman, thank you for the opportunity to be here this 
morning, and I look forward to your questions and working with 
you and your staffs in the future.
    [The prepared statement of Mr. Wessel follows:]
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    Mr. Tierney. Well, thank you Mr. Wessel. I thank all of our 
panelists for very good testimonies as well as the written 
comments that you supplied earlier. We are going to go to our 
question-and-answer period, 5 minutes per member on that, and 
probably more than one round if you'll bear with us on that.
    The U.S. Business and Industrial Council, a paper that was 
presented with some of the remarks here today, talked about 
import penetration. Mr. Baugh, I think you made mention of that 
report in there. One of the quotes is that high import 
penetration continues to deny the stimulus support of U.S. 
economy of major private sector growth and employment 
opportunities. Better control of the U.S. imports could have 
boosted domestic manufacturing output and overall growth by as 
much as $404.59 billion in 2008 alone in the 114 capital and 
technology intensive manufacturing sectors examined. In 
essence, it's easier to sell into one's own domestic market 
than it is into a foreign market.
    So tell me, Mr. Baugh, if you would, how does one better 
control--get better control over U.S. imports in that 
situation?
    Mr. Baugh. Thank you, Mr. Chairman. I think this was stated 
in terms of a number--it is actually our trade policies and how 
we enforce them, how we deal with these questions. You know, I 
know the author of the paper, Alan Tomlinson from USBIC and I 
can tell you any number of the things he would say. He would 
talk about firsthand you have to address currency manipulation 
as part of this. But actually the trade agreements we have in 
place we don't enforce our trade laws, and we need to do that 
and we need to strengthen them. That's part of a multiple 
approach to this, because it is not just one thing and there is 
no silver bullet to this.
    In terms of China it's more than just currency, they have 
all forms of illegal subsidies, the lack of enforcement of 
standards and laws in their own country, environmental safety 
and health standards and worker rights. So it's a series of 
actions that our trading partners engage in that we shouldn't 
stand for frankly. And these things all act as incentives. It 
is not just the 40 percent on the dollar currency. Instead all 
these other things are incentives for manufacturers from our 
country and other countries to go to China to produce access to 
the American market, short and simple, and we need to stop 
that.
    Mr. Tierney. Thank you. Mr. Faux, this is not just endemic 
to China, and I have heard a lot about China today, because I 
think they are a major source, but there are a number of other 
countries that are involved in the same types of practices, 
whether it is currency manipulation or subsidizing industries, 
failure to enforce their own laws and regulations on 
environmental safety and all that. Are our trade agreements, as 
they are currently structured, adequate for us to address these 
situations and, if not, what must we do?
    Mr. Faux. The trade agreements are not.
    Mr. Tierney. You might have to turn your microphone on.
    Mr. Faux. As a matter of fact, they are misnamed. These 
trade agreements are not particularly aimed at trade so much as 
they are about allowing American corporations, multinationals, 
to invest overseas and bring the products back into the United 
States. We still call them trade agreements, but you know, 
beginning with NAFTA and going through to the entrance of China 
into the WTO, we have consistently negotiated on behalf of 
American investment interests overseas rather than American 
production here. This now is built into our economy. For every 
1 percent increase in incomes in America we have a more than 1 
percent increase in the trade deficit. So we have a ratchet 
effect going on now. And that's--your point about how the 
stimulus demonstrates that. We've poured money not to create 
jobs elsewhere but to create jobs in the United States in the 
midst of a recession. And a good deal of that, I certainly 
hope--not all of it certainly, but a good deal of that just 
leaked out.
    The famous case in Texas with the solar panels where the 
money was supposed to go for green technology, and it turned 
out that 80 percent of the solar panels were coming from China. 
Now nobody designed that. It's now built into the way we run 
our economy, and that's why this is a multi-policy problem.
    Mr. Tierney. Thank you. Mr. Gordon, give us some short-term 
solutions to this.
    Mr. Gordon. Well, the short-term solutions I will go back 
to what you talked about in terms of H.R. 4692----
    Mr. Tierney. Just put your mic up a little bit. There you 
go. Thank you.
    Mr. Gordon. I'll go back to the 4692, National 
Manufacturing Strategy. That essentially will take a good long-
term view on what you can do in the short term for tax policy 
as well as trade, but certainly intervention in markets which 
are distorted.
    I want to say one thing--I heard you whisper--wind 
turbines. Wind turbines were one of the things that also were 
funded, hundreds of millions of dollars, and it went to foreign 
manufacturers of wind turbines that were then brought back into 
the United States. That's just something that did not at all 
meet the purposes of the stimulus funds.
    For the Defense Department there is a program such as the 
Title III program, this is the Defense Production Act Title 
III, and it's not simply for DOD. It is for eight of the 
largest Federal agencies. It is revolving fund authorities that 
would support any number of different national security 
industry capabilities within the United States. This is one of 
the short-term actions that could happen if that was funded and 
actually implemented across all the agencies. Currently there 
is a Defense Production Act committee that was just stood up in 
January of this year, and they are trying to figure out how to 
use these authorities across energy, across Homeland Security 
and in other agencies. To this point there can be loan 
guarantees, production commitments and other authorities that 
are used in order to essentially intervene in those 
capabilities and bring manufacturing back into the United 
States. This directly combats the offshoring because it 
provides to corporate, to board rooms a required demand for the 
foreseeable future, and that takes the uncertainty out of the 
decision since therefore the offshoring equation now is 
unbalanced. And you can bring back to the United States or you 
can preserve manufacturing capabilities in the United States 
through Title III.
    Mr. Tierney. Thank you, thank you very much. Mr. 
Luetkemeyer, you're recognized for 5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. Let me start with 
Mr. Wessel here, we haven't got to him yet.
    You have in your testimony talked about some of the trade 
policies and your comments with regards to how we've gotten 
boxed in. What do you see are some things--currency 
manipulation is one of your key items here. Is there something 
else in there we need to be looking at? What do you see as a 
way we can find a balance here to be able to keep ourselves out 
of hot water with our allies as well as be able to protect 
ourselves? What do you see we need to do?
    Mr. Wessel. First of all, and thank you for the question. 
All of this can be done in compliance with our international 
commitments.
    Mr. Luetkemeyer. You must have some special powers.
    Mr. Wessel. Shedding light on the issue. All of this can be 
done in compliance with our international commitments, so we're 
not talking about WTO legality or anything else. We're talking 
about, No. 1, enforcing our laws better than we are and 
creating confidence among manufacturers so that there's 
actually a future here in America.
    Fifty-eight percent of China's exports come from foreign 
invested enterprises. Those are United States and foreign 
companies that have moved to China in part hoping that they 
will be able to have a market to serve, but for many of them 
it's the products from the United States that are industrial 
tourists that go into their facilities there and come right 
back.
    We've had haphazard implementation and enforcement of our 
trade laws so that our companies don't know where they should 
invest for the future. As you've seen in the papers recently, 
our companies are sitting on over a trillion dollars of cash. 
Now if we were to take a set of policies to create confidence, 
one that if we break the rules there are going to be 
repercussions for that, which is again haphazard.
    No. 2, that we are going to have a set of domestic policies 
that make it clear that whatever your views are and what are 
causing those that there is a business climate here for the 
employers to be able to make the investments, R&D, all the 
various other things we need to do.
    So it is a set of policies and a mindset that quite frankly 
has not existed for a while that needs to tell business, 
government, workers that we're behind you and we're going to be 
doing this for the long term.
    Mr. Luetkemeyer. In your view, if we would start enforcing 
the trade laws, which I've got a company that I'm well aware of 
and working on right now, the individual spent over a million 
dollars of his own money to document a dumping charge against 
China. We can't get enforcement of the law, it's just 
ridiculous. But I mean if we were to start enforcing the law 
and really hammering on it, what in your opinion do you think 
would happen internationally? Are they going to start realizing 
that there's a new guy in town, a new sheriff in town and start 
behaving themselves and respect us for that or are we just 
going to get ourselves in real big trouble?
    Mr. Wessel. Well, despite my party affiliation I think 
probably the President who did the best job on trade over the 
last many administrations was Reagan, who basically said, you 
know, we're going to implement the rules, we're going to be 
tough and we're stand up for American interest. This was at a 
time, as you may recall, when Japan was breaking the rules 
right and left. As a result of that, with the Plaza Accord, 
with VRAs, with what he did in the technology industry with 
Semantec and a number of other things, he basically said we 
need to have a national security defense industrial base here. 
And the result was our trading partners ultimately realized 
that they couldn't get away with this. Japan, for better or 
worse, started moving many of their supply chains here. As you 
know, last year they actually started fielding for the first 
time. Toyota did a team at NASCAR, I mean they have been 
Americanized in a lot of different ways.
    Our trading partners need to understand that we're serious 
about enforcing our rules, we're going to stand by them and we 
are going to stand by our companies and our workers, and it is 
not going to be a question of what do you have to influence the 
political system. If you are being damaged, you're going to get 
recompense.
    Mr. Luetkemeyer. OK. Mr. Faux, you in your testimony have a 
number of solutions here or suggestions of things that we need 
to do. Can you explain a couple of them that you think are 
important or identify what you believe is the most important of 
those solutions that can be most impactful and something we may 
be able to do for the short-term.
    Mr. Faux. The big gap that I see, Congressman, is that 
there is no place in the Federal Government where this kind of 
discussion takes place, at the place where we can make policy. 
We've got these silos of policymaking, and I think after so 
many years of continuous trade deficits, of this problem, as 
Mr. Wessel said, beginning back in the 1980's that President 
Reagan understood, so that we know that the organizational 
structure doesn't work. We need in the Congress--and I think in 
the executive branch--we need a place where this discussion 
gets had and it connects with policy.
    My suggestion is to begin with some Presidential Commission 
on National Security, which includes economic security. We have 
to broaden the definition of national security beyond that of 
the Defense Department.
    Second, I think this needs to be some parallel 
reorganization in Congress. I suggested some select committee. 
You are a better expert on how all of that works than I am, but 
I know that we have these silos here in Congress.
    One of my other suggestions is that the U.S. Trade 
Representative be taken out of the Cabinet. I think what's 
happened in trade policy is that making trade agreements has 
become the measure of success or failure, rather than trade 
policy in the service of U.S. national goals. And I think it 
was a big mistake to elevate the making of trade deals to the 
Cabinet level.
    So I would start with those.
    Mr. Luetkemeyer. Thank you, I will yield back, Mr. 
Chairman.
    Mr. Tierney. Thank you. Mr. Welch, you are recognized for 5 
minutes.
    Mr. Welch. Thank you very much, Mr. Chairman. And I very 
much appreciate the witnesses. Manufacturing obviously is 
important everywhere, related to defense. Important everywhere 
including Vermont. General Electric in Rutland is a big, big 
employer, and people are always anxious to hang onto those 
jobs. They do a great job in green aviation.
    But you know, the thing that is troubling is this: We've 
got a Republican leader here--our ranking member and our 
chairman, Mr. Tierney, and I think they both share the 
objective that we have more manufacturing in this country. And 
there is probably across the aisles--both aisles--a lot of 
support for that in theory, but it doesn't happen.
    And the question I have is what are the dynamics that are 
the impediment to this Congress being able to do something 
that, whether you are in a red state or a blue state, would be 
good for the folks who are struggling to have jobs? And I don't 
think Mr. Faux as much as it would be beneficial to have that 
kind of fight to concentrate attention that's necessary--I 
would agree with that, but my question is what are the dynamics 
that are making it from the perspective of those opposing real 
action that make its rational for them to oppose something that 
I think all of us at this table, Republicans and Democrats, 
think would be in the long-run beneficial for this country?
    Mr. Faux. If I could answer that.
    Mr. Welch. Yes, go ahead. Go down the line.
    Mr. Faux. I think one part of it is the way economic policy 
is nested in a view of economics that doesn't consider what it 
is that we make, and there is a long history of this. It--it, I 
think, started after World War II, and we didn't have to worry 
about what we were making. But today at the highest levels of 
policymaking, whether it's under Republican or a Democratic 
administration, raising this question in a small room without 
the press gets snickers and ridicule.
    Well, you're talking about the government intervening in 
some way. And this is an ahistorical look at our country. From 
the very beginnings, I said before, we had governments that 
were concerned about what we made in this country. And it 
started with Alexander Hamilton's famous report on 
manufacturers. There is a wonderful story about Franklin 
Roosevelt at the end of World War I when he was Secretary of 
the Navy. What he found out was that the British were buying up 
patents for long-distance radio communication. Marconi had 
invented it and they were buying it from the Italians and 
everyone else.
    Many of those patents were in the United States in 
Westinghouse, GE and others. Franklin Roosevelt called it in--
this is the end of the Woodrow Wilson administration--and said 
we're not going to give this technology away. And so he got 
them to organize a corporation. The individual patent holders 
donated their patents and got equity from the corporation. And 
that corporation was charged with developing long-distance 
radio communication. It was called the Radio Corp. of America 
[RCA]. And I am not--I am not a military historian, but people 
I talk to tell me that the war in the Pacific in World War II 
would not have gone the way it did so easily had we not had the 
advantage of long-distance radio communication over the 
Japanese.
    So this is embedded in our history. But for reasons that 
would take me a 2-hour speech about the sociology of economics 
and the influence of the finance industry, which I think is 
part of this, this is seen as something that is obsolete. 
Manufacturing is gone. We have to have a new kind of economy. I 
think we see where that's gotten us, and it's time to go back 
to our roots on this issue.
    Mr. Baugh. Briefly, I think there are a couple of things 
that are very apparent about the conflictual interests. One is 
the multinational corporations and the financial interests 
which say go to the low-cost producer overseas and do that and 
take advantage of all of those things, the seduction of the low 
wages and the lack of standards and the currency manipulation 
in China, etc. And other governments understand this. China has 
a strategy. They're not the only one. So does Germany, so does 
France. I mean, our other competitors actually have a strategy 
to put policies in place to encourage manufacturing and 
employment to occur in their economy. We have done the 
opposite. All of the encouragement has been through our tax 
policy to do this.
    So here in Congress--I sit as a partisan working from the 
labor side saying we need to do these things, but here in 
Congress we end up having this conflict where you find the 
transnational corporations opposing action on these things. You 
find the retail, the large, jumbo retailers, the Wal-Marts of 
the world, opposing doing things around currency manipulation. 
And you find the financial communication saying no. And all of 
this is directed toward short-term return as opposed to long-
term investment dollars, which is one of manufacturing's 
problems. And I mean I think it's part of the source of the 
conflict. It's some of the things that we have to come to grips 
with and address and change the investment patterns back to 
saying that we are investing in this country for the right 
reasons. We can be competitive. We are competitive. But we 
actually want to create jobs income and employment in this 
country and be the technological leader.
    Mr. Tierney. Thank you, Mr. Welsh. Mr. Foster.
    Mr. Foster. Thank you, Mr. Chairman. I'd like to ask the 
whole panel, what you think the large sources of leverage that 
we have to deal with the currency manipulation problem are? And 
the relative merits of unilateral versus multilateral 
approaches to this. Because obviously currency manipulation is 
hurting the Europeans and many advanced countries.
    And there is also a fairly well-documented dragging effect 
where the other low-cost Asian and south Asian currencies tend 
to follow the big dog in this, which is the Chinese. So that 
fixing the Chinese problem will also cause the other currencies 
to move as well.
    I just wonder what you think the effective leverage that we 
have to try to apply to this problem are and I will go down the 
line.
    Mr. Faux. Well, I think what we have left is still the 
largest consumer market in the world. I don't know how long 
that piece of leverage is going to last. The Chinese eventually 
are going to buildup their own source of demand and that's--
that's clearly their long-term plan.
    So I'm not sure that we have leverage left under WTO and I 
would defer to Mike Wessel on this. But it seems to me that the 
efforts at persuasion, the effort at telling the Chinese--which 
is often what we do when we go there--that it is better for 
them if they would let their--let their currency get back to 
more realistic levels, that has not worked.
    So we need a 2-by-4 here. At least a 2-by-4 behind our 
back. And the only 2-by-4 that I know that we have left is the 
U.S. market. So in some way we have to ratchet up our 
determination to make it too costly for the Chinese to continue 
this kind of currency manipulation.
    Mr. Baugh. Thank you Congressman Foster for the question. I 
think there are a couple of things here and I think testimony 
brought it out in the Ways and Means Committee the other day. I 
think you actually have to operate off of your own piece of 
paper in negotiating, as Leo Gerard, the President of the 
Steelworkers said. You actually have to have a strategy and a 
plan and as Teddy Roosevelt said, ``the ability to speak softly 
and carry a big stick.''
    We aren't doing that. We are just talking with no stick and 
no threat of action and no actions having been taken that give 
veracity to what you are trying to do at the negotiating table. 
What we do need is leadership in a number of ways that give you 
that. Dr. Faux is absolutely right. The market is the No. 1 
thing and that is what everybody wants in this country. That is 
why other people want to come here and do business here and 
that is why they want to import to the United States.
    So that is the one thing that we do have. But what do we do 
about defending it and carrying our case forward? Action by 
Congress to pass legislation sends a strong message and 
provides some tools that we obviously need since the Commerce 
Department says they can't find specificity and charges of 
currency manipulation of specific products. Well, let's fix it. 
We have a law to do that.
    Congress and congressional action sends a message to the 
people who are violating and it is other countries. It's not 
just China, they are the poster child, but there is a whole 
series of countries as I noted in my testimony that are doing 
this.
    The second thing is take multilateral action. Absolutely. 
Engage with our partners and trading partners out there that 
are just as troubled. Intervention by the Japanese last week 
was a very, very serious move. They are troubled. So we should 
take multilateral action. We should take the unilateral action 
of passing legislation. We should engage in trade cases. We 
should consider the 301 case. It is not one tool or the other; 
it's all of the above that sets you straight on a path in 
negotiations so that when you sit down and talk to the other 
side, they are going to take you seriously.
    We have learned the Chinese will talk us to death. That is 
the role their government plays in this. And until they take us 
seriously, they keep talking to us till the sun sets.
    Mr. Gordon. I agree, especially with the multilateral. When 
you have that type of coordination and a coordinated response, 
it is much more powerful.
    I would also say that the Congress has a platform and one 
of the ways of using that platform in order to deny or change 
access to a very, very large market is to really make the case 
to American citizens that when you buy from China, with the 
currency manipulation, what is the harm that you are doing to 
this country? And that perception is a strong perception that 
can sway markets more than a unilateral action or more than a 
trade agreement.
    Mr. Wessel. Quickly, and there is staff here from the China 
Commission, so I will ask them to validate my figures 
afterwards. We have leverage as Jeff and others have pointed 
out. If I remember correctly, 22 percent of China's exports 
come to the United States and 4 percent of our exports go 
there. We have leverage.
    The Chinese leadership cannot afford what might come from 
trade conflict. There were 80,000 incidents of public unrest in 
China the year before last, the last time it was publicly 
noticed. That is incidents where there are 10 or more people 
who are coming together to raise concerns. The Chinese 
leadership needs this market. And the answer is, while they 
will huff and puff and do everything else, if we are serious, 
we can put them on a path to eventual market based currency. It 
is not going to happen overnight. I don't think anyone is 
asking for that. The question is how do we put them to a 
sustained course toward a market-based currency, with 
confidence that it is going to change quickly enough.
    I am all for doing it multilaterally, but I'm not sure we 
have a lot of time left. When we talk about what is happening 
to our manufacturing base, the confidence of our businesspeople 
in terms of investments, if we take the full 3 years that it 
could take to go through a WTO action, I don't know what is 
going to be left at that point.
    Mr. Foster. Thank you, I yield back.
    Mr. Tierney. Thank you. Interesting enough, Mr. Baugh, you 
were talking about in your testimony about innovation being 
offshored, subsidies, money manipulation and things of that 
nature and you talk about Intel. I think you said that Intel 
had gotten some R&D investment and actually had taken it 
offshore; is that accurate? So it reminded me of not too many 
weeks ago Andy Grove, who was, what, one of the co-founders of 
Intel, wrote an article in New Yorker or New York Magazine or 
something of that basis where he basically called for a tariff. 
He basically said that we should take any product that is the 
result of cheap labor overseas and gets dumped on to our market 
at a disadvantage to our companies, assess a fee or levy on it, 
take the money from that levy and deposit it in banks, but only 
those banks that agree to lend to only those businesses that 
agree to scale up in this country, their research, development, 
and manufacturing.
    So I'd be curious to know what the reaction of each of the 
panelists is to that, starting with Mr. Faux.
    Mr. Faux. I think, as Mike said, we are running out of 
time. If it was 10, 15 years ago, we might have answered that 
question with--in a more deliberate way. But I think when Grove 
and Warren Buffett and other people have come to point--and 
these are, nobody can doubt their free market capitalist 
credentials--when it has come to the point where they think 
that in order for this country to save its economic future, we 
have to raise barriers if other countries don't play on an 
equal playing field, I think that's a signal that the Members 
of Congress and in government need to pay attention to.
    The interesting thing is that someone like Buffett who is a 
financier and, of course, has made a lot of money on the 
current condition, understands what this is doing to our basic 
economic future. And the movement away from this country is 
going on daily. A few years ago, the President of Cisco 
Systems, CEO of Cisco Systems said that what we are trying to 
do is outline an entire strategy of becoming a Chinese company. 
Now that was several years ago. I don't know how far along he 
is on that plan, but I'm sure he is more far along than he was 
then. So time, as Mike said, is not our friend. And something 
like the Andy Grove or the Warren Buffett proposal, I think, 
needs to be serviced right now and supported. And maybe then 
that will get the Chinese attention.
    Mr. Tierney. Mr. Baugh.
    Mr. Baugh. I think it is a good idea. I think we should 
consider things like this. The whole point is to punish the 
behavior of countries taking illegal practices. This form of 
punishment is a tariff and the money that then is plowed back 
into this economy to create good jobs and technology and secure 
our leadership. That is the fundamental thing, whether it is 
this proposal or another, that is what needs to be done. We 
need to be serious about it and we need to think of scale. I 
wish we were hearing more from current executives, the retired 
executives. Unfortunately, I think the dynamic of the financial 
markets and the incentives are all the other way. And that is 
the kind of change we have to come to in the course we have 
been on. We have to find another path that changes that 
behavior, that changes that pattern, that changes those 
incentives for our economy, not someone else's.
    Mr. Gordon. I'd agree with conforming tariffs, especially 
as it brings the capital and productivity back to the United 
States. It is a natural consequence when you take manufacturing 
facilities and you offshore them that the next step a year or 
two later is to put product development facilities right to it 
so they can understand the manufacturing. And so the next step 
after that is that R&D facilities are now moving out of the 
United States and overseas in order to be lined up in this area 
and we need to stop that.
    The chart that Representative Foster put in earlier showed 
a huge turn right around the 2000 timeframe. And there is no 
secret that is the time period which one sector in 
manufacturing products, which is advanced technology products, 
all of a sudden started to look at a deficit in our trade--in 
our trade balance. Before that advanced technology was not a 
trade deficit, and since then it has gone down.
    And so what we see is we see all the of our seed corn in 
terms of R&D going offshore. So if that tariff was to bring 
that back and put capital and productivity enhancements into 
manufacturing in the United States, that would be successful.
    Mr. Tierney. If my colleagues will indulge me, I will ask 
Mr. Wessel for his opinion as well.
    Mr. Wessel. I think it is a great idea. I think that as the 
House earlier this year looked at having border adjustment 
mechanisms regarding climate change, that the right or the 
privilege of selling into the U.S. market and accessing our 
consumer bears with it certain responsibilities. Whether it is 
to address the questions of labor issues, labor rights, labor 
arbitrage, whether it is a question of bespoiling the 
environment, etc. Our public wants to be able to maintain their 
standard of living and their quality of life and they don't 
want it denigrated by a race to the bottom. So any mechanisms 
that can be put in place, serious mechanisms that will have a 
real impact, I think they are worth pursuing.
    Mr. Tierney. Thank you very much. Thank you for the 
indulgence, Mr. Luetkemeyer.
    Mr. Luetkemeyer. Absolutely, Mr. Chairman. Good questions. 
I don't have a specific question for anybody right now. I just 
want to ask a question, and anybody can jump in with regards 
to--to me, one of the things in my opening statement, I made a 
comment that sensitive equipment should be made either in the 
United States or in collaboration with our closest allies. I 
think we have a huge problem. We have sensitive equipment and 
we can't control the parts that make up that piece of 
equipment--someone made the comment, I don't know if it was in 
testimony, that 97 percent of the rare earth minerals are in 
China. I mean, this is a huge problem for us.
    To me, at some point, we need to have some sort of 
legislation or rules or some sort of agency that is able to not 
necessarily waive the rules, but be able to allow the rules to 
be put in place to be able to produce or mine these minerals in 
our country here in a way that is economically viable as well 
as environmentally safe. I can't believe that we can't do that 
in this country. At some point we ought to be able to have 
policy.
    What do you all think of something like that? And where do 
we need to start on that?
    Mr. Wessell. If I can, let me--first of all, I think your 
point is right on. And I think this committee, this 
subcommittee, the jurisdiction will allow you to really look 
deeply into these supply chains. At the China Commission, we 
commissioned a report to look at what was happening with the 
defense industrial base and how it was dispersing. We had a 
classified contractor that was in charge of the study. They 
were unable beyond the tier 2 suppliers--and if tier 1 is 
Boeing, tier 2 may be a major system within there--beyond tier 
2, they had no ability to get information on where things were.
    So as the chairman noted about his amendments in the past, 
whether it was with Mr. Hunter or others, we have to do a full 
assessment of what is happening with our supply chains. That is 
No. 1.
    If you look at, for example, high-tech, we have one trusted 
foundry left in the United States to be able to deal with--I 
think somebody raised EMP chips, radiation-hardened chips, etc. 
So we need to do a much better job of understanding the risks 
and then addressing them. And we're not--information is the 
first thing I think we need to look at.
    Mr. Luetkemeyer. Anyone else want to tackle that? Mr. 
Baugh.
    Mr. Baugh. I would just note that there is a bill in the 
House currently--and I apologize I don't have the number, it 
doesn't come off the top of my head--but it was a bipartisan 
bill that actually looks at rare earth metals. And it says we 
actually need to understand where this is. We need to develop a 
strategic supply. In a period of time, we need to redevelop 
this industry in this country on that specific piece, but I 
agree very broadly with what Mr. Wessel said that we need an 
assessment of this base. We have been in the conversations. We 
do not know what is going on below tier 2.
    And Mr. Chairman, you made reference to some of the 
scandals where people found defective parts and defective 
materials. What happened here? Well, we do not pay attention. 
And frankly, this is the nature of what has happened in 
manufacturing where the people who used to make things as the 
prime contractors--when I was a kid, I went to the Ford Rouge 
plant in Detroit. You walked in those gates and they made 
everything there that went into a car. By the time I worked in 
the plant, we only made some of the things. By this century, 
things were outsourced and then they were offshored. And this 
has happened across industries where the prime developers, it's 
been passed on to subcontractor to subcontractor to 
subcontractor. And we have been living on a legacy of the way 
we used to make things as opposed to the way we do make things. 
And we need to get a better handle on that.
    Mr. Luetkemeyer. My time is running, Mr. Faux. One more 
question. Mr. Baugh you brought up the question here and 
continue to develop the idea and the topic here of our 
industry, our manufacturing base is leaving. What in your 
judgments is the things that we need to do? I know that there 
is one of when we talked about tax rates, level policies, and 
environmental regulations are a problem right now. What do you 
see, what are your suggestions on how we need to get our 
manufacturing base to this country?
    Mr. Baugh. I think we need to do things on the trade front 
immediately to change that pattern of behavior and understand 
that we are going to enforce those laws. And again, secure sort 
of the investments of the businesses into this country by 
having some surety of how we're going to do that.
    The second thing is to change the tax policies to direct 
investment into domestic manufacturing in a way that we are not 
doing. We have tax deferrals that allow corporations to hold 
these profits offshore. They are not invested in the U.S. 
economy. The last time people were allowed to bring them back 
and not pay much tax on it, they didn't invest here to create 
jobs. So we need to change that behavior.
    We need to do what Secretary LaHood did. I commend him, he 
and Ron Bloom, our manufacturing person in this administration, 
they pulled together the high-speed rail industry or the rail 
industry and they said to them: ``We are going to build high-
speed rail in this country. We want to make sure we make it 
here. We're not going to grant waivers.'' We have to bring the 
industry together to think about industry developing the ways 
that we move forward on things like that.
    So that is a form of leadership within government that we 
have suggested that fits with what Dr. Faux has talked about, 
what everybody has talked about, in the way of bringing focus 
toward the incentives in the investment policies and bringing 
industry together and say this is the way we're going to start 
doing business here and thinking and acting in a way like a 
business as a government.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    Mr. Tierney. Thank you, sir. Mr. Welch, you are recognized 
for 5 minutes.
    Mr. Welch. Thank you very much. I want to go back to this 
question of how we can make some progress. In listening to your 
testimony, it seems as though in a very broad sense economic 
policies have favored the increase in the gross domestic 
product as opposed to the reduction of unemployment, and that 
finance has triumphed over manufacturing. And the dilemma that 
we have here in Congress is that it doesn't seem that even when 
we agree on the long-term objective, we can't seem to agree on 
doing it together. So there is a political impediment to doing 
things that are in our interest to do.
    So the question I have for a quick round of suggestions 
from each of you would be give two ideas that you believe 
potentially could have the support of Mr. Tierney and Mr. 
Luetkemeyer, who both share the objective of increasing 
manufacturing employment. And I will start with you, Mr. 
Wessel.
    Mr. Wessell. I will give you the first one which I noted in 
my testimony is make the R&D credit. Research, development, and 
deployment credit. We all want research here. We all want 
innovation to occur here.
    We should also be moving to the next stage to make sure 
that research is being applied in our own factories, again, 
within the boundaries of international commitments, etc., and I 
believe it can be done in a WTO legal way.
    Another thing that I think we need to do----
    Mr. Welch. I want to get two suggestions from everyone.
    Mr. Wessel. The other one is to address asymmetry in our 
law that's a problem. It was mentioned, the wind farm earlier 
today. The problem with the Texas wind farm is that we allowed 
uncapped money to go out and build wind farms, but we capped 
the money to help develop the domestic supply chain. So you had 
all of these financial people going out here wanting to build a 
wind farm, but not enough domestic supply and the result was 
they went out and made orders for Chinese goods.
    The President last December said let's increase 48(c), 
which was the domestic support and said $5 billion. We are 
still waiting for that. That is the kind of thing that we can 
do immediately to start revitalizing the supply chain.
    Mr. Welch. Mr. Gordon.
    Mr. Gordon. I would tell you, overall, one of the things 
you want to do is have that R&D investment come back and that 
directly deals with the false perception that you can't be 
competitive while manufacturing in the United States. That is 
just false. One of the ways to do that, or one of the ways to 
build on it for national security is to combine different 
functions within the defense industrial base assessments. Right 
now within the DOD there is the industrial policy division 
which finds out where defense essential production is needed 
and then somewhere else where they implement things, such as 
Title III for capital investment or ManTech for substitutes. We 
need to combine those things together into one implementation 
as well as identification of those capabilities.
    Mr. Welch. Thank you. Mr. Baugh.
    Mr. Baugh. No surprise here. I think this Congress should 
pass currency legislation. A bipartisan bill, the Ryan-Murphy 
bill, that has 140 or more cosponsors, a lot of Republicans and 
Democrats together on this. It is simple. We should do it. That 
is No. 1.
    And I agree completely with this issue of asymmetry of 
policies in research and development. This is the holy grail of 
the business community. R&D tax credits, not that you have to 
come back here and renew it every year. They want it made 
permanent and the President has said that. I would say 25 years 
ago you could assume that money for commercialization--R&D and 
commercialization would be done in this economy. We would make 
it here. That it is a false assumption today.
    You need to think like a State economic development agency, 
like I did when I used to run one. What is the return on the 
investment? Will that R&D investment create jobs in our 
domestic economy with making the things we invested in the R&D 
for? That is something that we should do and something frankly 
that every other country does with their industrial policies. I 
met with the Japanese MITI folks a month ago and they told me 
this. And they laughed when they said we don't.
    Mr. Welch. Thank you. Dr. Faux.
    Mr. Faux. Quickly, I think the research and deployment 
issue is one of the two more important. The other is currency. 
The currency manipulation in trade. I think that we ought to 
insist and have a time line. I think the Congress ought to come 
up with a time line that will get people's attention for 
reducing the trade deficit dramatically with China. If we can 
do that, perhaps again we could get some serious discussion at 
the table.
    Mr. Welch. Thank you, thank you very much. I yield back.
    Mr. Tierney. The gentleman yields back. Mr. Murphy you for 
recognized for 5 minutes.
    Mr. Murphy. Thank you, Mr. Chairman. And gentlemen, I'm 
sorry I'm joining the hearing late today. This is as important 
an issue as this Congress is going to talk about and it hits 
home for each and every one of us.
    I am going to maybe pose an initial question to Mr. Wessel 
by means of an example. I have a company in my district in 
Connecticut by the name of Ansonia Copper and Brass. It is the 
last domestic company that makes copper nickel tubing for the 
defense industry. It is found on submarines but also in our 
entire ship fleet. They have one international competitor. And 
right now, that company in Waterbury, Connecticut, is at risk 
of losing its remaining contracts with the U.S. Government, 
making a foreign supplier the only supplier of a critical 
element of our shipbuilding process to the U.S. Navy.
    And I guess this gets to a few issues, and I present them 
to Mr. Wessel. I'm concerned about one major component of our 
U.S. ship fleet being unavailable from U.S. suppliers. 
Currently this company is a German company based in Italy and 
so we could, I guess, have some relative sense of security that 
we're hopefully not going to war with Germany or Italy any time 
soon. But we do not know too much about their supply chain and 
where it comes from. We know that Ansonia Copper and Brass's 
supply chain was largely a domestic supply chain. We know that 
the supply chain of their foreign competitor is largely a 
foreign supply chain.
    I am happy to pose this question to the entire panel. I 
imagine although this is one specific industry in which we 
could potentially lose total domestic capability, I imagine 
that there are others. I imagine that there are other major and 
important parts and major and important industries that may be 
nonexistent or risk being nonexistent here in the United States 
because of our overreliance on foreign contracts.
    And so I merely pose that question first to you, Mr. Wessel 
and to others: Are there elements of our manufacturing base 
right now that we are in special jeopardy of losing? Are there 
areas of focus that this Congress should have in terms of 
making sure that we preserve manufacturing bases critical to 
the defense supply chain that may vanish in the next 5 to 10 
years, or may have already vanished with respect to this 
specific technology? It could be gone within a year or two. And 
something that is not easy to create with respect to this 
specific type of tubing.
    Mr. Wessel. Well, the answer is I agree completely that we 
need to have domestic sourcing on anything that is a critical 
system where there is not, you know, a multitude of suppliers 
that we can ensure that our defense needs are met. There is a 
large list of items--I mentioned in my testimony, for example, 
the propellant used for the hellfire missile. That is a missile 
launched from helicopters used as antitank. If there is a 
Taiwan scenario for example, that may be a missile that people 
might want to use, that the military might want to use again 
landing craft as well and we're going to be going to China to 
get the propellant. I think that is a greater problem than 
Italy; however, as I also noted with France denying overfly 
rights, with Switzerland as the chairman noted refusing to 
provide products for JDAMs, the fact is we can't be secure on 
anything unless we know that we are going to have a supply base 
here to be able to produce it.
    Titanium rivets for airplanes was an issue 2 years ago 
under the Berry amendment. My view is that your manufacturing 
company should be getting the support of our own military and 
our own government to make sure that we have a secure, quality 
supplier that is going to have the ability to produce those 
goods for the future. It is vital to our national security.
    Mr. Murphy. And then let me ask a followup--and happy to 
take comments from the rest of the panel--what about that 
supply chain? Given the rapid escalation of parts and contracts 
being outsourced, we saw just from 2007 to 2008 in this country 
a 450 percent increase in the number of waivers given to the 
Buy American clause. That is an almost unexplainable increase 
in the number of waivers to our existing law. How do we better 
track the supply chain when it starts maybe in a country that 
they are not as worried about like Germany, but can then go 
into countries that we are much less confident about a long-
term alliance with? How do we address that supply chain issue?
    Mr. Wessel. I think it has to be addressed quite frankly by 
this committee and this Congress. You have to make a question 
of supply chain integrity, globalization of supply chains a 
priority. Right after the cold war, the military moved off of 
Mil Spec procurement to what was called COTS, commercial-off-
the-shelf. So they are just looking to find the cheapest way, 
cheapest price they can do to obtain any good.
    We have to look at our supply chains and understand what is 
critical. We have what is called the MTCL, the military 
critical technology list, MCTL. It doesn't go deep enough. It 
is not being enforced aggressively enough. To Mr. Luetkemeyer's 
question regarding rare earth minerals, CFIUS approved, in 
1996, the sale of the last rare earths company here that was 
making the rare earth magnets, etc. They made a promise that 
they would continue to produce here. Three or 4 years later 
they moved all the production equipment to China. There was no 
after action review. So this is a holistic issue and we have to 
take national security a lot more seriously than we have been.
    Mr. Murphy. Thank you, Mr. Chairman.
    Mr. Tierney. Thank you. Would one of you volunteer to 
explain the concept of offsets in the context of manufacturing 
and trade?
    Mr. Baugh. I will take a shot at it. Actually I had 
recommended that this committee at some time should talk with 
one of my colleagues, Owen Hernstadt, from the International 
Association of Machinists, who has written extensively and 
testified on this.
    Mr. Tierney. He testified years ago in front of a 
subcommittee hearing as well.
    Mr. Baugh. He has testified in other committees as well and 
he has written again on it recently. And he is who I look to 
for advice and guidance on this. Very simply--and I may not get 
this completely correct--but the idea of offsets, when we do 
defense contracting and sales to other countries, one of the 
questions is about where are parts going to be secured, where 
are these things going to be maintained, how much money is in 
that contract. And, in fact, we're ending up spending more 
money--or getting more money being spent in the people that are 
buying it in terms of the offsets than we are in our own 
country producing these things.
    What this does is two things: one, it builds up their 
capacity and capability around the production for those goods. 
And capacity and capability to produce for that all the sudden 
become a producer as an ally of ours that qualifies under the 
Buy America rules. It comes back to haunt us and bite us in a 
number of ways. So I don't want to go any further because there 
is a good chance I'll get it wrong, Mr. Chairman.
    Mr. Tierney. No, the point I want to point out is that we 
do have agreements where people get a contract and the result 
of that is we end up obligated to send them technology and then 
to buy parts and equipment. It makes them compete, sometimes 
not even fairly, against our own operations on that. And that 
is an issue that we have addressed in past committee hearings, 
and we will have to address it again.
    One of the things we haven't talked much about is the 
manufacturing work force and the fact that we don't seem to 
have enough college graduates and others pursuing science, 
technology, engineering, and math. And that is going to take a 
while to get that turned around. I guess my question is what do 
we do in the short-term about this shortage of skilled 
personnel in the advanced manufacturing field? And what kind of 
incentives can we give to manufacturers to manufacture here in 
the face of that apparent shortage?
    Mr. Baugh. Mr. Chairman, I believe there are a number of 
things we can do. We actually have to put more funding in the 
training and education, both employed and unemployed. And I 
think in your opening statement, you noted a phenomenon that is 
coming up here very, very quickly. It is what we call the 
Silver Tsunami. That is the fact that I am a Boomer like many 
people around here and we are out of the work force very, very 
soon. That is a real challenge. At the same time we have 
denigrated manufacturing in a such a way that it is not 
attractive to young people to go in. And frankly, there haven't 
been jobs here and we have lost millions in the last couple of 
months in manufacturing.
    So we have to get around those impediments. Investments in 
that and our training and technical education system are part 
of that puzzle. There is another part too. That really has to 
make sure that we have employers adequately invested in the 
training and education of their work force too. It is not an 
either-or that they are just doing it or that the educational 
system is just responsible for it, but it is what both of them 
are doing together at the same time.
    Mr. Tierney. We are in the process of reauthorizing the 
Workforce Investment Act, and this is a major part of this. How 
do we get that cooperative efforts between labor, industry, 
academia, technical schools, and things of that nature to get 
this turned around?
    One of the issues that we have, not just here but also in 
energy technology and other areas, is getting the industries to 
spend the time and the effort and delegate the personnel to 
identify the standard of quality that they need out of our 
workers. What are the standards? What do they need to know to 
come in at a base level into your corporation so that you can 
then take them there and apply that to whatever it is you do, 
and determine who is it going to write the curriculum. And 
where? Is it going to be a technical school? Is it going to be 
at a community college or a 4-year college? Is it going to be 
some private vendor on that and get that working on that gear?
    So if any of you have any comments or improvements you 
think we can have as we reflect on that, I'd like to hear it. 
If not now, I will certainly accept it in writing later. Mr. 
Gordon, I know you wanted to say something.
    Mr. Gordon. I wanted to bring up one thing just in terms of 
the first question, how are we going to get in there and 
whether people are interested in it. There was a 
PricewaterhouseCooper survey on manufacturing about 6 months 
ago, and while in the high 70's and 80's everybody agreed that 
manufacturing was important, it had good jobs, and it was great 
for national security, only 30 percent of those same people 
said they would recommend that somebody in their family go into 
manufacturing. That is the problem. They believe there is no 
future in it, or that it is one of the three Ds: It is dull, 
dirty or dangerous.
    If people understood in this country that it is a very, 
very clean, safe, enjoyable career, you would have more people 
going into it and more families pushing them into it. And I 
think that an advertising campaign much like the U.S. Army or 
the Navy, you know ``Soldier of One,'' ``High Tech,'' that is 
the kind of thing that would get people involved in it and say 
I am going to be involved in being a part of building this 
Nation.
    Mr. Tierney. Mr. Luetkemeyer, any further questions? Mr. 
Murphy.
    Mr. Murphy. Mr. Chairman, on the work force issue I would 
note that I was visiting another company in my district, a 
District that has 9, 10 percent unemployment, an advanced 
manufacturing aerospace company who has had a help wanted sign 
out for months now because they can't find the type of tooling 
expertise that they need. Even though we have an enormous 
amount of our manufacturing work force base out of work, we 
don't have the high-skilled type of workers that they need.
    Just one remaining question, and let me pose it to you Mr. 
Faux, but also to Mr. Baugh as well. It is this: How do we 
assess the true price of a particular contract when we are 
looking at a domestic supplier and a foreign supplier? Right 
now, the price is simply the contract price. That we will buy 
it overseas if it is a certain percentage cheaper than the 
contract that is offered to us by a domestic supplier.
    And though that certainly is an accurate assessment for a 
private company who is only responsible for paying the bill 
that they get sent, the U.S. Government, I think, has a 
different calculation because that contract being awarded 
overseas, and by extrapolation, a job being lost in a U.S. 
manufacturing plant and then gained in a foreign manufacturing 
plant, has other costs to the U.S. Government. At the top of 
the list, obviously, lost payroll taxes, the lost income taxes, 
and then the increased social safety net costs of unemployment 
compensation and the like.
    So I guess it is a loaded question to an extent, but the 
question is right now we seem to simply award, based on 
contract cost with no holistic understanding of the full cost 
of moving that contract overseas. How do we get--if we should 
make a change, and maybe I'm prejudging your response--but 
should we make a change? And if we should, how do we make that 
change given the fact that we have the Department of Defense 
making those decisions?
    Mr. Faux. Clearly, we need to make that change because that 
is basically at the heart of what we have been talking about 
all morning. The social costs. Not simply the employment costs 
and the costs of government programs, but the long-term costs 
to the economic health of the United States are not included in 
that contract, even though the United States is the contractor. 
And the problem is no one is responsible for that. And for 
those in the government who care, and there are people who 
care, they have no access to the levels of power that would 
change that calculation.
    So the short answer is we don't have the calculation. We 
know that there are huge costs out there and huge benefits and 
historically, as I said before you came, there is plenty of 
history here. But we need to elevate that question to the 
highest levels of this government and public discussion. 
Because leaving it--we have found that leaving it to the 
Department of Defense, leaving it to the Treasury Department, 
leaving it to the CBO, who are not mandated to make that 
calculation simply puts us back into this simple, narrow and 
destructive obsessed-with-price issue.
    Mr. Murphy. And historically we have done that by some 
fairly inartful requirements: 50 percent content from the 
United States with certain percentages of waivers, a percentage 
above cost that--above the contract offered in the United 
States that gets you out of that Buy American clause. Is there 
a different way to force a calculation of the true cost to the 
U.S. economy? Is there a way to, for instance, add on a 
percentage increase to a foreign contract that accounts for all 
of those lost taxes and increased government costs to that job 
moving overseas? Is there just a different way of calculating 
the cost that we are not looking at today?
    Mr. Faux. Yes, there is a different way, and the history of 
the literature on tariff economics is full of formula and 
theoretical discussions on that. But I think our history shows 
that the most important thing was a change in the consciousness 
of the people writing those contracts. And an understanding 
that there is this larger national interest floating on top of 
that--of that contract. And historically we have been 
successful when, from at the very top of Congress and the 
executive branch, that message has gotten to the civil service 
and the people making those contracts. So it is not just how do 
I figure this out; it is my job to figure this out. And if 
that's their job, the formula will come.
    Mr. Murphy. Thank you.
    Mr. Tierney. Thank you very much. I have one last question. 
We talked about the rare earth minerals and metals in China 
having 97 percent of that market. There is a possibility or 
likelihood that the United States could get some of that market 
back, and do we have the wherewithal to do it? And what 
timeframe are we talking about getting to that if we were to 
start today? Mr. Wessel.
    Mr. Wessell. Well, first of all, as you may know, 2 weeks 
ago the steelworkers filed a trade case regarding the 
alternative and renewable energy sector. One of the five areas 
of action within that is to address China's actions and 
policies in the rare earth minerals area, which are clearly a 
WTO violation. So No. 1 is to open up the markets that will be 
able to get it.
    No. 2, there are efforts to reopen mines here in the United 
States. There is a mine that is presently under discussion for 
California, as I recall, right near the Nevada border. There 
has not--because of the uncertainty in the market for so long, 
it has not been worthwhile to do it. Now that China is 
withholding so much, it is becoming economical to do it here 
again.
    But, as I believe Mr. Luetkemeyer has said, it is going to 
take 15 years not only to get the mine back and operating but 
also to be able to transform those items into products that we 
can use in the clean and green chain, JDAMs, and everything 
else. So we can take action but the first thing is we have to 
get China to change its policies.
    Mr. Tierney. Thank you. If there is anybody on the panel 
that believes we haven't addressed a matter that needs 
attention, I would like to give you one opportunity to state 
that for us. Otherwise, we will wrap it up. Mr. Faux.
    Mr. Faux. Just a quick footnote on the training question. 
One of the problems here is credibility. For the last 20 years, 
the government and other leaders have been telling young people 
that get into computers, get into this sort of technology, get 
into that. And it turns out that in many of these areas, the 
supply of workers is much greater than demand. So there is a 
confidence issue both in the labor market--that is to make it 
clear to people that there is government policy to create those 
jobs and to create that dynamic sector, both for the labor 
market and for the financial markets to get the investment.
    Mr. Tierney. Anything else? Mr. Gordon.
    Mr. Gordon. I'd like to add one other comment on 
Representative Murphy's interests in how you add costs or take 
into account offshoring. Right now in Federal procurement 
policy you have a source election criteria and that source 
selection criteria doesn't allow you to understand or take into 
account what happens to domestic manufacturing capabilities. 
That means that a program manager that is making those 
decisions is not allowed--even if he understands those 
consequences, is not allowed to make a decision for a domestic 
versus an offshore supplier and that is a barrier to making 
that right decision.
    The Aerospace Industries Association has an industrial base 
report that it put out that said we should add what happens to 
the industrial capabilities on the domestic front as a source 
selection criteria when its defense essential needs. And that 
would take care of that.
    Mr. Baugh. I would also add the same point. We have 
suggested over and over that we really do have sort of a social 
impact cost on those things about the employment side, the 
income side, which you have been getting to with your question, 
Mr. Murphy. And frankly, I would note that the industrial 
policies of most of our competitors, whether they are communist 
or whether they are democratic societies, they actually do have 
strategies for manufacturing, and it is based upon the desire 
to have employment and income and technology in their society 
and to be making those things. We're the only ones that really 
don't.
    So it is just about twisting us all into a pretzel to find 
a cost accounting mechanism to get to it, it is also about the 
broader overview of how we think about manufacturing. It is not 
just the consumer interest. There is a vast society interest 
and an employment and income interest.
    Mr. Wessel. Many years ago there was a bill called the Save 
American Jobs Act which looked at the offshoring or outsourcing 
of production, and basically said we are going to look at the 
cost that you are leaving behind. So if a company is going to 
look at moving its operations or sourcing offshore, the public 
has a right to know what costs are being left behind. Whether 
it is diminution of the tax base or unemployment benefits, 
welfare, or anything else. And there is a way of doing that, to 
look almost at a severance tax, if you will, if you are going 
to pick up and leave. Which can be done in the defense area as 
well.
    So when the internal rate of return is looked at by a 
company as to what their return is when they move operations, 
they will have to factor in the cost of those people that they 
leave behind. And that is something I suggest be looked at that 
hasn't been brought up in many years.
    Mr. Tierney. I thank all of our witnesses again for your 
testimony. It has been extremely helpful to us and I hope this 
is not the last hearing that we have on this issue. And we 
would like to give a little bit of impetus to our colleagues in 
other committees to get moving on this, as well as the White 
House. And I thank my colleagues and staff as well. Meeting 
adjourned.
    [Whereupon, at 11:55 a.m., the subcommittee was adjourned.]