[Senate Hearing 113-262]
[From the U.S. Government Publishing Office]







                                                        S. Hrg. 113-262


                   REBUILDING AMERICAN MANUFACTURING

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

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                            ECONOMIC POLICY

                                 of the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                                   ON

   EXAMINING THE ROLE THAT U.S. MANUFACTURING PLAYS IN THE ECONOMY, 
ECONOMIC GROWTH, AND EMPLOYMENT; ALSO HOW ``INDUSTRIAL COMMONS'', SUCH 
  AS CLUSTERS, SUPPLY CHAINS, AND PUBLIC-PRIVATE PARTNERSHIPS, AFFECT 
                           U.S. MANUFACTURING

                               __________

                           DECEMBER 11, 2013

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs





[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]




                 Available at: http: //www.fdsys.gov /

                                   ______

                         U.S. GOVERNMENT PRINTING OFFICE 

87-798 PDF                     WASHINGTON : 2014 
-----------------------------------------------------------------------
  For sale by the Superintendent of Documents, U.S. Government Printing 
  Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; 
         DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, 
                          Washington, DC 20402-0001










            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon                 MARK KIRK, Illinois
KAY HAGAN, North Carolina            JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia       TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts      DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota

                       Charles Yi, Staff Director

                Gregg Richard, Republican Staff Director

                       Dawn Ratliff, Chief Clerk

                       Taylor Reed, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                 ______

                    Subcommittee on Economic Policy

                     JEFF MERKLEY, Oregon, Chairman

             DEAN HELLER, Nevada, Ranking Republican Member

JOHN TESTER, Montana                 TOM COBURN, Oklahoma
MARK R. WARNER, Virginia             DAVID VITTER, Louisiana
KAY HAGAN, North Carolina            MIKE JOHANNS, Nebraska
JOE MANCHIN III, West Virginia       MIKE CRAPO, Idaho
HEIDI HEITKAMP, North Dakota

               Andrew Green, Subcommittee Staff Director

        Scott Riplinger, Republican Subcommittee Staff Director

                                  (ii)














                            C O N T E N T S

                              ----------                              

                      WEDNESDAY, DECEMBER 11, 2013

                                                                   Page

Opening statement of Chairman Merkley............................     1

Opening statements, comments, or prepared statements of:
    Senator Heller...............................................     2

                               WITNESSES

Suzanne Berger, Raphael Dorman-Helen Starbuck Professor of 
  Political Science, and Cochair, MIT Production in the 
  Innovation Economy Commission, Massachusetts Institute of 
  Technology.....................................................     4
    Prepared statement...........................................    27
Leo Hindery, Jr., Chairman, Smart Globalization Initiative, New 
  America Foundation.............................................     6
    Prepared statement...........................................    38
Derek Scissors, Resident Scholar, American Enterprise Institute..     7
    Prepared statement...........................................    43
Julie Skirvin, General Counsel, Oregon Iron Works................     9
    Prepared statement...........................................    49

                                 (iii)

 
                   REBUILDING AMERICAN MANUFACTURING

                              ----------                              


                      WEDNESDAY, DECEMBER 11, 2013

                                       U.S. Senate,
                   Subcommittee on Economic Policy,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Subcommittee met at 3:38 p.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Jeff Merkley, Chairman of the 
Subcommittee, presiding.

           OPENING STATEMENT OF CHAIRMAN JEFF MERKLEY

    Chairman Merkley. I call this hearing to order. Thank you 
all very much for your patience. We are starting a few minutes 
late, and I hope we will have plenty of time to explore this 
important topic of manufacturing.
    When I became Chair of this Subcommittee, I knew that I 
wanted to spend as much time as possible to focus on 
manufacturing because if we do not make things in America, we 
are not going to have a middle class in America. Manufacturing 
is the heart of an economy that provides good living-wage jobs 
to working families.
    Growing up, I experienced firsthand the power of the 
manufacturing economy. My father worked as a millwright at a 
saw mill. We were never rich, but on a single working man's 
salary, it was possible to own a home, have food on the table, 
and for my parents to save a little bit to help send the 
children to college. So these jobs, these manufacturing jobs, 
can make all the difference between a firm financial foundation 
for a family and the absence of one.
    Unfortunately, over the last couple of decades, jobs like 
these have been disappearing from our Nation's shores. 
According to the Bureau of Labor Statistics, in the 12 years 
between 1998 and 2010, the United States lost more than 5 
million manufacturing jobs. Similarly, between 2001 and 2012, 
we lost more than 50,000 factories. This crisis in 
manufacturing is a huge challenge and must be addressed if we 
are to sustain a thriving middle class.
    The good news is we have recently made some progress toward 
reversing this trend. Since the end of the Great Recession in 
2009, our economy has added back more than half a million 
manufacturing jobs. In my home State of Oregon, we have seen 
headlines like, and I quote: ``Manufacturing leads job gains in 
Clackamas County.''
    But I note from the discussions I have had with 
manufacturers around the State, both during my Made in Oregon 
tour in 2012 and in my day-to-day work, that there are a lot of 
positives to be seen in Oregon and America regarding 
manufacturing right now. But there are many challenges. Are we 
developing the robust research and development and supply chain 
infrastructure so necessary to today's world of high-tech 
manufacturing? How do we make sure our middle and high 
schoolers are being exposed to manufacturing careers and hands-
on education in an era of shrinking budgets and fewer 
electives? And how do we make sure our workers are prepared not 
just for traditional manufacturing jobs but for the growing 
world of high-tech manufacturing?
    Do our manufacturers have sufficient access to capital that 
is needed for long-term growth? And how does the U.S. compete 
with other countries that may have lower labor or environmental 
standards without entering a race to the bottom? How do we make 
sure that we have enforcement action when other countries 
provide massive subsidies to State-backed industries?
    These are just a few of the questions I hope we explore 
today. There is no doubt that we have a lot of work to do once 
again to see a thriving manufacturing sector. There is also no 
doubt that we stand to gain a huge payoff for our economy and 
our middle class if we do so.
    With that, I will turn to Senator Heller for his opening 
statement.

                STATEMENT OF SENATOR DEAN HELLER

    Senator Heller. Mr. Chairman, thank you, and thanks for 
holding this hearing. I am pleased that our Subcommittee 
continues to focus on jobs in the middle class. I want to thank 
those of you here with us on the panel. Being here today does 
make a difference, so thank you very much for taking your time 
to spend that time with us.
    For too long, job creation has received second-class 
treatment by Congress. With Nevada continuing to lead the 
Nation in unemployment, Congress must develop policies that 
spur job growth, especially in industries like manufacturing. 
Manufacturing is critical to the American economy. Its 
continued strength is key to putting Americans back to work. 
While Washington hesitates to act, America's manufacturers are 
shutting down and jobs are being lost.
    While Nevada is known for traveling, gaming, and mining, 
manufacturing represents an important segment of our economy by 
employing more than 56,000 workers at 1,800 manufacturing 
companies. I would also note that the average wage for 
manufacturing employees in Nevada is $52,000 a year, which is 
$10,000 more than the average salary in the State. 
Unfortunately, Nevada's manufacturers are continuing to 
struggle in this recession. Just a few months ago, a headline 
in my hometown newspaper read, ``Manufacturing sector's rebound 
likely is not near.'' The article went on to highlight that 
Nevada has lost 10,000 manufacturing jobs during the recession 
and has only regained 1,000. By industry sector, that is the 
second largest job loss in the State.
    While it cannot be done overnight, it is my hope that 
Washington can get serious and implement an agenda to 
strengthen American manufacturing and create American jobs. I 
believe that the key to ensuring Americans continue to have 
access to high-quality manufacturing jobs is not to enact 
burdensome regulations or a protectionist agenda but to expand 
economic freedom. This goal can be accomplished by simplifying 
our Tax Code so that businesses are encouraged to locate and 
remain in the United States by ensuring that we are effectively 
educating our children and by supporting policies that foster 
fair competition and open access.
    As a Nation, we are encouraged by realities of this growing 
global and technological economy, and Congress must develop 
policies that ensure that the U.S. remains at the forefront of 
these dynamic changes and create jobs here in America.
    Thank you, Mr. Chairman. I look forward to the testimony 
from our witnesses.
    Chairman Merkley. With that, I am going to introduce the 
witnesses. I have already asked Senator Warren if she would 
like to make an opening statement. She said no, let us jump 
right in, so we will do so. I am so delighted to have all of 
you and your contribution and your expertise to address these 
issues.
    Suzanne Berger is the Raphael Dorman-Helen Starbuck 
Professor of Political Science at the Massachusetts Institute 
of Technology. She cochairs the MIT Production in the 
Innovation Economy Commission, otherwise known, I think, as the 
PIE Commission, a 20-member faculty group that studies 
innovation in manufacturing in industrial countries. The 
reports of the PIE Commission have just been published in 
``Making in America: From Innovation to Market'' and 
``Production in the Innovation Economy'', both in 2013. 
Professor Berger is also author of ``How We Compete: What 
Companies Around the World Are Doing To Make It in Today's 
Global Economy'', and other books and articles on the political 
economy. She served as the head of the Department of Political 
Science and director of the MIT International Science and 
Technology Initiatives. She is a member of the American Academy 
of Arts and Sciences and received the Legion d'Honneur.
    Leo Hindery is chair of the U.S. Economy/Smart 
Globalization Initiative at the New America Foundation, cochair 
of the independent Task Force on Jobs Creation, founder of Jobs 
First 2012, and a member of the Council on Foreign Relations. 
He is the former CEO of AT&T Broadband and its predecessors 
Tele-Communications, Inc., and Liberty Media, and is currently 
an investor in media companies. Thank you, Leo, for coming from 
New York, and thank you, Suzanne, for coming from Boston.
    Derek Scissors is a resident scholar at the American 
Enterprise Institute, AEI, where he studies Asian economic 
issues and trends. In particular, he focuses on the Chinese and 
Indian economies and U.S. economic relations with China and 
India. He is also an adjunct professor at George Washington 
University where he teaches a course in the Chinese economy. 
Before joining AEI, Mr. Scissors was a senior research fellow 
in the Asian Studies Center at the Heritage Foundation. He also 
worked in London for Intelligence Research, Ltd., taught 
economics at Lingnan University in Hong Kong, and served as an 
action officer in international economics and energy for the 
U.S. Department of Defense. He has a bachelor's degree in 
economics from the University of Michigan, a master's degree in 
economics from the University of Chicago, and a doctorate in 
international political economy from Stanford University. You 
did not have as far to come, but we really do appreciate you 
making it through this big snowstorm that we are experiencing 
here in D.C.
    Julie Skirvin is general counsel of Oregon Iron Works, the 
parent company of United Streetcar. Her experience at the 
company also includes leading the business development team at 
United Streetcar. She is also on the board of Drive Oregon, an 
entity that supports the growth of the electric vehicle and the 
electric mobility in Oregon. Early in her law career, she was 
deputy district attorney for Multnomah County in Portland. She 
is a graduate of Willamette University College of Law and 
Oregon State University. Julie, thank you very much for coming 
and for filling in for Bob Beal, the CEO of Oregon Iron Works, 
who was not able to be with us.
    Before we proceed, I would like to extend my appreciation 
to the UC-Hastings Law Professor Joel Paul and Ryan Costello of 
Click Bond, Inc., from Nevada, who prepared testimony for the 
hearing, but the hearing was canceled due to the Government 
shutdown, so we lost a couple folks along the way. They were 
not able to join us this time, but I will ask that their 
testimony be entered into the record, and the Chairman will do 
so since there is no objections.
    Chairman Merkley. We will keep the record open for 7 days 
for witnesses and Members to submit additional materials as 
well as for questions for the record, which we would kindly ask 
that our witnesses respond to as promptly as possible.
    With that, we now turn to our testimony. Dr. Berger.

  STATEMENT OF SUZANNE BERGER, RAPHAEL DORMAN-HELEN STARBUCK 
PROFESSOR OF POLITICAL SCIENCE, AND COCHAIR, MIT PRODUCTION IN 
 THE INNOVATION ECONOMY COMMISSION, MASSACHUSETTS INSTITUTE OF 
                           TECHNOLOGY

    Ms. Berger. Senator Merkley, Senator Heller, Senator 
Warren, I am very honored to have been invited to talk about a 
2-year study that we have just conducted at MIT, and we asked 
basically one question. What kinds of manufacturing do we need 
in the United States in order to get full value out of our 
innovation?
    We know that innovation is strong in the United States, and 
our question is: How do we get the benefit of that innovation 
in the form of economic growth, in the form of good jobs for 
American workers, in the form of new companies and enhanced 
profits for our existing companies?
    We look at new companies that have been created over the 
last 25 years, a company like Apple where Apple and other 
companies like it specialize in R&D, design, and distribution, 
but have no production at all, no production in the United 
States, and no production within the four walls of their own 
company, and yet they still earn the lion's share of the 
profits from products like iPad and iPhone. And the question 
is: Could we all do Apple? Is this the model for the future of 
the American economy? Do we really need manufacturing at all in 
order to get the benefits of innovation?
    And this is the question we started with, and the way in 
which we conducted the study was through surveys of 
manufacturing establishments, through studies of startup 
companies in the United States, through studies of Main Street 
manufacturers, and by going and interviewing in Fortune 500 
companies in the United States.
    And the question we asked in each one of them was: When you 
have an innovation, a new idea, whether it comes from an R&D 
lab or it comes from the shop floor, how do you get it to 
market? How do you get it into the hands of a customer? Where 
do you find the skilled workers? Where do you find the capital? 
Where do you find the suppliers, the facilities, the additional 
technical expertise that you need?
    And I think the bottom line of all of this research--and we 
did talk to about 260 companies in the course of it, not only 
in the United States but also in China and Germany. The bottom 
line is that while we are great on innovation, there are real 
problems about scale-up. And the problems about scale-up have 
to do with missing inputs. We find real problems in capital 
markets. We find real problems in the skills and the formation 
of the new skills that the most advanced manufacturing 
companies need. We see a variety of ways in which holes have 
opened up in the industrial ecosystem.
    And it is the comparisons that we have been able to draw 
between, let us say, a Main Street manufacturer in Ohio and a 
comparable mid-sized German company that really point to these 
holes in the ecosystem, the market failures that really are 
blocking scale-up of our own innovation.
    A Main Street manufacturer, when he has a great idea in 
Ohio, has a problem. There are no longer any local bankers in 
the United States, as you know, whereas the German manufacturer 
still has local and regional banking. There are real problems 
about who is training the workforce. There are real problems 
about suppliers. And if we look at the origin of all these 
problems, we think that it really dates back to the 1980s at a 
time in which financial markets put real pressure on 
manufacturing companies to become more asset light, and that 
meant getting rid of plants, getting rid of workforces, and all 
that was reflected in improvements in stock prices very 
rapidly.
    The reason that these enormous changes in corporate 
structure matter is today we have a much more fragmented 
industrial system. Think about DuPont when it invented nylon in 
the 1930s and 1940s. It had the plants to move that production 
into. It had no problem about capital markets. It had cash. It 
was able to retrain its own workforce because it knew those 
workers would be there for lifelong careers. And in every one 
of these dimensions, the industrial system has changed in the 
United States.
    So, in conclusion, I would say we believe that we are at 
the moment of great opportunity, a new window for American 
manufacturing. We have lower energy prices. We have a lot more 
realism about the real costs of outsourcing and offshoring. But 
if we are really going to consolidate this advantage and make 
this a real opportunity, we really need to think about how to 
bridge these gaps in the ecosystem, and that is going to 
require new private-public partnerships that we begin only now 
to see emerging.
    Thank you.
    Chairman Merkley. Thank you very much, Dr. Berger.
    And we now turn to Mr. Hindery. Thank you.

 STATEMENT OF LEO HINDERY, JR., CHAIRMAN, SMART GLOBALIZATION 
               INITIATIVE, NEW AMERICA FOUNDATION

    Mr. Hindery. Thank you, Senator. Just as like coals to 
Newcastle, your own enthusiasm for this sector is what guides 
the four of us.
    One of the challenges I think we have had in this country 
since about 1980 is we have failed to appropriately size the 
sector. We speak with passion about the sector, but we do not 
size it. Right now, as you know, we have about 8 percent of 
women and men in the civilian labor force in manufacturing, and 
work we have done suggests that this figure needs to be closer 
to 20 percent. With an objective in mind, I think it is easier 
to contemplate remedial policies.
    The other thing that has mired us down is the absence, the 
fundamental absence, of a national manufacturing policy. 
Nineteen of the G20 Nations have a very precise, very 
articulated manufacturing policy that coordinates the policies 
of their Federal-type Governments. We alone uniquely do not 
have such a national policy.
    We also, as Dr. Berger has mentioned, have put ourselves at 
what is called the SME level, the mid-sized level, in a capital 
drought. We hear often that the lack of capital to grow is the 
biggest challenge for the so-called feeder manufacturers for 
the large-scale manufacturers. It is certainly my hope that the 
Dodd-Frank rules will reopen the banking community to lending 
to the mid-sized manufacturers. But in the interim, it would 
help to see a program similar to the Small Business Credit 
Initiative that we passed in 2002 as part of the Small Business 
Jobs Act. Another initiative of this sort would be incredibly 
helpful right now.
    The other thing that would be helpful--and, Senator Warren, 
something that you have commented on, I know, a number of times 
is far greater use of public development banks. Twenty-five 
percent of the world's loans now come from this category of 
lending, and 30 percent of the loans made within the entire 
European Union. We also do not use our Export-Import Bank 
relatively as much as do the other G20 Nations.
    Of the other potential solutions, the one that comes to 
mind most immediately for me is a National Infrastructure Bank, 
and in my written comments we offer solutions that we spent a 
great deal of time on as to how such a Bank might be developed, 
Senators, that would primarily employ the fiduciary capital of 
the States and our larger municipalities in ways that the 
Federal Government's involvement would be scored at zero vis-a-
vis the Federal deficit. Specifics of that are found, again, in 
my written comments.
    The significant challenge that confronts us if we do not 
have our own National Infrastructure Bank is that with the need 
for infrastructure redevelopment being so high, we will soon 
see otherwise foreign monies coming in to resuscitate our vital 
seaports, roads, and airports. It is imperative, in my opinion, 
that an American Infrastructure Bank be part of the agenda of 
today's hearing.
    I certainly, Senator Merkley, agree, as does Dr. Berger, 
about the need of helping students transition into 
manufacturing-related careers. I am of an age personally that 
saw a pathway readily available to me as a student, but this is 
no longer the case today. Many countries, as we know, use the 
promise of free training and education in this category to 
achieve the positive employment outcomes that Dr. Berger spoke 
about.
    Finally, I must talk about the need for fundamental reform 
of our major trading relationships, and I mean all of our 
trading relationships. The imbalances that have occurred 
represent a panoply of challenges confronting us, and Dr. 
Scissors speaks to them better even than I do. But just our 
trade deficit with China alone costs us about $40 billion in 
lost wages each year.
    I am of a mind that the fundamental challenge confronting 
us in trade now is even greater than the challenge confronting 
us in our Federal deficit. We know that China and other 
countries in Asia especially now use unfairly gained trade 
advantages, and we are seeing them show up suddenly in places 
like Brazil and Bangladesh. And, Chairman Merkley, as you have 
endorsed, it should be easy to include the cost of these 
subsidies, these back-door advantages, in our antidumping duty 
calculations. But getting our trading relationship with China 
right is an imperative and where we need to start because it is 
now a model being adopted by other developing Nations, all to 
the detriment of the U.S. manufacturing sector.
    Let me just finish by saying that it is important, 
Senators, that we speak about the net export position of this 
country. The Administration, in my opinion, has spent way too 
much time talking about gross exports when net exports are what 
really matter.
    We certainly should, if we encounter it, call out currency 
manipulators. China continues to be one, in my opinion. There 
are serious questions continuing about China's Indigenous 
Innovation Act, probably the most protectionist act we have 
seen of its sort ever. And I am gravely concerned, as a closing 
comment, about the pending Trans-Pacific Partnership. The free 
trade negotiations there I think are intellectually and 
economically flawed in trying to treat these countries as 
``one-size-fits-all.''
    A real pleasure. Thanks, Senators.
    Chairman Merkley. Thank you.
    Dr. Scissors.

    STATEMENT OF DEREK SCISSORS, RESIDENT SCHOLAR, AMERICAN 
                      ENTERPRISE INSTITUTE

    Mr. Scissors. Thank you, Mr. Chairman, and thank you for 
your kind introduction. As you indicated, I will be speaking 
from the global perspective, and the first thing that you see 
from the global perspective is that the global perspective and, 
hence, my testimony do not matter very much.
    Notwithstanding that I just shot myself in the foot, that 
needs to be said. If you measure the size of an economy by 
aggregate wealth rather than gross domestic product--because 
gross domestic product is a terrible measure of everything--you 
get the United States at about $70 trillion, and you get China 
and Japan under $25 trillion each. That estimate is imprecise. 
Nonetheless, the advantage that we have is about $40 trillion 
or more.
    I do not mean to say that that means everything is fine. 
What I mean to say is that means what we do here matters much 
more than what everyone else does. And even though I am going 
to focus on what everyone else does, I think that is something 
that we need to remember, that our actions matter more than 
everyone else's actions, not only because it is our country but 
because we are much bigger than everybody else.
    Now, the international perspective to me offers two major 
observations, one of which I will pursue in detail, one of 
which I will not. The one that I will not, I will just make 
from the outset, is I worry about American monetary policy. I 
agree with my colleagues that we do not have excess credit in 
manufacturing for small and medium manufacturers. That is not 
what I mean. I mean that we have a pattern that we see overseas 
in Japan and in China where long periods of very loose monetary 
policy kills corporate competitiveness, because getting access 
to money is no longer about how good your project is, no longer 
about good your companies is. It is just, hey, there is all 
this money floating around, who are the people I know?
    So we are not at that point yet, but we have seen in our 
major manufacturing competitors loose money has hurt them in 
the long term--not 2 years of loose money, not 3 years of loose 
money, but a long period of loose money. And I would like that 
to be considered in our domestic policy as well as the 
macroeconomic effects which are considered on a more routine 
basis.
    The second major observation I want to make is that 
competition is the lifeblood of prosperity. Taking away 
competition in this country is never going to benefit us. It 
will only benefit a few. It will not benefit the whole. That 
also applies to overseas markets. The more competition we have 
in overseas markets, the better for everyone, including the 
United States.
    There is, if we are looking overseas--which, again, is 
secondary to being at home--the single biggest problem in 
competition that I identify would be Chinese subsidies. By 
subsidies, I do not just mean money. We normally think of 
subsidies as somebody handing over money to someone else. And I 
do not think the United States should think of it that way 
either--either at home or overseas. The biggest subsidy that 
you can have, violating that competition requirement that I 
spoke of, is pervasive in China. It is regulatory protection 
from competition. That is, China seals off major sectors from 
competition and reserves them for its State-owned enterprises: 
coal, oil, shipping, steel. There are a dozen more.
    Once you do that, once you say that State-owned enterprises 
must dominate these areas, everything else is a detail. Wages, 
land--it does not matter. You have ensured that your companies 
cannot go bankrupt and foreign companies can only succeed to 
the point that you allow them. So to me, that is something to 
think about around the world--protection from competition.
    There is, of course, also financial transfers that occur in 
China and elsewhere through the banking sector, but the 
protection from competition is the most fundamental problem 
that we face overseas, particularly in China.
    Now, let me also say what some of the impacts on the U.S. 
are. We tend to focus on imports. It is true that the Chinese 
subsidize their exports in various ways, and that creates an 
unlevel playing field. It is also true that our consumers 
benefit from those subsidies. Where nobody in the U.S. benefits 
and nobody overseas benefits is when China closes its own 
market. So that I would prefer to focus on U.S. exports to 
China, notwithstanding Leo's comments, because there is no 
benefit to the U.S. for Chinese subsidies in their home market; 
there is no benefit for them blocking competition; there is no 
benefit from U.S. goods and services being kept out at all.
    In addition, we have a third problem, which is competition 
in third markets. The Chinese presence in global markets has 
become much larger. I have a data set that tracks Chinese 
outward investment. You can see all the transactions if you 
want to see what they are doing, and what that means is, as Leo 
hinted, the Chinese are exporting their model. And when you do 
not have any protection in your home market--sorry, any 
competition in your home market, that gives you a big advantage 
in other markets. That is a disadvantage. American firms have 
to compete here. Chinese firms do not have to compete at home. 
They have better access to revenue; they have better access to 
customers. So I would focus on the impact on the U.S., the 
blocking of the Chinese market, and the growing problem of 
competition in third markets.
    There is not much time here. I am going to give an 
extremely boring recommendation which completes the circle of 
me saying my testimony is not that important, so it is 
unimportant and boring. That is a great one-two punch. I think 
I might be ready for the Congress. Sorry. I had to make that 
comment.
    We need to start measuring Chinese subsidies. We talk again 
and again and again about how the Chinese are unfair traders, 
and I agree with that talk in a number of respects. But we do 
not actually document it. We just assert it. We cannot 
negotiate with them. We cannot go to the WTO. We cannot take 
well-informed, unilateral action unless we actually know what 
they are doing. And that applies, of course, to China because 
they are the biggest violator here. But they are not the only 
one. Far from it.
    So in stressing that theme of violating competition and 
looking overseas and saying our access to foreign markets is 
being blocked hurts the country, we need to document that. And 
it is dull. It is not an exciting new program to announce. But 
it is what is going to enable us to take all those corrective 
steps that we need to take.
    Thank you.
    Chairman Merkley. Thank you very much, Doctor. And your 
self-evaluation may not be shared by all of us, because I found 
it very interesting and many questions to pursue there. Thank 
you.
    And I am so delighted to have an individual from Oregon 
come join us who is involved in manufacturing on the ground and 
may have some real-life experiences to share in this context.

 STATEMENT OF JULIE SKIRVIN, GENERAL COUNSEL, OREGON IRON WORKS

    Ms. Skirvin. Thank you, Mr. Chairman and Members of the 
Committee, for having this opportunity to address this hearing 
today on a topic that is so important to Oregon Iron Works and 
United Streetcar and other manufacturers across the country. 
And it is nice to have a home State Senator here in the room 
this afternoon.
    What some of you may not know is that I represent United 
Streetcar, who is the first manufacturer of modern streetcars 
in more than 60 years manufactured in America.
    Oregon Iron Works is a diverse company. We fabricate 
demanding hydroelectric, bridge, and civil construction trades 
applying modern manufacturing techniques. We fabricate space 
launch complexes, missile defense systems, the silos that 
support and defend this country against attack, marine craft 
for the Navy and our Special Forces, nuclear containment casks 
for storage of spent fuel, and our newest venture the 
manufacturing of modern American made streetcars. United 
Streetcar was organized in 2005, and I am pleased to share 
today that we are completing a streetcar every 6 weeks. We have 
delivered seven streetcars this year to the city of Portland 
and the city of Tucson, and our next delivery will be in the 
amazing town of Washington, DC. We are working with DDOT 
currently to coordinate the delivery of the first car.
    This new company has created a hundred jobs in the 
Clackamas area in a difficult recession time. Those are family 
wage jobs with good benefits. In creating a new supply chain, 
we have sourced over 350 parts and equipment for suppliers 
across 32 States and including 140 in Oregon. You can imagine 
the challenge and work required to create a new supply chain 
for an industry that has been absent from the U.S. for more 
than 60 years. We are pleased to be a part of the recovery of 
manufacturing jobs in the United States. Since August, 66,000 
jobs in manufacturing have been added to the U.S. economy. 
Since 2010, 700 manufacturing jobs have returned to Clackamas, 
Oregon.
    One of the key components and challenges that we face is 
ensuring a supply of skilled workers. Many young people 
entering the workforce now are unskilled, and they are not 
ready to work. Those skilled workers need access to training, 
and the public education system should place more emphasis on 
technical training in high schools. There are some examples of 
stellar programs in our area. We work with Benson High School, 
Portland Community College, and Clackamas Academy for 
Industrial Sciences. But these are too few, and too many 
schools and public officials downplay the important role that 
technical career paths and technical training can take and 
support our U.S. economy. What we need is the necessary funding 
and the respect that those programs deserve.
    Another important area in education is public and private 
partnerships, similar to what my colleague indicated in her 
written testimony. We are currently working with Clackamas 
Community College and the Workforce Investment Council in 
Clackamas County to identify new hires that have aptitudes in 
these areas and also to identify and train our newly hired 
skilled workers to enhance their skills and our workforce.
    We applaud the Manufacturing Jobs for America Initiative, 
which you, Chairman, helped to lead, that focuses on workforce 
training because that is an essential step in developing the 
source in the technical arena.
    Access to capital is a critical component of rebuilding 
American manufacturing. In forming United Streetcar, our owners 
invested more than $10 million of private money into our 
facilities, equipment, test track, the overhead catenary 
providing power for the streetcars, and our maintenance 
facility. But not all small businesses have access to capital 
to expand into new markets and to grow. So to increase the 
small businesses' and manufacturers' ability to have access to 
capital is critical.
    Finally, investment in America's infrastructure is critical 
to rebuilding American manufacturing. Investment in basic 
infrastructure in this country is necessary through 
reauthorization of MAP-21, finishing the fine work on WRDA, and 
fully funding the trust fund.
    Infrastructure projects support middle-class jobs through 
manufacturing. Families across the country rely on those jobs 
for their livelihood.
    I want to thank you very much for the opportunity to speak 
here today, and I would welcome any questions that you have.
    Chairman Merkley. Well, thank you very much. So we will 
enter a period of questions. We will take 5 minutes back and 
forth. I know Senator Warren is going to try to rejoin us.
    But I want to start out, Dr. Berger, with your insights 
regarding Apple. You said that the project was first motivated 
by looking at Apple basically not having any internal 
infrastructure for making anything, so they are doing their 
R&D, and then they are contracting out. And I think you called 
it ``whether the Apple for all was the appropriate model.'' But 
I believe that was much--and correct me if I am wrong, but that 
was largely Apple's model before they decided to move much of 
their manufacturing or all their manufacturing to China, that 
they still outsourced their production. And so what really was 
the reason that they said, ``You know what? Let us move it to 
China''? Was it the issues that we faced domestically in regard 
to access to capital and trained workers and supportive 
infrastructure? Or was it the inducements from abroad and 
China's famous brand strategy and all that goes with that?
    Ms. Berger. So when I mentioned Apple I was using that as 
an example of the most successful of the new big companies that 
have emerged in the United States over the last 30 years. There 
are also companies like Cisco, Qualcomm, and others that have 
the same model of focusing on the R&D design and distribution 
part of the function and having production take place somewhere 
else and most often in somebody else's factories.
    With respect to the specific decisions of Apple, as you 
know, Apple is a very secretive company, and so we did not have 
access to knowledge about their own decisions. But, of course, 
the new products that have made Apple's fortune over the past 
years are ones that were from the very beginning produced in 
China, in Shenzhen. And I think that what we are looking at is 
a model in which initially people believed that labor costs in 
the United States should really drive their decision. And when 
I talked before about greater realism in people's understanding 
of the real costs of outsourcing and offshoring, I think we had 
a wave of companies that believed that they were going to, by 
moving their operations out of the United States, significantly 
reduce their costs. And they have now realized how small a part 
of the overall cost equation labor costs actually are and how 
transportation and quality and conformance and responsiveness 
to changes in your market and your customers' desires, how much 
larger those factors are in the total success picture.
    I think finally with respect to Apple and other companies 
like them, I think it is very unlikely that those jobs will 
return to the United States, and not because of labor costs. I 
think it is because the Chinese have gotten really very good at 
doing things like rapid product introductions. There is now a 
very rich ecosystem in Shenzhen among the manufacturers 
producing Apple's products. So I do not think there is a great 
likelihood that those jobs will come back. I think our hopes 
have to be that the new jobs that we produce in the United 
States will actually stick here. And I think that the changes 
we need to make with respect to the industrial ecosystem are 
ones that will make companies and workers want to stick here, 
just as German manufacturers, in fact, remain in Germany for 
the skills and for the other characteristics of their 
ecosystem.
    Chairman Merkley. Mr. Hindery, you indicated you might like 
to add a little something to that?
    Mr. Hindery. I do. This is an area that Dr. Berger and I 
differ quite greatly on, Senator, and I would like to comment.
    In 2010, the machinists union offered to take every one of 
the Chinese jobs that manufacture the iPhone and the iPad and 
move them to the State of Oregon and promised similar quality 
and similar delivery costs. Ninety percent of the cost 
differential at the onset--and we know this from work done by 
Microsoft--between the original Apple goods being manufactured 
in China and the same goods if manufactured in the U.S. had 
nothing to do with labor. It was all subsidies. As the Doctor 
says, or described, Apple is secretive as heck. So Microsoft 
did the analysis essentially for Silicon Valley and concluded 
that 90 percent of the differential is illegal subsidies of all 
sorts--currency, finance, siting, everything. And my concern is 
if we do, in fact, wish to size this sector and if we do, in 
fact, conclude that we need a much larger sector on the order 
of two or three times larger, we will not get there by looking 
over our shoulders and not trying to recapture the jobs that 
have left us, in my opinion illegally. Apple and the Machinists 
Union could have worked an accommodation, I promise you, that 
would have had every iPad and every iPhone manufactured instead 
in Clackamas, Oregon, rather than in Shenzhen.
    Chairman Merkley. Thank you. When I come back, I will 
follow up on the subsidies part. But I want to turn now to 
Senator Heller.
    Senator Heller. Thank you. And thanks again, everybody, for 
taking time.
    Leo, do you think our tax structure is competitive?
    Mr. Hindery. Senator, I do not. I think it lacks the proper 
incentives, and it actually has disincentives built into it. We 
should have an R&D policy, Senator, that rewards R&D that 
produces jobs in America. We should as a Congress explore the 
VAT, the value-added tax, our current absence of which makes us 
uncompetitive against most of the G20. And the fundamental tax 
rate for corporate America continues to be too high.
    In my written comments, Senator, I lay out a number of 
things, but the easy answer is that we are not--with our 
current tax structure--our manufacturing sector's best friend.
    Senator Heller. I noticed that in your written comments. 
That is why I wanted to bring that up. I think that our 
corporate tax rates here in this country make us very 
uncompetitive, and perhaps--and you also speak of tax reform as 
being essential. Obviously we discuss that here in Washington, 
DC, but we do nothing about it. But we do spend a lot of time 
discussing it.
    A theme across the board here has to do with a National 
Infrastructure Bank, and there is movement, introduced by 
Senator Blunt, Senator Warner, myself, and several others, of 
trying to leverage about $10 billion in Federal funds. We 
believe we could leverage those to about $300 billion over a 
period of time.
    My State, the State of Nevada, needs about $10 billion in 
roads, bridges, and highways. Their budget is about $7 billion, 
so you can imagine how far behind they are in infrastructure 
needs. But what needs are in Nevada, of course, go to Oregon 
and across this country, and we believe that there is a need 
for an infrastructure bank.
    Could any of you speak on that more or do you have any more 
insight of the need and the effort? Leo.
    Mr. Hindery. Senator, I would argue that the ultimate size 
of that Bank needs to be almost $1 trillion. What cannot 
happen, at least in my opinion, in this Congress--and, frankly, 
perhaps in any Congress--is we cannot establish a National 
Infrastructure Bank in a way that further burdens the Federal 
deficit of this country. The best community to participate in 
the National Infrastructure Bank is the fiduciary community, 
for example, the State of Nevada pension plan, the municipal 
plan in the city of Las Vegas, and similar plans in Portland 
and in the State of Oregon. And what we have tried to come up 
with is a structure where, for roughly a 3-percent real rate of 
return, the public fiduciary community of the United States 
could be the primary source of funding for the Bank. And if you 
thoughtfully, Senator, constructed the soft Federal guarantee 
at the very bottom, it would be scored at zero; we have done 
work with the staff to show that it would be scored at zero. 
You would never actually touch a Federal dollar.
    And if for example the Nevada State pension plan opted in 
and the State of Oregon, Senator, opted out, then a project in 
the State of Nevada would have a preference over Oregon, or 
vice versa. So there is an incentive for all 50 States to 
participate in the bank. But what we cannot do, in my opinion, 
is persist in this short-term approach of sort of block grants 
through the Department of Transportation. That is simply not a 
Bank. It fails in scale, it fails in focus, and it fails in 
developing--something that we know for the country has to 
occur.
    Senator Heller. Thanks for your insight.
    Dr. Berger, I have another question for you having to do 
with banks. You mention in your written testimony that local 
banks are no longer plentiful, and I would agree with that. 
Nevada has lost about half of its community banks in the last 5 
years, and the impact that that has had on small- and medium-
sized manufacturers has been big. Big banks lend to big 
manufacturers, but nobody is lending to the smaller 
manufacturers. What can we do to help expand some of these 
community banks and get some competition in there so that they 
are not devoured? That is what is happening. We are being 
devoured by the larger banks. And at one time, you know, we had 
100 community banks. We have 50 community banks today, and that 
has a huge impact on these manufacturers.
    Ms. Berger. So we have noticed this in our research as 
well, and it was particularly in the comparison between the 
German manufacturers and the U.S. manufacturers that we were 
seeing in Ohio, Arizona, Massachusetts, and Georgia, that when 
the German manufacturers, when we talked to them about how they 
were able, for example, a machine tool maker who had been 
working in the auto sector and decided that it would be good to 
branch out into making machine tools for medical devices or 
machine tools in solar and wind, the first thing they would do 
is talk to their local bank. They have local banks, they have 
regional banks. And that was an enormous factor in their 
ability to diversify, to take legacy capabilities that they had 
in their firm, but to scale up in new sectors.
    And that is what we just did not see in the companies we 
were looking at. They had new projects, but all they have are 
the retained earnings from the previous year's profits, and 
that is why when you see an innovation in one of these 
companies, the resources get dripped in slowly, slowly, slowly. 
It does not move to market quickly, and it does not create many 
new jobs exactly because of this difficulty of accessing 
capital.
    Senator Heller. Thank you.
    Chairman Merkley. So I wanted to return to this core 
question about--thank you very much, Senator Heller.
    Senator Heller. Thank you.
    Chairman Merkley. He has a conflict to attend to, so I am 
going to carry on by myself for a while.
    Mr. Hindery. He is also a slow walker.
    [Laughter.]
    Chairman Merkley. Back when we were having the last round 
of discussions about trade agreements here in the U.S. Senate, 
I proposed an amendment that essentially required the U.S. 
Trade Representative to exercise its power under WTO to do 
counternotifications. Essentially China was required to do 
notifications of the subsidies it provides under WTO. It had 
not done so. And under the WTO agreement, it says that another 
party can then post counternotification. So within what seemed 
like a few hours, although it was probably a week, of entering 
that amendment, our U.S. Trade Representative did publish a 
list of counternotifications, and on that list were a whole 
series of items that were essentially famous brand strategies. 
There were solar and renewable energy strategies, there were 
paper strategies, and there were famous brand strategies, which 
goes right to the heart of why I was asking about what moved 
Apple, because the famous brand strategy was the concept if we 
can do everything possible to move a famous brand to China, 
their supply chain will follow, and their competitors will 
follow. So it may be kind of the loss leader, if you will. And 
there are many stories about how Apple was courted in terms of 
early invitations, pre-built factories, and so on and so forth. 
So that is the piece I wanted to understand a little better.
    But you have mentioned, Dr. Scissors, that we need to be 
able to measure the Chinese subsidies. As you have looked at 
those--and I know there are many, many different forms of 
them--could you start maybe by talking about some of those 
strategies that were revealed through the counternotifications 
and maybe also some of the ones that are less formal, like if 
you do not manufacture here, we will not let you market here in 
China, or if that is, in fact, an issue?
    Mr. Scissors. Let me just say I thought your legislation 
and the ensuing USTR response were a wonderful step forward 
because subsidies had been ignored, even though they are at the 
heart of the Chinese economy and the heart of the distortion of 
our trade relationship with China that had been ignored for 
years before that. So that was great. And I do not mean this as 
a criticism of USTR at all. That list is sadly incomplete, and 
it is incomplete because they feel like they are struggling 
with an absolutely gigantic problem.
    As you noted, the Chinese do not notify properly when they 
do notify. You kind of look at the list and say, ``That is what 
your notifying us about? Because I have got 10,000 others over 
here that you have not mentioned.'' And so the problem on the 
American side is difficult. It is not something that can be 
solved in a week.
    As I said, with regard to--you were concentrating on famous 
brands. That naturally attracts attention and for good reason, 
because as you mentioned, the brands bring along other 
companies with them. So the Chinese correctly saw that there 
were industries, textiles, which were already--China was 
already a part of, but also consumer electronics that have long 
supply chains and who moves them is the head of the chain, 
somebody like Apple, somebody like Qualcomm.
    Those are important factors. I would not necessarily 
consider them the most important because they do not distort 
the entire Chinese economy. That is what is going on there. 
When you do not allow competition, you have changed the whole 
nature of the game.
    We are in a situation now where American auto firms, for 
example, are doing very well with their business in China, but 
it is skewed because their production in China is given 
advantages over exports from the United States or other places 
of production, and their production in China is under threat 
because the Chinese would like to brand the production 
themselves. They want to say, ``Hey, we used to be the minority 
partner of this famous brand. Now we are the majority partner 
of this famous brand.''
    So I think, my--I am taking too long for the answer, but we 
took a step in the right direction. We have a lot more work to 
do. The big thing would be to try to quantify what the cost is 
to American firms and workers of barriers to competition. 
Famous brands are certainly a part of that. I would not make 
them the biggest part because they are particular to certain 
areas and not an economy-wide issue.
    Chairman Merkley. So if I were to mention some of the 
different categories--and one is land that is often taken from 
peasant agriculture work with very little compensation, and one 
is subsidized interest capital and sometimes even a negative 
real rate of interest, and then there are other forms of 
grants, et cetera. What are kind of the top three that the USTR 
and all of us should focus on in trying to understand the 
competition from China?
    Mr. Scissors. Well, I think the first thing is that you 
have to know in the sector you are dealing with--and this is 
across the whole economy--are private firms, domestic private 
firms, Chinese private firms, foreign firms, foreign imports, 
are they allowed to actually outcompete Chinese State firms? If 
you are not, no matter what you do, if we know how incompetent 
certain Chinese State firms, they would never go out of 
business--and they never do--that has got to be the biggest 
subsidy.
    I use numbers like trillions in my written testimony 
because that is the amount of money that is being transferred 
under the rubric of, ``Our State firms cannot go out of 
business. They have to control the majority of the market. The 
rest, OK, knock yourselves out.''
    The second one is financial transfers, because the cost of 
capital is extremely low for State-owned enterprises. It is 
essentially zero if they need to. And sorry to get a little 
technical here, Chinese money supply--remember I said that 
China's wealth is $40 trillion less than ours? Their money 
supply is bigger than ours. They have so much money in 
circulation that it overwhelms the size of their enterprises 
and the size of all the enterprises competing with them, which 
means their banks can just loan what are essentially infinite 
amounts of money.
    Every single Chinese green energy firm of any size is a 
loss maker at the moment. It does not matter. They never go out 
of business. There is an infinite amount of money heading in 
that direction. So that would be number two.
    And the third one you put your finger on. In some cities 
you cannot get land. You want to operate in certain cities, you 
are a foreign entity, you cannot get the land. It is not 
available to you. If you are domestic private Chinese entity, 
you can get it. It is incredibly expensive. If you are a State-
owned enterprise, it is free.
    And so I would not say that is an economy-wide problem, but 
in certain cities where land is very expensive, it is a killer 
because you cannot operate there and State-owned enterprises 
can operate there at no cost.
    Mr. Hindery. Can I just----
    Chairman Merkley. Yes, Mr. Hindery.
    Mr. Hindery. Senator, could I just add two quick ones? 
Environmental, which is something you are most aware of as a 
Senator from the State of Oregon, is clearly an identifiable 
subsidy, their failure to meet even reasonable world standards 
on effluents and emissions. And you have to add to that not 
just the underlying low wages but also low-grade labor 
standards, something that you have talked about on numerous 
occasions. Where I admire Dr. Scissors' work is it is 
complicated but it is not hard to calculate all of these 
subsidies, and work he has done and work we have done, and 
others, we just need to do it. And it runs the panoply, and 
Derek spoke to the Big Three. I would just throw in, as I said, 
environmental and labor standards as an adjunct to labor wages.
    Chairman Merkley. Well, certainly that goes to this 
question of the race to the bottom that sometimes can occur 
within an international trading regime. And by that I mean you 
have manufacturers who are searching for the place that has the 
least cost in any form of environmental systems and the least 
cost in labor.
    Now, as Dr. Berger pointed out, the world is changing, and 
hands-on labor is--I am expanding on what you said, so correct 
me if I am on the wrong track here. But essentially we have 
more and more computer-driven robotics that can do just about 
anything the human hand can do, and, therefore, the 
differential in labor costs is less of a factor than it might 
have been even 10 years ago. Is that a fair way to put it?
    Ms. Berger. Yes, and I would say that even 10 years ago, 
people overestimated how important labor costs would be, even 
in their equations 10 years ago. There was a lemmings-like 
movement toward outsourcing in which people miscalculated how 
much advantage they could get sheerly from cheap labor. And I 
think that people are pulling back from that sort of 
calculation today.
    Chairman Merkley. So just last year, I was at a technology 
conference and talking to venture capitalists, and they 
basically said our model is this: R&D here, but start from day 
one to plan the manufacturing in China. And, in essence, I 
thought that is so destructive to our ability to actually 
create jobs in manufacturing here in America.
    Ms. Berger. Can I just add on that that in the startup 
companies that we studied, companies that were reaching the 
point when they could commercialize products in semiconductors 
and above all in renewable energy, we saw the same movement to 
China. But now companies are moving to China not for the 
cheaper labor. Venture capital is insisting that you go to 
China simply because what you now have are these very competent 
supply chains. You have an explosive market for energy, so 
renewable energy, whereas in the United States exactly because 
we have a relatively stable energy market, many of these firms 
feel that they will have better customers or a larger market in 
China because of the explosive demand. And, second, we are 
finding that actually the Chinese at this point have become 
pretty capable manufacturers. So the story now is quite 
different than 10 years ago.
    Chairman Merkley. Yes, Leo.
    Mr. Hindery. Senator, I find the comments that you heard in 
Silicon Valley immoral, and I wonder if regarding R&D tax 
credits, which in the Valley they use to develop products and 
then move the related jobs overseas, the R&D tax credit 
couldn't be substantially higher for a company who committed to 
keeping workers and developing jobs in the United States. Right 
now we have the perversity of using the base R&D tax credit to 
do what Dr. Berger talks about, and then they run overseas with 
the new jobs being created.
    Chairman Merkley. Well, if you can indeed have the R&D 
subsidized here in the U.S. by the U.S. Government and the 
manufacturing subsidized overseas by the Chinese Government, 
you have a pretty sweet arrangement.
    Mr. Hindery. It is a sweet and immorally sweet deal.
    Chairman Merkley. Yes. Dr. Berger.
    Ms. Berger. Thinking about the R&D tax credit, when we are 
looking at startup companies, they really do not have any 
revenues. So our R&D tax credit is really of no use to them, 
and it is actually of little use to the Main Street 
manufacturers either, because what they do does not get counted 
as really being ``R.'' And so it really is a research and 
experimentation credit. And so you really have to--and 
particularly because innovation today mainly comes out of 
public and university laboratories. I just wonder whether, you 
know, trying to actually implement something like Leo has 
suggested, whether that would really make very much difference 
in the actual location of production.
    I think there we need a different set of changes in tax 
incentives. When you look at the Main Street manufacturers, 
they are paying full corporate taxes in the United States 
because they have no way of recycling their revenue through 
foreign--and they are in an entirely different situation than 
multinational corporations who often end up paying, as we know, 
something like zero in the United States.
    So we have a tax system now that just treats the Main 
Street manufacturer in a very different way and in a much more 
onerous way than the large corporations.
    Chairman Merkley. Thank you.
    Dr. Scissors. Then I want to turn this over to Senator 
Warren.
    Mr. Scissors. I am again in the position of demeaning 20 
years of my own research by saying China is a symptom. It is 
not--what we need to do here is first is primarily here. The 
Chinese have much higher corporate debt levels than we do. They 
have much higher local government debt levels than we do. We 
focus here on the Federal deficit, which is a huge problem, but 
we should not get carried away that the Chinese are doing all 
this at no cost. It is not just visible costs you can see in 
their air and their water. It is also financial costs.
    So I am not worried about endlessly unbeatable Chinese 
competition. What I think we do need--and I agree with my 
colleagues here--is fundamental changes here. Energy innovation 
has a possibility of changing the competitive balance between 
the U.S. and China. It cannot stop like, hey, you know, we 
discovered shale gas, it is all over now, it will be fine. We 
have to continue to innovate in energy. But we are in a much 
better place to do that than they are because they do not have 
any small energy companies that innovate. They do not allow 
them.
    So we have a big advantage there. If we were to engage in 
fundamental tax reform, not nibbling away--my colleagues have 
talked about this, and I agree. It has to be fundamental. That 
could also change the competitive balance.
    Another thing, as I mentioned earlier, when you have a long 
period of zero interest rates, you start having a lending 
environment that does not mean anything. Cost of capital means 
nothing. I do not care about--I know you, if your project has a 
tiny little return, I will take it because, whatever, you know, 
my borrowing costs are so small. When you have real interest 
rates, you get real projects that get funded, and people start 
looking for value.
    So big things like monetary policy, tax policy, energy 
innovation, that is what is going to boost the U.S. position. I 
am not worried about the Chinese. I am more worried about us.
    Chairman Merkley. Thank you.
    Senator Warren. Thank you, Mr. Chairman. I apologize for 
being in and out. This is a conversation that we started a 
couple of months ago. I learned a great deal then, and I very 
much wanted to be here for all of the continuation of it, but 
we have got flood insurance on the floor, though, right now in 
the Senate. A flood on the floor. And so I had to be there for 
part of it.
    So I want to thank you, but I want to go back to something 
we have talked about before, and this is about the notion of 
the German model of manufacturing, the idea that there are 
high-wage, high-skilled jobs, and that that is where we are 
aiming. We are not aiming for the Chinese jobs. We are aiming 
for the German jobs that help us build a strong and robust 
middle class. But the question is: How do we get there? And we 
were once there. We are just not there now.
    And so, Dr. Berger, you talk about how it is that German 
firms--you talk about this in your research and in your book--
can bring innovation to markets so much faster than we can here 
in the United States. You talked about some of this in your 
testimony. And I made a note of the things you talk about: 
relatively easy access to suppliers, local research 
institutions, university-industry collaborations, a lot of 
things that right now small- and mid-sized manufacturing just 
does not have access to.
    So my question is, and it is for all of you, but I want to 
start with Dr. Berger: What are the changes we could make in 
Federal policy that would help support this kind of environment 
of sort of chain that would help support mid-sized 
manufacturing?
    Ms. Berger. I think that if we move to--when we give public 
funds, we should be giving public funds in whatever form, 
whether tax credits or subsidies, not to individual companies, 
as we so often do today when communities give tax breaks to a 
company that will move into town, and that is a process that 
leads to one community basically competing with another. I 
think we should be trying to support institutions like the new 
National Additive Manufacturing Innovation Institute that has 
been set up in Youngstown or like SEMATECH or like some of 
these other institutions in which we are encouraging 
coalitions, teams of small and medium enterprises, large 
manufacturers, universities, and a variety of different--
community colleges and large universities, to come together, 
and in which the withdrawal of any single partner would not 
kill the institution.
    What we have seen in SEMATECH, the consortium of 
semiconductor manufacturers, is that some partners have moved--
some companies have moved out; others have moved in. But this 
institution encourages roadmapping that allows companies to 
reduce their risk by combining some of their efforts, and it 
allows companies to sponsor pre-competitive research together. 
It has kept the semiconductor industry as a very vital part of 
the American economy. There are 250,000 jobs in that industry, 
an industry that in 1987 looked like it was about to disappear 
under the pressure of Japanese competition.
    So initially the Federal Government actually supported 
that, but now it is basically supported by private companies 
and to some extent by the State of New York. It also needed, 
however, special antitrust protection, so that was another part 
of our effort there.
    Senator Warren. Good. Was there anyone who wanted to add to 
this? Mr. Hindery.
    Mr. Hindery. Senator, three quick comments. If you are a 
company that is dependent on a supply chain, your great fear is 
that the chain will be rolled up behind you. And our failure to 
enforce our trade laws creates that palpable fear. When you 
talk to the SMEs about what is really holding them back, they 
say two things: one is a changed competitive environment out of 
their control; and something you are familiar with especially 
on a personal level, which is access to credit.
    The big banks might get back to lending to this category. I 
am not sure, which is why I spend so much time on the Small 
Business Initiative, development banks, Export-Import Bank, 
things of that sort, which are institutions that we can direct 
more readily their behaviors.
    The one closing comment, when you had stepped out, I 
mentioned to Senator Merkley, in 2010, following a dinner in 
Silicon Valley, the Machinists Union promised Apple that they 
would take every Chinese job and move it to the State of Oregon 
and promised a comparable product.
    Chairman Merkley. If only we could turn the clock back and 
make that happen.
    [Laughter.]
    Mr. Hindery. And it was an offer made by Tom Buffenbarger 
to Steve Jobs, and it was rejected. And it was rejected in very 
large part because Jobs knew that he could continue to go to 
the well in China for subsidies if the prospect was that 
Chinese jobs would head back to the U.S. This sense that every 
solution can be found in high-tech manufacturing also troubles 
me greatly. If I want to see manufacturing grow from 12 million 
jobs to 24 million and higher, then I look to my colleague from 
Portland. Those jobs, these are hands-on jobs. These are the 
jobs that Senator Merkley's father and I had growing up. And 
they are good jobs. We do not have to always be talking about 
the high, high end of manufacturing, because if we only do so, 
then we are going to be leaving millions of American women and 
men behind.
    Senator Warren. Thank you.
    Ms. Skirvin, would you like to weigh in on this?
    Ms. Skirvin. Yes. Thank you for the question, Senator 
Warren. It is important to fund public education and to enhance 
and focus on technical training at the high school level, but 
even through programs like STEM to go to a lower level to 
encourage children at the youngest levels in the areas of math 
and sciences and really look at their attributes and their 
capabilities and encourage them in the technical arena or 
engineering. We should encourage public-private partnerships, 
and Workforce Investment Councils and community colleges to 
enhance their technical programs. We are doing some of that 
locally to identify new hires and take that opportunity to give 
them more skills, but funding and support of those programs is 
very important.
    Senator Warren. Good. And, Dr. Scissors, did you want to 
add anything, or are we good here?
    Mr. Scissors. I think we are good.
    Senator Warren. OK. Good. I wanted to give you a chance if 
you wanted to.
    Can I just keep going? Is that all right, Senator? Thank 
you.
    I want to talk about something else, and you alluded to it 
here, Mr. Hindery and Dr. Berger both, in your prepared 
testimony. You talked about the question about access to 
funding, and I very much appreciate the point that you make 
about looking for alternative ways to fund. But I want to go 
back to the heart of this, and that is, right now the Fed 
discount rates are available to the largest financial 
institutions in this country, and they are effectively at zero.
    So the question is: How do we get these larger financial 
institutions to start lending to smaller manufacturers again 
here in the United States? Mr. Hindery, can I start with you?
    Mr. Hindery. I think an enormous opportunity was missed, 
Senator, in that there was no ``quid'' for the ``quo'' in the 
bailout. There are reserve requirements that could be lessened 
for lending to the SME community. And for certainly the next 
year or so, we are going to continue to discuss the vagaries of 
Dodd-Frank and other aspects of the reform.
    I think that you have to ask these banks to get back to 
lending, and whether you do it through reserve relaxations or 
just a demand for the benefits that continue to flow from the 
Federal Government to their bottom lines, we need some balance 
here.
    I do think that if you look--and you used the example, 
Senator, with Dr. Berger of Germany at the very specifics of 
the German development bank, that would have been a chapter in 
my book. Their development bank is stunning. It is size-
insensitive. It goes deep into the chain, and it is not just 
the Mercedes Benzes of the world and the Audis that can attract 
German development monies. It is down deep into the SME 
community. We need to do that. We also need to have a much more 
vital Export-Import Bank that uses an SME track as part of the 
approval process.
    Senator Warren. You know, and I will pick up on that, 
because the point about the Export-Import Bank, even there, 
whether or not it is getting enough funding down to the smaller 
manufacturers, do you want to comment on that?
    Mr. Hindery. I know the Export-Import Bank well, and it 
does not at all achieve that objective. It really only does 
whatever Boeing asks it to do, and it does not go down deep 
into the supply chain. I believe that if you want an Export-
Import Bank loan, then you should have to respect the entire 
supply chain, for it is the taxpayers' money after all.
    But the other issue, Senator--and, again, I regret that you 
had walked out, is our great need for a National Infrastructure 
Bank. If we can keep it from increasing the Federal deficit, 
get it properly sized, as Senator Merkley often talks about, 
toward $1 trillion, and put a Made in America or domestic 
content requirement on it, then that is millions of instant new 
manufacturing jobs that would be created.
    Senator Warren. Dr. Scissors.
    Mr. Scissors. Again, I will give you the global perspective 
on this, and I realize there are a lot of American policy 
issues that I am sort of touching on. I do not mean to. I mean 
to just talk about the global side, and let us just use Japan, 
because they are the longest period. The Japanese banking 
system is terrible now, and it never got any better. And it is 
impossible for it to get any better. I mean, Japanese banks 
have moved offshore and become very good banks. But there has 
not been any improvement in Japanese domestic capital 
allocation, and let us just think about this logically. Let us 
say we are making milk and we set the price of milk to a penny. 
What are you going to be doing in that situation? Who is going 
to be lending? Who is going to have the milk innovation? When 
you have no prices, you cannot have a functioning market.
    So what I would urge--and, again, this is the international 
perspective--is when you are thinking about how to get credit 
to where it should go, to the most productive companies, you 
cannot do that when you have no real prices. You cannot do it. 
So proposals that are made, whatever they are, should be in the 
context of normal interest rates. And if for macroeconomic 
reasons, for whatever reasons, we cannot get there for 3 or 4 
years, OK. But without that, it will not work. The Japanese 
have tons and tons of money; they have tons and tons of 
Government options on that sort of financing; and their banking 
system is awful because you cannot have--sorry to be--I am 
getting a little nerdy here. You cannot have financial 
intermediation when you do not have a price. You cannot have a 
banking system when you have an interest rate that is the base 
interest rate that is set to zero, a banking system that finds 
good projects.
    So all I want to do, without saying anything about U.S. 
policy options, they need to be explored in the context of 
going back to normal interest rates, 10, 15, 20 years ago. That 
is where the Federal Government can make a difference. 
Otherwise, you are just swimming in this sea of liquidity and 
nothing really happens.
    Senator Warren. You make a very fair point about this and 
about the effect of interest rates. But we cannot use that as 
an excuse to obscure that there seem to have been structural 
changes in how lending occurs in the United States, and that 
the smaller financial institutions as a proportion of their 
capital are disproportionately engaged in small business 
lending, because small business lending has to be crafted in 
a--they tend to be one-offs. You have to understand the 
business that you are lending to.
    Large financial institutions as a proportion of their 
capital in play are moving--it appears that they are less 
enthusiastic about doing small business lending than they were 
a decade ago. And a decade ago, they were less enthusiastic 
than a decade before that.
    So as we see a shift in the banking industry, where we see 
so much more concentration in the larger financial institutions 
and so much squeeze on the smaller financial institutions, it 
has an echo effect in manufacturing in squeezing access to 
capital. So these things are interactive. It does not take away 
from your point. But your point is not the only change that is 
going on at this level, and that is the part I just wanted to 
explore.
    You look like you wanted to say something more, Dr. Berger.
    Ms. Berger. Yes. I would say that was has happened is that 
when we talk about local banks, the local banks now are 
national banks that have purchased the local banks. So there no 
longer is someone who knows local industry. There is no longer 
a person who can actually appreciate the circumstances of the 
small and medium manufacturer that they are talking to. And so 
the scene has changed entirely in a way that makes it really 
difficult for this national bank that may be locally present in 
Ohio to actually understand local industry well enough even to 
make reasonable decisions about who to lend to and how to lend 
to them. So I think we have had a structural change, and so 
that is the one we have to fix.
    The other point I would like to make is that the same 
financial market pressures that led to the fragmentation of 
American industry from the 1980s on are still eating up 
American manufacturing. One of the promising companies that we 
saw in Ohio was a company called Timken that makes tapered 
bearings, power transmissions, and steel. And in May, we 
learned that two of their shareholders--this is the California 
State Teachers retirement pension fund plus Relational 
Investors, another activist asset firm--have demanded that this 
firm actually split into two. This is exactly the same process 
that we have seen since the 1980s. Why? Because investors want 
pure play investments. So this company, which is more or less 
one-third a specialty steel company, two-thirds a bearing 
transmission company, and which believes that there are 
synergies in production between these two activities, is 
actually being broken up by investors. We have seen this again 
and again across the manufacturing sector. And I think this has 
really had--I mean, I am not talking about the particular 
circumstances of this company, but this is a process that 
continues and that has very negative effect.
    Senator Warren. Mr. Hindery, as long as the Chair is going 
to indulge me here.
    Mr. Hindery. Timken Roller Bearings, is in Hamilton County, 
Ohio. In the last decade, Hamilton County experienced more 
unemployment than any other county in the United States because 
of the transfer of production out of the United States to 
Chinese roller bearing companies, and the splitting up of the 
company which is being talked about today is simply a 
desperation Hail Mary pass. This company was one of the great 
American companies, and it was emasculated by unfair China 
trade, pure and simple. Under China's Indigenous Innovation 
Act, you cannot readily buy Timken bearings in China today.
    Senator Warren. So, Mr. Chairman, forgive me, I have been 
called away again. I do want to say that this point on finance, 
it is not only whether or not finance serves to help support 
the manufacturing we need, but whether or not finance has 
actually helped destroy much of the manufacturing we need. And 
so I appreciate your very thoughtful comments on that. Thank 
you. And thank you all. And I apologize that I am not here for 
every word of this. This is terrific.
    Thank you, Mr. Chairman.
    Chairman Merkley. Thank you very much, Senator Warren.
    We are going to conclude in a few minutes, but in the 
course of getting there, I want to draw back in the on-the-
ground experience that Ms. Skirvin represents. You noted in 
your conversation, you said, ``We need a lot more people who 
are ready to work.'' I was involved in a conversation recently 
where folks were saying, ``How can it be that this is really a 
problem?'' Because we see folks who are so ready to work, they 
are working two or three jobs at minimum wage trying to support 
their family. There seems to be a work ethic there. But I think 
they are referring to the challenge of folks coming up maybe 
out of high school or community college into the manufacturing 
sector, and they are not prepared to show up on time or to pass 
a drug test. Is that the gist of it? Or would you like to 
expand on that?
    Ms. Skirvin. Thank you, Mr. Chairman. With regard to ready 
to work, the employable workforce typically does not have the 
necessary skills to enter the workforce and perform the work 
needed in the technical jobs. Young people coming out of high 
school do not have hands-on training. They do not have basic 
shop math skills that are truly necessary to form a foundation 
for a technical worker to be a machinist or to be a welder. 
Employable workers are willing to work, but do not have skills, 
knowledge, and hands on experience to qualify for the 
positions. Sometimes we have problems with qualifications in 
other ways, but the emphasis really is that we want to identify 
those people with those aptitudes for technical skills and open 
doors for them, reach out to them through partnerships with the 
community colleges, like Clackamas Community College, and the 
Workforce Council, and identify people with attributes in the 
technical arena and create opportunities for them to obtain 
technical training and skills.
    Chairman Merkley. So it really is not an issue of work 
ethic or discipline. It is an issue of being prepared and 
knowing how to basically have an affection for and an ability 
to utilize tools in the manufacturing setting.
    Ms. Skirvin. It is. I have been a member of our team for 
over 10 years now and worked on the missile defense program, 
and the pride that people take in forming silos and silo 
interface vaults to defend this country is amazing. It is very 
humbling to be on our shop floor when we are doing that work. 
They take it very seriously, and they are dedicated. They work 
through holidays. They travel on weekends to go to the site and 
support the work that needs to be done. And I think creating 
those opportunities and identifying those young people that 
have that work ethic is something that we need to do and do 
more outreach on all levels.
    Chairman Merkley. So do we need to radically modify No 
Child Left Behind in this regard? I say that in the context of 
what we have seen in schools throughout Oregon--at least this 
has been my impression--is that in the face of competing for a 
set of--the reputation of the school is based on a couple key 
tests and how their students perform. Anything that is not 
bearing upon the success of that school on those tests has 
essentially been unfunded, from art to music to gym to shop 
classes, or as we now call them, ``career technical 
education.'' And I think about how when I was growing up--and I 
still live in the same community now--the kids in the 
community, working-class community, they built things in their 
garage, and they built things in part because their parents 
built things, their dads built things. They worked on cars. 
They built mini-bikes. They built go-karts. They grew up using 
tools. And that was complemented by shop classes starting in 
junior high school. So I had wood shop, I had metal shop. I am 
sure there are still some treasures sitting in my parents' 
basement that only a mother could treasure.
    [Laughter.]
    Chairman Merkley. But we do not have that now because kids 
come home. And they are not in the garage making things with 
tools. They are on the computer in all sorts of different ways. 
And then there is not any shop classes. So I have proposed a 
BUILD Act which essentially is about funding career technical 
education or shop classes in junior high and high school. And I 
think there is also a place here for STEM--science, technology, 
engineering, and mathematics--to play as well and get kids 
excited in robotics and a whole series of things of how math 
applies. I think the two are complementary. But that then 
creates a foundation for folks who say, well, I really want to 
pursue that welding course at the local community college, and 
then I will be ready to build things, the great variety of 
things that you make in Clackamas.
    Any insights about that?
    Ms. Skirvin. Senator, I absolutely agree with you. There is 
always room for improvement, and having a niece and nephew, 
attending middle school and high school, it has been difficult 
to see the lack of opportunities for those types of classes 
when they and their friends demonstrate those aptitudes. It is 
incumbent upon the family and parents to encourage and support 
access to these opportunities in the absence of them being 
available. Absolutely, I think funding those types of programs 
at the middle school level and also at the high school level, 
and even lower, is essential, and encouraging and developing 
those skills in our community with our children at an early age 
and encouraging them as a viable path forward, whatever it 
takes.
    Chairman Merkley. Thank you very much.
    Dr. Berger, you used a phrase. I was searching for it, but 
it is the--is it the ``culture of innovation'' or the 
``community''? What was the term?
    Ms. Berger. Ecosystem?
    Chairman Merkley. Ecosystem. Thank you. Ecosystem. Do you 
see this as a key challenge in the ecosystem, the lack of kind 
of hands-on tool experiences in junior high and high school?
    Ms. Berger. I think it is absolutely critical that we 
provide those opportunities to students to have hands-on 
experience. In fact, at MIT, which is a university, our motto 
is ``Mens et manus,'' ``Hand and mind.'' And we can see even 
among our students across fields the pleasure in actually 
making things. And this is certainly, I think, one of the real 
strengths of American life and American culture. And I believe 
that the problems with recruiting people for the manufacturing 
workforce have to do with the insecurity of those jobs and low 
wages in those jobs.
    I totally agree with Leo Hindery. Everybody is not going to 
be working in advanced manufacturing or highly automated 
plants. A lot of people are going to be making things with 
their hands, and this is something I think people like doing 
and that we need to provide opportunities for.
    I would just like to mention that, as part of our research, 
we did a survey and got responses from 1,000 manufacturing 
establishments to see if they were finding workers with the 
skills they needed, and we asked them one question, basically: 
How long did it take you to fill your last vacancy? Three-
quarters of the factories responded that they could do it in 
less than a month. So overall we still do have a lot of people 
who actually can fill the jobs that we have.
    The other 25 percent of the companies that were having more 
trouble, often wanted skills that were not available. But the 
problem that you actually mentioned about bad behaviors, bad 
work ethic, or cannot pass the drug test, that turned out to be 
a very small part of the problem of filling the jobs, even in 
the 25 percent that had trouble. So it is kind of an urban 
myth, I think, that this is really a significant fact.
    Chairman Merkley. Well, thank you, and I want to turn to 
the last connection between the ecosystem and the work on the 
ground, and that is, we talked about the skill sets, but the 
other is financing. And we have heard a little bit about 
Germany where I believe two-thirds of the funding comes through 
bank loans. In the U.S. it is more bonding. And so what is your 
experience in terms of the challenges? Your company has many, 
many projects, a sizable company for Oregon, and you undertake 
new projects, like the streetcar. Any insights as we wrestle 
with this question of access to capital?
    Ms. Skirvin. Yes. Thank you, Senator. Oregon Iron Works, as 
you said, is a diverse company, and we are in industries that 
have higher risk, such as the marine industry. In searching for 
a surety and bonding capacity to bid and have the capacity to 
bid on these jobs and enter markets and continue to grow as a 
manufacturer, we actually had to go outside the U.S. market for 
our bonding capacity. The lack of access in the U.S. was 
hindering our ability to grow our business. One of the reasons 
why Oregon Iron Works is so successful is because of our 
diversification, and our innovation in the Marine Division in 
the Nuclear Division, or in missile defense. So we are always 
learning in the different areas that we are working in, and the 
market and what is available for opportunities to do work is 
going up and down.
    To be diversified and to have the ability to grow into 
different industries like United Streetcar, companies must have 
access to risk management from a financial standpoint, with 
insurance, access to capital, and also with sureties.
    Chairman Merkley. OK. That raises more questions than we 
have time for, but we are touching on a whole lot of different 
aspects of the American economy and international economy. And 
so this is very important to those of us here in the Senate as 
we wrestle with creating living-wage jobs and a foundation for 
families to thrive and certainly as we also ponder the 
investment that we need to make for the success of the ongoing 
next generations in both the education side and the 
infrastructure side.
    Thank you very much for your testimony. We will keep the 
record open for questions, as I mentioned at the beginning, and 
with that I adjourn the Subcommittee.
    [Whereupon, at 5:05 p.m., the hearing was adjourned.]
    [Prepared statements supplied for the record follow:]
                  PREPARED STATEMENT OF SUZANNE BERGER
   Raphael Dorman-Helen Starbuck Professor of Political Science, and 
           Cochair, MIT Production in the Innovation Economy
                           December 11, 2013
    Chairman Merkley, Senator Heller, Members of the Subcommittee and 
Committee, thank you for the opportunity to testify today about the 
challenges and opportunities for rebuilding American manufacturing.
    My presentation today builds on findings from 2\1/2\ years of 
research at MIT on the role of manufacturing in getting innovation into 
the market place. The research was conducted by a group of 20 MIT 
faculty from disciplines ranging from engineering, social sciences, 
management, to biology. The United States is a powerhouse of new ideas, 
new technologies, new products and processes. Many people question, 
though, whether we need production capabilities located in the United 
States in order to reap the full benefits of these innovations in the 
form of good new jobs, strong companies, and sustainable economic 
growth. Many of the companies that have been most profitable over the 
past two decades are ones with R&D, design, and distribution in the 
U.S., but which outsource their manufacturing around the world. Without 
production capabilities in the U.S., can we generate new growth and 
jobs? Is this a model that would allow us to grow new industries in 
sectors like biotech, medical devices, and new materials where there 
seems to be a tighter connection between R&D and production? Can we 
even sustain innovation without manufacturing capabilities in the U.S.? 
The bottom line finding of our research is that manufacturing does play 
a vital role in commercializing innovation. To move our economy onto a 
trajectory of sustainable growth and creation of new good jobs, we need 
to bring innovation from across the country--from high-tech start-ups, 
Main Street manufacturers, Fortune 500 companies--at greater rate and 
speed into the market. The critical policies to accelerate these 
processes are private-public partnerships to rebuild the industrial 
ecosystem.
    At the time the MIT research began in 2010, pessimism about the 
future of production in the United States was sweeping across the 
country. Millions of manufacturing jobs had disappeared over a decade. 
People were questioning whether U.S. manufacturing could ever compete 
with Asian low-wage production. The trade deficit in advanced 
technology products was deepening--equal to 17 percent of the total 
U.S. trade deficit by 2011. It seemed that even high-tech sectors of 
industry were doing better overseas than here.
    Everyone agreed that the U.S. needed a higher rate of good job 
creation, but no one seemed to know where jobs could come from. Could 
manufacturing jobs come back? The brightest corporate superstars, like 
Apple, were locating production abroad and still reaping the lion's 
share of profits within the U.S. Was this going to be the American 
model for the future? In emerging technology sectors, like batteries, 
solar, and wind, even when the startups were created in the U.S. out of 
U.S. innovations, commercialization of the technology was taking place 
abroad. What could Americans do to leverage their strengths in new 
science and technology to rebuild a dynamic economy? Would production 
capabilities at home be needed to capture the flow of benefits from 
invention and entrepreneurship? Which capabilities? And how could they 
be created and sustained?
    The point of departure for the MIT Production in the Innovation 
Economy research was recognizing that innovation is critical for 
economic growth and for a vibrant and productive society. Our question 
was: what kinds of production do we need--and where do they need to be 
located--to sustain an innovative economy? As Professor Richard 
Freeman, a Harvard economist, has put it, a person knows it's a 
manufactured product when he drops it on his foot. But for most 
valuable activities today, the traditional line between 
``manufacturing'' and ``services'' has become so blurred that it no 
longer serves to distinguish separable and distinct activities or end 
products. Whether in a giant like Apple or in a small Ohio company that 
makes half-sleeves to repair pipelines and sends its technicians along 
with the product to stand on the oil platforms and shout down 
instructions to the divers, the activities that create most value, that 
is, the ones that are most difficult for others to replicate, are 
bundles of an object you could drop on your foot and of services. We 
focused on those bundles, and we structured our inquiry to locate 
opportunities and dangers for American prosperity in the changes that 
have taken place over the past 30 years in the linkages between an 
innovation and the broad range of production processes that bring it to 
market.
    There are many serious reasons to worry about the fate of 
manufacturing in the United States. Virtually every week brings a new 
report diagnosing the state of manufacturing and emphasizing different 
aspects of its critical significance for the economy. One of the key 
danger points identified in these reports is the declining weight of 
the U.S. in the global economy. Even though the U.S. share of world 
manufactured output has held fairly steady over the past decade, 
economists have pointed out that this reflects good results in only a 
few industrial sectors. And even in those sectors, what appear to be 
productivity gains may be the result of underestimating the value of 
imported components (Houseman 2010). A close look at the composition of 
a worsening trade deficit shows that even in high-tech sectors the U.S. 
has a deteriorating picture. While the output of U.S. high tech 
manufacturing is still the largest in the world and accounted for $390 
billion of global value added in high-tech manufacturing in 2010, U.S. 
share of this world market has been declining, from 34 percent in 1998 
to 28 percent in 2010, as other countries made big strides ahead into 
this market segment. Jobs are another huge concern. The great spike in 
unemployment over the past 5 years was disproportionately due to loss 
of manufacturing jobs. And as the economy revived, such jobs were slow 
to return. Many of them never will. Over the long postwar years of 
prosperity, manufacturing jobs had been especially valuable to workers 
and valuable for middle-class opportunity because they paid higher 
wages and had better benefits than other jobs available to people with 
educational qualifications of high school or less. New manufacturing 
jobs now often come with lower wages and fewer benefits attached. 
National security is also linked to the health of manufacturing through 
the procurement of new weapons and the maintenance and replacement 
parts for the many generations of equipment still in service. The wave 
of disappearance of many small- and medium-sized suppliers creates 
worrisome and still relatively unknown degrees of dependence on foreign 
suppliers for U.S. military contractors. Across the entire industrial 
landscape there are now gaping holes and missing pieces. It's not just 
that factories stand empty and crumbling; it's that critical strengths 
and capabilities have disappeared that once served to bring new 
enterprises to life. Economic progress may be preceded by waves of 
creative destruction, as Joseph Schumpeter claimed. But we need to know 
whether the resources that remain are fertile enough to seed and 
sustain new growth.
    Today digital technologies and borders open to the flow of ideas, 
goods, and services make it possible to build international 
partnerships for bringing innovation into production and into the 
market. For U.S. innovators there are unprecedented new opportunities 
to draw on production capabilities that they do not have to create 
themselves. But there are also long-term risks in these relationships, 
and they go far beyond the loss of any particular proprietary knowledge 
or trade secret. The danger is that as U.S. companies shift the 
commercialization of their technologies abroad, their capacity for 
initiating future rounds of innovation will be progressively enfeebled. 
That's because much learning takes place as companies move their ideas 
beyond prototypes and demonstration and through the stages of 
commercialization. Learning takes place as engineers and technicians on 
the factory floor come back with their problems to the design engineers 
and struggle with them to find better resolutions; learning takes place 
as users come back with problems. And in the challenges of large-scale 
production, companies like 3M and Gillette find a terrain for 
innovation that allows them to reap higher profits.
    There are reasons to fear that the loss of companies that can make 
things will end up in the loss of research that can invent them. When 
we visited the laboratory of MIT Professor Tonio Buonassisi, a leading 
researcher on solar cells, he pointed out all the leading-edge 
equipment that came from tool makers located within a few hours of 
Cambridge, Massachusetts. Much of the machinery had been made in close 
collaboration between the lab and the instrument companies as they 
handed ideas and components and prototypes back and forth. Used for the 
first time in the lab, these tools were now being marketed to 
commercial solar companies. The news on the U.S. solar industry was 
looking worse and worse as the economy stalled, as stimulus spending on 
renewable energy ended, and Chinese competitors hung in, despite losses 
and low margins. If the local equipment makers Buonassisi worked with 
were to collapse it would mean real trouble for research, for the 
scientist relied on working with them to make new tools faster for more 
efficient and cheaper cells. Even in a fragmented global economy with 
instant connection over the Internet to anywhere in the world, the ties 
that connect research in its earliest stages to production in its final 
phases remain vital.
The MIT Production in the Innovation Economy Study: Objectives and 
        Methods
    The approach of the MIT Production in the Innovation Economy 
project was to focus on one broad question: how production capabilities 
here and abroad contribute to sustaining innovation and realizing its 
benefits within the United States. We organized our research to 
discover what it takes to sustain innovation over time and what it 
takes to bring innovation into the economy. We approached these 
questions from multiple angles, looking at innovation in products, in 
processes, in combinations of products and services; at innovation in 
startups, in large multinationals, in Main Street small- and medium-
sized manufacturers, in European and Asian partners and competitors, in 
hotspots for new technologies, like the biotech cluster of Cambridge, 
Massachusetts, in traditional manufacturing country, like Ohio, and in 
new manufacturing areas in the Southwest, in Arizona, in China, and 
Germany.
    To retrace the pathways through which an invention or a new idea 
about a product or a way of improving a product or process get made 
into goods and services for sale in the market, much of our research 
was conducted in firm-level interviews. National Science Foundation 
statistics state that in 2006-8, 22 percent of all U.S. manufacturing 
firms reported ``a new or significantly improved product, service or 
process'' (NSF 2012) but we did not know what they were doing or how 
they were doing it. There is data, too, on the high-risk venture and 
corporate funding of startups, but no systematic account of how these 
firms find the full range of inputs they need on the road to 
commercializing their innovations. In the interviews with senior 
managers we could trace out in concrete detail the trajectories along 
which each company moved as it attempted to make its ideas into 
profits. Where did the company get the inputs it needed to bring 
innovation into production? Did it find these inputs at home or abroad? 
Where and why did it decide to locate each of its operations? Which 
parts of its production activities does it believe it needs to keep in 
close proximity to its R&D in order to bring a product to market and to 
maximize the gains from its own innovation? In the case of innovations 
growing out of existing process or product technologies, our interviews 
in companies allowed us to track interactions between the innovators 
and the manufacturers in great detail from the point at which the new 
idea came into play through production into the hands of customers.
    In all PIE interviews (see Table 1) teams of MIT researchers raised 
basically the same questions, with wording adapted to the context and 
circumstances of each company. The interview template prompted each 
researcher to ask: Tell us about two or three new ideas--new products, 
new processes, improvements on old products or processes--that you 
tried to bring to market over the past 5 years. What did you do to try 
to move it from the stage of being an idea (in a lab, in an R&D center, 
on the shop floor, in your head) into a product that was sold in the 
market? Where did you find the capital for the various stages of scale-
up? Did you self-finance? Or get venture capital? Or bank loans? Or 
corporate partners? Where did you find engineers and workers with the 
right skills? Where did you find technical know-how? Where did you find 
suppliers? How did you decide what to do in-house and what to 
outsource? How did you decide where to locate production? What failed 
and why? What policies make a difference for a company like yours?


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    The first group in our interview population were American-based 
multinationals that figure among the largest global investors in R&D. 
Ten of the firms in our sample rank in the top 100 of the Fortune 500 
companies. Over the past 30 years these companies have changed from 
almost entirely U.S. based operations to organizations carrying out R&D 
and production around the world.
    A second research focus was the population of new companies that 
grew out of patents that had been created in MIT laboratories and 
licensed by the MIT Technology Licensing Office over the years 1997-
2008. There were 189 of them. The researchers set aside the pure 
software start ups and zeroed in on the 150 companies that were engaged 
in some form of production. These are starts-ups that are especially 
well-positioned to succeed, because they emerge from very strong 
research labs, because they take their first steps in the world in an 
extremely dynamic regional hub of innovation with many complementary 
resources in close proximity, and because they have far better access 
to early-stage high risk capital than do firms in much of the rest of 
the country. At those points in the scale-up process where these firms, 
even with all their relative advantages, find serious difficulties in 
obtaining the inputs they need for getting their products into the 
hands of customers, we can anticipate that the ``average'' new American 
firm based on innovative technologies will also be having trouble, so 
there are important lessons to be learned from their experience. There 
are, of course, many reasons firms might fail to find resources to 
scale-up, relating to the market, or competitive landscape, or the 
product, or management.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    The research team learned that these highly innovative companies 
were usually able to obtain funding through relatively long periods 
(even up to 10 years) of early phases of scaling up through early 
market demonstration. But many of them when they came to the stage of 
moving to full-scale commercialization could not find finance in the 
U.S. As many of them made the transition from venture funding to high-
volume manufacturing, they had to look for foreign investors and often 
moved abroad to manufacture their products.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    The third target population within the PIE company sample were 
small- and mid-sized U.S. manufacturers. To figure out how to raise the 
water-level of all kinds of innovations--product, process, service, 
incremental, radical, repurposing, business model--flowing into the 
economy, we need to look beyond Silicon Valley and Cambridge, 
Massachusetts. PIE researchers started from the population of the 3,596 
manufacturing companies in the U.S. which had doubled their revenues 
and increased head count between 2004 and 2008 and had more than $5 
million in annual revenues and more than 20 employees. These companies 
were presumably viable, hence ones in shape to potentially carry 
forward new products and processes into the market. In Arizona, 
Georgia, Massachusetts, and Ohio we carried out interviews with 53 of 
these firms. To this group we added 43 similar firms that we discovered 
through other branches of our work.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Innovation is not only in patents. The novel activities of 
established small- and medium-sized manufacturers rarely correspond to 
the OECD's Frascati Manual and ``Oslo'' definitions of ``research and 
development.'' But there's also a hidden wealth of innovation in 
process, business organization, and manufacturing across America in 
firms of all sizes. Some have leading-edge innovations (and patents). 
But for most Main Street manufacturers, the major innovative activity 
is repurposing technologies developed in one sector for uses in 
different products and processes. A third-generation CEO of a Midwest 
company that makes steel components, for example, told us of developing 
special lighter steel he had used in construction and experimenting 
with bringing it into new work he was doing in defense contracting. For 
an important group of Main Street manufacturers, their role in 
innovation is as suppliers providing vital components and services to 
enable scale-up in other companies. One such company, Mass Tank in 
Middleboro, Massachusetts, exemplifies the pattern. It's a 50-employee 
firm that does its main business in fabricating tanks and selling tank 
inspection services for chemical, food, pharmaceutical, and water 
industries. But it is also working with five start-ups in the region 
and going back and forth with their engineers developing new materials 
and components that may someday be part of a blockbuster new product 
that Mass Tank will have helped these innovators to bring to market. In 
these suppliers, the greatest strength is a combination of design and 
fabrication capabilities.
    But even the strong Main Street manufacturers we studied were not 
growing fast and were not creating many new jobs. Much of the reason 
why, we discovered, was that all scale up of new ideas depended on 
their internal resources. They were not finding any complementary 
capabilities they could draw on in the industrial ecosystem as they 
tried to develop new components. There are few local banks with local 
knowledge left in the U.S. to fund such scale up. Connections with 
community colleges, trade associations, research consortia are weak or 
not present. All these resources are plentiful on the landscape of 
German companies. As we wondered why the contributions to innovation of 
the Main Street manufacturers did not lead to greater profits and 
faster growth, the comparison with Germany was inevitable. An Ohio 
machine toolmaker is not going to take off like Microsoft or Facebook, 
but there are great underexploited possibilities for such firms also. 
We considered what it would take to galvanize more innovative activity 
within Main Street manufacturers, a faster uptake of new technology, 
and a tighter enabling connection with new start-ups across the 
economy.
    The fourth group of firms in the PIE sample were foreign: mainly 
German and Chinese. Germany is one of the world's richest and most 
advanced industrial societies. China is still a poor-to-middle income 
country with rather low productivity and few companies that compete in 
world markets on the basis of unique products or processes. Yet both of 
these very different countries have companies that are world-beaters in 
scaling up innovation to market. In both Germany and China we found 
compelling examples of innovative manufacturing and scale-up that 
challenged many of our ideas about why innovative companies in the U.S. 
so often falter before attaining the size and capacity to reach large 
numbers of customers. The strength of German companies goes well beyond 
defending niches against low-cost competition with incremental 
advances. They create new businesses through the transformation of old 
capabilities and their reapplication, repurposing, and 
commercialization. The U.S. Main Street manufacturers we interviewed 
usually had only their own material, human, and financial resources to 
draw on when they tried to scale-up an innovation. They are ``home 
alone.'' In contrast when the German firms expand into new sectors, 
they draw not only on strong legacy resources, but also on easy access 
to a rich and diverse set of complementary capabilities in the 
industrial ecosystem: suppliers, trade associations, industrial 
collective research consortia, industrial research centers, Fraunhofer 
Institutes, university-industry collaboratives, technical advisory 
committees. The differences in the density and availability of 
resources in the German and U.S. ecosystems explain much of the 
differences between the fate of manufacturing in the two countries.
    The China interviews showed firms emerging with remarkable 
innovative capabilities in manufacturing. China's great initial assets 
were cheap factor prices--cheap land, labor, capital, and an 
undervalued currency. Low-cost labor allowed Chinese companies in 
apparel and footwear to make huge inroads in Western markets. But today 
the PIE research team found Chinese firms in emerging industries like 
renewable energy. These are firms that excel in scale-up to mass 
manufacturing not because of low-cost labor, but because of their 
ability to move complex advanced product designs into production and 
commercialization. The huge China market is of course a major draw for 
investors of all nationalities. But even in those industries in which 
the main customer markets are still in the West, as for consumer 
electronics, photovoltaic cell and module production, American and 
European innovators are turning to Chinese partners. Increasingly the 
reason is the solid capabilities in knowledge-intensive scale-up they 
find in China. These capabilities involve reverse engineering and 
reengineering a mature product to make it more rapidly and efficiently; 
making designs into new-to-the-world products and processes; and 
indigenous product innovation. In each of these categories PIE 
researchers interviewed Western companies and their Chinese partners 
and walked through the Chinese plants with engineers to track how 
exactly innovation was being produced.
    Two other research groups formed within PIE to analyze critical 
inputs to bringing innovation to market: jobs and skills and advanced 
manufacturing technologies. For these research modules, the project 
used surveys as well as interviews. The group working on jobs and 
skills talked with companies, community colleges, high schools, and 
labor market programs across the country. Their sample of close to 900 
manufacturing establishments is the first nationally representative 
data on what skills are needed and shortages occur. Since production 
workers account for over 40 percent of all those employed in 
manufacturing, the team focused on whether there is a shortage of 
skills in this population, as many have claimed. What skills do your 
workers need? employers were asked. Basic reading, writing, and math? 
To use a computer? To work in teams? To take independent initiatives? 
Have skill requirements increased significantly over the past 5 years? 
How long does it take to identify and hire the right candidate? The 
median answer was 4 weeks. Just under 20 percent of the establishments 
had some long-term vacancies (over 3 months) equal to 5 percent or more 
of their core production workers. The analysis drilled down into the 
job categories and firm types where there do seem to be problems 
finding candidates with the right skills. The problems centered in jobs 
requiring skills not generally available in the region; jobs requiring 
advanced math skills; and very small companies. Further probing showed 
that firms with few or no connections to other companies in their area 
and few or no connections to local schools also had more hiring issues. 
The research group conducted interviews in regions with programs that 
have brought together industry, schools, and Government funding to work 
on these problems with some success.
    The team working on advanced manufacturing technologies queried 
engineering colleagues across the country in order to try to locate the 
potential sweet spots for technologies that could radically speed up 
the passage of new goods and services from the lab bench to market. 
Using the surveys and interviews, the team identified and ranked the 
promise of seven major technology groups. These technologies could 
accelerate growth and energy efficiency by transforming manufacturing. 
Today, manufacturing is a lengthy and often inefficient process in 
which the raw materials which nature provides are pushed through stages 
of fabrication, assembly, and warehousing and emerge as goods for sale 
in the market. In a future which new technologies could enable, 
manufacturing might become a rapid process in which human-designed and 
engineered materials would be pulled by demand through continuous 
manufacturing and customization to meet specific and differentiated 
human needs. Today manufacturing remains highly centralized and 
concentrated in large factories and components and finished goods are 
transported at great cost and with high impact on the environment 
through long supply chains. Trends to offshoring and outsourcing have 
made manufacturing plants bigger and the distances goods traverse even 
longer. Tomorrow we can imagine technologies that would ``destroy the 
tyranny of bulk'' and distribute manufacturing, thus making it possible 
to manage capacity and demand flexibly through networks of small, 
localized manufacturers linked by Internet.
The Great Transformation: The New Corporate Structures of the American 
        Economy and the Origins of the Production Problem
    Fifty years ago, at the high water mark of American economic 
dominance in the world, 29 percent of U.S. workers were employed in 
manufacturing (January 1960), wages of the manufacturing workforce had 
been rising for decades, and innovation and manufacturing moved 
together in lockstep to produce a vast new stream of products for the 
market. Invented in the USA meant made in the USA. New products were 
first scaled-up, standardized, mass produced, and brought to high 
levels of performance and reliability in the advanced industrial 
countries in which they were invented. Only when production matured and 
the good became a commodity did manufacturing shift to less-developed 
countries with less-skilled workers.
    Today invented in the USA no longer means made in the USA. Given 
the capabilities that now reside abroad, the next generations of 
consumer electronic products designed in the U.S. are likely still to 
be made in Asia--even if wages continue to rise there. In some 
industries today, it would be very difficult to do early-stage 
manufacturing in the U.S., because the technical expertise, the 
workplace skills, equipment, and the most advanced plant lay-outs are 
no longer present in the country or have degraded and fallen behind 
state-of-the-art elsewhere.
    It's not only in ``mature'' industries like apparel that 
manufacturing has moved overseas. It's in newer sectors, like solar 
cells, wind turbines, and batteries. In the past chip design and chip 
fabrication had to be carried out within the four walls of the same 
company; today chip designers can send files of digital specifications 
to semiconductor fabrication plants anywhere in the world for 
production. Apple can define, design, and distribute iPods and iPhone 
and iPads in the U.S. without having any significant production 
facilities here at all.
    How did this new global economy of fragmented research, 
development, production, and distribution come into being? What does it 
mean for the future of the U.S. economy? There were multiple causes of 
this transformation including many taking place outside the U.S., like 
the rise of emerging market competitors and large new consumer markets. 
But what stands out in the PIE analysis is the impact of a tectonic 
shift in corporate ownership and control that took place well before 
globalization or Asian development had come into full play. The driver 
was financial market pressure for higher quarterly returns from 
companies that were less diversified, ``asset-light,'' and organized 
around core competence. From the 1980s the large vertically-integrated 
corporations that had long dominated American manufacturing began to 
shed many of their business functions from R&D and design through 
detailed design to manufacturing and after-sales services. These 
activities had all once been joined under one corporate roof. By 2013, 
however, very few large American companies remain with vertically 
integrated structures. Companies like General Electric or Procter & 
Gamble with a wide range of different businesses under one corporate 
roof and a predominant preference for integrating research through 
production are the exception.
    First among the business functions that companies started moving 
out of their own corporate walls was manufacturing--for that shift 
produced reductions in headcount and in capital costs that stock 
markets immediately rewarded. Advances in digitization and modularity 
in the 1990s made it possible to carry out this strategy and to 
outsource production to manufacturing subcontractors like Flextronics 
and Jabil and eventually to foreign suppliers and contractors like 
Taiwan Semiconductor Manufacturing Company, Quanta, and Foxconn.
    Out of those changes in corporate structure have come not only 
great new opportunities, but also some of the most difficult hurdles we 
face today in trying to move U.S. innovation into the market. Here we 
can only list some of these challenges:

    Vertically integrated enterprises used to organize and pay 
        for educating and upgrading the skills of much of the 
        manufacturing workforce. They had the resources to do this. And 
        long job tenure meant companies could hope to recoup their 
        investment over the course of the employees' careers. Many of 
        the employees who were trained in big companies or in 
        vocational schools they supported ended up working for smaller 
        manufacturers and suppliers. Today, American manufacturing 
        firms are on average smaller, and have fewer resources. They do 
        not plan to hold on to their employees for life. They cannot 
        afford to, or, in any event, do not, train. How do we educate 
        the workforce we need?

    Vertically integrated enterprises like AT&T used to support 
        long-term fundamental research in centers like Bell Labs and 
        Xerox PARC and Alcoa Research Lab, each employing thousands of 
        scientists and engineers. As corporate structures have been 
        resized, basic research has been drastically cut, these centers 
        have mostly disappeared, and corporate R&D is now far more 
        tightly linked to the near-term needs of the business units. 
        How should we fund a strong stream of basic and precompetitive 
        research today? If much cutting-edge research no longer is 
        taking place within companies--but in universities or small 
        start-ups or in Government labs--how can we propel these 
        innovations through to commercialization? How can we diffuse 
        new technologies into established companies?

    When innovation grew out of large firms, they had the 
        resources to scale up to mass commercialization. In the 
        thirties, a corporation like DuPont not only invested for a 
        decade in the fundamental research that led to nylon, but once 
        the lab had a promising product, DuPont had the capital and the 
        plants to bring it into production. Today, when innovation is 
        more likely to emerge in small spin-offs or out of university 
        or Government labs, where do the scale up resources come from? 
        How available is the funding needed at each of the critical 
        stages of scale up: prototyping, pilot production, 
        demonstration and test, early manufacturing, full-scale 
        commercialization? When scale-up is funded mainly through 
        merger and acquisition of the adolescent start-ups and when the 
        acquiring firms are foreign, how does the American economy 
        benefit? How do American taxpayers who paid for much of the 
        research at the origin of the process benefit?

    Big American corporations used in effect to provide public 
        goods through spillovers of research, training, diffusion of 
        new technology to suppliers, and pressure on State and local 
        governments to improve infrastructure. These spillovers 
        constituted ``complementary capabilities'' that many others in 
        the region could draw on, even if they had not contributed to 
        creating them. As the sources of these ``complementary 
        capabilities'' have dried up, large holes in the industrial 
        ecosystem have appeared. How can these capabilities be 
        recreated and sustained in order to maintain a terrain 
        favorable for innovation?

    As the PIE researchers looked across the interviews and surveys we 
carried out in the project, we saw the holes in the industrial 
ecosystem as the single most challenging obstacle to creating and 
sustaining production capabilities in the United States that enable 
innovation to come to market. What we have come to think of as 
``holes'' might be less picturesquely described as ``market failures'' 
or as absence of ``complementary capabilities'' that companies can draw 
on to supplement their own resources when they seek to develop their 
new ideas. These holes in the industrial ecosystem are ones that have 
been hollowed out by the disappearance of large numbers of suppliers 
under pressure from global competition and by the disappearance of 
local capabilities once provided by large corporations as part of their 
own business operations. As national banks have bought up local banks, 
local bankers with intimate understanding of local manufacturing have 
become an endangered species--making it harder to get bank loans. 
Critical suppliers have dwindled in numbers. In small firms as well as 
large defense contractors, we found companies considering the costly 
option of internalizing some of the functions their suppliers currently 
perform, for fear that what's become a single-source supplier will go 
out of business. These are concerns even for current production. But 
the difficulties are far more challenging when a company seeks to 
develop a new or improved product or process. New inputs are needed, 
like different skills, finance, and components that firms cannot 
efficiently produce all by themselves. Even startup companies with 
great novel technologies and generous venture backing cannot do it all 
in-house: they need to find suppliers, qualified production workers and 
engineers, expertise beyond their own. Established Main Street 
manufacturers in the regions we visited find little beyond their own 
internal resources to draw on when they seek to develop new projects. 
They're ``home alone.'' This environment is far different from that of 
the German manufacturers we interviewed who are embedded in dense 
networks of trade associations, suppliers, technical schools, and 
applied research centers all within easy reach.
What's To Be Done? Pathways for Growth
    There is much work to be done on all fronts to renew the production 
capabilities that the United States needs in order to gain full value 
from its innovation. The PIE research, however, points to one objective 
as most urgent: rebuilding the industrial ecosystem with new 
capabilities that many firms of all kinds could draw on when they try 
to build their new ideas into products on the market. New research 
suggests that it's the colocated interdependencies among complementary 
activities, not narrowly specialized clusters, that over time produce 
higher rates of growth and job creation, and they do so across a broad 
range of industries, not just in high-tech or advanced manufacturing. 
The examples we have observed in the PIE research of trying to create 
public goods--or semipublic, or club goods--in the industrial ecosystem 
is the approach that may pay the greatest dividends.
    The cases we have studied in detail are extremely diverse, but the 
institutions they have set in place involve a few common principles. 
The key functions that such mechanisms perform are convening, 
coordination, risk-pooling and risk-reduction, and bridging. They are 
public goods that the market does not generate. There are initiatives 
in which a private company or a public institution performs a convening 
function. The initiative usually starts with the ``convenor'' putting 
new resources on the table for use by others on condition that they too 
contribute to the pot. One well-known example is the SEMATECH 
Consortium that the semiconductor manufacturers and equipment makers 
formed in 1987 with financing both from the U.S. Federal Government and 
industry. SEMATECH today functions with funds from its members. By 
bringing companies together for roadmapping next generation chips, 
SEMATECH reduces the costs and risks of each company as it moves along 
the Moore's Law trajectory. New York State's investments in new 
fabrication facilities and new nanotechnology research in upstate New 
York at the College of Nanoscale Science and Engineering at the State 
University of New York, Albany, create common resources that the 
industrial partners can use.
    Another example came from our Ohio interviews: the Timken Company, 
a manufacturer of tapered bearings and of specialty steels, initiated a 
partnership with the University of Akron and transferred Timken's 
coatings laboratory, its equipment, and several of its key researchers 
to the university. With resources from the company, the university, and 
the State, new graduate degree programs are starting; a new consortium 
on coatings and engineered surfaces has been created that is open to 
other corporate members; and a set of promising coatings technologies 
that had been ``stranded'' in a bearings company can now be developed 
as potential start-ups in which both the university and the corporate 
consortium members can invest. Potentially, companies from outside the 
region might join, but much of the value from participation will derive 
from face-to-face presence in the labs at the University of Akron, from 
being able to use university labs (funded at least in part with public 
money) instead of keeping these facilities in-house, and from the 
chance for local companies to hire graduates. In these cases the 
``convenors'' hold out the lure of the use of common facilities and 
expensive equipment and training and proximity to cutting edge 
researchers. In contrast to tax breaks, which many States hand out, new 
resources are embedded in institutions that do not stand or fall on the 
participation of any one member.
    Sometimes the lead in creating new coordination was taken by a 
private company. In other cases, coordination comes from a public 
intermediary. In Springfield, Massachusetts, the Hampden County 
Regional Employment Board (REB) is mandated by Federal job training 
legislation to work with firms, localities, and educational 
institutions in the operation of the Workforce Investment Act. When the 
local machining association faced a shortage of skilled workers as the 
result of the closing of several large companies that had previously 
trained apprentices, it approached the REB. The REB brought the firms 
together with five vocational high schools and two community colleges. 
The connections between the schools and the companies had been thin and 
intermittent. With active intervention from the REB, the parties 
started to work on curriculum development; on training programs for 
supervisors and for unemployed workers; on organizing career fairs and 
firm visits to encourage high school students to consider machining 
jobs; and the gaps began to close.
    Risk-reduction and risk-pooling are among the original functions 
for all forms of insurance and standard setting, and virtually all 
trade associations develop these functions to a greater or lesser 
extent for their members. For example, as we traced out the network 
mentioned above that connects Mass Tank to start-up companies in the 
New England region, we discovered that Mass Tank itself depends on a 
trade association, the Steel Tank Institute, for standards, testing, 
expertise, and insurance. The dangers of leaky tanks create enormous 
potential hazards--and lawsuits--and no small company on its own could 
afford adequate insurance from the regular insurance market. By working 
with the Environmental Protection Agency to develop safety standards, 
the Steel Tank Institute has been able to offer its members technology, 
testing, and insurance that covers them.
    These very old uses of association for risk-pooling today are being 
put to new purposes in harnessing them to innovation and to 
commercializing innovation in the United States. The first of the 
National Manufacturing Innovation Institutes, the National Additive 
Manufacturing Innovation Institute (NAMII) in Youngstown, Ohio, offers 
companies, universities, and Government agencies a way to distribute 
the risks of investing in new technologies while still deriving many of 
the potential benefits. As one industrial partner from a metal-working 
company expressed his perception of the risks: ``We don't make plastic 
toys, so we couldn't justify investing in-house in a technology like 
this that may just be a flash in the pan. But just suppose it does work 
out and we're not close enough to it to have a voice in shaping its 
development . . . what then?'' For those firms that do already have 
proprietary stakes in additive manufacturing there are yet other risks, 
and some forms of association with NAMII can help protect against them. 
For a region like Northeast Ohio and Southwest Pennsylvania, there's 
the enormous promise of technologies that could revitalize many of the 
small- and medium-sized manufacturers but no way of finding a single 
industrial champion that would have an interest in carrying the 
project. The gains from 3-D printing, if it ever succeeds in overcoming 
its many current limitations, would be harvested by a multiplicity of 
users across diverse industrial sectors. When gains from innovation are 
significant but distributed thinly across many firms, it's unlikely 
that any single one of them will invest enough to bring it to life. 
NAMII offers potential ways to induce collaboration and spread its 
risks that could bring a new technology to life and inject new vitality 
into the regional economy.
    The cases we have described as exemplifying new approaches to 
rebuilding the industrial landscape are so new that we cannot know if 
any one of them will ultimately work or not. If we believe, 
nonetheless, that they have a real chance, it's because what's held 
manufacturing in the United States in the last resort--even as so much 
turned against it--was the advantage firms gain from proximity to 
innovation and proximity to sophisticated users. Even in a world linked 
by big data and instant messaging, the gains from colocation have not 
disappeared. If we can learn from these ongoing experiments in linking 
innovation to production, new streams of growth can flow out of 
industrial America.
                                 ______
                                 
                 PREPARED STATEMENT OF LEO HINDERY, JR.
    Chairman, Smart Globalization Initiative, New America Foundation
                           December 11, 2013
The Manufacturing Imperative
    The importance of the manufacturing sector to America and the 
American economy is, to most policy makers and economists, hard to 
dispute, yet over just the past 12 years U.S. manufacturers have cut 
30-plus percent of their workforce, or more than 6 million workers. The 
manufacturing sector's contribution to GDP has fallen to around 12 
percent from nearly 23 percent in 1970.\1\ \2\
---------------------------------------------------------------------------
     \1\ ``A Reality Check on American Manufacturing'', Bloomberg 
Businessweek, September 10-16, 2012.
     \2\ Table B-1, et al., of the August 2012 BLS Employment News 
Release, http://www.bls.gov/news.release/pdf/empsit.pdf.
---------------------------------------------------------------------------
    In a compelling statement in defense of the importance of 
manufacturing to domestic job creation and maintaining America's 
competitiveness and national security, Rich Harshman, President and CEO 
of Allegheny Technologies Inc., wrote: ``You can't just have a service 
sector as the underpinning of a successful, diverse, and globally 
competitive economy. The type of economic diversification that can 
support a middle class and meet our international obligations mandates 
that the U.S. be a successful manufacturer.'' \3\
---------------------------------------------------------------------------
     \3\ ``Made in America'' special advertising section, Bloomberg 
Businessweek, September 10-16, 2012.
---------------------------------------------------------------------------
    The attributes and implications of the manufacturing sector are 
compelling:

  1.  Largest multiplier effect. Manufacturing has by far the largest 
        employment multiplier of all sectors of the economy, at least 
        three times that of any service sector, including the hallowed 
        financial services sector.

  2.  Productivity powerhouse. Manufacturing productivity growth is 
        consistently 60 percent greater than in the private, nonfarm 
        economy as a whole.

  3.  Better wages and benefits. Manufacturing employees earn, on 
        average, 23 percent more than workers in other parts of the 
        economy.

  4.  Source of innovation. Manufacturers are responsible for more than 
        70 percent of all business R&D.

  5.  Diversified employment. And ethically, manufacturing employs 
        workers at all skill and educational levels and reduces income 
        inequality.

    Yet even as we meet here today, the meager real economic recovery 
which we are experiencing has, in relative terms, substantially further 
disadvantaged production and nonsupervisory workers. \4\
---------------------------------------------------------------------------
     \4\ Ben Casselman, ``Job Gap Widens in Uneven Recovery'', Wall 
Street Journal, November 11, 2013.
---------------------------------------------------------------------------
Size of the Manufacturing Sector
    What we have consistently failed to do in America since about 1980 
is appropriately ``size'', so to speak, the sector.
    Right now, the U.S. manufacturing sector employs about 12 million 
workers, or just 8 percent of the U.S. civilian labor force. However, 
work we've done shows that the sector needs to represent more on the 
order of 20 percent of total U.S. employment, otherwise periodic 
consumer-credit driven bubbles will continue to plague our economy 
while concurrently we will never bring to bay our several hundred 
billion dollar a year trade deficit in manufactured goods.
    It's actually far more important that policy makers focus on our 
manufactured goods trade deficit, with its myriad adverse economic, 
social and defense implications, than on the more nuanced Federal 
budget deficit. In fact, it's almost impossible to fix the budget debt 
without fixing the trade deficit. \5\ Because, when you try to do that 
as we have for the last 3 years, the results of the austerity on jobs 
and the economy, especially for hard working lower-income Americans, 
has been devastating. \6\ And we know, verifiably, that eliminating the 
trade gap in manufactured goods can be achieved without materially 
reducing Americans' standard of living. \7\
---------------------------------------------------------------------------
     \5\ Joseph Stiglitz, ``Making Globalization Work'', 2006, pp. 245-
68.
     \6\ Paul Krugman, ``The Mutilated Economy'', New York Times, 
November 7, 2013.
     \7\ Michael Mandel and Diana G. Carew, ``Manufacturing in the App 
Economy: How Many Jobs Should We Aim For?'' Progressive Policy 
Institute, May 2012.
---------------------------------------------------------------------------
A National Manufacturing Policy
    Perhaps the primary reason for America's dramatic decline in 
manufacturing is that unlike every one of its large trade competitors, 
the U.S. does not have an articulated all-of-government national 
manufacturing policy. U.S. Government policies related to access to 
financing, R&D and investment tax credits, taxes, foreign subsidies, 
and domestic procurement must be integrated into a dynamic cohesive 
strategy. Mandating the U.S. Government develop a coherent strategy is 
an idea that has been proposed by a number of members of Congress and 
the Senate, and it's something that is long overdue. \8\
---------------------------------------------------------------------------
     \8\ See, S.1709 Coons-Kirk bill on the subject, cosponsored by 
Sherrod Brown, at http://www.coons.senate.gov/newsroom/releases/
release/senators-coons-kirk-introducebipartisan-bill-to-create-a-
national-manufacturing-strategy.
---------------------------------------------------------------------------
    In considering a national manufacturing strategy, it is not simply 
enough to identify what the U.S. should be doing. Countries like 
Singapore, China, and others already prepare their own national 
economic strategies, where they indicate certain preferred sectors into 
which they deploy significant subsidies to build at home and attract 
companies from abroad. The U.S. should not turn a blind eye to foreign 
country's economic strategies, and rather should make a defensive 
economic strategy a key part of any national manufacturing strategy. 
This defensive strategy should focus on identifying key subsidies and 
unfair trade practices, like discriminatory technology standards, being 
used to build up local industries to the detriment of U.S. businesses 
and workers. And our trade enforcement agencies should get serious 
about forcing the disclosure of the subsidies and unfair trade 
practices and bring cases to stop them. \9\
---------------------------------------------------------------------------
     \9\ See, S.355, Merkley-Enzi bill to require USTR to do a 
counternotification of subsidies for any country 2 years in a row that 
does not meet its WTO requirements to notify on subsidies.
---------------------------------------------------------------------------
Access to Financing
    While commercial bank lending to the Nation's large multinational 
manufacturers is fairly robust, more than a quarter of the small- and 
medium-sized manufacturers (or SMEs) still cite ``lack of capital to 
grow'' as their biggest challenge, precisely at the time they need 
loans to hire more workers, buy new equipment and aggressively market 
themselves.
    The banks' expressed reservation, as if out of the movie 
``Casablanca'', is that these SMEs are ``too dependent on short-term 
contract work'', \10\ which of course is what largely defines most 
manufacturing SMEs.
---------------------------------------------------------------------------
     \10\ Parija Kavilanz, ``Manufacturers to Banks: We Need Money 
Now'', CNNMoney.
---------------------------------------------------------------------------
    Part of the problem is our largest national banks' focus on short-
term financialism and the attractiveness to them of generating revenues 
through secondary-market trading rather than from primary market 
capital raising and on-the-ground lending. The Dodd-Frank Act's reforms 
to ban proprietary trading, if meaningfully implemented, should help 
reorient the major banks away from betting on the ups and down on 
markets, and instead focus on raising capital for customers. More 
should be done as well.
    Programs such as the State Small Business Credit Initiative, passed 
in the 2010 Small Business Jobs Act, also appear to offer a successful, 
flexible model that the Congress may wish to revisit and expand. States 
like Michigan have used the 2010 Act to fund collateral support 
programs, while others have used it to support loan losses by banks, 
allowing them to make loans that would otherwise not get made.
    The U.S. also needs to be more realistic in its approach to public 
development banks. All of the world's leading industrial Nations--
except the United States--have important public development banks, 
which in the aggregate account for 25 percent of the assets of the 
world's banking system and 30 percent of the financial assets in the 
banking system of the European Union. \11\
---------------------------------------------------------------------------
     \11\ Jose de Luna-Martinez and Carlos Leonardo Vicente, ``Global 
Survey of Development Banks'', The World Bank--Policy Research Working 
Paper 5969, February 2012.
---------------------------------------------------------------------------
    Specifically to this point, all of the world's leading industrial 
Nations, except the U.S., have important public development banks: 
Japan relies on Japan Development Bank; Germany on Kreditanstalt fuer 
Wiederaufbau (KfW); South Korea on Korea Development Bank; Brazil on 
Brazil Development Bank (BNDES); Canada on Business Development Bank of 
Canada; and of course China on China Development Bank. And by not 
deploying public capital to support manufacturing, the U.S. is putting 
our businesses at a competitive disadvantage and allowing foreign 
countries to pull jobs overseas, which is especially the case if the 
U.S. does not aggressively enforce illegal subsidy cases through WTO 
and U.S. domestic trade remedy law.
    These countries also use their export-import banks far more 
aggressively than the United States uses its, often notably to make 
``matching loans'' to help offset foreign competition.
    Another way to provide this funding is through a ``Made in America 
Bonds'' (MABs) program modeled on the Build America Bonds program that 
was created by the American Recovery and Reinvestment Act of 2009. \12\ 
As proposed by Michael Lind and Daniel Mandel of the New America 
Foundation, Made in America Bonds would be a new class of tax credit 
bonds issued by States, local governments, and other authorized 
entities, especially municipalities, to encourage the establishment and 
expansion of manufacturing in the United States.
---------------------------------------------------------------------------
     \12\ Michael Lind and Daniel Mandel, ``Made in America Bonds'', 
New America Foundation, March 22, 2010.
---------------------------------------------------------------------------
    Important aspects of the MAB program should be (a) ``employment 
impact statements'' to determine which proposed new manufacturing 
initiatives are most likely to create and support U.S. jobs and (b) 
``Made in America'' requirements, since no single measure would do more 
to help resuscitate U.S. manufacturing employment than an all-of-
government buy-domestic procurement requirement.
    Another aspect of maintaining a level playing field with respect to 
access to capital relates to State-owned and State-invested enterprises 
(broadly defined as SOEs) operating on other than commercial 
considerations. The U.S. needs to establish a legal structure to 
prevent anticompetitive practices, and to then ensure that when they 
occur, there are specific legal remedies available.
    We of course have laws against unfair trade--most notably the 
Sherman Antitrust Act passed almost 125 years ago and the Clayton 
Antitrust Act passed roughly 25 years later. But vis-a-vis the new 
world of foreign investment by SOEs, especially given China's ``go 
out'' strategy designed to promote its SOEs' foreign investments and 
activities, there is in reality little in current law to adequately 
ensure that U.S. workers, businesses and investors have a level playing 
field to compete for the ownership and control of important national 
economic resources. Compare this to Canada, which recently passed a 
foreign investment law that allows the Government to review foreign 
investments in light of their impacts on Canada's national economic 
strategy.
    Should a major Chinese or Vietnamese SOE seek to establish 
operations in the U.S. market directly or through takeovers of U.S. 
firms, there is now the real risk that such SOE could, given its below-
market State-supported cost-of-capital and other behavior, unfairly 
compete with U.S. businesses, workers, and investors, all without 
running afoul of our current antitrust laws. It's past time to update 
our foreign investment laws to ensure a level playing field, and the 
United Steelworkers have proposed some interesting ideas in their 
important position paper ``Ensuring Competitive Markets.'' \13\
---------------------------------------------------------------------------
     \13\ United Steelworkers Union, Position Paper: ``Ensuring 
Competitive Markets'', June 2013.
---------------------------------------------------------------------------
    The 2012 Task Force on Jobs, which I cochaired with USW President, 
Leo Gerard, also identified three investment incentives that should be 
made part of any overall access-to-capital initiative, including:

    First, extend and expand Treasury's 1603 Cash Grant Program 
        for manufacturing-centric renewable energy production.

    Second, extend the Advanced Manufacturing Tax Credit 
        (Section 48c) of The American Recovery and Reinvestment Act 
        (ARRA) in order to prompt further investments in qualified 
        advanced energy projects at manufacturing facilities.

    Third, expand the Loan Guarantee Program of Title 17 of the 
        Energy Policy Act of 2005 to include ``energy-efficiency'' 
        investments.

    Permanent R&D and investment tax credits directly linked to job 
creation would also play an important role in industrial 
revitalization. Such tax credits would help rehabilitate and renovate 
existing manufacturing facilities, provide incentives for purchasing 
new equipment, and jump-start new technologies and process-development.
Tax Reform
    President Obama has said many times that, ``It's time to stop 
rewarding businesses that ship jobs overseas, and start rewarding 
companies that create jobs right here in America.'' \14\
---------------------------------------------------------------------------
     \14\ http://www.whitehouse.gov/the-press-office/2012/01/24/
remarks-president-state-unionaddress
---------------------------------------------------------------------------
    Two actions would significantly improve the financing prospects and 
the global competitiveness of the manufacturing sector:

    First, reduce the corporate tax rate from 35 percent to 
        between 25 and 28 percent while getting rid of the corporate 
        ``tax expenditures'' that have nothing to do with retaining 
        existing jobs and creating new ones.

    Second, enact a value-added-tax (VAT) to offset the 
        significant tax disadvantages now faced by American 
        corporations on account of the VATs used by most trading 
        partners, but not by the U.S. Right now, in order to attract 
        overseas investment and retain domestic production, our major 
        foreign competitors without exception use a lower corporate 
        income tax combined with a VAT, the result of which is net 
        higher taxes on U.S.-made products sold both at home and 
        abroad. \15\
---------------------------------------------------------------------------
     \15\ Leo Hindery, Jr., and Michael Lind, ``America Needs a VAT'', 
Los Angeles Times, May 24, 2010.
---------------------------------------------------------------------------
Building Our Physical Infrastructure
    A key foundation of the manufacturing sector--and a widely 
recognized public responsibility--is infrastructure. Moving materials 
and goods--and workers--around the country and to market requires 
roads, rapid transit, bridges, ports, and airports that serve 21st 
century needs. Right now, however, the U.S. is sorely underinvesting in 
infrastructure, and what's especially needed, for manufacturers of all 
sizes and for the Nation, is a new large National Infrastructure Bank, 
ideally with the following principle characteristics:

    The Bank should be an independent financial institution 
        owned by the Federal Government with overall capitalization of 
        at least $1 trillion and with its primary source of leverage 
        being the large State and municipal pension plans.

    As its equity-capital base the Bank should have a soft 
        Federal guarantee equal to about one-tenth of its total 
        capitalization, which, if thoughtfully designed, will not need 
        to be ``scored'' and thus added to the Federal deficit.

    Using its authorization to make and guarantee loans, 
        leverage private capital, and issue general-purpose bonds, the 
        NIB should be allowed to fund a broad range of infrastructure 
        projects beyond traditional roads, rails, and runways.

    Governance should be by an independent, nonpartisan board 
        of (i) executives who are expert in infrastructure, (ii) labor 
        leaders, and (iii) public policy experts.

    Projects in the States and for the local governments whose 
        pension plans participate in capitalizing the Bank should have 
        preference over those of States and local governments which 
        elect not to participate.

    Finally, the Bank should only fund projects which adhere to 
        ``buy domestic'' (Made in America) requirements that are 
        consistent with the United States' international trade 
        agreements.

    The Defense Production Act, which is up for reauthorization next 
year, might, if DOD's understandable concern about quick delivery of 
time-sensitive goods can be addressed, might serve as a meaningful 
complement to an all-of-Government National Infrastructure Bank.
    One further comment I must add is that maintaining mostly local, 
public control of our infrastructure is critical. Resuscitating 
America's infrastructure cannot become a mechanism for outsourcing 
control over some of our major rehabilitated roads and bridges and, 
especially, some of our vital seaports and airports to private 
investors, whether they're from Wall Street, Beijing, or Abu Dhabi. Of 
particular concern, at least to me, is the proposal, yet again being 
advanced by former Treasury Secretary Bob Rubin, that China's big banks 
be given a major role in upgrading our important infrastructure.
Building Our Human Infrastructure
    Abundant, pertinent skills are integral to the robustness of a 
Nation's manufacturing sector, and skill setting must be part of any 
national manufacturing policy. Currently, far too many young Americans 
are growing up without the opportunity to obtain the skills and the 
interest at young enough ages to develop promising careers in 
manufacturing.
    By the time students get out of middle school, if they've not 
developed sufficient science, technology, engineering, and math 
skills--i.e., so-called ``STEM'' skills--it may well be too late for 
them in the increasingly highly automated world of advanced 
manufacturing. Yet we know that working with your hands at almost any 
level is a great way to establish living wage careers in the 
manufacturing sector.
    Many countries use the promise of free education and training for 
local workforces--and apprenticeship programs \16\--to attract 
investors to move factories and associated jobs abroad. The U.S. can't 
sit idly by without further eroding our global competitiveness.
---------------------------------------------------------------------------
     \16\ Nelson D. Schwartz, ``Where Factory Apprenticeship Is Latest 
Model From Germany'', New York Times, November 30, 2013.
---------------------------------------------------------------------------
    Expanding STEM education as well as career and technical 
education--and providing professional development and support for 
teachers and school leaders to promote high-quality instruction--is 
critical to restoring the human infrastructure of the U.S. \17\ As we 
are hopefully winding down our involvement with foreign wars, we need 
to redouble our training efforts here at home as we did in the 
immediacy of the end of the Second World War.
---------------------------------------------------------------------------
     \17\ S.1675, ``Preparing Students for Success in the Global 
Economy Act'', Senator Jeff Merkley, et al.
---------------------------------------------------------------------------
Trade Enforcement
    Any effort aimed at revitalizing manufacturing in America must 
include fundamental reform of our trading relationships. For example, 
our annual trade deficit in manufactured goods just with China costs us 
about $40 billion in lost \18\ wages.
---------------------------------------------------------------------------
     \18\ Economic Policy Institute, September 30, 2013.
---------------------------------------------------------------------------
    Much has been written about how China has unfairly gained trade 
advantages through its abysmally low direct-labor costs, low-grade 
environmental and labor standards and currency manipulation. These same 
conditions are now drawing American manufacturing jobs to even less 
developed countries, like Vietnam and Bangladesh. As trade scholars 
such as Hastings trade law professor Joel Paul have argued for and 
policy leaders like Subcommittee Chairman Merkley have endorsed, it 
should be easy to include the cost of both adequate wages and 
sustainable production methods within the calculation of the cost of 
production in antidumping duties which should incentivize foreign 
companies to raise wages, workplace safety, and environmental 
compliance proactively. \19\
---------------------------------------------------------------------------
     \19\ Joel Paul, ``Fair Wages for Free Trade'', Huffington Post, 
October 10, 2012, http://www.huffingtonpost.com/joel-richard-paul/fair-
wages-for-fair-trade_b_1944379.html.
---------------------------------------------------------------------------
    Less appreciated, however, are the variety and magnitude of the 
other measures China, for example, uses to game the system. Since some 
of these unfair practices are already being adopted by countries such 
as Brazil and Vietnam, getting right America's trade relationship with 
China is particularly critical. These so-called ``trade advantages'' 
include: China's regulations to block foreign firms from selling their 
products to Government agencies; technical standards that prevent or 
hinder the Government and local businesses from buying U.S. goods; and 
rules that force Western companies to give up technological secrets in 
exchange for market access.
    Of the many possible responses to the persistent trade abuses that 
are happening in China and elsewhere, six that particularly stand out 
are as follows:

  1.  The Administration's focus should not be, as it states, growing 
        gross exports. \20\ All that matters is our net exports 
        position, which currently remains massively negative. \21\
---------------------------------------------------------------------------
     \20\ August 4, 2010, letter to President Barack Obama by Senators 
Sherrod Brown (D-OH), Olympia J. Snowe (R-ME), Charles E. Schumer (D-
NY), Debbie Stabenow (D-MI), Jim Bunning (R-KY), Arlen Specter (D-PA), 
Susan M. Collins (R-ME), Ron Wyden (D-OR), Benjamin L. Cardin (D-MD), 
Robert P. Casey, Jr. (D-PA), and Carl Levin (D-MI).
     \21\ Leo Hindery, Jr., ``U.S.-China: How Long China's Doormat?'' 
Huffington Post, August 24, 2010.

  2.  The next required Semiannual Report on International Economic and 
        Exchange Rate Policies from the Treasury Department must be 
        objective and designate any country as a currency manipulator 
        that meets the standard. Thereafter, the USG needs to go after 
---------------------------------------------------------------------------
        all of that country's illegal subsidies.

  3.  The USG should not enter into new investment treaties with 
        countries like China until those countries are fully WTO-
        compliant. For example, there are still serious questions about 
        China's Indigenous Innovation Production Accreditation (IIPA) 
        Program. In the interim, the USTR should bring a Section 301 
        case against the IIPA Program. \22\
---------------------------------------------------------------------------
     \22\ Leo Hindery, Jr., ``China Trade: A `Target Rich Environment' 
'', Huffington Post, March 20, 2012.

  4.  The ``one size fits all'' premise behind the proposed Trans-
        Pacific Partnership FTA negotiations--which would include 
        Brunei and New Zealand equally alongside China and Japan--is 
        deeply flawed, both intellectually and economically, and should 
---------------------------------------------------------------------------
        be revisited.

  5.  Congress needs to pass a bill similar to the Reciprocal Market 
        Access Act of 2011 (H.R. 1749) and its Senate counterpart 
        (S.1766) which would eliminate the distinction that exists 
        between traditional tariff barriers and the much-larger 
        nontariff barriers that prevent fair market access by American 
        suppliers. \23\
---------------------------------------------------------------------------
     \23\ Ibid.

  6.  Finally, ``trade agreement enforcement'' should be moved from the 
        U.S. Trade Representative's office to a fully enabled and 
        funded office in the Justice Department. At a minimum, the new 
        Assistant Secretary of Commerce for Enforcement and Compliance 
        should be named the head of the Interagency Trade Enforcement 
        Committee and made independently accountable to Congress for 
        the ITEC's trade enforcement agenda. A top-to-bottom review of 
        the USG's trade enforcement capabilities, including budgetary, 
        should be initiated.
Conclusion
    Getting our manufacturing policy right means taking actions both 
here and abroad. We have to adopt a national manufacturing policy, 
build our physical and human infrastructure, close tax loopholes that 
drive manufacturing abroad, and fight for a level playing field in 
international trade. Although the Obama administration has made some 
progress, the United States is still tolerating far too many selfish, 
shortsighted behaviors that are hurting the middle class and its 
workers, creating a large and unsustainable trade imbalance in 
manufactured goods, and crippling our economic vitality and national 
security.
                                 ______
                                 
                  PREPARED STATEMENT OF DEREK SCISSORS
            Resident Scholar, American Enterprise Institute
                           December 11, 2013
    Large economies should always get their own house in order first. 
American private wealth is by far the world's highest, on the order of 
$45 trillion ahead of Japan's and China's. \1\ This staggering 
achievement has been due overwhelmingly to American policies, not 
foreign. The challenges facing the U.S. economy, and manufacturing in 
particular, can and should be addressed primarily by American policy.
---------------------------------------------------------------------------
     \1\ Credit Suisse, ``Global Wealth Report 2013'', October, 2013, 
https://publications.credit-suisse.com/tasks/render/file/
?fileID=BCDB1364-A105-0560-1332EC9100FF5C83
---------------------------------------------------------------------------
    As a secondary matter, manufacturing is now a global activity and 
foreign actions play a role. Among the many global factors, the single 
most important is Chinese subsidies. The People's Republic of China's 
(PRC) manufacturing sector is the only one of comparable size to the 
U.S. It is driven by Government intervention, rather than genuine 
commercial competition, and this intervention harms American 
manufacturing companies and workers.
    The harm is usually identified as large-scale U.S. imports from 
China. In fact, the main problems are barriers to American exports to 
the PRC and, perhaps soon, a growing battle in third markets. For the 
last decade, Beijing has acted as if competition is good for everyone 
except Chinese firms on their home turf.
    The best American policy does not, and indeed is unable to, imitate 
the PRC's anticompetitive actions. Instead, the U.S. should document 
Chinese regulatory and financial subsidies, then take a sequence of 
steps--multilateral, bilateral and, if ultimately necessary, 
unilateral--to reduce them. The PRC will remain a competitor regardless 
of whether its new Government returns the country to the path of 
market-driven reform. But wise choices by the U.S. could help move 
China further from an unpleasant challenge to American manufacturing 
and closer to the intriguing opportunity many hope for.
Barriers to Competition
    Competition is the foundation of economic prosperity. It cuts 
prices, raises quality, and drives innovation. Even limited competition 
offers considerable benefits along these lines. For an economy as a 
whole, whether a national economy or the world economy, the more 
competition the better. Conversely, anticompetitive behavior by 
companies or Governments is always harmful to the economy as a whole.
    Monopolization is the most basic form of anticompetitive behavior. 
Monopolies can extend over specific goods or services or a specific 
region. Monopolies don't innovate, and the quality of their goods and 
services is generally substandard due to lack of incentive to improve. 
\2\ Very close to outright monopolization is guaranteed market shares. 
Here, there is more than one firm but some or all participants are 
guaranteed business. If any portion of such industries is competitive, 
it is only a slice.
---------------------------------------------------------------------------
     \2\ ``We're the Phone Company: We Don't Care, We Don't Have To'', 
Saturday Night Live via Stop the Cap, http://stopthecap.com/2012/08/23/
were-the-phone-company-we-dont-care-we-dont-have-to/
---------------------------------------------------------------------------
    The second main form of undermining competition is through prices. 
These can be sales prices, of course, but there are also a number of 
input prices that can be manipulated. Wages (the price of labor) can be 
distorted, as can borrowing costs (the price of capital), the price of 
land, power, water, telecom services, and so on. A determined and 
effective Government has many tools to limit competition.
    These and other tools are all subsidies. There are always 
individuals or firms who benefit from limited competition. They may 
receive outright regulatory protection, such as a guaranteed market 
share. They may receive Government transfers to offset their labor 
costs. They may be able to borrow at low prices, or receive free land 
or power. Subsidies can be financial in nature, but they do not have to 
be. Indeed, regulatory protection is more fundamental.
Regulatory Protection
    The PRC has legitimate and sizable comparative advantages. It has a 
solidly capable labor force with wage rates that are still relatively 
low compared to many of its peers. It now has plenty of capital. And 
China is hardly the only country in the world to engage in large-scale 
subsidies. The U.S., for one, has subsidized some farm goods despite 
being the world's biggest agriculture surplus country. It is in the 
size, range, and effectiveness of its subsidies that the PRC is 
unmatched.
    For a set of major industries, the principal subsidy is regulatory 
shelter from competition. By central Government decree, the State is 
required to control these industries to various extents. At the top of 
the list, where the State must have ``absolute'' control, are 
armaments, aviation, coal, oil and petrochemicals, power generation and 
distribution, shipping, and telecom. The State should also lead in 
autos, construction, IT, machinery, and metals. \3\ Though it is not 
formalized, State entities also control nearly all of insurance, media, 
railways, and some smaller sectors.
---------------------------------------------------------------------------
     \3\ Zhao Huanxin, ``China Names Key Industries for Absolute State 
Control'', China Daily, December 19, 2006, http://
www.chinadaily.com.cn/china/2006-12/19/content_762056.htm
---------------------------------------------------------------------------
    In addition, there are ongoing consolidation efforts, to address 
what Beijing calls ``disorderly'' competition. \4\ The solution is to 
contract the total number of firms, while increasing the combined 
market share of remaining State-owned enterprises (SOE's). \5\
---------------------------------------------------------------------------
     \4\ Liu Jin, ``Construction Machinery Industry on the Road to 
Recovery'', China Economic Net, May 16, 2013, http://en.ce.cn/Insight/
201305/16/t20130516_24390213.shtml
     \5\ For instance in autos, see: Han Tianyang, ``Another Call for 
Consolidation'', China Daily, January 28, 2013, http://
www.chinadaily.com.cn/cndy/2013-01/28/content_16178732.htm
---------------------------------------------------------------------------
    Nonstate firms have not been able to enter any of these industries, 
nor could nonstate firms already in the industry succeed beyond a 
certain, unspecified point. In contrast, SOE's can only fail to the 
extent of being absorbed by other SOE's, the State share as a whole is 
not permitted to shrink. Such SOE's have no final obligation to 
ostensible creditors and certainly cannot go bankrupt. For these 
sectors and companies, nothing else matters--wages, borrowing, land are 
all details when success is essentially guaranteed for some and barred 
for others. \6\
---------------------------------------------------------------------------
     \6\ Zhao Huanxin, op cit.; Zhang Xiang, ed., ``China To Nurture 7 
New Strategic Industries in 2011-2015'', Xinhua, October 27, 2010, 
http://news.xinhuanet.com/english2010/china/2010-10/27/c_13578293.htm.; 
Central Huijin Investment Ltd., ``Investments'', http://www.huijin-
inv.cn/hjen/investments/investments_2008.html?var1=Investments; Grant 
Turner, Nicholas Tan, and Dena Sadeghian, ``The Chinese Banking 
System'', Reserve Bank of Australia, September 2012: 53-64 http://
www.rba.gov.au/publications/bulletin/2012/sep/pdf/bu-0912-7.pdf.; Mu 
Xuequan, ed., ``China Launches New State-Owned Railway Corporation'', 
Xinhua, March 14, 2013, http://news.xinhuanet.com/english/china/2013-
03/14/c_132234204.htm; Chinese Government, ``State Tobacco Monopoly 
Administration'', news release, http://english.gov.cn/2005-10/03/
content_74295.htm; and Towers Watson, The Chinese Insurance Market, No. 
19 (Shanghai, China, March 2012), http://www.towerswatson.com/en/
Insights/Newsletters/Asia-Pacific/
The%20Chinese%20Insurance%20Market%20Newsletter/2012/The-Chinese-
Insurance-Market-Newsletter-No19.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Beijing's mandates are exacerbated by analogous provincial goals. 
Provincial leaders listen to the central Government when they want to 
and when they absolutely have to. That is: not all the time. \7\ 
Unfortunately, the provinces are almost always pleased to accept the 
demand for State dominance of major industries. They typically want 
more, to add sectors such as agriculture and environmental protection 
to the monopoly list. \8\
---------------------------------------------------------------------------
     \7\ See, for example, Yongheng Deng, et al., ``Incentives and 
Outcomes: China's Environmental Policy'', National Bureau of Economic 
Research, February 2013, http://www.ires.nus.edu.sg/workingpapers/
IRES2013-004.pdf.
     \8\ Alan Chu, ``China by the Numbers: Understanding China's 
Provincial Priorities'', PwC LLP, http://www.pwc.com/us/en/view/issue-
13/understanding-chinas-provincial-priorities.jhtml.
---------------------------------------------------------------------------
    Alternately, they want their SOE's to be the major players in the 
industries set aside by Beijing. Of course, this breeds a sort of 
competition, political--it is always someone else who should close down 
excess capacity. This is far from healthy--immense amounts of resources 
are wasted as provinces seek to best each other in the battle of 
subsidies. Perhaps the most perverse example is in shipping, where 
State regulatory protection and provincial competition have kept 1,500 
shipyards open, even though fewer than 100 have won orders in the past 
year. \9\
---------------------------------------------------------------------------
     \9\ Keith Wallis, ``Orders Climb at China's Shipyards, But Rebound 
Favours a Few'', Reuters, September 18, 2013, http://www.reuters.com/
article/2013/09/18/china-shipyards-idUSL4N0GD1LS20130918.
---------------------------------------------------------------------------
Financial Subsidies
    On top of all this, the single most important area of control for 
the State is banks, both national and local. Competition in banking is 
suppressed--there is exactly one large domestic private bank and the 
foreign share of banking assets is under 2 percent and still managing 
to fall. \10\ Not only is banking itself tightly controlled, the 
control gives the State a gigantic lever to influence the rest of the 
economy.
---------------------------------------------------------------------------
     \10\ Wang Zhaoxing, ``Integration of Foreign Banks'', China Daily: 
Europe, June, 2, 2012, http://europe.chinadaily.com.cn/business/2012-
06/02/content_15456078.htm
---------------------------------------------------------------------------
    State banks lend for political not commercial reasons, as 
dramatically demonstrated by the surge in lending in 2009 as the global 
crisis struck home and profit opportunities disappeared. They loan 
overwhelmingly to State firms, with estimates of the State share still 
in excess of 80 percent of formal borrowing from all sources. \11\ 
Interest rates on these loans are often less than producer inflation, 
so that the real cost of borrowing is negative. When loan payments 
actually bite, most State firms have the option not to repay. \12\
---------------------------------------------------------------------------
     \11\ Wing Thye Woo, ``China Meets the Middle-Income Trap: The 
Large Potholes in the Road to Catching-Up'', Journal of Chinese 
Economic and Business Studies, Volume 10, Issue 4, 2012, http://
www.tandfonline.com/doi/abs/10.1080/14765284.2012.724980#preview and 
``State Capitalism's Global Reach: New Masters of the Universe'', The 
Economist, January, 21, 2012, http://www.economist.com/node/21542925.
     \12\ ``Zhou Xiaochuan: Real Interest Rate To Stay Negative for 
Now'', China.org.cn, March, 14, 2011, http://www.china.org.cn/china/
NPC_CPPCC_2011/2011-03/14/content_22133432.htm.
---------------------------------------------------------------------------
    Not all SOE's are deemed worthy of an endless supply of credit but 
most are, at least for some periods. These range from industries 
targeted for expansion, such as green energy, to those losing vast 
amounts of money and targeted for consolidation, such as parts of the 
food industry. \13\ Many unsuccessful SOE's receive a seemingly 
permanent bailout. The subsidies are enormously wasteful and have led 
to daunting debt problems. \14\ Nonetheless, it is naturally quite 
difficult to compete with any firms getting so much nearly free 
capital.
---------------------------------------------------------------------------
     \13\ ``Chinese Zombies Emerging After Years of Solar Subsidies'', 
Bloomberg News, September 9, 2013, http://www.bloomberg.com/news/2013-
09-08/chinese-zombies-emerging-after-years-of-solar-subsidies.html and 
Adam Jourdan, ``China Milk Makers Including Yili, Mengniu To Get State 
Support'', Reuters, September 22, 2013, http://www.reuters.com/article/
2013/09/22/us-china-dairy-idUSBRE98L03F20130922.
     \14\ Liyan Qi and Grace Zhu, ``Researcher Puts China's Local 
Government Debt at $3.3 Trillion'', Wall Street Journal, September 17, 
2013, http://online.wsj.com/article/
SB10001424127887324665604579080683134844374.html and Xinhua, 
``Corporate Debt Reaches `Alarming Levels' '', China Daily, May 18, 
2012, http://www.chinadaily.com.cn/business/2012-05/18/
content_15328186.htm.
---------------------------------------------------------------------------
    A proper estimate of the size of the subsidy would involve a great 
deal of work, especially given lack of financial and corporate 
transparency. At the end of 2012, the People's Bank reported 
outstanding loan volume of $12.93 trillion. \15\ On the order of $10.3 
trillion was loaned to SOE's and almost all of that on noncommercial 
terms--at near-zero costs or with optional repayment. This certainly 
does not constitute a $10 trillion subsidy, since there would be a 
large amount of lending under a commercial banking system. But the 
amount of capital affected by Chinese subsidies and used by SOE's is 
approximately $10 trillion.
---------------------------------------------------------------------------
     \15\ All loan data taken from National Bureau of Statistics, China 
Monthly Statistics, Beijing PRC.
---------------------------------------------------------------------------
    About half of this has been rung up since 2009, thanks to the loan 
spike after the crisis. While a rigged banking system is not a 
guarantee of success the way regulatory protection is, the quantity of 
money involved qualifies as an powerful distortion of competition. 
Domestic bonds and stock markets are also heavily biased toward SOE's, 
further inflating their access to capital. \16\ (This is a considerable 
problem for the Chinese economy, but less important as a subsidy than 
loans.)
---------------------------------------------------------------------------
     \16\ Pierre Pessarossi and Laurent Weill, ``Choice of Corporate 
Debt in China: The Role of State Ownership'', China Economic Review, 
Volume 26, September 2013, pp. 1-16, http://www.sciencedirect.com/
science/article/pii/S1043951X13000242 and Henk Berkman, Rebel A. Cole, 
and Lawrence J. Fu, ``Improving Corporate Governance Where the State Is 
the Controlling Block Holder: Evidence From China'', The European 
Journal of Finance, June 13, 2012, pp. 1-26, http://
www.tandfonline.com/doi/abs/10.1080/1351847X.2012.671784#.UkGqRoashcY.
---------------------------------------------------------------------------
    A new group of Chinese Communist Party leaders was named in fall 
2012, a new Government took over in March of this year. As a result, 
the fall 2013 Party plenary meetings provided a real opportunity for 
fresh economic reform, the first such opportunity in a decade.
    This is a potentially vital development, but the success and 
direction of reform are open questions. Pro-competition reforms--the 
ones the U.S. is interested in--are strongly opposed by some elements 
of the Party, both nationally and locally. In addition, Beijing has a 
full menu of items competing for high-level attention--including 
corruption, pollution, and an aging population--and internal 
disagreement over priorities. \17\ Even progressive steps such as the 
promised modification of the one-child policy do not enhance economic 
competition. For the next 5 years, at the very least, Chinese subsidies 
will be a major problem.
---------------------------------------------------------------------------
     \17\ Derek Scissors, ``The U.S. Should Be Wary of Fake Chinese 
Economic Reform'', The Heritage Foundation, August 12, 2013, http://
www.heritage.org/research/reports/2013/08/us-should-be-wary-of-fake-
chinese-economic-reform.
---------------------------------------------------------------------------
Immediate Impacts
    Chronicling the full impact of Chinese subsidies would require 
multiple books. At one level, Chinese subsidies drive national 
imbalances and contribute prominently to global imbalances. \18\
---------------------------------------------------------------------------
     \18\ Derek Scissors, ``The Facts About China's Currency, Chinese 
Subsidies, and American Jobs'', The Heritage Foundation, October 4, 
2011, http://www.heritage.org/research/reports/2011/10/the-facts-about-
chinas-currency-chinese-subsidies-and-american-jobs.
---------------------------------------------------------------------------
    Subsidies do not appear from thin air, someone always pays for 
them. In the PRC, it is consumers and savers. Consumers pay because 
State monopolies charge higher prices and offer lower quality. Savers 
pay because interest rates on deposits lag inflation so that banks can 
afford to hand money to SOE's. These implicit taxes on savings and 
consumption are transferred to producers and borrowers.
    The obvious result is not enough consumption and too much 
investment, a decade-long phenomenon that is now driving Xi Jinping's 
China toward an investment-consumption imbalance reminiscent of Mao 
Zedong's China. The PRC's large trade and other external surpluses 
arise from this imbalance and are a destabilizing factor globally.
    At the corporate level, subsidies mean that all foreign and private 
Chinese companies face an unbalanced fight when competing with SOE's in 
China or other markets. Focusing on American firms, the unbalanced 
competition is embodied in American imports, American exports to China, 
and in third markets.
    A disproportionate amount of attention, some of it misguided, has 
been paid to unbalanced competition from imports. Chinese subsidies 
certainly affect American imports. Measuring this through the bilateral 
trade imbalance is unwise, however, since it reflects neither value 
added nor the new phenomenon of Chinese production moving off-shore. 
\19\ More important, even while some American producers suffer, most 
American consumers benefit from Chinese subsidies in the form of lower 
producers.
---------------------------------------------------------------------------
     \19\ Robert Johnson and Guillermo Noguera, ``The Value-Added 
Content of Trade'', VoxEU.org, June 7, 2011, http://www.voxeu.org/
article/value-added-content-trade-new-insights-us-china-imbalance.
---------------------------------------------------------------------------
    The same cannot be said for American exports. There, Chinese 
subsidies do nothing than deny sales to American firms and workers. The 
demand for State dominance leads to regulatory barriers that ensure 
that exports of American goods and services can claim only a tightly 
limited share of the market in banking and many other sectors. The same 
is true for firms operating within the PRC, especially in oil and gas. 
Financial subsidies cap American exports of environmental technology 
and other areas of U.S. comparative advantage.
    The blocking of American exports is well-established and by far the 
worst problem but a new area of difficulty is Sino-American competition 
in third markets. Guaranteed revenue at home from regulatory protection 
and financial subsidies targeted at overseas expansion make Chinese 
firms artificially competitive outside the PRC, too. \20\
---------------------------------------------------------------------------
     \20\ For an illustration, see Japan External Trade Organization--
Institute of Developing Economies, ``China in Africa: The Role of 
China's Financial Institutions'', October 2009, at http://
www.ide.go.jp/English/Data/Africa_file/Manualreport/cia_11.html 
(September 27, 2011).
---------------------------------------------------------------------------
    Not surprising, the main areas for financing are what are labeled 
strategic industries such as power, transport, and telecom. \21\ The 
Heritage Foundation's China Global Investment Tracker puts Chinese 
overseas investments from January 2005 through June 2013 at $430 
billion. Though their share is slowly declining, SOE's still account 
for slightly over 90 percent of this. \22\ That's another $400 billion 
in corporate spending that is heavily subsidized. It does not measure 
up to the amount of spending subsidized at home but it is directly and 
increasingly salient to American companies and workers trying to 
compete with Chinese in foreign markets.
---------------------------------------------------------------------------
     \21\ Cyrus Lee, ``ZTE Receives $20B Loan From China Development 
Bank'', ZDNet, December 5, 2012, http://www.zdnet.com/cn/zte-receives-
20b-loan-from-china-development-bank-7000008321/. For an overview, see 
``China's Superbank: Debt, Oil and Influence--How China Development 
Bank Is Rewriting the Rules of Finance'', by Henry Sanderson and 
Michael Forsythe.
     \22\ Derek Scissors, ``China's Steady Global Investment: American 
Choices'', The Heritage Foundation, July 16, 2013, http://
www.heritage.org/research/reports/2013/07/china-s-steady-global-
investment-american-choices.
---------------------------------------------------------------------------
The American Response
    It is extremely unwise to enter into a subsidies battle with the 
People's Republic of China. Beijing has myriad ways to intervene in the 
market, starting with simply telling companies and banks what to do. In 
2009, President Obama was frustrated that American banks were not 
lending more. \23\ Chinese banks, meanwhile, were following orders and 
expanding lending 34 percent. State ownership is the ultimate trump 
card for subsidies.
---------------------------------------------------------------------------
     \23\ Helene Cooper and Eric Dash, ``Obama Presses Biggest Banks To 
Lend More'', New York Times, December 14, 2009, http://www.nytimes.com/
2009/12/15/business/economy/15obama.html?_r=0.
---------------------------------------------------------------------------
    Rather than having subsidies envy, the President and Congress 
should be thankful for their limited authority. American corporate 
balance sheets have been returning to normal while Chinese corporate 
debt is worst among major economies. \24\ The PRC has doubled local 
government debt while seeing macroeconomic indicators deteriorate. \25\ 
Chinese subsidies without question hurt individual American companies, 
but they harm the entire Chinese economy. Promoting competition, not 
sinking to China's level, is by far America's best response.
---------------------------------------------------------------------------
     \24\ Federal Reserve Board, ``Financial Accounts of the United 
States'', Table B.102: Balance Sheet of Nonfinancial Corporate 
Business, September 25, 2013, at http://www.federalreserve.gov/
releases/z1/current/accessible/b102.htm versus Xinhua, ``Corporate Debt 
Reaches `Alarming Level' '', China.org.cn, May 18, 2012, at http://
www.china.org.cn/business/2012-05/18/content_25416137.htm.
     \25\ Liyan Qi and Grace Zhu, ``Researcher Puts China's Local 
Government Debt at $3.3 Trillion'', The Wall Street Journal, September 
17, 2013, http://online.wsj.com/article/
SB10001424127887324665604579080683134844374.html.
---------------------------------------------------------------------------
    The obvious first step is negotiation. This has failed to now. The 
Strategic and Economic Dialogue (S&ED) is a sensible idea that, for 8 
years running, has yielded precious little in the way of results. The 
latest hope for better Sino-American economic relations is renewed 
talks on a Bilateral Investment Treaty (BIT). But a BIT has only 
limited scope to deal with internal Chinese policies--at most it will 
create a few new hurdles to subsidization which can be easily overcome 
if Beijing desires.
    What matters is not the acronym governing talks but the nature of 
the Chinese Government. A pro-market Chinese Government will act on its 
own to enhance competition to some extent. In turn, the U.S. should 
have a very small number of priorities in negotiations, with reducing 
regulatory protection first in line. A long list of American demands on 
scattered issues, formulated to satisfy interest groups here, will 
continue to be ignored. The U.S. should compile a comprehensive 
measurement of subsidies to enable concrete bargaining and, more 
important, objectively measure progress over time. The U.S. should also 
be ready to offer something of value in return, such as a faster, 
clearer review process for Chinese investors here. \26\
---------------------------------------------------------------------------
     \26\ Derek Scissors, ``A Better Committee on Foreign Investment in 
the United States'', The Heritage Foundation, January 28, 2013, http://
www.heritage.org/research/reports/2013/01/enhancing-the-committee-on-
foreign-investment-in-the-united-states-cfius.
---------------------------------------------------------------------------
    In contrast, it has proven to be a waste of time to merely 
negotiate with a pro-State Chinese Government. Such a Government, such 
as the one which just left office, will only reduce subsidies if pushed 
hard, which will require considerable time and effort.
    The first step in this case is also a needed action with a Chinese 
Government positively disposed to reform. Though it is dull 
politically, the U.S. must periodically identify and measure Chinese 
subsidies, including regulatory protection.
    Measuring the subsidy provided by protection against competition 
will be difficult and controversial. If it is not done, though, 
subsidies will be seriously underestimated and considerable harm will 
continue to be inflicted on American companies and workers, as well as 
the Chinese and global economies. Including regulatory protection along 
with capital and other subsidies means that initial estimates will be 
inexact, but they will improve over time. And measuring subsidies will 
enable important actions.
    A fairly exhaustive measure of Chinese subsidies may somewhat 
improve bilateral negotiations, or at least clarify their status. 
Another route is through the WTO. The U.S. has asked for Chinese 
documentation of subsidies via the WTO but this has accomplished almost 
nothing, in part because the American inquiry was based on too little 
information. \27\
---------------------------------------------------------------------------
     \27\ Office of the United States Trade Representative, Executive 
Office of the President, ``United States Details China and India 
Subsidy Programs in Submission to WTO'', October 2011, http://
www.ustr.gov/about-us/press-office/press-releases/2011/october/united-
states-details-china-and-india-subsidy-prog.
---------------------------------------------------------------------------
    Last, if renewed and better informed bilateral and multilateral 
approaches fail, a rigorous measurement of subsidies is necessary to 
determine the best unilateral actions. Otherwise American policy risks 
being ill-targeted or even, if seen as unjustified protectionism, 
counterproductive.
Pushing China Toward Genuine Competition
    In sum,

  1.  The U.S. should not engage in competitive subsidization against 
        the PRC. This will waste hundreds of billions of dollars and 
        achieve almost nothing.

  2.  The United States Trade Representative (USTR), with assistance 
        from the Department of the Treasury, Department of Commerce, 
        and International Trade Commission, should immediately begin 
        the process of measuring Chinese subsidies, featuring 
        regulatory protection and noncommercial loans.

  3.  The Department of the Treasury, with assistance from the USTR, 
        should make the economic segment of the 2014 S&ED primarily 
        about subsidies.

  4.  Failing identifiable progress at the S&ED, the USTR should 
        petition the WTO regarding China's failure to disclose the 
        subsidies documented in the USTR-led effort.

  5.  If these steps fail to change Chinese policy, the U.S. should use 
        the subsidies measurements to inform unilateral actions.

    Chinese subsidies are certainly not the biggest challenge for 
American companies and workers. But they are the biggest international 
challenge. As a first step, the U.S. can do a far better job of the 
information gathering and economic diplomacy that can reduce what is 
become a global threat to the health of American manufacturing.
                                 ______
                                 
                  PREPARED STATEMENT OF JULIE SKIRVIN
                   General Counsel, Oregon Iron Works
                           December 11, 2013
    Mr. Chairman and Members of the Committee, thank you for the 
opportunity to testify today. My name is Julie Skirvin, and I am 
General Counsel of Oregon Iron Works, a small business headquartered in 
Clackamas, Oregon. Oregon Iron manufactures structural steel parts for 
bridges, commercial buildings, and dams. We build silos to house the 
interceptor missiles that protect our country from attack, renewable 
energy devices, containers to store nuclear waste safely, marine 
vessels, rocket launch platforms, and sophisticated metal processing 
equipment. Oregon Iron, together with its subsidiaries, employs over 
450 workers at living-wage jobs in Oregon, Washington, and 
Pennsylvania.
    One of our company's newest product lines is streetcars. When 
Oregon Iron created our subsidiary United Streetcar in 2005, it had 
been over 60 years since an American company had built a modern 
streetcar. I am pleased to report that after years of hard work, Oregon 
Iron and United Streetcar are now completing modern streetcars at a 
rate of 1 every 6 weeks. We have delivered seven cars this year to 
customers in Portland, Oregon, and Tucson, Arizona.
    During the Great Recession our streetcar business provided work for 
100 people earning family wages with good benefits at our Clackamas 
facilities. To support our streetcar production we purchased parts and 
materials from 350 U.S. companies in 32 States. In Oregon alone, we 
sourced materials from 140 local businesses.
    I am honored to appear today before the Committee to address your 
questions about the role of manufacturing in the U.S. economy, 
challenges U.S. manufacturers face, and how we can strengthen this 
important sector. Drawing on Oregon Iron's recent experience launching 
a streetcar business, as well as my work for 10 years in the 
manufacturing sector, I welcome this chance to share my perspective.
The Role of Manufacturing in Creating a Solid Middle Class
    The leaders at Oregon Iron believe that American manufacturers 
create the kind of good, middle-class jobs that are essential to a 
strong United States economy. The Great Recession was hard on our 
sector, but we are coming back. The Oregonian reported that between 
2008-2010, Clackamas County lost more than 3,500 manufacturing jobs. 
Since the first quarter of 2010, however, one in three jobs gained has 
been in manufacturing. Fabricated-metal manufacturing saw a gain of 
more than 700 jobs.
    Unemployment in Oregon remains high, at 7.7 percent. Even with a 
job, workers in the service sector may not earn enough to meet a 
family's basic needs. In contrast, a skilled machinist can earn well 
over $50,000 per year. Manufacturing jobs pay good wages that support 
strong, stable families.
Challenges and Opportunities Facing the U.S. Manufacturing Sector
    Below are some of the policy steps that I believe would invigorate 
the U.S. manufacturing sector.
1. Ensuring a Supply of Skilled Workers
    Oregon Iron and other manufacturers need access to skilled, work-
ready employees. Many young workers entering the manufacturing 
environment do not possess the skills and training necessary to be 
successful. While skilled workers are crucial for a business like ours, 
it can be difficult for small businesses to invest in training without 
an imminent project. At times, our company has had difficulty finding 
applicants who have a solid grasp of shop math, possess hands-on 
experience, and can pass a drug test.
    I believe our public education system should place more emphasis on 
technical training for high school students. There are some stellar 
technical training programs in our area, including the Clackamas 
Academy for Industrial Sciences and Sabin-Schellenberg High School, but 
too many schools, and too many public officials, downplay the value of 
technical training. We need to ensure these programs receive the 
funding and respect that they deserve.
    The community college system and local workforce training centers 
also play a key role in helping manufacturers identify and train 
workers who can thrive in this environment. Oregon Iron is currently in 
conversations with Clackamas Community College and the Workforce 
Investment Council of Clackamas County to identify potential new hires 
and to help our current employees gain the shop math and other skills 
they need. This collaboration should benefit both our workers and 
Oregon Iron's ability to compete for and fill contracts.
    Finally, we believe that support for programs linking industry 
employers and engineers-in-training can be productive. Oregon Iron has 
benefited from our close relationships with Oregon State University and 
Portland State University through the Multiple Engineering Co-op 
Program (MECOP). Through MECOP, students obtain paid internships with 
manufacturers during their training. That helps students, including 
those from historically underrepresented groups, learn and understand 
the sector. It also helps companies find local workers to hire.
    We applaud the Manufacturing Jobs for America Initiative, which 
you, Mr. Chairman, are helping to lead. This initiative's focus on 
workforce training is an important step in ensuring an adequate supply 
of skilled workers.
2. Buy America Provisions
    Government contracts that include Buy America requirements also 
have the potential to invigorate American manufacturing. For one thing, 
they help level the playing field; Oregon Iron knows first-hand that if 
you want to build a boat for Brazil, you build it in Brazil. Other 
countries include local sourcing requirements when they procure goods, 
and it makes sense that when the United States Government uses public 
dollars to buy boats or build bridges, it should contract with United 
States companies to do that work.
    We support efforts to ensure that companies maintain ongoing 
operations in this country as a condition of satisfying Buy America 
requirements. Such an approach creates longer-term local jobs than 
would an interpretation of Buy America rules that enabled a foreign 
company to set up a temporary operation in the U.S. to qualify for a 
job and then exit once it completed the contract.
    Mr. Chairman, you have led recent efforts to improve the way 
Federal agencies do business, and to ensure that when Federal funds are 
used, they are used to buy products from American companies. We are 
grateful for these efforts, and for the improvements made through the 
passage of MAP-21. We are hopeful, Mr. Chairman, that your Buy America 
provisions in the Senate's Water Resources Development Act are retained 
during conference with the House on their version of this important 
water infrastructure legislation.
    We also appreciate work by the U.S. Department of Transportation 
(DOT) to manage Buy America requirements in a manner that strengthens 
the domestic supply chain. Former Secretary Ray LaHood and current 
Deputy Secretary John Porcari have been creative and proactive in 
helping people find and create U.S. products where many thought none 
were available. This effort continues under the leadership of Secretary 
Foxx.
    The Federal Transit Administration (FTA) has also been a leader in 
this area, requiring that FTA-funded transit vehicles/rolling stock 
contain at least 60 percent domestic content. (The streetcars we 
produce contain an average of at least 70 percent domestic content, and 
100 percent domestic assembly.) FTA has also ensured that Federal 
dollars are invested in U.S. business and labor. From 2008-2012, 
initial requests to FTA for Buy America waivers numbered 37. FTA has 
been able to reduce that number to just 3 for 2013 by working hard to 
identify local suppliers of components. Recently, the FTA and the 
United States Department of Commerce's National Institute of Standards 
and Technology entered into an interagency agreement that will help 
transit properties and companies more easily find U.S.-made components. 
This will benefit our company and many others.
    We also appreciate the U.S. Dept. of Commerce's many initiatives to 
``make it in America'' and to launch the Investing in Manufacturing 
Communities Partnerships.
    The Buy America rule has given Oregon Iron and United Streetcar the 
ability to compete where no American company had competed in over 60 
years. When we started out, streetcars operated in the U.S. generally 
came from the Czech Republic, Germany, Spain, and Japan. By creating a 
minimum requirement for domestic content in this industry, the United 
States Government created an opportunity for domestic manufacturers to 
enter a new market. It also created an incentive for foreign companies 
to start investing in facilities and products in the U.S. Buy America 
rules have strengthened competition in the U.S. streetcar market.
    We encourage you to support and strengthen Buy America rules as 
part of your economic policy agenda.
3. Access to Capital
    A crucial ingredient to Oregon Iron's success, including to the 
success of our streetcar work, has been access to private and public 
capital.
    Private Capital: In the midst of the Great Recession our company's 
leaders did not sit on their money. Instead, they invested it to create 
a new industry by building the production facilities and purchasing the 
equipment we now use to build streetcars. Significant private 
investment is crucial to any start-up; when times get tough, there is 
no substitute for personal skin in the game to keep business people 
working hard.
    At the same time, modest levels of Government investment, including 
through tax credits to support capital investments, provide a crucial 
complement to private capital. We think some efforts to increase access 
to capital for business creation could be helpful if accompanied by a 
strong requirement for entrepreneurs to also put their own resources on 
the line. Through tax reform, small businesses could have improved 
access to working capital. Current tax law requires small businesses to 
pay taxes on in-process projects despite not receiving complete 
payments from either a prime contractor or Government entity. Without 
substantial bank funding, small business growth is limited by its 
access to operating capital.
    Public Capital: Eight years ago Congress provided a modest level of 
funding to stimulate domestic streetcar production. The U.S. DOT, this 
Administration, and the FTA invested research dollars to investigate 
the potential for a U.S.-made propulsion system and off-wire 
technologies. The U.S. DOT (along with HUD and EPA) through the Urban 
Circulator and TIGER grants, has helped transit entities all over the 
country develop streetcar systems and other public transit systems. 
These investments have generated significant returns by creating a new 
industry, jobs, improved transportation systems, and more livable 
communities.
    Mr. Chairman, this Committee provided the foundation for critical 
transit investments and changes in SAFETEA-LU and in MAP-21 that have 
reduced red tape and costly steps in the approval of transit projects. 
I want to thank you for all this Committee has done to ensure more 
efficient and cost-effective Federal investments in critical 
infrastructure.
    Local governments make all kinds of investments to stimulate 
economic development. Procurement decisions are some of the most 
powerful investments. The decision by officials in Portland, Tucson, 
and Washington, DC, to buy streetcars from our company, and to pay us 
for our work as we hit our performance benchmarks, has provided some of 
the most important capital we have received.
    We remain thankful that the Oregon Legislature and Oregon 
Department of Transportation provided crucial capital to help build 
Portland's transit system. We also appreciate that Clackamas County has 
provided approvals, permits, a low-cost lease, and other support so 
that Oregon Iron could remain and grow in Clackamas County.
Conclusion
    Manufacturing provides the kinds of good middle class jobs that 
help families thrive. By supporting technical training for workers, 
retention and strengthening of Buy America rules, and tax credits and 
other tools to help entrepreneurs access necessary capital, the Members 
of this Committee can help our country's manufacturing sector thrive 
and grow. That would be good for the economy and good for local 
families.
    Thank you again for this opportunity to testify. I would welcome 
your questions.
