[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
__________
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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\
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\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.
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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\
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\3\ ``Made in America'' special advertising section, Bloomberg
Businessweek, September 10-16, 2012.
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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\
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\4\ Ben Casselman, ``Job Gap Widens in Uneven Recovery'', Wall
Street Journal, November 11, 2013.
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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\
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\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.
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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\
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\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.
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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\
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\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.
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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.
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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.
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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.
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\12\ Michael Lind and Daniel Mandel, ``Made in America Bonds'',
New America Foundation, March 22, 2010.
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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.
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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
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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\
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\15\ Leo Hindery, Jr., and Michael Lind, ``America Needs a VAT'',
Los Angeles Times, May 24, 2010.
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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.
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\16\ Nelson D. Schwartz, ``Where Factory Apprenticeship Is Latest
Model From Germany'', New York Times, November 30, 2013.
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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.
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\17\ S.1675, ``Preparing Students for Success in the Global
Economy Act'', Senator Jeff Merkley, et al.
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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.
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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\
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\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.
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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.
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\1\ Credit Suisse, ``Global Wealth Report 2013'', October, 2013,
https://publications.credit-suisse.com/tasks/render/file/
?fileID=BCDB1364-A105-0560-1332EC9100FF5C83
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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
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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\
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\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.
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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.
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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.)
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\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.
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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.
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\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.
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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\
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\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.
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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.
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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\
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\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).
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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.
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\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.
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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.
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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.
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\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.
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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.
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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.
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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.