Manufacturing in America 3

MANUFACTURING A Comprehensive Strategy to Address IN the Challenges to U.S. Manufacturers AMERICA

U.S. Department of Commerce Washington, D.C. January 2004 ISBN 0–16–000000–0

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2 U.S. DEPARTMENT OF COMMERCE Contents

Introduction ...... 7

One Competing—and Winning—in a Global Economy ...... 13

Two Challenges Facing American Manufacturing ...... 33

Three Recommendations and Next Steps ...... 59

Appendix List of Manufacturing Roundtables and Participants ...... 81

MANUFACTURING IN AMERICA 3

Message from the Secretary of Commerce

President Bush is committed to making sure every American who wants to work can find a job. In the third quarter of 2003, the U.S. economy grew at 8.2 percent—the strongest growth in nearly 20 years. Over the past five months, more than 250,000 new jobs have been created and the December 2003 unemployment rate of 5.7 percent was significantly below the 30-year average of 6.4 percent. Thanks to the President’s pro-growth policies, America’s economy is strong—and growing stronger. The recent economic downturn hit the U.S. manufacturing sector particularly hard, but now our manufacturers are beginning to experience the benefits of the President’s pro- growth policies. Factory activity is at its highest level in 20 years and new orders are at the highest level since 1950. Strengthening American manufacturing is a top priority for the President. America's manufacturers provide our nation and our people with good jobs, a better quality of life, and inventions that have established our national identity. Manufacturing is the backbone of our economy and the muscle behind our national security. To make sure the administration is doing everything possible to help American manufacturers, last year I ordered a comprehensive review of our manufacturing sector. Our goal is to help the American manufacturers compete and win in the 21st century. Through the Manufacturing Initiative, we will redouble the administration’s efforts on behalf of the millions of Americans who work in the manufacturing sector. The Initiative organized over 20 public roundtables to solicit input from American manufacturers. Our question was simple: How can government help manufacturers compete? This report includes a series of recommendations aimed at unleashing the full potential of American manufacturers. It is an important first step toward strengthening American manufacturing and creating new jobs. In the coming weeks and months, the Department of Commerce will continue to work with manufacturers, other state and federal agencies, and Congress to help U.S. manufacturers become more competitive in the global marketplace. American manufacturing has a rich history. After traveling the country and meeting with hundreds of factory workers, executives, and experts, I am confident it will have an equally rich future.

Donald L. Evans Secretary of Commerce

MANUFACTURING IN AMERICA 5

Introduction

American manufacturers are a cornerstone cutting-edge manufacturing techniques. of the American economy and embody Perhaps most importantly, productivity in the best in American values. They enhance manufacturing has continued to rise sig- U.S. competitiveness while improving lives nificantly. domestically and internationally. Even as U.S. manufacturers engage in APresident Bush’s concern for the men global competition with singular and women who work in manufacturing strengths, they also face unprecedented and the critical contribution they make challenges. These challenges are both to the U.S. economy is the driving force cyclical and structural. The most recent behind this report. Manufacturers are full recession in the business cycle—a down- partners in the effort to build the future turn that first began to be felt in 2000— of the country in the marketplace for new hit U.S. manufacturers and their workers products and ideas. Simply put, a healthy hardest. Output fell 6 percent in manu- manufacturing sector is key to better jobs, facturing even though the recession was fostering innovation, rising productivity, relatively shallow overall. Employment and higher standards of living in the fell by 2.6 million jobs in manufacturing, United States. accounting for all of the net job losses The United States is the world’s lead- from the fourth quarter of 2000 through ing producer of manufactured goods. the third quarter of 2003. Standing alone, the U.S. manufacturing Today, as the overall U.S. economy sector would represent the fifth-largest expands strongly, much of the manufac- economy in the world—larger than turing sector continues to operate well China’s economy as a whole.1 The U.S. below its previous peak. For example, manufacturing sector also leads in inno- while automobile production remains vation, accounting for more than 90 per- strong, many of the industries that sup- cent of all U.S. patents registered annu- port this production, such as the machine ally.2 Investments in technology create tools and tool and die industries, con- new industries and careers in manufactur- tinue to lag behind the rest of the econ- ing as U.S. firms introduce products and omy by a wide margin. As difficult as the recession has been for U.S. manufacturers, the sector faces

MANUFACTURING IN AMERICA 7 even more significant structural chal- create the economic conditions that foster lenges from the effects of rapidly chang- a healthy and competitive manufacturing ing technology and adjustment to a sector and spur economic growth? What global economy. Barriers to trade have are the best means of removing the im- fallen rapidly over the past decade. Inno- pediments that government action has vations in communications, computing, contributed to in the form of increased and distribution have accelerated the de- energy and healthcare costs and high or sign, production, and delivery of goods. distortionary tax and regulatory compli- Improved production processes have ance burdens that make it harder for U.S. spread rapidly throughout the world. Pri- manufacturers to attract investment and vate investment now flows largely unim- compete? How can government policy peded across national borders as investors foster an environment in which American seek the highest rates of return. All these manufacturers and their workers are the factors equate to unprecedented global best trained in the world? And, equally competition for capital and markets. Be- important, how can America ensure that cause manufactured goods make up the success in the global marketplace is based bulk of international trade, the competi- on economic strength, rather than on tion is especially strong. Taken together, government intervention that creates arti- the effects of technology and globaliza- ficial advantages? tion accelerate the competitive pressures The Manufacturing Initiative to lower costs and increase productivity. In a March 2003 speech to the Na- The challenges facing U.S. manufac- tional Association of Manufacturers in turers raise important questions for both Chicago, U.S. Secretary of Commerce industry and government. For industry, Donald Evans launched the Manufactur- the question is how best to reinforce the ing Initiative to begin answering those sector’s strengths and maintain its com- questions. Secretary Evans called for a petitive edge in an increasingly competi- comprehensive review of issues affecting tive global economy. The competitive the competitiveness of the U.S manufac- pressure on U.S. manufacturers has forced turing sector. The goal of the review was them to cut costs, to adopt lean manufac- to develop a strategy designed to ensure turing techniques, and to implement “that the government is doing all it can to quality assurance programs that guarantee create the conditions” necessary to foster zero defects in production. Innovation in U.S. competitiveness in manufacturing products, processes, and services has be- and stronger economic growth at home come a key determinant for success. and abroad. Fostering a competitive manufactur- Secretary Evans directed the U.S. De- ing sector also requires a different way of partment of Commerce to seek the help of looking at government policy. The right American manufacturers themselves in policies in Washington, D.C.—and across identifying the roots of the manufacturing the nation—can unleash the great poten- sector’s current challenges and the specific tial of the U.S. economy and create the obstacles that government policy might conditions for growth, prosperity, and job pose to U.S. manufacturing competitive- creation. For government, the ultimate ness. To that end, the Department of question is whether the actions that it Commerce held over 20 roundtable events takes help or hinder American manufac- with manufacturers, in which the advice turers as they compete in global markets. of individual attendees was sought and What steps should government take to obtained. These nationwide discussions included representatives from the aero-

8 U.S. DEPARTMENT OF COMMERCE space, auto and auto parts, biotechnology, Paper Association, Motor and Equipment semiconductor, chemical, pharmaceutical, Manufacturers Association, Aerospace In- plastics, and tool and die industries, dustries Association, Association of Equip- among others. The manufacturers attend- ment Manufacturers, American Foundry ing the roundtables represented a broad Society, American Forest Products Associa- mix of small, medium-sized, and large tion, and others. companies, as well as minority-owned and The following report is divided into women-owned enterprises. three chapters. The first chapter provides To demonstrate Secretary Evans’ an overview of the domestic and interna- commitment to meeting the challenges tional economic issues facing American facing the manufacturing sector, the manufacturing and identifies the power- Commerce Department’s senior managers ful trends shaping the environment in led the roundtables,3 with help from the which U.S. manufacturers compete today. Commerce Department’s local Export As- The second chapter draws on the ex- sistance Centers and private sector Dis- perience of U.S. manufacturers themselves trict Export Councils. Commerce Depart- in identifying the challenges government ment industry specialists attended the must tackle. Small, medium-sized, and roundtables to listen to and report on the large manufacturers all stated that the first discussions to Commerce Department priority should always be to eliminate gov- leaders, thus ensuring follow-up action ernment policies and practices that hinder with any companies needing information U.S. competitiveness. They identified im- or assistance. mediate priorities such as spurring higher In addition, the Commerce Depart- economic growth and creating incentives ment set up a Web site to gather and dis- for investment, including research and de- seminate information regarding the ini- velopment, as well as long-term efforts tiative as broadly as possible. This Web such as the reliability of energy supplies, site—www.export.gov/manufacturing—was reducing healthcare costs, and tort reform used to provide information on events needed to reduce the indirect costs im- and activities, and to encourage those posed on manufacturers by government who could not attend the roundtables to action or inaction. contact the Commerce Department re- On the international front, manufac- garding manufacturing issues. turers stressed the importance of breaking The process also benefited from dis- down the barriers that other governments cussions with industry association repre- erect against U.S. exporters and eliminat- sentatives who reflected a broad cross- ing the practices that distort trade and in- section of the American manufacturing vestment. With respect to both finance community. The Commerce Department and trade, manufacturers stressed that the received considerable help from both the goal of U.S. foreign economic policy personnel and member companies of the should be to ensure that competition is National Association of Manufacturers, free and fair. They also emphasized the Manufacturers Alliance/MAPI, Association need to reinforce U.S. trade promotion ef- for Manufacturing Technology, Society of forts in markets opened by recent trade Plastics Industries, Alliance of Automobile agreements, particularly in China. Manufacturers, National Tooling and Ma- Manufacturers also emphasized the chining Association, American Forest and importance of looking to the future and investing in activities that have given U.S. manufacturers their competitive edge. In practical terms, that means ensuring that government does not impede

MANUFACTURING IN AMERICA 9 the development of new technologies with manufacturers across the country, to that will create the industries and jobs of address the challenges identified, and to the future, as well as improving the com- help set immediate priorities that will petitiveness of America’s existing manu- benefit American manufacturing. facturing base. Manufacturers stated that In the meantime, the challenges this effort would require government re- confronting American manufacturers and search and development funding and the manufacturing workers are urgent, and creation of a highly educated and moti- President Bush has already taken action. vated workforce. He has implemented a jobs and growth The third chapter of this report sets agenda and outlined a six-point plan: out a series of recommendations designed 1. To make healthcare costs more to address the challenges identified by affordable. U.S. manufacturers. The recommenda- 2. To reduce the lawsuit burden on the tions represent a first step toward crafting U.S. economy. the comprehensive strategy Secretary 3. To ensure an affordable, reliable Evans called for in March 2003. energy supply. The recommendations respond to 4. To streamline regulations and report- the call by U.S. manufacturers for a ing requirements. greater focus within the federal govern- 5. To open markets for American ment on manufacturing competitiveness, products. including the creation of an Assistant Sec- 6. To enable families and businesses to retary of Commerce for plan for the future with confidence. Manufacturing and Services. American manufacturers are The necessity of acting on these re- President Bush announced forms was reflected in the roundtable dis- enthusiastic about meeting the on Labor Day 2003 that the cussions: each proposal would improve creation of this position competition, but they need a fair the U.S. manufacturing sector’s competi- would help keep the federal tiveness in the years and decades to come. international playing field and government focused on is- One final point deserves emphasis. sues relating to manufactur- a domestic environment free Despite the challenges faced by American ing and would drive the manufacturing, there is one fundamental from impediments to Manufacturing Initiative reason for optimism about the future of forward. The recommenda- investment and growth American manufacturing: the talent and tions also address the chal- motivation of the men and women who lenges identified by U.S. work in and manage America’s manufac- manufacturers on both the domestic and turing companies. More than anything international front, as well as reinforcing else, manufacturers participating in the American manufacturing’s competitive Commerce Department’s roundtables ex- edge in the development of new tech- pressed their commitment to roll up their nologies and a workforce that can meet sleeves and address the challenges they the needs of modern manufacturing. face in doing business in an increasingly These recommendations represent global and competitive environment. the start of a process, not the end. From American manufacturers are enthusiastic the outset, Secretary Evans has viewed about meeting the competition, but they this report and its recommendations as need a fair international playing field and an opportunity to work closely with U.S. a domestic environment free from imped- manufacturers to develop a sound strat- iments to investment and growth. This egy for American competitiveness in manufacturing. The Commerce Depart- ment intends to review these proposals

10 U.S. DEPARTMENT OF COMMERCE report and its recommendations represent 3 They included Secretary Donald Evans; Deputy a commitment on the part of the Bush Secretary Samuel Bodman; Under Secretaries Grant administration to foster an environment Aldonas, Philip Bond, and Kathleen Cooper; Assistant for the continuing success of American Secretaries Linda Conlin, Bruce Mehlman, and David Sampson; Directors Arden Bement, Ronald Langston, manufacturing. and John Maxon Ackerly; and Deputy Assistant Secre- taries Joseph Bogosian, Kevin Murphy, and Michelle Notes O’Neill. Officials of the U.S. Department of Labor (in- 1 See “Total GDP 2002,” World Development In- cluding Assistant Secretary Emily DeRocco) co-hosted dicators database, World Bank, July 2003. a roundtable focused specifically on workforce, educa- 2 Jeff Werling, The Future of Manufacturing in a tion, and training issues, to which the U.S. Depart- Global Economy, December 2003. ment of Education contributed as well.

MANUFACTURING IN AMERICA 11 Abbreviations and Acronyms

FDA Food and Drug Administration

GATT General Agreement on Tariffs and Trade

GDP gross domestic product

HSA health saving account

IRC Internal Revenue Code

ITA International Trade Administration

ITC International Trade Commission

MEP Manufacturing Extension Partnership

NAFTA North American Free Trade Agreement

NAM National Association of Manufacturers

NIST National Institute of Standards and Technology

NTMA National Tooling and Machining Association

OECD Organization for Economic Cooperation and Development

OEM original equipment manufacturer

OMB Office of Management and Budget

ONR Office of Naval Research

OSTP Office of Science and Technology Policy

PCAST President’s Council of Advisors for Science and Technology

R&D research and development

R&E research and experimentation

SBA Small Business Administration

SBIR Small Business Innovation Research

STTR Small Business Technology Transfer

TRIPS Agreement on Trade-related Aspects of Intellectual Property

TPCC Trade Promotion Coordinating Committee

TPSC Trade Policy Staff Committee

USPTO U.S. Patent and Trademark Office

USTR Office of the U.S. Trade Representative

WTO World Trade Organization

12 U.S. DEPARTMENT OF COMMERCE One Competing—and Winning—in a Global Economy

The following discussion sets out a frame- in mid-2000, before the overall economy work for understanding the challenges took a downward turn. Although rapid identified by U.S. manufacturers. This monetary and fiscal responses kept the re- chapter highlights the critical contribu- cession in check, the cyclical changes tion manufacturing makes to the U.S. flowing from the recession hit the manu- economy and details the many underlying facturing sector with unusual force. strengths of the manufacturing sector. In fact, the general economic down- The manufacturing sector’s rapidly turn that first appeared in the manufac- rising productivity is its greatest strength turing sector in mid-2000 may have and a major contributor to the growth of masked the far more powerful underlying the U.S. economy. Higher productivity of- structural changes affecting manufactur- Tfers multiple benefits: stronger competi- ing. With rapid advancements in technol- tiveness in manufacturing and other sec- ogy, lower barriers to trade, and the entry tors of the economy, higher real wages, of significant new competitors into global and a rising standard of living. That same markets, the past five to 10 years have productivity growth, however, has also been marked by rapid change for Amer- been largely responsible for the gradual ica’s manufacturers, even as they continue decline in employment in manufacturing: to adapt to the global market. manufacturing employment has declined even as U.S. manufacturers have become Importance of more efficient both in absolute terms and Manufacturing to the relative to other sectors in the economy. Economy The manufacturing sector’s overall Manufacturing is crucial to the U.S. performance in the past 25 years has been economy. Every individual and industry very strong, despite difficult periods of ad- depends on manufactured goods. In addi- justment through the 1970s and 1980s. It tion, innovations and productivity gains remained strong despite shocks to the in the manufacturing sector provide bene- world economy, including those in some fits far beyond the products themselves. of the strongest U.S. export markets dur- There is no dispute over the signifi- ing the Asian financial crisis of 1997. cant contribution that manufacturing However, the manufacturing sector was hit by a particularly harsh recession

MANUFACTURING IN AMERICA 13 makes to the U.S. economy and to Amer- as a whole. For example, improvements in ica’s standard of living. The sector contin- cotton harvesting equipment, manufac- ues to account for 14 percent of U.S. GDP tured in the Midwest, help improve the and 11 percent of total U.S. employment. productivity of cotton growers in Califor- Those statistics, however, do not ade- nia and Texas. And expanding the power quately convey the importance of the of computers makes on-line banking and manufacturing sector to the U.S. economy other financial services possible. and to America’s future. Manufacturing is A recent study by the National Insti- an integral part of a web of inter-industry tute of Standards and Technology rein- relationships that create a stronger econ- forces how the benefits of improved man- omy. Manufacturing sells goods to other ufacturing productivity extend to other sectors in the economy and, in turn, buys sectors in the economy. The NIST study products and services from them. detailed the service sector’s reliance on Manufacturing spurs demand for U.S. manufacturers for the goods and everything from raw materials to interme- technology that spur service sector diate components to software to finan- growth. It emphasized “the substantial de- cial, legal, health, accounting, transporta- pendency of services on manufacturing tion, and other services in the course of firms for technology” and the “critical doing business. According to the Bureau role” manufacturing plays in stimulating of Economic Analysis, every $1 of final growth in the services sector, which now demand spent for a manufactured good makes up more than 70 percent of the generates $0.55 of GDP in the manufac- U.S. economy.5 turing sector and $0.45 of GDP in non- From the perspective of the average manufacturing sectors.1 American worker, rising productivity trans- The automotive sector provides a lates into higher real wages and a broader good example. The production of automo- range of higher-quality, lower-cost goods, biles stimulates the demand for every- meaning each additional dollar earned thing from raw materials in the form of goes further. This makes it is easier to buy coal and iron to manufactured goods in a home, save for a child’s college educa- the form of robots to the purchase of serv- tion, or set aside money for retirement. ices in the form of health insurance for The manufacturing sector has gener- the automobile companies’ employees. ated many of the innovations that have A healthy manufacturing sector is led to significant productivity gains over critical to America’s economic future for the past 25 years in manufacturing and other reasons as well—innovation and throughout the economy. Increases in productivity.2 Innovation holds the key to manufacturing productivity have consis- rising productivity, and productivity gains tently outpaced other sectors of the U.S. are the key to both economic growth and economy. From 1977 to 2002, productiv- a rising standard of living.3 As one leading ity in the overall economy increased 53 economist put it: percent, while manufacturing sector pro- A nation’s standard of living in the long term ductivity rose 109 percent. The greater depends on its ability to attain a high and than 50-percent increase in overall pro- rising level of productivity in the industries in ductivity represents a tremendous gain in which its firms compete.4 the U.S. standard of living, and the more than 100-percent increase in manufactur- Rising productivity is the key to main- ing productivity is a remarkable achieve- taining U.S. competitiveness in manufac- ment. As Figure 1 reflects, labor productiv- turing, but the benefits of rising manufac- ity in manufacturing has doubled since turing productivity extend to the economy 1977. The rate of change has increased

14 U.S. DEPARTMENT OF COMMERCE over time, with productivity growing Figure 1. Productivity in Manufacturing and the Total faster (14.2 percent) in the past two and a U.S. Economy, 1977–2002 half years, since the beginning of the last recession, than in any two-and-a-half-year 2.5 period in the past 50 years. Further, U.S. productivity strongly ex- ceeds that of America’s principal trading partners (Figure 2). The United States 2.0 leads all countries in the absolute level of labor productivity, both per hour and per Manufacturing Sector employee. This position has enabled the 1.5 United States to maintain its labor cost advantage over these trade competitors despite the higher wages and benefits paid 1.0 Total Economy* to American workers. The recently stronger performance of U.S. manufacturing in raising its productivity represents one of the causes for optimism for the 0.5 1977 1980 1985 1990 1995 2000 sector’s ability to adjust to rising levels of competition at home and abroad. The * Excludes government and agricultural sectors. ability to raise productivity, even in the Index: 1977 = 1.0 midst of recession and recovery, reflects Source: U.S. Department of Labor, Bureau of Labor Statistics. that U.S. manufacturers have made changes in their operations and production methods to put themselves in a stronger position than manufacturers in Figure 2. Per-Capita Manufacturing Output in Western Europe other industrialized nations. Relative to the United States, 1950–2000 The growth in productivity has also United States had a profound effect on the U.S. stan- 100 dard of living. The 31-percent productivity advantage of the U.S. economy over West Germany OECD members accounts for three-quar- 80 ters of the per capita income difference.6 France One important vehicle for the rising productivity in manufacturing has been 60 technological innovation. And in manufacturing, technological innovation comes United Kingdom 40 in two forms. First, new inventions provide a leap forward in technology. Con- sider the first integrated circuits and the 20 astonishing array of products that are di- 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 rectly related to its development. Many of those inventions derive from large invest- Index: U.S. level = 100 ments in research and development in the Note: ”West Germany“ data are for West Germany throughout, even after 1990. Source: U.S. Department of Labor, Bureau of Labor Statistics; Groningen Growth and Development manufacturing sector: manufacturing firms Center, International Comparisons of Output and Productivity by Industry. fund 60 percent of the $193 billion that the U.S. private sector invests annually in R&D.7 Those technologies are absorbed by the much larger service sector and drive

MANUFACTURING IN AMERICA 15 the increasing rates of innovation and pro- and manufacturing processes within major ductivity growth in that sector. technology life cycles. Such improvement The other form of innovation comes involves many less dramatic innovations, from the steady improvement in products but collectively these innovations have a significant effect. For example, incremental improvements in the ability to etch a Figure 3. Prices in Manufacturing and the Total U.S. Economy, higher number of functions on a micro- 1977–2002 processor or to multiply the number of calls a fiber-optic cable can transmit have 2.6 a remarkable effect over time.8

2.4 Both major and incremental innovations improve the competitiveness of the 2.2 manufacturing sector and the U.S. econ- 2.0 Total Economy omy as a whole. Because productivity has risen faster in manufacturing than in the 1.8 services sector, prices of manufactured 1.6 goods have risen more slowly than prices Manufacturing Sector 1.4 of services. At times, manufactured goods prices have even declined. That pricing 1.2 pressure helps keep production costs in 1.0 check for both the manufacturing sector 0.8 and other areas of the economy. 1977 1980 1985 1990 1995 2000 In the past 25 years, prices in the overall economy have increased more than Index: 1977 = 1.0 140 percent, while prices in manufacturing Sources: Total economy: U.S. Department of Commerce, Bureau of Economic Analysis; manufacturing sector: U.S. Department of Labor, Bureau of Labor Statistics. have increased only slightly more than 60 percent (Figure 3). That also explains why manufacturing’s share of nominal private output has declined from around 27 per- Figure 4. Output in Manufacturing and the Total cent in 1977 to around 16 percent at pres- U.S. Economy, 1977–2002 ent, even while the sector’s contribution to real private output growth has remained

2.4 roughly the same since 1977. Real manufacturing output, adjusted 2.2 for changes in prices, provides the best 2.0 representation of manufacturing output over the past 25 years relative to the rest 1.8 of the economy. Real manufacturing out- Total Economy 1.6 put since 1977 has grown nearly as fast as real output of the private economy as a 1.4 whole (Figure 4). 1.2 Manufacturing Sector Another way of measuring the simi- larity between manufacturing’s growth in 1.0 real terms and that of the broader econ- 0.8 omy is to look at the sector’s contribution 1977 1980 1985 1990 1995 2000 to the growth of real private output. Mea- sured that way, the manufacturing sector’s Index: 1977 = 1.0 contribution has remained roughly steady Source: U.S. Department of Commerce, Bureau of Economic Analysis. at 0.6 percentage points for each 10-year

16 U.S. DEPARTMENT OF COMMERCE average annually from the 1977–1987 pe- Figure 5. Manufacturing as a Percentage of Average U.S. Private riod to the most recent 1992–2002 period GDP Growth, 1987–2002 (Ten-Year Averages) (Figure 5). (Ten-Year Averages) 5 Compensation and Employment Manufacturing Sector Total Real Private Output Historically, the manufacturing sector has had the reputation of providing a way 4 for blue-collar workers to find good-paying jobs. Even today, the average hourly total compensation of production workers 3 in manufacturing is higher than the average in all other sectors. 2 However, manufacturing’s advantage in total compensation is based on benefits, rather than higher hourly wages. Av- 1 erage hourly earnings of production workers since 1967, when measured on an inflation-adjusted basis, suggest that man- 0 1987 1989 1991 1993 1995 1997 1999 2001 ufacturing as a sector has offered an average, rather than high, hourly wage. There are, of course, specific sectors such as Note: “Total real private output” is the same as total real U.S. private GDP—that is , GDP minus the government sector. The top bars show the 10-year growth of private GDP, annualized to single- autos and steel that have offered wages far year averages. The bottom bars show 10-year moving averages: for a given year, contribution to private GDP growth by the manufacturing sector for that year is averaged with the previous nine above the average, but these are balanced years. by others that have offered below average Source: U.S. Department of Commerce, Bureau of Economic Analysis. wages. In fact, the average hourly earnings in the wholesale trade, finance, and Figure 6. Employment Cost Index, 1980–2002 service sectors have surpassed those in manufacturing over the past 10 years; only retail trade remains lower. 350 The advantage of working in the manufacturing sector has derived, instead, 300 from the higher level of average benefits Benefits received ($8.89 per hour for manufacturing versus $5.94 for non-manufacturing). 250 Compensation Manufacturers contribute an average of $0.81 per hour more for health insurance, 200 $0.66 more for overtime and supplemen- tal pay, $0.62 more for leave, $0.29 more Wages and Salaries 150 for retirement, and $0.34 more for other benefits (Figure 6).9 Because productivity gains in manu- 100 facturing have outstripped the growth in 1980 1985 1990 1995 2000 demand for manufactured goods, manufacturing employment has been falling for Index: 1980 = 100 the past three decades. Manufacturing Source: U.S. Department of Labor, Bureau of Labor Statistics. employment was significantly lower in 2002 than in 1977, falling from 22 percent of the non-farm economy to under 12 percent. Partial data for 2003 indicate

MANUFACTURING IN AMERICA 17 Figure 7. Total Employment Growth and Manufacturing Employ- that the share has fallen further to about ment Decline, 1977–2002 11 percent (Figure 7). Given that manufacturing represents a 1.8 stable part of the economy while enjoying outsized productivity gains, the gradual de- 1.6 Total Economy cline in manufacturing employment is not surprising. Expressed another way, given 1.4 the more rapid gains in labor productivity, manufacturing’s share of total output 1.2 would need to increase dramatically to 1.0 maintain a given level of employment. While the number of U.S. manufac- 0.8 Manufacturing Sector turing jobs has fallen since 1979, other advanced economies have experienced the same trend. In the 1990s, manufactur- 0 ing’s share of employment fell at least as 1977 1980 1985 1990 1995 2000 fast, if not faster, in Western Europe than in the United States (Figure 8). Index: 1977 = 1.0 Source: U.S. Department of Labor, Bureau of Labor Statistics. On average, U.S. manufacturing employment has fallen 0.4 percent annually over the past 35 years. But that average 24 rate of decline masks large fluctuations. 23 Manufacturing employment rises and 22 falls sharply in each business cycle. With 21 each recession, manufacturing employ- 20 Manufacturing Share 19 of Total Employment ment falls slightly lower than the previ- 18 ous trough. When the business cycle 17

Percent turns up and manufacturing firms begin 16 hiring again, manufacturing employment 15 14 rises, but it does not quite reach its previ- 13 ous peak. 12 These trends provide a useful transition to discuss the more recent develop- 0 ments in manufacturing. 1977 1980 1985 1990 1995 2000 Cyclical Effects of Recession Source: U.S. Department of Labor, Bureau of Labor Statistics. and Recovery After seeing prospects improve for more than a decade, American manufacturers have, in the past five years, faced harsh economic conditions. Recessions are typically hard in manufacturing. Of the eight recessions since 1950, real GDP has declined, on average, about 2 percent, whereas manufacturing output has declined 7 percent. By the standard of overall output, the recession of 2001 was relatively mild;

18 U.S. DEPARTMENT OF COMMERCE however, it hit the manufacturing sector Figure 8. Manufacturing Employment as a Percent of Total Civilian particularly hard. Manufacturing output Employment in Europe and the United States, 1980–2001 declined about 6 percent from the fourth quarter of 2000 to the third quarter of 35 2001, over which time real GDP fell 0.5 Germany* percent. What has been striking about the 30 United Kingdom most recent recession in manufacturing, however, was not the sharp drop in out- 25 put, but the slow pace of recovery. In all but the most recent recession since World United States Italy War II, manufacturing output has in- 20 France creased nearly 15 percent in the first two Netherlands years of economic recovery. However, over 15 the past two years, a period during which GDP rose nearly 6 percent, manufacturing output declined slightly (Figure 9). Total 0 manufacturing production is still down 1980 1983 1986 1989 1992 1995 1998 2001 some 4 percent below its previous peak of mid-2000. * “Germany” data are for West Germany through 1990, and for unified Germany thereafter. The recession and the slow pace of Source: U.S. Department of Labor, Bureau of Labor Statistics. recovery in manufacturing have been particularly hard on workers in manufacturing. Since the onset of the manufacturing Figure 9. GDP and Manufacturing Output, 2000–2003 employment downturn, the sector has lost 2.6 million jobs, while employment in other sectors has been relatively stable. 1.08 In the third quarter of 2003, manufactur- 1.04 GDP ing employment remained 15 percent 1.00 lower than in the period immediately before the recession. Perhaps more signifi- 0.96 cantly, employment in manufacturing has 0.92 Manufacturing fallen 8 percent since the recovery began. Output This decline was widespread across all 0.90 manufacturing sectors (Table 1). 2000-Q4 2001-Q2 2001-Q4 2002-Q2 2002-Q4 2003-Q2 There were several features of the re- 2001-Q1 2001-Q3 2002-Q1 2002-Q3 2003-Q1 2003-Q3 cent recession that made its effect on the manufacturing sector more pronounced. Index: Fourth quarter 2000 = 1.00 First, there was a significant retrench- Sources: GDP: U.S. Department of Commerce, Bureau of Economic Analysis; manufacturing output: Board of Governors of the Federal Reserve System. ment in business investment in technology following a surge in such investment throughout the preceeding decade. It is generally accepted that the high-tech sector spurred the economy in the late 1990s. High-tech production peaked, however, in late 2000 (Figure 10). Output in the sector declined 12 percent by the summer of 2001, decreasing considerably

MANUFACTURING IN AMERICA 19 Table 1. Net Change in Manufacturing Employment, Fourth Quarter further than the average for the manufac- 2000 to Third Quarter 2003 turing sector as a whole. The drop-off in high-tech spending Percent Number of Jobs that led the decline affected the high-tech Total Manufacturing -15.1 -2,599,000 sector worldwide. Data on global semicon- Food -1.8 -29,000 ductor sales, for example, indicate a sizable Beverage and Tobacco -6.7 -14,000 drop beginning in late 2000 and continu- Textile Mills -29.5 -109,000 ing for the next year as businesses spent Textile Product Mills -15.8 -34,000 considerably less on communications and Apparel -37.4 -178,000 computing technology (Figure 11). Leather and Products -34.1 -22,000 Two manufacturing sectors that expe- Wood Products -9.6 -57,000 rienced among the largest percentage job Paper -12.3 -74,000 declines were precisely those industries Printing -14.0 -113,000 most affected by the decline in high-tech Petroleum/Coal Products -3.9 -5,000 spending. Employment in computers and Chemicals -6.3 -62,000 electronics fell 24 percent from the fourth Plastics/Rubber -11.9 -112,000 quarter of 2000 to the third quarter of Nonmetallic Minerals -9.4 -52,000 2003, and the decline in employment in Primary Metals -22.7 -140,000 electrical equipment was of similar magni- Fabricated Metals -16.6 -293,000 tude—23 percent. Both decreases were Machinery -19.6 -285,000 larger than the 18-percent average for Computers and Electronics -25.1 -467,000 manufacturing as a whole. Electrical Equipment -21.3 -125,000 The second feature of the recession Transportation -12.8 -260,000 that deserves attention was the sharp drop Furniture -15.5 -105,000 in inventories that accompanied the Miscellaneous -8.6 -63,000 downturn. Inventory imbalances are typi- Source: U.S. Department of Labor, Bureau of Labor Statistics. cal for recessionary periods. Demand falls, and excess inventory is left on the shelves. Businesses respond by cutting Figure 10. High-Tech Industrial Production, 1996–2003 back orders, shipments, and production until demand returns. In the most recent recession, busi- 800 80 nesses reacted to a modest increase in in- Percent Change 700 70 ventory-to-sales ratios during 2000 by (right axis) 600 60 cutting back production in 2001 to get supply under control. The extent of the 500 50 resulting relatively drastic inventory liq- 400 40 uidation was much more severe in the Index level 300 30 2001 recession than it was in the

200 20 1990–1991 recession. Index Level The third feature of the recession 100 10 Percent change from year ago (left axis) worth noting is the uncertainty caused by 0 0 the events of September 11, 2001, which depressed investment and demand. In ad- 1996 1997 1998 1999 2000 2001 2002 2003 dition to the direct effects on demand for manufactured goods, the decline in the demand for services such as tourism had Notes: High-tech industries are defined for this analysis as computers, communication equipment, and semiconductors. subsequent effects on other manufactur- Source: Board of Governors of the Federal Reserve System. ing sectors such as autos and aircraft.

20 U.S. DEPARTMENT OF COMMERCE A fourth feature of the recession is Figure 11. Worldwide Semiconductor Sales, 1996–2003 the extent to which slower growth at (Billions of Dollars) home was compounded by the effects of slower growth abroad, particularly the dramatic drop in U.S. manufacturing ex- 20 ports to our principal export markets. 19 Stronger growth abroad helps cushion the 18 effects of recession at home. 17 Unfortunately, although they have 16 shown recent signs of growth, both Eu- 15 rope and Japan have grown considerably 14 slower than the United States since the 13 beginning of the recovery. Slower growth Billions of dollars 12 among the industrial economies has mag- 11 nified the effect of slower growth in 10 emerging economies in Asia since the 9 onset of the Asian financial crisis in mid- 8 1996 1997 1998 1999 2000 2001 2002 2003 1997. Although several Asian economies have recovered, the region’s growth, with the principal exception of China, has yet Notes: Data are based on a three-month moving average, wherein each month’s sales figure is an average of its total sales and those of the subsequent two months. Data for 2003 are through to approach the levels reached before to October. Source: Semiconductor Industry Association. the financial crisis. Continued slow economic growth abroad produces less demand for U.S. manufactured goods than would other- Figure 12. Economic Growth: History and Forecast, 1980–2004 (Percent Change) wise be the case. Figure 12 covers a period that includes the last three U.S. recessions: 8 in 1982, 1991, and 2001. The pattern of 7 the most recent recession resembles that United States of the 1982 recession, which was marked 6 by stagnation among America’s major 5 trading partners. 4 What the trend lines reflect is that the U.S. economy in general, and the 3 manufacturing sector in particular, re- 2 World ceived little support from growth among 1 major U.S. trading partners over the past two years. 0

However, the U.S. economy as a -1 whole has responded to both monetary -2 and fiscal stimulus in the past year. The economy grew at an annual rate of 8.2 -3 percent in the third quarter of 2003, 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 which translates into stronger demand for all goods and services, including manufac- Sources: World: International Monetary Fund; United States: U.S. Department of Commerce, Bureau tures. In addition, there are signs of grow- of Economic Analysis. ing strength in a number of markets abroad. That stronger growth, combined with the continued competitiveness of the

MANUFACTURING IN AMERICA 21 U.S economy, has improved the prospects reduction in barriers to trade, particularly for exports of U.S. manufactured goods. with respect to trade in manufactured The manufacturing sector has re- goods. The third is the end to political di- cently begun to participate in the broader visions that have segmented markets for recovery under way in the U.S. economy. more than 70 years and the corresponding The Institute of Supply Management’s emergence of Russia, China, and other Purchasing Manager’s Index has remained countries in the world trading system. above 50 (indicating continuing growth Each of these trends has significant impli- in future orders for manufactured goods) cations for U.S. manufacturing, both in since August 2003. the form of new market opportunities as Furthermore, rising productivity re- well as stronger competition. mains a bright light. Since the end of the Role of Technology recession, productivity in manufacturing is up 9.7 percent. Measuring from the pe- Global manufacturing has been fun- riod immediately before the recession, damentally reshaped by the remarkable productivity is up 14.2 percent. improvements in computing, communica- Those increases in productivity speak tions, and distribution. Each factor, stand- to the ability of American manufacturing ing alone, would have greatly expanded to meet the competitive challenges and the opportunities for trade, investment, make a contribution to the rising stan- and global production. Taken in combina- dards of living in the economy. What the tion, however, the rapid changes in all manufacturing sector can control—to in- three influence many of the trends that vent, to innovate, and to combine re- have most reshaped manufacturing from sources to produce quality merchandise— the shop floor to the loading dock to the it does quite well. final customer. What these factors have also done is raise the bar to compete in Structural Changes Shaping today’s manufacturing environment. the Competitive Environment In 1987, in a review of the book Man- ufacturing Matters, Nobel Prize-winning With renewed growth in the U.S. economist Robert Solow famously ob- economy, rising production numbers in served, “You can see the computer every- the manufacturing sector, and significant where but in the productivity statistics.”10 gains in productivity even in the face of But, in the latter part of the 1990s, the ev- the recent recession, the manufacturing idence of the computer’s effect on produc- sector is poised for what could be a strong tivity finally surfaced. Compared with the recovery. Nevertheless, the cyclical effects relatively slow rates of productivity of the recession and the strengthening re- growth experienced between 1973 and covery are only part of the manufacturing 1995, labor productivity grew “roughly story. In some respects, the recent reces- 1.2 percentage points [faster] a year from sion has obscured the more fundamental 1995 through 2000, a rise of more than structural changes under way in the man- 80 percent” above the previous trend ufacturing sector globally. line.11 Investments in information tech- Over the past two decades, three sepa- nology are estimated to account for 60 rate, powerful trends have reshaped the percent of that increase in productivity.12 manufacturing sector globally. The first is The dramatic expansion of comput- the revolution in technology that has been ing power and its application to an ever under way for two decades, raising produc- greater range of tasks in the business en- tivity in manufacturing and reducing costs vironment is without a doubt the single worldwide. The second is the significant most powerful technological change

22 U.S. DEPARTMENT OF COMMERCE affecting manufacturing today. Moore’s Similarly, new communications Law—that computing power will double technologies allow engineers to conduct every 18 months—still prevails and is real-time product development discus- likely to continue for some time to come. sions with colleagues around the world. One useful way to think about the explo- In addition to the videoconferencing ca- sion in computing power is the fact that pability, communications technologies the microchip in today’s talking greeting use operating systems that allow anyone cards contains more computing power participating in the discussion to manip- than existed worldwide in 1945.13 ulate the same computer-generated de- Even skeptics of the contribution of sign on the screen. information technology to productivity The revolution in communications gains, such as Robert Gordon, generally has fundamentally changed the way man- have conceded its impact on manufactur- ufacturers do business. Wireless communi- ing.14 The increase in computing power cation means that a cellular touches every part of the manufacturing phone and a laptop com- manufacturing has been funda- process. It has revolutionized product de- puter can replace a salesper- sign by introducing computer-assisted de- son’s office. Not only does mentally reshaped by the remark- sign that allows much of the product de- the cellular phone allow for able improvements in computing, velopment and testing to be done at a far greater contact and consul- lower cost in a virtual environment. Com- tation with customers about communications, and distribution puting power has revolutionized manufac- their needs, but it also con- turing by creating a whole new family of tains the necessary functions to place an multiple-axis machine tools that offer un- order and begin the manufacturing matched precision, quality, and efficiency. process directly from the point of sale. Computers have also made possible The communications revolution has most of the revolutions in business also significantly changed the delivery of processes as well. In the absence of the finished goods to customers. For instance, computing power available today, con- in trucking, the combination of a global cepts such as “just-in-time” production positioning system transmitter and a cellu- and “demand-pull” manufacturing lar phone has meant less waste, greater ef- processes could not exist in their current ficiency, and a lower cost to manufactur- forms.15 The dramatic increase in coming customers. New communications puting power has created an ever more devices also ease the distribution of goods powerful tool for developing new prod- by creating an interface with government ucts, lowering production costs, raising agencies that may require information for quality, measuring performance, and security or regulatory reasons. By reducing managing business. the costs of distribution, new communica- Communications technologies are es- tions technologies have reduced the cost sential to running high-performance man- of the end products. ufacturing operations. New communica- The application of technology has tions technologies create the ability to also transformed the distribution of man- manage just-in-time inventories and de- ufactured goods and reduced the costs of mand-pull manufacturing. Real-time com- transportation. Obviously, air travel has munication is critical to feeding informa- contributed much to making the competition back into a system that is designed to tive marketplace for manufactured goods yield zero defects. Interoperable commu- a single market. In addition, significant nications systems provide opportunities changes in shipping since World War II, for manufacturers and their customers to such as the rise of containerization and collaborate in product development.

MANUFACTURING IN AMERICA 23 roll-on/roll-off cargo allow for a smooth The post-World War II investment in transition from container ship to rail to R&D paid enormous dividends in the truck and dramatically increase efficiency. form of new products, new industries, and Distribution is also aided by new cargo improved growth and competitiveness of handling facilities operated by express de- U.S. manufacturing. But, increasingly, it is livery services. For example, this enables private industry that is making the invest- computer manufacturers to operate ments driving innovation. By 1980, indus- overnight repair facilities and deliver re- try had become the lead investor in U.S. paired computers to their owners in fewer R&D activities, investing more than the than 24 hours. federal government for the first time. The combination of the trends in Today, robust private sector investment in computing, communications, and trans- R&D outpaces federal R&D funding by a portation has generated a new service of ratio of more than two to one, effectively door-to-door logistics. Logistics has be- reversing the ratio that prevailed through- come essential to meet the demands of out the Cold War and the space race. The lesson that the post-World War II revolution in science and engineering in the United States flowed from investments in R&D was not lost on foreign nations. Today, nations everywhere recognize the link between technology, economic growth, and job creation. They are, as a consequence, increasingly establishing research institutes and key technology programs; creating incentives for partnerships among industry, academia, and government; and boosting training for scientists and engineers. That dynamic is reflected in the sharp decline in the U.S. share of total world R&D spending. Through the 1960s, the U.S. share of global R&D ranged between 60 and 70 percent. Today, by con- the market and has been fundamental in trast, the U.S. share is 30 percent. lowering the costs of manufacturing to re- Equally important is the proportion main competitive. The competitive envi- of a nation’s output that is reinvested in ronment has been reshaped by such ad- R&D, as this ratio is an indicator of an vances, which grew out of post-World War economy’s commitment to competing on II defense research.16 The Office of Naval the basis of new technology in the fu- Research funded the research of a number ture. In this regard, the R&D intensity of of engineering professors at the nation’s the U.S. economy has remained essen- premier research institutions. Those pro- tially constant for 40 years, during which fessors had been instrumental in solving a time the surge in foreign R&D invest- wide range of practical technical problems ment has occurred. attendant to the war effort during World The change in R&D funding patterns War II and continued to receive ONR in technology has led to the broad disper- funds after the end of the war in 1945. sion of technology worldwide. The increase in foreign direct investment by many global firms has reinforced that

24 U.S. DEPARTMENT OF COMMERCE trend. Advanced, state-of-the-art manufac- eliminated tariffs and many non-tariff bar- turing facilities capable of producing riers applicable to the largest three-way high-quality, low-cost goods are now trade in the world. available worldwide. American manufac- The value of world trade has grown turers face competition not only from enormously as a result. Since the creation manufacturers of low-cost commodity of the GATT system, world products, but also from manufacturers of exports grew from $58 bil- U.S. manufacturers face sophisticated products and the tools to lion in 1948 to $5.98 trillion make them. in 2001. According to data considerably higher compliance Thus, U.S. manufacturers will face compiled by the WTO, the costs than do many of America’s constant pressure not only to lower prices, volume of world exports in- but also to increase the value that they add creased at a compound an- trading partners to their products. Competition from low- nual rate of 5.8 percent in cost producers creates an incentive to the past 25 years alone, a pace that was move up the value chain in the direction more than twice as fast as growth in the of higher-margin goods, where the condi- world economy as a whole.18 tions of competition are not based on price Most of the growth in world trade alone. Increasingly, success in manufactur- has been in manufactured goods. The sec- ing will depend on the ability to integrate tor now accounts for approximately three- new technologies rapidly into both prod- fourths of all trade in goods and 60 per- ucts and operations. That ability puts a pre- cent of all trade, in goods and services mium on continuing R&D as the primary combined.19 One reason for the predomi- means of gaining a competitive edge. nance of manufacuring trade is that the United States and its trading partners Lowering Barriers to Trade have reduced barriers to trade in manufac- The second trend reshaping the envi- tured goods further and faster than in ronment in which U.S. manufacturers other sectors. While trade in agricultural compete is the significant reduction in tar- goods, for example, has grown at a rela- iff and non-tariff barriers to trade in manu- tively strong annual rate of 3 percent over factured goods globally. Successive rounds the last 20 years, exports of manufactured of multilateral trade negotiations under the goods advanced at nearly twice that rate, General Agreement on Tariffs and Trade averaging 5.7 percent per year. and its successor, the World Trade Organi- The growth in trade over the past 50 zation, for example, have cut the average years, fueled by falling trade barriers, has tariff on manufactured goods worldwide by contributed directly to the most rapid, 30 percent. For industrialized countries the sustained economic growth in U.S. his- results are even more remarkable. Accord- tory. Output in the United States in- ing to a 1999 study published by the Orga- creased fivefold and real GDP tripled. U.S. nization for Economic Cooperation and real GDP, expressed in 2000 dollars, grew Development, the average tariff rate for from $11,672 in 1950 to $34,934 in 2002. OECD countries, which was 40 percent at Trade continues to contribute signifi- the end of World War II, is now 4 percent.17 cantly to U.S. economic growth. In the The more recent creation of free trade past decade alone—which included the agreements, such as the North American creation of NAFTA, the conclusion of the Free Trade Agreement between the United Uruguay Round of GATT talks, and the States, Canada, and Mexico, has reinforced creation of the WTO—world trade grew the trend. Over the past 10 years, NAFTA by 87 percent.20 Between 1990 and 2000, U.S. exports were up 98 percent and the share of world trade represented by U.S.

MANUFACTURING IN AMERICA 25 exports actually grew from 11.4 to 12.2 The benefits from import competi- percent.21 In other words, rather than hav- tion are not limited to the final consumer. ing a negative impact on the U.S. econ- Access to the highest-quality, lowest-cost omy and manufacturing sector, the most components is an essential element of the recent round of trade agreements appears U.S. manufacturing sector’s competitive- to have allowed U.S. exports to grow at a ness. Imports stimulate competition and faster pace than world trade overall. spur American manufacturing to increase The U.S. economy grew rapidly over its own quality and productivity. It is those same years, exceeding the pace of worth underscoring that during the past most other industrialized nations. From decade, while trade was expanding signifi- 1990 to 2002, the economy expanded at cantly, the U.S. manufacturing sector was a 3-percent annual rate: the economy growing faster and in more dynamic ways grew from $7 trillion in 1990 to $10 tril- than it had in decades. lion in 2002.22 During that time, the None of those results are surprising growth in U.S. exports accounted for one- in economic terms. A more open econ- sixth of all growth in the U.S. economy.23 omy has moved the United States toward In sectors such as machinery, computers the position of its greatest comparative and electronics, and transportation equip- advantage. This openness has brought ment, exports now make up between 50 about increasing returns and a more effi- and 60 percent of all sales.24 In one-third cient use of resources. Both are consistent of U.S. manufacturing industries, exports with stronger economic performance. In- account for one in every five manufactur- deed, some of the latest research suggests ing sales. According to the most recent that the broad engagement of the United figures available, exports now support States in the world economy—particularly more than 12 million jobs, and those the adjustment of the U.S. economy to- jobs pay between 13 and 18 percent ward a more competitive state—has actu- higher than the average U.S. wage.25 ally helped retain employment in the The benefits of trade, of course, flow manufacturing sector that would have from imports as well as exports. Reduc- otherwise been lost.28 tions in tariffs on imports into the United In fact, to the extent that other coun- States represent a tries are currently examining the health of cut in regressive their own manufacturing sectors, they taxes. This cut of- have identified the United States as the fers significantly model. In its recent study of manufactur- higher benefits to ing in the United Kingdom, for example, low-income the British government essentially bench- households than marked the U.S. manufacturing sector as to those with the best measure of its own progress and higher incomes. policies.29 Similarly, the European Union By some esti- articulated a vision of aerospace manufac- mates, NAFTA turing that expressly contrasted the devel- and the Uruguay opment of their aerospace industry with Round agreements raised the average an- that of the United States.30 Many develop- nual income of an American family of four ing countries also use the United States as by $1,300 to $2,000.26 A further reduction a model. in global barriers by just one-third would These developments point to the increase that family’s annual average in- basic benefits to the U.S. economy, and to come by an additional $2,500 a year.27 its manufacturing sector in particular, from participating in an increasingly open

26 U.S. DEPARTMENT OF COMMERCE trading system governed by a common set The United States has led the way in of rules. They also point to the benefits reducing trade barriers worldwide and that can be derived, both for U.S. manu- has, in past negotiations, proved willing facturers and for the country, from the to cut its tariffs and limit other forms of current effort to open markets through its own intervention in the market to a trade negotiations. Furthermore, vigorous greater extent than a number of Amer- enforcement of agreements is needed to ica’s trading partners. While noting that ensure that U.S. manufacturers, together there are significant excep- with the nation’s farmers and service tions, including in the manu- the United States has led the providers, receive the benefit of the bar- facturing sector, the average way in reducing trade barriers gains negotiated. U.S. tariffs on a trade-weighted Given the concerns expressed basis are now less than 1.7 per- worldwide throughout the U.S. manufacturing sector cent.31 While many major in- about the current trade rules, it is worth dustrial trading partners have also re- reiterating the extent to which the rules duced their tariffs to comparable rates, in adopted in recent trade agreements have other parts of the world U.S. exporters served, rather than undercut, U.S. eco- still face heavy tariffs. In addition, the nomic interests, including those of U.S. United States is far less likely to subsidize manufacturers. Reducing tariff barriers, im- its manufacturers directly than is the case proving investment rules, and developing in many other countries. stronger intellectual property protections, Wholly apart from the basic regula- for example, mainly benefit the small tion of trade or the imposition of specific manufacturers that were previously locked protective barriers lies the question of out of foreign markets. While larger firms costs imposed by government. U.S. manu- can afford to invest behind the “tariff facturers face considerably higher compli- wall” and have the resources, in many ance costs in labor, environmental, and cases, to develop strategies for protecting other regulatory areas than do many of their intellectual property, smaller manu- America’s trading partners, particularly in facturers have generally had only two op- the developing world.32 But there is little tions: either export directly or sell to doubt that the disparities in certain someone who exports. highly visible areas drive the perception of In the aggregate, macroeconomic unfairness that permeates many of the forces—rates of growth and relative concerns of U.S. manufacturers about the prices—have the primary effect on our current trade rules. trade balance and help explain the trade In today’s global economy, a policy deficit. These forces, combined with inno- of protection simply does not work. A vation and productivity, underpin our good example is the tool and die industry. trade position over the long term. While the U.S. tool and die industry has On the other hand, from the perspec- sought protection from import competitive of individual firms, other factors can tion, particularly from China, the indus- be seen as important in global markets try was also among the most vociferous and America’s trade position. Continued opponents of President Bush’s imposition trade deficits, combined with the very vis- of tariffs on imports of steel into the ible efforts by some countries to confer a United States in 2002. What the tool and competitive advantage on their firms, lead die industry’s position reflects is that pro- some U.S. manufacturers to question the tection invariably involves costs and can fairness of our trade agreements and the injure other U.S. industries, including basic tenets of U.S. trade policy. many manufacturers. Instead, what U.S. manufacturers seek is simply to ensure

MANUFACTURING IN AMERICA 27 that the rules that apply to U.S. manufac- onset of World War I. Even with the rapid turers apply to their competitors as well, changes in technology and the reduction especially in the case of competition with of tariff and non-tariff barriers to trade, companies that benefit from heavy state the global economy would not be possible intervention. if those divisions still existed. Overall, the U.S. economy has bene- The numbers bear this theme out. fited from import competition, which has While the so-called Asian tigers’ share of helped maintain the competitiveness of world trade grew rapidly over the past 20 many manufacturing enterprises and has years, the biggest gains in share of world dampened inflation considerably. At the trade in manufactures were captured by same time, however, stronger import com- China. China’s manufactured exports in- petition has put extraordinary pressure on creased from only 0.8 percent of world manufacturing industries, including steel, shipments in 1980 to 5.3 percent in 2001. furniture, tool and die, foundry products, With the onset of economic reforms in textiles and apparel, and automotive 1979 and a heavier reliance on market parts, while touching advanced technol- forces, China has rapidly expanded its ogy sectors as well. trade in manufactured goods. China now Increasingly, competi- ranks fourth among exporters of manufac- what U.S. manufacturers seek is tion in manufactured goods tures worldwide. has been driven by the evo- It is worth underscoring that virtually simply to ensure that the rules lution of low-cost competi- all of the market share gains of China and that apply to U.S. manufacturers tors in emerging Asian mar- other Asian nations have come at the ex- kets. In 1980, the United pense of Japan and Europe, while the U.S. apply to their competitors as well States, together with the Eu- share of world exports of manufactured ropean Community and goods actually increased marginally be- Japan, dominated trade in manufactures, tween 1980 and 2001, from 13 percent to accounting for nearly 75 percent of the 13.5 percent.33 That increase, in turn, is value of world manufactures exports ac- due to the ability of U.S. manufacturers to cording to WTO statistics. By 2001, how- raise their productivity significantly over ever, that share had fallen by almost 15 the same period. At the same time, how- percentage points, to 60 percent. ever, U.S. manufacturers in a variety of sectors were seeing their share of the U.S. Emergence of New Competitors market eroded. The third powerful trend affecting There is another side to the political the manufacturing sector globally is both and economic revolution that has taken political and economic. It involves the place over the past two decades; any form increasing reliance of other countries, of economic restraint has the effect of cre- notably China and the nations of the ating imbalances between demand and former Soviet Union, on market mecha- supply. Consequently, when those re- nisms, rather than government planning, straints are removed, capacity often ex- as the principal means of structuring ceeds demand, and the markets must ad- their economies. just to bring supply and demand back Though not often thought of in trade into equilibrium. terms, the economic consequences of the The end of the Cold War and China’s end of the Cold War may have had the reentry into the world economy had a most profound effect of all. The end of similar effect. A recent study of trends in the Cold War marked the end of political manufacturing employment illustrates and economic divisions that had split the this. The study showed that manufactur- world in one way or another since the

28 U.S. DEPARTMENT OF COMMERCE ing employment has fallen not only in cusing on what traditionally defined man- the United States, but also around the ufacturing—that is, the process of turning world.34 In fact, China’s manufacturing raw materials into components or fin- employment has actually fallen faster ished products—manufacturers today than that of the United States in percent- think of manufacturing as a system de- age terms in recent years.35 signed to perform the activities required This decline in employment largely to deliver the end-product to the cus- reflects the gradual privatization of tomer and meet the customer’s needs, China’s many state-owned enterprises and from design to finance to production to the subsequent reduction in employment sales and marketing to after-sales service. as they adjust to competing in world mar- Thought of in that way, the structure kets. But it also underscores the effect of of manufacturing no longer implies that rising global productivity and the extent all of those processes need take place in a of the excess capacity in manufacturing single enterprise. Manufacturers increas- that continues to put downward pressure ingly see themselves as system integrators, on the price of manufactured goods managing a supply chain or “virtual net- worldwide. work” that may consist of any combination of the activities mentioned above, Shift toward Global Outsourcing whether or not provided by the “manu- The practical effect on U.S. manufac- facturer” itself. turers of the three trends described above Adapting to this changing competi- has been to increase the availability of tive environment has forced U.S. manu- new sources of low-cost labor and manufacturers to adopt new production, mar- facturing capacity. Indeed, the trends keting, and management methods, from have not only made it available, they “lean manufacturing” techniques, to qual- have also made it an important competi- ity assurance programs that tive issue. In a global economy in which guarantee zero defects, to in- competing in a global market- both goods and capital are mobile, but ternational product stan- place puts a premium on gov- labor is not, manufacturers’ tapping of dards so their goods can be lower-cost labor by importing it in the incorporated in other firms’ ernment getting the economic form of lower-cost parts, components, global supply chains. It also fundamentals right to create an and—increasingly—finished goods is means an increasing de- simply a function of trying to stay com- mand to reach out to cus- environment in which U.S. petitive in a global economy. tomers worldwide in order Hence, the trend toward sourcing to show how a manufacturer manufacturing can flourish parts and components globally is driven can add value to the cus- by powerful competitive forces and is here tomer’s product and its supply chain. to stay. Manufacturers now have the abil- The automotive sector provides a ity to manage global supply chains effec- case in point. Whereas U.S. automobile tively, which allows them to source from manufacturers once provided a ready mar- the lowest cost supplier globally and, as a ket for many domestic suppliers of parts competitive matter, forces them to do so and components, the manufacturers now in order to remain competitive themselves. operate on a global basis. Thus, automo- In an increasingly global market for tive parts suppliers must now find niches manufactured goods, competition will in the global supply chains of U.S. auto largely take place among supply chains, companies or their foreign competitors to rather than between individual manufac- succeed in today’s market. That brings turers. That implies an entirely different concept of manufacturing. Rather than fo-

MANUFACTURING IN AMERICA 29 U.S. auto parts suppliers into head-to- goods were shipped from one manufacturing proces- head competition with parts suppliers sor to another, or inputs from other sectors-agricul- worldwide. The possibility of relying on tural products into food manufacturing, crude petro- increased auto sales in the United States leum into petroleum refining, and iron ore into steel manufacturing, as well as contributions from the that automatically translate into increased transportation, financial, and business services sectors. orders for parts and components for U.S. 2 Productivity is defined as the amount of goods suppliers simply no longer exists. Compe- and services produced, adjusted for inflation, per hour tition now takes place on a global basis, of work. and that fact will continue to shape the 3 See, for example,William J. Baumol, The Free- prospects for the manufacturing sector in Market Innovation Machine—Analyzing the Growth Mira- the future. cle of Capitalism (Princeton, N.J.: Princeton University Press, 2002); see also Michael E. Porter, “Building the The Government’s Role: Microeconomic Foundations of Prosperity: Findings Getting the Fundamentals from the Microeconomic Competitiveness Index” in Right The Global Competitiveness Report (Geneva: World Eco- nomic Forum, 2003). The changing nature of competition 4 Michael E. Porter, The Competitive Advantage of requires, correspondingly, a different way Nations, 1st ed. (New York: The Free Press, 1990). of looking at government policy. This 5 Gregory C. Tassey, R&D and Long-Term Competi- means fostering an economic environ- tiveness: Manufacturing’s Central Role in a Knowledge- ment, both domestically and internation- Based Economy, Planning Report 02-2 (Gaithersburg, ally, that encourages growth, rewards Md.: National Institute of Standards and Technology, sound investment, controls costs, and fos- February 2002). 6 R. McGuckin and B. van Ark, Productivity, Em- ters innovation and rising productivity. It ployment, and Income in the World’s Economies (New also means an aggressive international York: The Conference Board, 2002). economic policy that ensures a level play- 7 Thomas J. Duesterberg and Ernest H. Preeg, eds., ing field by reducing barriers to trade and U.S. Manufacturing: The Engine for Growth in a Global investment and vigorously enforcing the Economy (Westport, Conn.: Praeger, 2003). trade rules when violated. 8 Baumol, Free-Market Innovation Machine. Baumol Competing in a global marketplace makes that point a central theme in his recent work puts a premium on government getting on the determinants of economic growth. He finds the economic fundamentals right to create that “the social benefits contributed by the initial in- an environment in which U.S. manufac- novations are typically smaller than those provided by turing can flourish. It means examining the accumulation of subsequent incremental improve- whether the U.S. government’s actions ments.” Baumol points to the rapid improvement in performance and reduction in the cost of computers, and the structure of the U.S. market im- which is largely attributable to the incremental improve or hinder the ability of American provements in production technology, rather than a firms, in manufacturing and throughout quantum leap in the form of an entirely new way of the economy, to compete in an increas- computing. ingly global marketplace. 9 U.S. Department of Labor, Bureau of Labor Sta- tistics, “Employment Cost for Employee Compensa- Notes: tion” (Nov. 25, 2003). 1 Bureau of Economic Analysis, U.S. Department 10 Robert Solow, review of Stephen Cohen and of Commerce (2002). Calculations based on total re- John Zysman, Manufacturing Matters: The Myth of the quirements matrix from the BEA Web site, Post-industrial Economy in The New York Times Book Re- www.bea.doc.gov. Considered on an aggregate basis, view (July 12, 1987). total manufacturing shipments in the most recent 12- 11 Roger E. Alcaly, The New Economy (New York: month period were $4 trillion, but only roughly 40 Farrar, Straus, and Giroux, 2003). percent of this was value added in the manufacturing 12 Ibid. sector. The rest was either duplicate shipments as

30 U.S. DEPARTMENT OF COMMERCE 13 Diane Coyle, The Weightless World (Cambridge, 31 U.S. International Trade Commission calcula- Mass.: MIT Press, 1998). tions for all goods in 2002, including preferences. Ex- 14 Robert Gordon, “Technology and Economic Per- amples of exceptions in the manufacturing sector in- formance in the American Economy,” National Bureau clude tariffs over 50 percent for certain footwear and of Economic Research Working Paper, no. 8771 (Feb- over 30 percent for certain apparel. ruary 2002). 32 Jeremy A. Leonard, “How Structural Costs Im- 15 Economic Report of the President (January 2001). posed on U.S. Manufacturers Harm Workers and 16 Ibid. Threaten Competitiveness,” NAM/MAPI study, Decem- 17 Organization for Economic Cooperation and ber 2003. Development, Post-Uruguay Round Tariff Regimes: 33 World Trade Organization, International Trade Achievements and Outlook (Paris: OECD, 1999). Statistics, 2002. 18 World Trade Organization, International Trade 34 Joseph G. Carson in Alliance Capital’s U.S. Statistics (Geneva: World Trade Organization, various Weekly Economic Update (October 2003). editions). 35 Ibid. China’s manufacturing employment de- 19 World Trade Organization, International Trade clined by 15 percent from 1995 to 2002, while U.S. Statistics 2002 (Geneva: World Trade Organization, manufacturing employment declined 11 percent over 2002). the same period. 20 International Monetary Fund, Direction of Trade Statistics (Washington, D.C.: International Monetary Fund, 1981–2002), data from various editions. 21 Ibid. 22 U.S. Department of Commerce, Bureau of Eco- nomic Analysis. 23 Ibid. 24 Bureau of the Census, Annual Survey of Manu- factures and foreign trade data in the FT 900 releases for 2001and 2002. 25 U.S. Department of Commerce, Economics and Statistics Administration, “U.S. Jobs Supported by Goods and Services Exports, 1983–94,” staff research report, November 1996. 26 Drusilla K. Brown, Alan V. Deardorff, and Robert M. Stern, “Computational Analysis of Multilateral Trade Liberalization in the Uruguay Round and Doha Development Round,” Discussion Paper no. 489 (Ann Arbor, Mich.: Research Seminar in International Eco- nomics, 2002). 27 Idem, “Multilateral, Regional, and Bilateral Trade-Policy Options for the United States and Japan,” Discussion Paper no. 490 (Ann Arbor, Mich.: Research in International Economics, 2002). 28 Lori G. Kletzer, “Imports, Exports, and Jobs: What Does Trade Mean for Employment and Job Loss?” unpublished paper for the W.E. Upjohn Insti- tute for Employment Research, December 2002. 29 United Kingdom, Department of Trade and In- dustry, Manufacturing—a Sector Study; the Performance of Manufacturing Companies within Benchmark Index (Staffordshire, England: Benchmark Index, 2002). 30 European Commission, Star21: Strategic Aero- space Review for the 21st Century (Brussels: European Commission Enterprise Publications, 2002).

MANUFACTURING IN AMERICA 31

Two Identifying the Challenges Facing American Manufacturing

This chapter highlights the challenges fac- 1. Manufacturers perceived a lack of ing the U.S. manufacturing sector, as ex- focus within government on manufactur- pressed by manufacturers themselves ing and its competitiveness. Manufactur- through the Department of Commerce ers are looking for a commitment to un- roundtables. It also seeks to capture the derstanding the challenges that the sector priority issues that manufacturers believe faces in competing in a rapidly globaliz- need to be addressed in a comprehensive ing economy. They want government to strategy to ensure the competitiveness of take the steps needed to foster the manu- U.S. manufacturing. The views reflect a facturing sector’s ability to adjust to that common understanding of the trends out- new competitive reality. Tlined in Chapter 1 that likely will shape 2. Manufacturers want the govern- the competitive environment for manu- ment to focus on encouraging stronger facturing. Manufacturers also recognized economic growth both at home and the basic strengths of the U.S. manufac- abroad. There is a broad understanding turing sector as it meets the challenge of that the recent recession was led by a competing in a global economy. sharp drop in business investment and If there was one underlying theme that both monetary policy and fiscal pol- that emerged in the roundtables, it was icy have worked to set the economy on the understanding that fundamental ad- the route to recovery. But there are still justments are under way throughout the steps that manufacturers feel are necessary global manufacturing sector. Manufactur- to encourage business investment, and to ers asked for an increasing focus by gov- reinforce the recovery under way in the ernment on these adjustments and economy as a whole and in the manufac- wanted to ensure that government was turing sector in particular. taking the steps necessary to create an 3. Manufacturers see the need for economic environment in which U.S. government to match the effort that they manufacturers could succeed. have made in controlling manufacturing Toward that end, manufacturers at- costs. As manufacturers have focused on tending the Commerce Department’s reducing costs to improve productivity roundtables outlined six areas that require and ensure their competitiveness, they immediate attention: often find their efforts eroded by costs they cannot control—costs that result in

MANUFACTURING IN AMERICA 33 part from government policy. Manufactur- fair. Many manufacturers expressed ers seek a commitment on the part of gov- concerns regarding China. What manufac- ernment to reduce those costs and, in the turers seek is not protection from compe- process, create an economic environment tition, but the ability to compete on equal that is attractive to investment in manu- terms. Toward that end, they strongly facturing within the United States. support leveling the playing field interna- 4. Manufacturers emphasized that en- tionally by lowering barriers to trade and hancing America’s technological leader- eliminating efforts by foreign govern- ship was critical to their future. There is ments to confer unfair competitive advan- widespread recognition that the United tages for their manufacturers. States remains the world’s leader for in- The following discussion explores vestment in research and development, each of those themes. and that U.S. investments in technology have paid significant dividends in current Focusing on Manufacturing manufacturing competitiveness. It is also and Its Competitiveness understood by U.S. manufacturers that At every roundtable, U.S. manufactur- technology is now more widely diffused ers made the point that, although the throughout the world economy and that manufacturing sector represents a corner- this trend risks eroding what has become stone of the U.S. economy, manufacturing the principal competitive advantage of receives scant attention from the public or the United States. What manufacturers government. To many manufacturers seek is a commitment to encourage re- across the country, it appears that the pub- search and development and to ensure lic and government have lost sight of a that the government reinforces, rather simple truth: you cannot have good jobs if than creates obstacles to, the process of you do not have strong businesses. bringing innovations to the marketplace. That thought was articulated by Phyl- 5. Manufacturers regarded education lis Eisen of the National Association of as crucial. Manufacturers are extremely in- Manufacturers at a roundtable held in terested in addressing the shortcomings of Washington, D.C. She summed up her the U.S. educational system. Roundtable conversations with “teachers, educators at participants underscored that the evolving all levels, with kids from seventh grade nature of the manufacturing sector relies through university, with their parents, on individuals entering the workforce with with politicians, and with our own manu- greater problem-solving abilities. These facturers,” with this statement: workers must continually sharpen their skills through lifelong learning. In addi- The information we got is not good about tion, roundtable participants expressed manufacturing. It is invisible to most people. concern that the United States risks losing They don’t equate the table and the spoon an innovation infrastructure if the nation they use and the glass they use...with this fails to produce scientists and engineers. extraordinary industrial strength that we’ve Manufacturers seek a renewed emphasis had for so many years and that we have to from all levels of government to invest in maintain. educational and training institutions. Some roundtable participants went 6. Manufacturers also focused on the further, describing what they saw as a per- need for international trade and monetary vasive bias against manufacturing, based policies that ensure that global competi- on an old assembly-line image, causing tion in manufacturing is free, open, and the best and the brightest to pursue careers outside the manufacturing sector. At the roundtable in New Britain, Conn.,

34 U.S. DEPARTMENT OF COMMERCE Bruce Thompson of Projects Incorporated efforts. While it is widely understood that noted that manufacturing had evolved in the Commerce Department serves as the ways most people did not know or appre- principal advocate for manufacturing’s in- ciate. He emphasized that “people need to terests, there is no office in the Commerce get out and see that it’s not a dirty, oily, Department that is solely responsible for old mess anymore. It’s technicians run- looking out for the competitiveness of U.S. ning high-precision equipment.” manufacturing. The roundtable participants attrib- Many roundtable participants thus uted some of the public’s misperception requested the establishment of a manufac- about manufacturing to the lack of focus turing-related position within the Com- in government on manufacturing. They merce Department at the assistant secre- pointed out that there was no single advo- tary level or higher to focus cate for manufacturing within the execu- on manufacturing competi- manufacturers sought the tive branch departments. “I think the tiveness and the health of establishment of a single office United States is the only country in the the manufacturing sector in G8 which doesn’t have a very-high level general. Manufacturers also within government with department of manufacturing,” said Bob urged stronger coordination responsibility for implementing Brunner of Illinois Tool Works at the both within the federal gov- Rockford, Ill., roundtable. “I think that ernment and with state and the Manufacturing Initiative [establishing such a department] would be local governments to foster a real positive development in terms of investment in manufacturing, as well as supporting us manufacturers.” requesting a regular dialogue between Manufacturers expressed frustration government and the manufacturing sector that there was no focal point for the on its competitive challenges. many programs that government supports The administration has therefore at the federal, state, and local levels to as- proposed creating an assistant secretary sist manufacturers. Bruce Thompson for manufacturing and services who pointed out that there was no “seamless would develop and implement a compre- interface.” What was needed, in his view, hensive strategy on manufacturing. While was “a one-stop shopping mentality,” so maintaining a focus on manufacturing, that manufacturers do not have to call on strategic planning must include the serv- a lot of different organizations to get the ice sector, which both influences and information and assistance that they benefits from the manufacturing sector’s need. As Von Hatley of the Louisiana De- competitiveness. partment of Economic Development put This new position would provide the it at a roundtable in New Orleans, “We re- focus within the Commerce Department ally need a concerted effort between fed- needed to respond to manufacturers’ con- eral and state [governments] to do what it cerns. The assistant secretary’s office takes to save manufacturing.” To ensure would be able to provide regulatory eco- accountability, manufacturers sought the nomic analysis essential to assessing the establishment of a single office within costs and benefits of government action government with responsibility for imple- on manufacturing competitiveness. This menting the Manufacturing Initiative. office would be charged with establishing Historically there has been little insti- a mechanism for coordinating manufac- tutional focus on manufacturing in the turing-related initiatives among the vari- federal government. Although various ous executive branch agencies and would agencies take into account elements of manufacturing competitiveness, in practice there is no mechanism to coordinate these

MANUFACTURING IN AMERICA 35 enhance the Commerce Department’s Relief Reconciliation Act was a “signifi- ability to ensure that focus on a govern- cant achievement,” and the resulting re- ment-wide basis. covery in the U.S. economy would “create sufficient or significant demand for The Need for Stronger investment in the industry” to put the Economic Growth at Home manufacturing sector on the right path. and Abroad Despite the reductions in capital gains and dividend taxes, as well as ex- Manufacturers attending the roundta- pensing provisions, many manufacturers bles indicated that the single most impor- believed that the recent tax cuts did not tant economic policy objective from their go far enough. They underscored the need perspective was encouraging economic to create greater certainty under the tax growth. Stewart Dahlberg of J.D. Street & code to encourage business investment. Co. described the reality of the global mar- They also emphasized their desire for gov- ketplace at the St. Louis, Mo., roundtable: ernment to address longer-term issues: The world is a very big place. There are lots specifically, manufacturers highlighted the of customers out there and lots of niche cus- need to reform the tax code to eliminate tomers to find. What we would...simply the penalties they believe it imposes on ask [is] that every possible opportunity to their businesses, such as outmoded depre- open up every single possible market be inves- ciation schedules and the overall impact tigated and called out anywhere you can. of the alternative minimum tax. Although many of the specific con- They also sought simplification of cerns raised by manufacturers focused on the tax code, which in its present com- the effect of indirect costs on plexity raises the costs of compliance— American manufacturers, both the supply side of the eco- particularly for smaller manufacturers. nomic equation, no one dis- Manufacturers further focused on reforms large and small, understand the agreed with the notion that in the tax code that they believe would value of promoting economic the first and most pressing yield a broader and deeper pool of invest- issue was sufficient demand, ment capital to the benefit of U.S. manu- growth worldwide and reducing domestically and globally, to facturers, particularly for small and the barriers to global trade stimulate purchases by con- medium-sized businesses. Murry Gerber, sumers and businesses of the former chair of NAM’s Small and Medium goods that U.S. manufacturers produce. Manufacturers Group, explained the need Manufacturers recognized that the at the New Britain, Conn., roundtable: most recent recession was one driven by a They [small and medium-sized manufactur- sharp decline in business investment, ers] haven’t kept up to date with new equip- rather than a drop in consumer spending. ment, and you can’t blame them. They have They also understood that policies de- had falling sales, their margins are deci- signed to encourage business investment mated, they don’t have the wherewithal.... were essential to any recovery in manu- An offer of investment tax credits . . . would facturing. Most manufacturers indicated drive companies to put on this additional that recent efforts to stimulate the econ- equipment that’s consistent with the high- omy were paying off, even though they tech manufacturing in the future. had not fully filtered through to the There is little doubt that reducing manufacturing sector. As Mustafa Mo- complexity and making the recent tax hatarem of General Motors put it at the roundtable in Washington, D.C., the recent passage of the Jobs and Growth Tax

36 U.S. DEPARTMENT OF COMMERCE cuts permanent would encourage busi- monetary stability, reducing taxes, and re- ness investment. Greater certainty as to ducing the costs and inflexibility of heavy the tax treatment of earnings is one of regulations that impose limits on growth. the basic components in any firm’s in- Every country, including the United States, vestment plans. has room for improvement in terms of the The other salient point reflected in steps it could take to foster growth and a the comments of manufacturers was a rising standard of living. clear understanding of the implications Another aspect of growth involves of slower growth abroad. Roundtable par- trade liberalization. From the perspective ticipants focused on the need to use both of U.S. manufacturing, reducing trade bar- international monetary and trade policy riers and opening markets abroad has to promote growth internationally. They manifold advantages. Liberalization pro- cited issues such as exchange rates, based motes economic growth in foreign mar- on their understanding of the economics kets, which raises the demand for manu- affecting the value of the dollar. They factured goods worldwide. It offers the made the point that, in addition to doing prospect of higher exports, and the result- everything possible to restore growth at ing greater efficiencies for American man- home, the United States needs to press its ufacturers and exporters. It also eliminates major trading partners for stronger the implicit subsidy that tariff protection growth abroad. extends to foreign competitors. Encouraging international economic Significantly, U.S. manufacturers con- growth requires consistent advocacy of tinue to stand behind the effort to open growth-oriented economic policies markets abroad at the negotiating table. abroad. Not only must the United States That is true of virtually every industry and promote growth through its own eco- business large and small. Matthew Coffey, nomic policies, but it also must be willing of the National Tooling and Machining to “preach what it practices.” Association, which represents many small In practical terms for policy-makers, and medium-sized metalworking firms promoting economic growth abroad across the United States, put it this way in means action on two fronts. The first is an NTMA policy paper: focusing discussions with U.S. trading The NTMA believes in the free-enterprise sys- partners, whether bilaterally or multilater- tem . . . whether it is in the United States, the ally, on policies that will foster growth. Americas, or the world as a whole. That leads That means continuing to advocate us to the conclusion that competition should growth in G7 finance ministers’ meetings, be open. The NTMA is in favor of open mar- the G8 summit, and the annual meetings kets and getting rid of trade barriers and tar- of the International Monetary Fund and iffs and has, therefore, generally supported the World Bank, since growth is not an free trade initiatives as long as there was a issue for the larger, industrial economies prospect of fairness over time.1 alone. But it also means, most particu- In short, American manufacturers, larly, encouraging the largest economies both large and small, understand the in the world to pursue policies that stimu- value of promoting economic growth late their growth, since they make up a worldwide and reducing the barriers to significant share of the world economy. global trade. They are more than willing Growth-oriented economic policies to compete in that environment as long start with the basics, such as promoting re- as the competition is open and fair, and spect for private property and observance as long as the same rules governing com- of the rule of law, which are essential to all petition apply equally to all. market transactions. It means ensuring

MANUFACTURING IN AMERICA 37 Reducing the Costs That Keith Guggenberger of Starkey Labs Erode Competitiveness summed up the perspective of many U.S. manufacturers, at the roundtable in Min- One of the most consistent themes neapolis, Minn.: expressed by manufacturers attending the roundtables was the need to “keep our Healthcare is a big part of the concerns of side of the street clean.” For manufactur- policy that we have in keeping us competi- ers mean that government, at all levels, tive....At Starkey, we spend almost $8,000 must understand that it does not have the per employee on healthcare in the U.S., and luxury of making domestic economic pol- when half of our people make under icy choices in a vacuum. Every regulation, $28,000 a year, it is hard to make those every additional form to be filed, every in- sorts of ends meet. crease in litigation, and every increase in The problem is becoming particularly healthcare costs can impose unwarranted acute in the automotive industry, which is costs on American manufacturing. central to the health of so many other Manufacturers expressed concern manufacturers, particularly in the Mid- that, too often, fundamental decisions west. At a Washington, D.C., roundtable, about taxation, government spending, en- Mustafa Mohatarem of General Motors vironmental regulation, workplace re- underscored that point: forms, energy policy, personal injury com- American companies also face two other chal- pensation, and trade policy are made in lenges that are related to their legacy costs. isolation. They stated that legislatures, ad- The first is pensions, which over time is most ministrative agencies, and courts make de- likely to be equalized. That’s something we cisions without understanding the multi- have negotiated and we’re trying to address ple burdens that those decisions impose within that context. The one we don’t have as on manufacturers. good of control on is the medical side of it. As you know, the cost of medical care has been Rising Healthcare Costs rising much more rapidly than other costs in Curt Magleby of the Ford Motor our economy. So the traditional American Company underscored this most fre- companies that have large healthcare obliga- quently cited concern at a roundtable in tions to retirees are being really harmed by Washington, D.C.: “Where we really need this rapid increase in healthcare costs. help for U.S. manufacturing is some sta- This statement is not merely anec- bility in healthcare.” Most manufacturers dotal: there is no doubt that healthcare indicated that they want to continue to costs have risen sharply. A 2002 report by provide healthcare benefits, because such PricewaterhouseCoopers noted that in benefits made for a motivated and more 2000, the share of U.S. GDP devoted to productive workforce that contributed to healthcare was 13.2 percent, up from 8.8 the success of their firms. percent in 1980, and, according to fore- Rapidly increasing healthcare costs casts, that share will continue to rise and directly affect the bottom lines of U.S. reach 16 percent of GDP during the next manufacturers and steadily erode their five years.2 competitiveness. John Vaught of Tri-Cast The rising cost of healthcare is the noted at the Columbus, Ohio, roundtable biggest barrier to health coverage. The an- that, while the cost of the healthcare he nual family health insurance premium in- provides to his employees had been “sky- creased to $9,068 in Spring 2003, accord- rocketing,” he was only able to raise ing to a survey of 2,808 companies by the prices less than 1 percent a year. Kaiser Family Foundation and the Health Research and Educational Trust.3 Further,

38 U.S. DEPARTMENT OF COMMERCE between Spring 2002 and Spring 2003, become less competitive. However, cost monthly premiums for employer-spon- containment may not be an avenue open sored health insurance rose 13.9 percent— to small manufacturers, which face special the third consecutive year of double-digit problems in obtaining health insurance. premium increases and the highest pre- They commonly must pay higher premi- mium increase since 1990. Small firms, ums and, thus, are less likely to offer with three to nine workers, faced the health insurance as a benefit. largest increase of all: a 16.6-percent surge Employers, both large and small, in premiums.4 have responded to these rising costs in a Rising healthcare costs are not variety of ways. Firms are less likely to unique to the United States. While overall offer retiree health coverage; the percent- spending on healthcare is higher in the age of large firms offering retiree health United States, the growth rate of spending is similar to that of other nations. The average real annual rise in healthcare spending in this country was 3.2 percent from 1990 through 2000, which is comparable to the 3.3-percent rate in OECD countries, and the 3.1-percent growth rate among countries in the European Union.5 However, what is unique to the United States is the extent to which it relies on businesses as the primary providers of healthcare coverage and the burdens they bear as a consequence.6 Employer- sponsored health insurance is a cornerstone of healthcare financing in the United States. Three out of every five Americans receive some type of employer- Commerce Secretary sponsored health benefits.7 Donald Evans, Labor According to the National Associa- benefits has decreased from 66 percent in Secretary Elaine Chao, tion of Manufacturers, 97 percent of its 1988 to 38 percent today.9 And many and Treasury Secretary members continue to voluntarily support firms increasingly rely on cost sharing as a John Snow discuss employer-provided healthcare in spite of way to increase awareness of cost and U.S. manufacturing the growing cost of these benefits and the value in healthcare. Tiered reimburse- with factory workers sluggish economy for manufacturing.8 The ments, often used for drug benefits, have at Harley Davidson headquarters in Mil- percentage of employers providing cover- become a common approach to encourag- waukee, Wisconsin. age has not declined substantially, and in ing the use of generic and lower-priced spite of rising costs, employers have not medications. Some companies have begun increased the percentage of the premium offering consumer-driven health plans, paid by the employee. which combine high-deductible insurance To avoid shifting more of the costs to with health spending accounts. the actual consumers of healthcare serv- What these facts suggest regarding ices, employers, particularly those in small policy is that there is economic and com- and medium-sized manufacturing firms, petitive value for reducing the growth in have to find ways to contain costs or they healthcare costs that U.S. manufacturing companies face, particularly for the small and medium-sized manufacturers that are the foundation of the U.S. manufacturing

MANUFACTURING IN AMERICA 39 sector. One means of addressing their Addressing the underlying causes of needs, as well as those of larger firms, rising healthcare costs would, of course, would be to encourage the development complement the effort to improve cost of association health plans and other containment. In that regard, tort reform, joint purchasing arrangements that discussed below, is vital. Current malprac- would increase firms’ bargaining power in tice litigation often fails to compensate the market for health insurance and people who should be compensated and healthcare services. rewards those who do not experience malpractice. In the process, it also dramatically raises the costs of all doctors and healthcare providers, regardless of their records, by increasing liability insurance premiums. Equally important, it raises the cost to the consumer and to the employer in manufacturing by encouraging costly and wasteful “defensive” medicine.

Need for Tort Reform Perhaps no single issue drew more heated comments from manufacturers than the need for tort reform. Manufac- turers pointed to a system that drove insurance costs higher even for firms that had never had lawsuits filed against them or had never put hazardous products on the market. Rick Kelly of Pellerin Milnor Corp. explained at a roundtable in New Orleans, La., that his firm had recently re- The historic Medicare reform legisla- newed his product liability insurance and tion, which was enacted following the was obliged to pay an annual premium roundtables, provides assistance to firms worth 30 percent of the coverage itself. As offering health insurance to retirees and is Kelly put it: an important step in controlling health- We need tort reform real bad. We just recently care costs. This legislation also established had our insurance renewed for the following health savings accounts to help employ- year. A $1-million product liability insurance ees pay for their healthcare expenses by premium gives you $3 million in coverage. combining the purchase of a high-de- That’s insane. That’s absolutely insane. ductible health insurance plan with tax- free savings accounts. Employees will use These comments only begin to de- the accounts to pay for their healthcare scribe the ways that tort costs debilitate needs, with any remaining balances rolled businesses. Manufacturing firms pay “tort over from year to year. HSAs ensure that taxes” in several ways. First, manufactur- workers have the health insurance cover- ers pay significantly higher costs for em- age they need plus the money to pay for ployee healthcare benefits, due to increas- day-to-day medical care, all while providing medical liability costs. Second, ing them with an incentive to save for manufacturers pay as product liability and their future health care needs. other tort claims increase the cost of general liability insurance. And third, manufacturers pay in the form of legal fees even

40 U.S. DEPARTMENT OF COMMERCE when there is no merit to claims and manufacturer was dubious or nonexist- manufacturers ultimately prevail in litiga- ent. From these types of tort claims, it is tion—a problem that is only exacerbated difficult to reach any conclusion other by the growth of frivolous shareholder than that the company in question was class-action suits. targeted simply because the plaintiff’s The indirect costs of tort litigation counsel identified it as the deep pocket are also significant—particularly the time from which the lawyer could maximize spent by managers and employees, who the award. would otherwise focus on improving op- Consumers, workers, and investors all erations, raising productivity, and expand- pay for excessive claims of the current tort ing sales. Giff Kriebel of BAE Systems put system. Tort costs amount to a tax on that part of the tort system in perspective consumption, wages, and investment. at the roundtable in Manchester, N.H. He Clearly, tort costs make U.S. manufactur- said, “I can think of nothing that is more ers less competitive, increase the risk of non-value-added than all the litigations bankruptcy, and are a significant drag on that all of us have to go through....The the American economy. time it takes and distraction that it causes Just as important is the fact that the is absolutely huge.” current system also fails to deliver for The basic reason for manufacturers’ those who are injured and deserve com- concern about the civil liability system is pensation. Only 20 percent of direct tort the dramatic increase in tort claims and costs actually go to claimants for eco- awards. Manufacturers have become out- nomic damages, such as sized targets, as plaintiffs’ lawyers consider lost wages or medical ex- the basic reason for manufacturers’ operating companies’ “deep pockets” of penses.10 insurance and capital. From a personal in- The U.S. tort liability concern about the civil liability jury lawyer’s perspective, manufacturers system is already the most system is the dramatic increase in represent desirable defendants because ju- expensive in the world; its ries can more easily sympathize with a cost is more than double tort claims and awards claimant by assigning blame to a seem- the average cost of such ingly impersonal corporation regardless of systems in other industrial nations, as fault, assumption of risk by the plaintiff, measured in GDP share. The consulting or contributory negligence. firm of Tillinghast-Towers Perrin pub- The tort system significantly under- lished findings that in 2002, the U.S. tort mines the competitiveness of U.S. manu- system cost $223 billion—approximately facturers. The awards have driven insur- 2 percent of the nation’s GDP.11 Similarly, ance premiums higher and, in instances the U.S. Chamber of Commerce recently when liability insurance proved cost pro- released a study showing that a state’s tort hibitive, the insurance premiums have liability system has a “statistically signifi- driven firms out of business. cant” impact on its economic develop- The examples of tort claims cited by ment, which in plain terms means slower manufacturers attending the Commerce economic growth and fewer jobs, particu- Department’s roundtables were striking. larly in manufacturing.12 In many instances, the connection be- It is crucial to understand that none tween the plaintiff’s injury and the prod- of these studies capture anything more uct put on the market by the defendant than the direct outlays of existing firms, such as the payment of liability insurance premiums. Although those costs continue to rise dramatically, they understate the impact on manufacturers and the cost to

MANUFACTURING IN AMERICA 41 the U.S. economy as a whole. These stud- The comments of Dow Chemical’s ies do not capture the value of the prod- Gene Reinhardt at a New Jersey round- ucts that otherwise would have been de- table put the problem in context: veloped or other opportunities that Asbestos litigation that continues after so manufacturers have forgone because of lit- many years...is a problem for society in igation risk. that...the victims of asbestos are not the Manufacturers stated that common- ones getting the help. We’d like to see that we sense legal reforms are crucial to bolster- get some legislation that would protect the ing manufacturing competitiveness. Al- victims now and in the future and make the though tort liability is most often a system fair. It is chaos now, with litigation function of the common law of each coming from all directions that is damaging state, a better balance needs to be struck. the economy and undermining the security of In fact, individual states are already devel- jobs and pension systems. oping models of tort reform in an effort Tort reform should focus on three to maintain their manufacturing bases. areas. The first is the critical need to cap Wisconsin’s efforts at reform were medical malpractice awards in ways that touted at the Commerce Department’s ensure that those deserving compensation roundtable in Milwaukee as one of the get compensated. The second is the need reasons for manufacturing firms staying to restore the balance that previously ex- despite higher taxes and relatively broad isted in tort law: meaningful reforms are regulation. As explained at the round- required that would hold individuals ac- table, the reforms in Wisconsin did no countable for their own actions in the use more than restore some of the balance of products, rather than holding manufac- that previously existed in U.S. tort law, as turers strictly liable for any injury suffered opposed to the strict liability standards in proximity to their products. And the enacted in many jurisdictions. third area is the need to resolve the litiga- One particular issue on the legal tion over asbestos-related injuries by en- front dwarfed all others: the ongoing as- suring that those deserving compensation bestos litigation, which continues to cre- receive it. Such class-action suits remain a ate a great deal of uncertainty for manu- contingent liability for U.S. manufacturers, facturers in the marketplace. The point making it hard to attract capital and liabil- raised by many manufacturers was hard to ity insurance for their current operations. dispute. When asbestos was first installed as a safety device to retard the spread of fire in many factories, no one knew the Reducing Regulatory Costs potential danger of long-term exposure to At the roundtables, manufacturers asbestos. The product was not subject to frequently mentioned the issue of regula- regulation by the government, nor was tory costs and the relative burdens they there any warning to manufacturers replace on U.S. firms versus their competi- garding the risks inherent in its use. tors. An OMB study found that regulatory But now, many years later, the multi- costs were 3.7 percent of GDP in 1997.13 ple class-action lawsuits filed over the use Since manufacturing tends to bear a of asbestos have created a legal and finan- greater share of regulatory costs than cial quagmire. While the litigation contin- other sectors, it is safe to assume that ues, affected individuals in American soci- roughly 4 percent of manufacturing GDP ety are not receiving any assistance to goes to compliance. Of this, about half of cope with the medical bills they face. And the continuing litigation remains a cloud over the entire manufacturing sector.

42 U.S. DEPARTMENT OF COMMERCE the cost is for compliance with environ- Further, taken together, all compli- mental regulations; the remainder is for ance costs appear to have increased sig- compliance with workplace safety and nificantly since the SBA’s study of 1997 product safety requirements, as well as for data. According to a recent NAM study, the time spent filling out government pa- the total burden of environmental, eco- perwork and keeping records. nomic, workplace, and tax compliance is One measure of the economic cost of $160 billion on manufacturers alone, compliance is the cost to government of equivalent to a 12-percent excise tax on managing regulatory programs and the manufacturing production. This reflects consequent drain on tax revenues which an increase of about 15 percent over the that effort represents. Total federal budget last five years.18 In short, regulatory com- outlays for regulatory compliance activi- pliance costs are rising faster than income ties have almost doubled in the past 13 in the manufacturing sector, which im- years, from $13.7 billion in 1990 to $26.9 plies a loss of cost competitiveness or, at billion in 2003 in real terms.14 Those costs a minimum, a negative offset to the ben- cover all regulatory activities, from trade efits of the extraordinary productivity and customs, to consumer safety, to secu- gains and efforts by manufacturers to cut rities laws. They do not include the cost costs under their direct control. to the private sector of compliance, which can be many times greater. Rising Energy Costs From a manufacturer’s perspective, Another point of concern for manu- particularly that of a small or medium- facurers is the rising cost of energy, partic- sized business, the most common compli- ularly natural gas. Manufacturers depend ance costs are related to environmental on affordable, reliable energy. Industry regulation, workplace safety, and tax com- uses more than one-third of all the energy pliance/employment rules. The Small consumed in the United States, the major- Business Administration’s Office of Advo- ity of which is natural gas and petroleum, cacy has conducted the most comprehen- followed by electricity. In all sectors, en- 15 sive study of those costs. The study ergy prices have a significant effect on op- found that the total cost of complying erations and product prices. with regulations in those areas in 1997 Manufacturers uniformly criticized amounted to $147 billion annually, or a the failure to enact the legislative aspects cost per employee of $7,904. Of the indi- of a comprehensive and coherent energy vidual categories that made up that total, plan that would increase America’s energy environmental compliance costs took the independence while yielding energy prices largest share. Environmental costs ac- that would help ensure manufacturers’ counted for nearly 50 percent of the total: long-term competitiveness. Don Wain- $69 billion in 1997, or a cost per em- wright of Wainwright Industries put it in 16 ployee of $3,691. straightforward terms at a roundtable in Significantly, the cost of compliance St. Louis, Mo., explaining that manufac- with such rules falls hardest on businesses turing is “one of the biggest users of en- with fewer than 20 employees. According ergy.” He emphasized that, in his view, to the SBA study, small manufacturing the biggest challenge facing his industry is businesses reported that compliance with “energy policy, which is before the Senate workplace rules amounted to a cost of right now.” $16,920 per employee. For larger firms, As it stands, America “faces the most that cost dropped by more than half, to serious energy shortage since the oil em- 17 $7,454 per employee. bargoes of the 1970s,” directly attributable

MANUFACTURING IN AMERICA 43 to a “fundamental imbalance between budgets, consumer spending slows, lower- supply and demand.”19 From 1991 to ing demand for manufactured goods. That 2000, Americans consumed 17 percent contraction in demand feeds back into more energy than they had in the previ- the manufacturing sector in the form of ous 10 years. During that same period, lower sales, lower use of capacity, and an U.S. production rose only 4.9 percent; the inability to take advantage of the difference accounted for by imports.20 economies of scale that manufacturers’ America’s energy challenge will con- existing capital investments would other- tinue to grow as the U.S. economy grows. wise afford. Energy consumption in the United States For energy-intensive industries such as is expected to rise “by about 32 percent paper products, plastics, and chemicals, the by 2020.”21 While the Bush administra- impact of rising energy costs, particularly tion has pursued successful executive ac- the cost of natural gas, is compounded. At tions to increase domestic access and pro- the Commerce Department’s roundtable in duction, there is no prospect, in the Trenton, N.J., Gene Reinhardt, of Dow absence of congressional action, for signif- Chemical Company, explained: icant new U.S. production. Those of us in the chemical sector are getting a Conservation and efficiency can double hit with natural gas, since we use it help, and U.S. manufacturers lead the way both for our fuel and as raw material for our in producing and implementing chemicals....Natural gas prices are the high- rising energy prices and technologies designed to foster est in the world and drain all of the industry. efficiency and reduce costs. Consumers are spending $70 billion more in disruptions in energy supply Those efforts pay big dividends. natural gas costs in 2003 than they did last reduce profits, production, Today, it takes only 56 percent of year in 2002. So it is not only an emergency or the energy required to produce a an emergent issue for Dow Chemical; it is re- investment, and employment dollar of GDP as it did in 1970. ally an issue for all of the industry in America. The nation’s “energy intensity” for U.S. businesses Additionally, energy supply disrup- (the amount of energy required tions can pose a significant problem even to produce a dollar of GDP) has in industries in which energy is not an declined in recent years and is expected to important component of the total cost of decline further, at a rate of 1.5 percent the goods or services produced. Many yearly, through 2020.22 With appropriate businesses require a high-quality, reliable capital investments, conservation could source of power. Even a brief loss of power reduce that figure even further. Yet in the can impose significant costs on technol- short run, rising energy prices and disrup- ogy firms. Products or product inputs may tions in energy supply reduce profits, pro- be damaged or destroyed, or production duction, investment, and employment for runs may be interrupted. U.S. businesses. In practical terms, absorb- The effects of the blackouts in Califor- ing the cost of high and rising energy nia several years ago illustrate this. A sur- prices means deteriorating profit margins. vey of small businesses, which was con- And by reducing a manufacturing com- ducted by the National Federation of pany’s cash flow, high energy costs restrict Independent Business in February 2001, a firm’s access to capital needed for new found that more than half of the firms plants and equipment. surveyed that had experienced blackouts The impact of high energy costs on in California were forced to reduce or shut the demand side also negatively affects down business operations altogether dur- manufacturers. With rising energy costs ing the blackouts. About one-third of the taking a greater percentage of consumers’ firms surveyed lost sales. Roughly one-fifth

44 U.S. DEPARTMENT OF COMMERCE said materials were aged or destroyed. And American manufacturing. Manufacturers nearly two-fifths absorbed additional costs, attending the roundtables stressed the im- such as in wages and benefits, for work portance of cutting taxes in a way that that was not completed.23 would stimulate consumer demand and Plainly, the problems manufacturers business investment, which has lagged face because of rising energy costs and even during the recovery from the recent disruption have been a long time in the recession. making. They are the product, like many The other frequently made point is of the other issues manufacturers raised the need for certainty. What manufactur- during the roundtables, of nearly a ers attending the roundtables see in the decade of neglect. To put it in perspec- marketplace is an unwillingness of their tive, it helps to understand that not a “single major oil refinery has been built in the United States in nearly a generation.” By some estimates, the United States needs “38,000 miles of new gas pipelines, along with 250,000 miles of distribution lines” to match the demand for natural gas with supply.24 It will take a comprehensive, long- term strategy to address the energy challenges facing America’s manufacturing sector, and an equal attention to modern- izing the U.S. energy infrastructure, increasing energy supplies, and improving energy conservation and efficiency. And it will require a multifaceted approach. The nature of the problem requires first that government ensure that energy markets work well; for example, by moving ahead customers to make the investments that with the restructuring of electricity mar- will lead to purchases of capital equip- kets where necessary to ensure that energy ment and a strong recovery throughout savings are passed on to the consumer. the manufacturing sector. That unwilling- The problem may also merit a hard look ness is inconsistent with the strong con- at increased federal funding for research sumer demand that continues to pull the and development of renewable energy re- economy along through the recession and sources and energy-saving manufacturing into a stronger recovery. techniques and products, tax incentives Manufacturers explained that the for the development of new technologies, other forces inhibiting investment are re- and greater coordination among the vari- lated to the general uncertainty regarding ous levels of government involved in the the strength of the recovery, concerns re- approval and development of new energy garding the effect of the events of Septem- supplies and infrastructure. ber 11, 2001, the rising cost of security in their aftermath, and to the more uncer- Taxes tain international economic environment. Manufacturers pointed to federal, But the one concern manufacturers identi- state, and local taxes as one of the key fied that is entirely within the control of factors inhibiting future investment in

MANUFACTURING IN AMERICA 45 the federal government is the uncertainty In addition to the IRC’s outdated in- created by frequent changes in the tax ternational provisions, manufacturers code and the often-conflicting policies identified numerous ways in which the that the tax code represents. U.S. manu- code may distort investment decisions. facturers put a premium on getting the They cited the alternative minimum tax, right rules and rates in place and then which imposes significant extra costs on making them permanent so businesses manufacturers and results in almost no can invest with greater certainty in terms additional revenue for the federal govern- of the treatment of income earned on ment. In addition, depreciation schedules their investments. in some sectors may not reflect high rates Interestingly, the most salient but of innovation. least-understood tax issue involves the in- Assessing the full impact of the international provisions of the Internal Rev- vestment distortions contained in the cur- enue Code. Far from encouraging compa- rent IRC requires an understanding of how nies to move offshore, manufacturers the IRC’s impact reaches well beyond the believe the IRC contains significant penal- federal system of taxation. Because many ties on income derived from foreign in- state tax codes are ultimately based on def- vestment that sometimes lead to the dou- initions of income that flow from the fed- ble taxation of foreign-source income. In eral tax code, the distortions of the IRC a global economy, manufac- perpetuate themselves at the state level. manufacturers attending the turers understand that their Several manufacturers went consider- successes will increasingly ably further with respect to state and local roundtables stressed the impor- depend on their ability ei- taxation, suggesting changes to the most tance of cutting taxes in a way ther to export (which often prevalent forms of state and local taxa- requires investment abroad tion. Many states and localities rely more that would stimulate consumer in marketing) or to sell to heavily than the federal government on demand and business investment U.S. firms that compete in property and other taxes that are fixed in global markets (which also dollar amounts or in the form of a fixed increasingly depends on the ability to in- percentage of asset value. Those taxes be- vest, produce, source, and sell abroad). In come far more regressive in an economic short, manufacturers recognize that the downturn; although revenues and income government should not impose penalties fall, the liability for tax does not. The net on those American companies that are the effect is an increase in tax on manufactur- best U.S. competitors in world markets, ing firms as a percentage of income. The even when the exact penalties imposed by manufacturers’ comments suggested a the Internal Revenue Code are not always need to shift from taxes based on fixed apparent to purely domestic producers. values to those tied to income, and to rely The basic point in support of tax re- more heavily on consumption as the basis form was made by Curt Magleby of Ford for defining income subject to taxation. Motor Company at a roundtable in Wash- Lastly, with respect to taxes, there is ington, D.C.: broad recognition of the advantage con- Our tax code internationally was developed in ferred on foreign manufacturers by the in- the 1940s and 1950s [and] updated in the terrelationship between the current U.S. 1980s and represented a completely different tax system and international trade rules. environment. For us to be competitive domes- American manufacturers are well aware tically, we’ve got to update the tax code on that most of their competitors are located the international side. in countries that rely more heavily on consumption, rather than income, as the basis

46 U.S. DEPARTMENT OF COMMERCE for taxation. In practical terms, foreign Reinforcing America’s governments apply taxes solely to income Technological Leadership earned on sales in their jurisdictions and At every roundtable, American manu- will rebate any taxes that apply to exports. facturers expressed their concern for Amer- By relying more heavily on income ica’s contined leadership in technology as the basis for taxation, and in taxing and its ability to produce the workforce U.S. manufacturers on their worldwide in- needed to maintain U.S. excellence in come, the U.S. system contains no simple manufacturing. Manufacturers continually means of ensuring that U.S. exporters re- emphasized the important role that tech- ceive comparable treatment. The interna- nology plays in serving customers and en- tional trade rules reinforce that disparity suring cost competitiveness. Lou Auletta of because they allow the rebate of indirect Bauer, Inc., made that point at the New taxes (that is, taxes on consumption such Britain, Conn., roundtable: as value-added taxes) but prohibit the rebate of any direct taxes on income, on We’re in the process of developing new tech- which the U.S. system relies so heavily. nologies that are going to save our customers Although manufacturers believe recently money, and also technologies and enhance- passed changes in federal tax law have ments that are going to make us more efficient helped, manufacturers maintained that in production, both from the design aspect and those changes do not go far enough to the manufacturing side. offset the underlying inequity between Manufacturers understand that leader- the tax treatment of most foreign manu- ship in innovation and technology are key factured goods and those produced in the to their future competitiveness. William United States. Fee of Magnesium Elektron, Inc., at the The basic lesson to draw from the Trenton, N.J., roundtable spoke for many roundtables regarding tax is the need for in describing the process that his company both short- and long-term efforts to re- had gone through to remain competitive, duce the cost and uncertainty that the and the extent to which it increasingly de- IRC creates for American manufacturers in pends on investment in technology: their operations and their pursuit of in- Our response has been to shift our business vestment capital needed to maintain their towards more technically sophisticated appli- competitiveness. In the short term, the cations, for example, catalysts, high-tech most significant step would be to make ceramics, and water treatment. To achieve the recent tax cuts permanent in order to competitive advantage in these new markets, increase the certainty of the business envi- we corner a strong commitment to research ronment in which manufacturers operate and development and ongoing innovation in and the relative attractiveness of investing products and the processes needed to manu- in manufacturing in the United States. In facture them. To be successful, this strategy the long run, manufacturers called for an requires significant investment in scientific intense focus on tax reform—reform that talent, laboratories and analytical equip- reduces rates, reduces investment distor- ment, intellectual property patents, and fol- tions, and simplifies the IRC to reduce the lowing the pursuit of same information tech- cost of compliance. nology to control manufacturing processes, and even the most difficult of all is step change in the level of detail engineering support necessary to manufacture products to ever-tightening specifications and consistency demanded by our customers.

MANUFACTURING IN AMERICA 47 From the perspective of manufactur- Group, stated what was a uniform opin- ers, there is a need for continuing invest- ion among manufacturers: ment in research and development of One is the R&D tax credit, which should be new products so that manufacturers re- made permanent. We’ve been arguing about main one step ahead of the competition. this for years and years, and it’s critically im- The fact that technology and innovation portant because if you want to know where are key to the future of manufacturing manufacturing is going to be in 20 years; it’s simply reinforced the concern many going to be involved with the highest-tech manufacturers had for the declining in- work that’s possible in the world that can’t be vestment in research and development as done in other nations where they pay 80 cents a percentage of GDP, both in industry a day or whatever to lesser skilled workers. and in government. Mike Mauer of Siko- As noted at the outset, U.S. manufac- rsky Aircraft Group made that point at turers continue to invest in innovation the roundtable in New Britain, Conn., and technology, accounting for the major- noting that U.S. manufacturing’s compet- ity of R&D dollars spent in any given year. itive edge depends on “great new tech- The roundtable participants also emphasized the importance of government’s investment in the basic sciences that lead to later innovations in manufacturing. They view government’s role as catalytic—spark- ing many of the ideas that manufacturers later transform into consumer products. Manufacturers expressed concern over the declining commitment of federal government funds for directed basic or generic technology research of the sort that drives innovation in manufacturing. At the Washington, D.C., roundtable focused on the future of manufacturing, many of the attendees highlighted the well-known role that the Defense Department and the Na- tional Aeronautics and Space Administra- tion played in research on electronics, nology . . . that’s a result of some of the computing, and communications. What investments that were made 20, 30 years manufacturers seek is focus within the ago.” Mauer described the decline in in- government’s budget on research that vestment in research and development as would yield the same spillover effects that “worrisome,” recognizing that future the earlier work on defense applications competitiveness is “really about the tech- and the space program provided. nology and the investment up front U.S. manufacturers suggest that the and...the engineering and development federal government’s ability to provide the that ends up leading” manufacturing to- means necessary to maintain the techno- ward a more competitive future. logical edge of the United States needs to Many of the comments focused on be strengthened. At the roundtable in Min- making the Internal Revenue Code’s re- neapolis, Minn., which focused on manu- search and experimentation credit perma- facturers in the medical device industry, nent. At the roundtable in New Britain, Conn., Murry Gerber, former chair of NAM’s Small and Medium Manufacturers

48 U.S. DEPARTMENT OF COMMERCE many of the participants commented on improve our standard of living in the future. the need to improve the responsiveness of That is a reality.26 the Food and Drug Administration to the The numbers bear out that other requirements of a rapidly evolving indus- countries are increasing their technological try. Currently, the FDA is grappling with sophistication. The United States, until re- the question of how best to regulate the in- cently, consumed 40 percent of the world’s troduction of biotechnology into the mar- semiconductor production, meaning that ketplace. In the view of some manufactur- American firms were manufacturing goods ers, the inability to match the speed of containing 40 percent of the world’s semi- innovation in industry with innovation in conductors. In the past two years, the U.S. government is becoming a drag on what share has dropped to 20 percent, whereas provides the United States its primary Asia now represents 40 percent of the advantage in the manufacturing sector— world’s semiconductor consumption.27 continuing innovation. One of the principal advantages Asia now holds is a very well-educated techni- Education and Skills cal workforce. Both China and India are The President’s Council of Advisors graduating high numbers of talented sci- on Science and Technology (PCAST) re- entists and engineers. In 2002 alone, 58 cently completed the first phase of a study percent of all the degrees awarded in gauging the health of U.S. high-tech in- China were in engineering and the physi- dustries. The PCAST report emphasizes a cal sciences, compared with 17 percent in concern that motivated many of the par- the United States. China’s 219,600 engi- ticipants in the Commerce Department’s neering graduates accounted for 39 per- roundtables: with continued outsourcing cent of all college graduates, whereas U.S. of manufacturing functions to lower-cost engineering graduates, a total of only alternatives outside the United States, the 59,500 engineers, represented a mere 5 United States risked losing the “innova- percent of all college graduates in the tion infrastructure of design, research and United States.28 development, and the creation of new Particularly troubling is that compar- products and industries.”25 ative advantage in today’s manufacturing George Scalise, president of the Semi- sector has less to do with physical endow- conductor Industry Association and chair- ments, such as natural resources, than it man of the PCAST subcommittee that has to do with human capital. According drafted the report, put it this way: to some U.S. firms’ estimates, by 2010, as Foreign governments—and especially China— much as 90 percent of their research and have done an effective job of creating a rich development, design, and manufacturing environment for the manufacture of electron- will be conducted in either China or ics and semiconductors, and the implications India. There is frankly little government are that U.S. high-tech leadership is not guar- can do through tax, cost reduction, and anteed. That is all there is to it. We have it. other policies to prevent this shift toward We enjoy it. We have been here forever, but it Asia if the United States is not at the same is not guaranteed going forward. If we lose time providing the talent pool necessary that leadership and if we don’t have that as a to continue spurring innovation. driving force in our economy, it will have an The discussions of education, train- impact on our ability to maintain and further ing, and workforce needs in manufacturing at the Commerce Department’s roundtables raised the same concerns. Beyond the incentives needed for investment in

MANUFACTURING IN AMERICA 49 research and development, manufacturers four years of college, for entry into the stressed the importance of a skilled work- company’s workforce. The reason for that force in maintaining America’s technologi- shift is the increasingly complex capital cal leadership. Chris Bollinger of Bollinger equipment involved in today’s manufac- Shipyards, Inc., at the roundtable in New turing processes. Orleans, La., identified the “biggest prob- Manufacturers stressed the need to lem that we see” as the “lack of qualified concentrate increasingly on readying labor.” He indicated that this observation students for the requirements of modern was true even during the recent recession. manufacturing and the modern market- He expressed concern about what that place. They emphasized the potential meant as the manufacturing sector recov- threat to U.S. technological leadership ered, calling the lack of qualified labor from declining numbers of engineering “our biggest issue and our biggest...road- graduates and high school graduates block to continuing to grow.” with adequate technical skills to qualify From the perspective of most manu- for even entry-level jobs in manufactur- facturers, the effort to maintain America’s ing today. leadership in innovation and technology Phyllis Eisen of the National Associa- must begin with improvements in the tion of Manufacturers captured the views basic education delivered by U.S. public of many when, at a Washington, D.C., schools. Many manufacturers now spend roundtable, she offered the following a considerable amount of time and re- perspective: sources simply training their workers to We are in a highly competitive state with meet the basic skill levels that workers in other countries that have taken education very other countries have attained by the time seriously for a very, very long time—from they enter the workforce. small countries like Denmark, [which] have General Motor’s Mustafa Mohatarem been at the peak of pushing kids in the educa- identified the problem at a Washington, tional world, to China, [which] graduated D.C., roundtable, noting, “the auto indus- close to 40 percent of engineers as undergradu- try was always considered a high-wage in- ates last year. We graduated less than 6 per- dustry that would hire people without cent. Now this should be a frightening thought much education. Your physical skills were to all of us. Manufacturing is an engineering- much more important than your mental based industry, and whether we’re training skills. That clearly has changed.” To meet technicians at a very high scale or high per- the challenge that this change presents formance production workers or engineers and will require continuing improvement in chemists or whatever . . . we’re not doing it the basic education America gives all stu- fast enough or good enough, and we have to dents through high school. put as much pressure on the education com- Most manufacturers recognize, how- munity and ourselves to work with them. ever, that even a solid high school-level The role of talent is critical to the education is not enough to remain rele- future viability of America’s manufactur- vant in today’s manufacturing sector. Tim ing sector. The 2001 U.S. Competitiveness Timken of the Timken Company made Report, published by the Council on Com- that point at a roundtable held in Wash- petitiveness and co-authored by Professor ington, D.C., concerning the future of Michael Porter, stated that “the priorities manufacturing. He emphasized that his for sustaining U.S. economic growth and company, the world’s leading manufac- competitiveness center on strengthening turer of roller bearings, was increasingly the nation’s innovative capacity and skills looking for workers who had training be- of the American workforce.”29 The report yond high school, up to and including

50 U.S. DEPARTMENT OF COMMERCE further stated that “the nation’s ability to more responsive in a dynamic and rapidly commercialize innovation—and further changing economic environment. As a productivity growth—rests on the skills of part of that effort, it would also be helpful its workers. But, the bar for skills is rising- to work toward programs that actually en- and demand for higher skills is outstrip- courage re-employment. It is widely un- ping supply.”30 Higher-level skills are derstood that the most valuable training essential to enable productivity and com- and retraining occur on the job. Being out mercialize innovation. of work, even briefly, means that an indi- Worker skills and education will be a vidual’s skills are eroding. Programs that dominant, if not decisive, factor in Amer- put a premium on helping individuals ica’s ability to compete in the global econ- find new employment may be the most omy. The United States’ ability to engage important form of adjustment assistance. in the world economy must be accompanied by a commitment to boost the skills Communities and Economic of every worker. Educational institutions Development must respond by giving every American A separate topic is the adjustment of the tools to prosper in the global economy. communities. Recent stories of plant clo- The final component that manufac- sures in the hard-hit textile mill towns turers focused on in their comments throughout the Southeast re- about workforce needs and training was inforce the need to ensure worker skills and education will the need to ensure lifelong learning. closer linkages between com- be a dominant, if not decisive, Nowhere is that need more acute than in munity economic-develop- the case of workers faced with a layoff bement initiatives and workforce factor in America’s ability to cause of changes in the underlying eco- development programs. As a nomics of their industry. compete in the global economy practical matter, job training Traditional trade adjustment assis- programs are useful only if there are jobs tance programs, though helpful in those available for those pursuing the training. specific instances, may not actually ad- Consistent with the need to upgrade dress the circumstances faced by most the skills of existing and dislocated work- workers laid off during the recent reces- ers is the need to ensure that there is a di- sion who have yet to be called back to versified economy capable of employing work simply because the manufacturer those workers. Areas with diversified has learned to produce the same quantity economies are more stable and generally of output with fewer workers. That drive provide for a higher standard of living for to innovate and raise productivity may or their citizens. Communities that are may not be spurred by competition from overly dependent on a single industry are imports, but that debate is increasingly ir- at greater risk for economic dislocation. relevant in light of the changes under way There is considerable room for com- in the manufacturing sector. There are a munities to engage in thoughtful and number of federal as well as state pro- proactive economic-development plan- grams directed at training and retraining ning. Establishing a comprehensive workers. The Workforce Investment Act, strategic plan for economic development passed in 1998, has gone a long way to- is a critical element in maintaining a ward streamlining and consolidating the community that can grow, thrive, and en- efforts of a wide variety of federal job- dure changes in the economic environ- training initiatives. However, more ment. Coordinated economic develop- change is needed to make the system ment programs can help build a more

MANUFACTURING IN AMERICA 51 favorable business climate to attract pri- Disparities in the Cost of Doing vate investment. Business Economic development planning is, According to manufacturers attend- furthermore, not just a strategy for adjusting the roundtables, one key reason for ment in a particular industry. A sound ap- leveling the international playing field is proach to economic development can to address the differences in the cost of help promote competitiveness, innova- doing business within the United States to tion, and increased productivity among the costs of doing business in other coun- existing businesses or industries in the tries. Steve Prout of Alpha Q at the New community as well. Britain, Conn., roundtable cited the ear- One of the development concepts lier discussed issue of rising healthcare manufacturers highlighted is the concept cost as contributing significantly to in- of clustering. Economically healthy re- creased indirect costs that affect competi- gions can often foster competitiveness tion. “Many of our companies have seen and innovation by focusing on industry medical healthcare cost increases of 20 clusters—groups of interrelated firms and percent or greater. You cannot sustain that industries. America’s ability to produce year after year . . . it’s just impossible.” high-value products and services that sup- Those and other cost differences con- port higher-skill and higher-wage jobs front U.S. manufacturers with stark largely depends on the creation and choices and create an incentive to shift strengthening of these competitive clus- manufacturing abroad. As Joe Fusco, of ters. Significantly, the concept of clusters Novus Fine Chemicals, put it at the both draws on and reinforces the benefits roundtable in Summit, N.J., “I could of funding for research universities, which throw up my hands. I could shut my fac- often form the core of such clusters. tory. I could turn my factory into condo- In general, there is a need for a more miniums . . . and then just ship my manu- aggressive look at how existing economic facturing overseas, and—guess what—I development programs could best rein- can make...more money.” force a community’s development of a What Fusco added was also represen- sound approach to building a more diver- tative of most American manufacturers. sified and strengthened local economy. While acknowledging the differences in Reinforcing the focus of communities on costs that are driving many manufacturers building more diversified economic bases offshore, Fusco also stressed: is one means of both attracting and re- I don’t think that that’s the right way to go. taining manufacturing companies. That’s just my opinion. I’d like to think that Leveling the International we can be creative and innovative....It’s re- Playing Field ally about just...doing a good job and being productive and [competitive]. And we Perhaps the key short-term demand do...But the only thing I’m complaining of U.S. manufacturers is for a level inter- about is this uneven playing field that I see. national playing field. They stressed the importance of international economic Economic and Trade Policy and policies, on both finance and trade, which Manufacturing Interests ensure that U.S. manufacturers have a fair Roundtable participants raised the opportunity to compete. issue of exchange rates, in particular China’s peg of its currency, the yuan, to the dollar. Many manufacturers expressed

52 U.S. DEPARTMENT OF COMMERCE concern that exchange rates with a number with certain exceptions such as apparel of trading partners are set by government manufacturers. intervention rather than market forces, Further, most manufacturers argued leading to lower U.S. exports and stronger that the global marketplace is here to stay import competition. American manufactur- and that the United States is better off ers pressed for the market to set the terms using the tools available to ensure that of competition, not governments. competition in that global marketplace is Manufacturers attending the round- on even terms. For most, it was clear that tables made the same basic point about one of those tools is trade negotiations, trade. What most manufacturers asked and many applauded the U.S. initiative for was not for protection from interna- within the WTO to eliminate tariffs alto- tional competition, but to level the play- gether as the most direct route to ending ing field by lowering trade barriers the current disparity. abroad. As Jay Jackson of Stuller, Inc., a Stephen Collins of the Automotive privately held jewelry manufacturer and Trade Policy Council, which represents wholesaler, pointed out at the New U.S. automakers on international trade is- Orleans roundtable: sues, echoed that basic point at a round- Mexico went to zero percent [tariffs] on pre- table in Washington, D.C.: cious jewelry in January of 2002. And first The greatest levels of growth are going to be quarter of this year, we actually had an 8 per- outside of the United States. That’s where the cent-plus balance of trade surplus of greater U.S. government does have an extremely im- exports going to Mexico than were actually portant role in helping to open those markets imported, and that’s the first time. So we can through the WTO, through bilateral negotia- compete if we’re allowed to compete where we tions, and through regional negotiations. And have the competitive edge, and we can com- the reason it’s so important is because those pete with the low labor cost, but we just have governments will try to protect their markets to have that level playing field. and try to protect the development of their There were serious criticisms of U.S. markets during that same period. trade policy. Some manufacturers ex- That basic point is worth underscor- pressed continuing concerns about the ing. Manufacturers understand that tariff impact of trade agreements, such as protection abroad is not only a barrier to NAFTA, and questioned whether contin- its exports, but it also repre- ued U.S. participation in the World Trade sents a means of subsidizing many manufacturers expressed Organization is warranted. foreign manufacturers by lim- concern that exchange rates are Other criticisms reflected dissatisfac- iting the competition they tion with the terms of the agreements face. In fact, the disparity in set by government intervention themselves, particularly the extent to tariff rates applied by foreign rather than market forces which they opened the U.S. market to countries compared with the goods made with low-cost labor. Those tariffs applied on goods enter- criticisms were offset, to an extent, by the ing the United States was, apart from the recognition that, in today’s manufactur- difference in operating costs, the most ing, direct labor costs in the form of common example that U.S. manufacturers wages actually represent a small portion pointed to in terms of the lack of a level of the total cost for most manufacturers, playing field. Kimberly Hayden of Supreme Tool & Die at the roundtable in St. Louis, Mo., expressed her strong dismay at the disparities

MANUFACTURING IN AMERICA 53 in tariff rates, stating what many others can. We want the Chinese and other competi- voiced at roundtables across the country: tors to honor trademark laws. We want them In 2020, if things don’t change, we may not to respect . . . to show the same respect to U.S. be here. That playing field needs to be evened manufacturers that we show to them. out in order for us to compete globally. I can Indeed, U.S. manufacturers indicated compete in the United States. I can’t compete a willingness to compete in a global mar- with the Chinese imports, and I can’t import ket, but they want to make sure that the or export my product over there....Bringing ground rules are the same for everyone a die cast tool into the United States, the total and that those ground rules are enforced. taxes equal 3.9 percent. Bringing a die cast Toward this end, the administration tool from the U.S. into China, the taxes equal has undertaken a number of significant 30 percent. initiatives to address this issue: an in- Tariffs are not the only trade barrier creased focus on intellectual property that U.S. manufacturers face. Another rights enforcement, heightened efforts to salient example is the lack of adequate in- promote the adoption of U.S.-developed tellectual property protection and enforce- technical standards, focused efforts on en- ment in the markets of some of America’s forcement and compliance, particularly major trading partners. For U.S. manufac- with respect to China, and expanded ex- turers, protection of intellectual property port promotion activities. is not an abstract concept. America’s com- The rapid globalization of world mar- petitive edge ensues directly from innova- kets presents American manufacturers tion and rising productivity. Intellectual with new challenges and opportunities. property protection is the best means for Falling trade barriers create opportunities ensuring that American manufacturers in two forms. First, lower barriers to trade enjoy the benefits of their investments in open markets for American exports. The research and development and of their ef- United States is already one of the most 31 forts to raise productivity. It is also the open economies in the world. Lowering means best calculated to ensure that they barriers to trade largely means lowering can enjoy the investment they make in barriers to trade abroad, where significant customer service and creating a brand barriers still exist. name that distinguishes them from other Second, increased trade brings manufacturers. stronger competition, which represents a As Frank Johnson of the Manufactur- double-edged sword for U.S. manufacturing Alliance of Connecticut underscored ers. Although it can place stiff demands at the New Britain, Conn., roundtable: on U.S. manufacturers, competition in trade also ensures that American manufac- We understand what free trade was designed turers remain competitive. Increased com- to be, but free trade isn’t free. We want free petition demands higher productivity, trade. If there is a tariff on tea going into greater efficiency, and greater innovation. China and not coming into the United States, In today’s global economy, the industries that’s not fair. If a manufacturer in China can that engage in the constant process of in- steal pictures from a Connecticut manufac- novation—lowering costs, creating new turer’s advertising brochure and put them on products, and serving new markets—rep- their Web site and use the company’s trade- resent market leaders. mark name to sell products in China, that’s Global competition represents an op- not fair. We want fair trade. We understand portunity for American manufacturers in free trade, but we want it to be fair. We want one other respect as well. Opening mar- to level the playing field in every place that we

54 U.S. DEPARTMENT OF COMMERCE kets abroad allows U.S. manufacturers to the subsequent peso devaluation. The bal- take advantage of economies of scale that ance of payments adjustment assistance they would not enjoy if they were limited provided to Mexico after the peso devalu- to the U.S. market alone. It also delivers ation simply reinforced that impression. high-quality, low-cost inputs that are nec- In fact, NAFTA has proved to be a essary to maintain the competitiveness of boon economically to all parties by mak- American manufacturing in many sectors. ing the U.S., Canadian, and Mexican In many industries, particularly those economies more efficient. Indeed, most in which American manufacturers main- critics ignore the actual terms of the tain a significant technological or other agreement under which Mexico had to competitive advantage, there is growth in undertake far more significant reforms exports. During the roundtables in Chicago and was obliged to remove more trade and Minneapolis, several firms indicated barriers than Canada or the United States, that more than 50 percent of their sales are simply because the U.S. and Canadian now offshore. That trend holds true for markets were already largely open to Mex- firms throughout the high-technology ican products. sector of the American economy. Even the most ardent crit- opening markets abroad allows Most of the manufacturers with ics of U.S. trade policy, how- U.S. manufacturers to take whom Commerce Department officials ever, were not advocating pro- met understand the benefits of trade and tection from import advantage of economies of indicated that much of what they produce competition, nor were they scale that they would not enjoy is destined for foreign markets. However, looking for subsidies. Rather, some manufacturers believe that the fed- they were looking for a level if they were limited to the U.S. eral government is not aggressive in de- playing field—an equal oppor- market alone fending the interests of American manu- tunity to compete for business facturing in its international economic both at home and abroad. and trade policy. They argued that the Manufacturers showed support for an broad opening of U.S. markets through aggressive trade policy intent on opening NAFTA was evidence that federal govern- markets. Such a policy does not require ment officials did care about U.S. manu- backing away from current trade negotia- facturing or its competitiveness. tions in the WTO or in bilateral, multilat- Instead of the terms of the deal, crit- eral, or regional free trade agreements. It ics of NAFTA focus on Mexico’s subse- does, however, require that the interests quent devaluation of the peso, which had of American manufacturers, as well as U.S. a far more significant impact on the terms farmers and service providers, be served of trade between Mexico and the United by those negotiations and that the U.S. States than did cuts in tariffs or quotas. government be vigilant in ensuring that That fact is reflected in the movement of the benefits of the bargains reached at ne- U.S. trade with Mexico from surplus to gotiating tables are, in fact, delivered. deficit in the years immediately following It also requires an understanding that the implementation of the agreement. trade policy does not take place in a vac- The lesson many in manufacturing uum. During the latter part of the 1990s, drew from that experience is that the U.S. trade policy was in a rut because of a de- government, following the implementa- bate about the extent to which future tion of the trade agreement, failed even to trade negotiations should be conditioned acknowledge the implications for Ameri- on labor or environmental standards. can manufacturing of the agreement and That debate prevented the previous administration from vigorously pursuing,

MANUFACTURING IN AMERICA 55 much less obtaining, trade negotiating au- reduction in the United States will work to thority. The debate was also one of the reduce the current account deficit. many reasons that the WTO conference in The Bush administration’s interna- Seattle in 1999 failed to launch a new tional economic strategy aims for high round of multilateral trade talks. economic growth throughout the world. From U.S. manufacturers’ perspective, At the core of this strategy are the growth- the politics of the trade debate largely ig- oriented economic policies being imple- nore the need for an ongoing effort, with- mented within the United States. But out the threat of coercion, to improve working with U.S. trading partners to en- labor and environmental standards. There courage pro-growth and pro-stability poli- is little doubt that there is much to be cies is also a central part of the adminis- gained by encouraging economic growth tration’s strategy. Good economic policies in the developing world. As countries de- in other countries benefit the United velop, they tend to choose higher labor States and the rest of the world. It is and environmental standards for them- widely recognized that free markets are selves. Trade liberalization is one of the best able to allocate scarce resources to most promising means by which to their most productive uses. The United achieve those higher standards. States believes that the goals of raising growth and increasing stability can best Concerns Regarding the be accomplished in an international fi- Trade Deficit nancial system that relies on the principles of free trade, free capital flows, and Many manufacturers point to the market-based exchange rates among the trade deficit, including the rising bilateral world’s major economies. trade deficit with China, as a major con- The world economy has strength- cern. While the trade deficit has changed ened over the past year. Outside the little over the past year and exports have United States, growth in Japan has re- been rising, America’s trade and current sumed, and prospects for the euro area account deficits reflect broad economic brightened in the second half of 2003. forces, strong U.S. growth The United Kingdom and Canada, as well growth in the trade deficit has been relative to growth in as many emerging market countries, are America’s major trading driven by relative rates of economic also growing more strongly. Rising U.S. partners, and a low-infla- exports reflect this greater vitality in growth and consumption, rather tion environment. Sus- America’s trading partners. tained, strong U.S. per- than the competitiveness of However, what the broader trend of formance relative to weak export performance should not ob- American goods and services performance abroad has scure is the fact that certain industries also served to attract sub- have faced, and continue to face, a surge stantial capital to the United States to fi- in imports that, in particular sectors, has a nance the current account deficits. At the stronger impact than the decline in ex- most fundamental level, the current ac- ports. Textiles and apparel are primary ex- count deficit is related to developments in amples. The most significant feature shap- U.S. national saving relative to U.S. investing those sectors has been the gradual ment. When investment is higher in the removal of quotas on textile and apparel United States than domestic saving, for- products that have protected the two sec- eign investors make up the difference, and tors since the textile agreements of the the United States has a current account early 1960s. Quotas had the effect of deficit. Increased private saving and deficit maintaining a relatively high level of investment and productive capacity, as well

56 U.S. DEPARTMENT OF COMMERCE as supporting higher price levels. They institutions was an important component also allowed for the existence of sectors of the overall effort to ensure the future of characterized by a large number of firms freedom, democracy, and a market-based producing a wide variety of products. In economic system in the midst of the Cold addition, they provided an incentive for War. Unilateral trade liberalization toward the establishment of outward processing the developing world formed an essential arrangements to try to maintain industry element of American foreign assistance competitiveness. strategy, which was also a tool in achiev- As quotas were removed pursuant to ing broader foreign policy goals. In the the Uruguay round of GATT negotiations, long run, however, multilateral trade lib- increased competition lowered prices, eralization by both developing and devel- dampened profitability, and placed much oped countries would provide the greatest of the previous investment in apparel overall benefit. under pressure from competition from But some manufacturers expressed abroad. In response, apparel manufactur- concern that the United States has “given ing, which is labor intensive, began to more than it has gotten” out of the world move offshore. Meanwhile, U.S. textile trading system and that foreign policy, manufacturing, which encompasses in- rather than U.S. commercial interests, creasingly capital-intensive enterprises, drives trade policy. Those views are based began to see its primary customers move on the visible difference between the aver- offshore or enter bankruptcy. The result- age tariffs in the United States and those ing decline in demand for U.S. textile pro- in many markets abroad and on the obvi- duction has placed the fabric makers in ous point that the United States has the same difficult financial position that proved willing to open its market faster apparel makers faced earlier. than the vast majority of its trading part- The rise in the trade deficit does not ners. Although the broader reach of U.S. necessarily indicate that American manu- foreign policy certainly was one of the facturing is uncompetitive. As mentioned motivating reasons for pursuing trade lib- above, growth in the trade deficit has eralization, it is difficult to point to a spe- been driven by relative rates of economic cific area where, as a result of foreign pol- growth and consumption, rather than the icy concerns, American negotiators put competitiveness of American goods and more on the table than they otherwise services. Many American manufacturers would have done. The argument also see the playing field being distorted by tends to ignore the active role that Con- foreign government intervention. gress has played in oversight of the trade Most discussions of trade begin and negotiation process in defense of particu- end with a survey of the most recent lar manufacturing industries’ interests. round of trade talks and what they mean That oversight alone has ensured that for particular sectors of the U.S. economy. trade policy has normally been driven by In the past 15 years, a dynamic has un- commercial considerations. folded that has complemented and rein- It is also worth reiterating what those forced the impact of trade negotiations in views ignore: the benefits of an open trad- lowering the barriers to trade worldwide ing environment and the competition it as well as the opportunities and chal- brings. There is little doubt that open lenges lower barriers create for American economies grow faster than closed manufacturers. economies and that competition is essen- U.S. leadership within the context of tial. The United States itself has, because post-World War II international economic of its openness, grown considerably faster than it otherwise would have.

MANUFACTURING IN AMERICA 57 Notes: 18 Leonard, Structural Costs. 19 National Energy Policy Development Group, Re- 1 Matthew B. Coffey, “NTMA Manufacturing Pol- liable, Affordable, and Environmentally Sound Energy for icy” (paper adopted by NTMA Executive Team, July, America’s Future (Washington, D.C.: National Energy 16, 2003). Policy Development Group, May, 2001). 2 PricewaterhouseCoopers, “The Factors Feeding 20 Ibid. Rising Healthcare Costs” (April 2002). 21 Ibid. 3 Kaiser Family Foundation and the Health Re- 22 Ibid. search Educational Trust, Employer Health Benefits; 23 National Federation of Independent Business, 2003 Annual Survey (Washington, D.C.: Kaiser Family “NFIB Poll Reveals Initial Effects of Deregulation on Foundation, 2003). California Small Businesses” (press release, Feb. 26, 4 Ibid. 2001). 5 Alliance for Health Reform, Covering Health Is- 24 National Energy Policy Development Group, En- sues: A Sourcebook for Journalists (Washington, D.C.: Al- ergy for America’s Future. liance for Health Reform, 2003). 25 President’s Council of Advisors on Science and 6 That is not to say that the total cost of health- Technology, “Report on Information Technology Man- care does not take a toll on manufacturers elsewhere. ufacturing and Competitiveness” as reported in Manu- Even in systems like Canada’s or Great Britain’s, facturing and Technology News (Oct. 3, 2003). where the government actually provides the health- 26 Ibid. care, taxpayers, including manufacturing companies, 27 Ibid. end up paying for it in the form of higher taxes. To 28 Ibid. the extent that those taxes take the form of value 29 Michael E. Porter and Debra van Opstal., U.S. added or similar taxes that are rebated upon export of Competitiveness 2001: Strengths, Vulnerabilities and Long- a manufactured good, the price of the good on inter- Term Priorities (Washington, D.C.: Council on Competi- national markets may not fully bear the cost of the tiveness, 2001), p. 37. healthcare system in a way that U.S. goods must, 30 Ibid. since they are built into the cost base of the U.S. 31 On a trade-weighted basis, the U.S. average tariff manufacturer itself. is less than 1.7 percent; the current U.S. simple average 7 National Association of Manufacturers, Health tariff is 3.6 percent on a legally bound basis under the Care Costs at the Crossroads: Manufacturers’ Agenda for WTO. Average tariffs throughout much of the world are Lower Costs and Higher Quality (Washington, D.C.: The significantly higher, with simple average WTO legally Manufacturing Institute, 2002). bound rates of 31.4 percent in Brazil, 37.2 percent in 8 Ibid. Egypt, 49.8 percent in India, and 39.5 percent for WTO 9 Kaiser Family Foundation, Employer Health members overall. The manufacturing sector of the U.S. Benefits 2003. economy is also largely free of non-tariff barriers to 10 Jeremy A. Leonard, How Structural Costs Imposed trade, such as quotas and trade-distorting subsidies. In on U.S. Manufacturers Harm Workers and Threaten Com- addition, because of requirements of the Commerce petitiveness (Washington, D.C.: National Association Clause of the Constitution, there are few barriers to of Manufacturers, 2003). trade within the United States. Taken together, that 11 Tillinghast-Towers Perrin, U.S. Tort Costs: 2003 makes the United States the most open and contestable Update; Trends and Findings on the Costs of the U.S. Tort market of any major economy in the world. System (New York: Tillinghast-Towers Perin, 2003). 12 Todd Buchholz and Robert Hahn, Does a State’s Legal Framework Affect Its Economy? (Washington, D.C.: U.S. Chamber of Commerce Institute for Legal Reform, 2002). 13 Office of Management and Budget, Office of In- formation and Regulatory Affairs, Report to Congress on the Costs and Benefits of Federal Regulations (Wash- ington, D.C.: Office of Management and Budget, Sep- tember 1997). 14 Leonard, Structural Costs. 15 Thomas Hopkins and W. Mark Crain, The Im- pact of Regulatory Costs on Small Firms, report no. PB2001–107067 (Washington, D.C.: U.S. Small Busi- ness Administration, Office of Advocacy, 2001). 16 Ibid. 17 Ibid.

58 U.S. DEPARTMENT OF COMMERCE Three Recommendations and Next Steps

The recommendations that follow are de- goods, capital, and labor. They are also designed to address the challenges identified signed to foster compliance with the rules by U.S. manufacturers over the course of governing the international trading sys- the Commerce Department’s roundtable tem so that it is competition in the mar- discussions. These recommendations rep- ketplace, rather than government inter- resent a step toward building the compre- vention, that determines success. hensive strategy called for by Secretary The recommendations include pro- Evans to ensure “that the government is posals that demand immediate action by doing all it can to create the conditions” Congress and new activities that can be Tthat would enhance U.S economic growth pursued under existing authority to and manufacturing competitiveness. strengthen current efforts to support U.S. These recommendations start from manufacturers. A number of recommenda- the premise that it is manufacturers and tions also provide direction for broad-based their actions in the marketplace that will reforms that will require coordinated effort define their success, spur economic over the long term. The new Assistant Sec- growth, and create jobs. The government’s retary of Commerce, called for by President role is not to interfere with that process, Bush in his September 4, 2003, Labor Day but rather to foster it. For government, address, will be responsible for coordinat- creating the conditions for success in the ing the administration’s efforts to imple- marketplace means focusing on economic ment these recommendations. fundamentals, such as encouraging eco- The recommendations are divided nomic growth and innovation in the pri- into the following six sections: vate sector and reducing the cost of gov- • Enhancing Government’s Focus on ernment policies on U.S. manufacturers. It Manufacturing Competitiveness also means regulating only when ab- • Creating the Conditions for Eco- solutely necessary and then with a view nomic Growth and Manufacturing toward minimizing unwarranted costs. Investment This same basic approach informs the • Lowering the Cost of Manufactur- recommendations on international eco- ing in the United States nomic policy and trade. The recommen- • Investing in Innovation dations are designed to encourage govern- • Strengthening Education, Retrain- ments to open markets and eliminate ing, and Economic Diversification trade practices that distort markets for • Promoting Open Markets and a Level Playing Field

MANUFACTURING IN AMERICA 59 Enhancing Government’s assistant secretary would be responsible for Focus on Manufacturing implementing the recommendations con- Competitiveness tained in this report and for supporting the Secretary of Commerce in his role as One of the major concerns registered the federal government’s chief advocate by manufacturers was the long-standing for the manufacturing sector. lack of focus and accountability within Specific responsibilities of the assis- government on manufacturing and its tant secretary would include: competitiveness. The following recommendations are intended to sharpen that Lead a Benchmark Analysis to Measure Progress toward Achieving the President’s focus and to ensure accountability for im- Goals plementing the recommendations that make up the Manufacturing Initiative. One of the key components of any Beyond providing greater focus and strategy is a means of measuring progress accountability, the recommendations are toward a defined goal. That requires both also designed to enhance coordination a baseline that sets a starting point for within the federal government and with analysis and the tools to measure progress. state and local authorities to improve the To establish a baseline against which to domestic economic environment for measure progress toward improving the manufacturing. These steps would estab- economic environment for manufacturing lish a mechanism for ongoing dialogue in the United States, the newly established with the manufacturing sector on the assistant secretary would work with the implementation of the President’s Manu- Council of Economic Advisers, the U.S. facturing Initiative. Treasury and Labor Departments, and These activities would further the other relevant agencies, to initiate a work begun by this report. One of the first benchmark analysis of the U.S. environ- steps that the newly established assistant ment for manufacturing. secretary should take is to conduct a study The study would identify and priori- of the cost competitiveness of U.S. manu- tize those areas of public policy that have facturing relative to its principal competi- the most impact on manufacturing com- tors. This should include an assessment of petitiveness. The findings should be sub- the business environment in terms of sup- ject to further analysis to determine porting innovation, not just in terms of what, if any, actions could be taken. In products and services, but in manufactur- addition, the study would review initia- ing process and business organization. tives to improve manufacturing competi- This work will help determine whether tiveness underway at the state and local there are additional steps the government level or abroad. could take to reduce costs and to enhance Create a New Office of Industry Analysis competitiveness. Through a new Office of Industry Create an Assistant Secretary of Analysis, the assistant secretary would Commerce for Manufacturing and be responsible for assessing the cost com- Services petitiveness of American industry and evaluating the impact of domestic and in- As President Bush called for in his ternational economic policy on U.S. Labor Day address, the federal government competitiveness, particularly in the manu- should establish an assistant secretary-level facturing sector. This effort would require position at the Department of Commerce developing the analytical tools and ex- to serve as the principal point of contact pertise within the Commerce Department with the U.S. manufacturing sector. The

60 U.S. DEPARTMENT OF COMMERCE to assess the impact of proposed rules and Foster Coordination and regulations on economic growth and job Cooperation among Federal, creation before they are put into effect. State, and Local Governments Establish a President’s Not all of the steps needed to foster Manufacturing Council to Provide an economic environment helpful to Oversight and Advice on the manufacturing reside in the jurisdiction Implementation of the President’s of the federal government. However, the Manufacturing Initiative federal government could serve as a coordinator of activities designed to foster a To ensure that the government re- healthy manufacturing sector throughout sponds to the challenges facing U.S. man- the United States. The states have tradi- ufacturers and remains focused on what tionally served as laboratories for a wide matters to their competitiveness, Con- variety of initiatives that have shaped gress should establish a Manufacturing economic policy throughout the country. Council under the chairmanship of the The administration should create an in- Secretary of Commerce. The assistant sec- tergovernmental coordinating committee retary would serve as the executive direc- on manufacturing, with the assistant sector of the council. The council would retary serving as the coordinator, to en- provide a means of ensuring both regular sure that sound ideas on regulatory re- contact between government and the form or economic development strategies manufacturing sector and effective coun- are widely available to all state and local sel in the implementation of the Presi- governments. dent’s Manufacturing Initiative. The council’s membership should reflect the diversity of American manufacturing in terms of industries and the size of the enterprise, particularly small and medium- sized businesses. Create an Interagency Working Group on Manufacturing Chaired by the Secretary of Commerce

Implementing the recommendations outlined below will require coordination among a number of agencies within the federal government. Toward that end, the administration should establish an interagency working group modeled on the Trade Promotion Coordinating Commit- tee. This manufacturing competitiveness interagency working group, chaired by the Secretary of Commerce, would be responsible for coordinating the implementation of the recommendations, as well as developing new initiatives that would carry President Bush’s Manufacturing Ini- tiative forward.

MANUFACTURING IN AMERICA 61 Creating the Conditions for investment, which accounts for the other Economic Growth and one-third of GDP, has gained strength but Manufacturing Investment has yet to reach pre-recession levels. Fostering a climate for strong busi- Creating an economic environment ness investment, particularly in manufac- designed to foster manufacturing competi- turing, requires a stable economic envi- tiveness begins with establishing the con- ronment that reduces risk. Reducing risk ditions for strong economic growth at requires greater certainty. Congress should home. Congress has already taken several increase certainty and foster a healthier significant steps toward that goal by en- climate for investment in manufacturing acting President Bush’s proposals reflected and other sectors of the economy by mak- in the Economic Growth and Tax Relief ing the recent tax cuts permanent. Reconciliation Act of 2001, the Job Cre- The elimination of the estate or ation and Worker Assistance Act of 2002, “death” tax, the temporary increase in ex- and the Jobs and Growth Tax Relief Rec- pensing limits, and the new incentives for onciliation Act of 2003. small business investment are among the By acting decisively to lower the tax most significant business-related features burden on American manufacturers, par- of the recent tax cuts. In addition, the re- ticularly for small and medium-sized busi- ductions in individual marginal tax rates nesses, President Bush and Congress aid those businesspeople whose incomes helped to keep the recession short and flow through directly to individual re- start the process of economic recovery. turns, such as sole proprietors and part- According to the U.S. Treasury Depart- nership members. Congress should act to ment, had President Bush and Congress make the elimination of the death tax failed to enact those measures, by the end and the investment incentives for small of 2004, 3 million fewer jobs would have businesses permanent to ensure that man- been created and a deeper recession and a ufacturers, particularly small and medium- far slower and more uncertain recovery sized businesses, are able to attract the in- would have resulted. vestment capital needed to ensure their Nevertheless, there remains an enor- future competitiveness. mous amount that government can still do to increase the certainty of the busi- Reduce the Costs of Tax ness environment in which U.S. manufac- Complexity and Compliance turers operate. The following steps would U.S. tax laws have become unneces- ensure that the government makes sarily complex. Complexity increases the progress toward that goal. cost of compliance and creates a drag on Make Recent Tax Cuts Permanent the economy, with businesses spending to Enable Manufacturers to Attract more time and resources on compliance Capital and Invest for the Future and diverting talent and resources away with Confidence from productive activities. Small business owners are particularly unprepared to deal One of the key features of the recent with this complexity and do not have the recession was the sharp drop in business resources to hire sophisticated tax counsel investment. Consumer spending, which to advise them. It is time to make a seri- makes up two-thirds of U.S. GDP, re- ous effort to simplify the tax rules. The mained strong throughout both the reces- Treasury Department should undertake a sion and the subsequent recovery. Business study of tax simplification, focusing on those provisions that are particularly complex for manufacturers, including

62 U.S. DEPARTMENT OF COMMERCE depreciation, the corporate alternative Lowering the Cost of minimum tax, and the research and ex- Manufacturing in the United perimentation tax credit. States Make Permanent the Research As manufacturers made clear in every and Experimentation Tax Credit roundtable discussion, to make the United While public investment in research States an attractive place to invest in man- and development is a critical component ufacturing, government must reduce the in the development of new technologies, costs it imposes on manufacturers. The the private sector bears the burden of the following recommendations outline steps research and development needed to that the government should immediately bring those technologies to market. take to bring down the cost of manufac- To reinforce the existing incentive turing in the United States, including reg- available under the Internal Revenue ulatory, energy, legal, healthcare, and pen- Code, Congress should make the research sion costs. and experimentation (R&E) tax credit per- Reduce the Cost and Improve the 1 manent. Making the R&E credit perma- Availability of Healthcare nent has been a consistent, long-time priority for advanced manufacturers. Doing Healthcare costs represent the largest so will increase the certainty associated and fastest rising costs faced by U.S. man- with the tax treatment of research expen- ufacturers. These costs are also least ditures and thereby reduce the risk and within their control to manage. Manufac- cost associated with attracting or allocat- turers have a vested interest in the health ing capital expenditures to such activities. of their employees. Building on the historic Medicare reforms signed into law by Deepen the Pool of Investment President Bush, the following actions Capital Available to Manufacturers would help reduce the burden of provid- by Introducing Incentives for ing this care: Saving Establish Association Health Plans Another key element for encouraging As President Bush has endorsed, Con- investment is deepening the pool of in- gress should pass legislation to create and vestment capital available to U.S. busi- fund association health plans. Such plans ness. To do so, Congress should adopt tax would afford small business manufactur- incentives to increase the savings rate of ers greater leverage in negotiating the cost American taxpayers. of health insurance with providers. That Increasing U.S. savings and invest- leverage would translate into lower ment would also address the growing U.S. healthcare costs and improved cost com- trade deficit. By providing incentives for petitiveness. savings and investment, the United States would reverse one of the main causes of Promote Health Savings Accounts the trade deficit, as well as expand access Health savings accounts (HSAs) were to, and lower the cost of, capital available established in the Medicare prescription to U.S. manufacturers. drug bill signed by the President on Dec- ember 8, 2003. HSAs combine high- deductible health insurance plans with tax-free savings accounts that can be used to pay for medical expenses incurred by employees and their families. Under HSAs,

MANUFACTURING IN AMERICA 63 year-end balances can be rolled over, en- medium-sized businesses that make up the couraging employees to be more cost-con- bulk of the U.S. manufacturing sector. scious and giving them both an incentive Modernize the U.S. Legal System and the means to save for future health- to Eliminate Disincentives to care needs. Invest in Manufacturing Accelerate the Food and Drug The U.S. legal system discourages in- Administration’s Review of Generic vestment in manufacturing by raising the Drugs risk and cost associated with manufactur- In addition to the FDA’s broad efforts ing. There are three steps Congress should to speed the development of safe, innova- immediately take to lift the disincentives tive, and low-cost new health treatments, for investment in manufacturing that the the FDA continues to expedite the review current system of tort liability creates: of generic drugs in order to make lower- cost prescription drugs available to con- Enact Class-Action Reform sumers. The administration has increased Congress should enact a common funding for generic drug reviews by over sense class-action system through the pas- 35 percent over the past two years, allow- sage of a consumer “class-action bill of ing the FDA to establish ambitious new rights” that would, among other provi- performance targets for reducing review sions, require notice of a lawsuit to class times for generic drugs. Continued FDA members in understandable terms, require performance improvements will allow judicial review of settlements that give generics to reach the market more class members only non-cash benefits, and quickly, resulting in lower prices for pre- prohibit a court from approving a settle- scription drugs available under employer ment that discriminates among plaintiffs. health plans. Enact Asbestos Reform Implement New Technologies to Prevent Litigation is an enormously expen- Costly Medical Errors sive means of compensating those injured To ensure medical treatments are by the use of asbestos in construction being used as effectively as possible and prior to the 1970s. Because asbestos is no to prevent costly adverse events, the longer being used in construction, class- healthcare industry should adopt and im- action lawsuits no longer serve even a de- plement 21st century technologies such terrent purpose. Congress should enact as bar coding of medical products and legislation resolving the current class-ac- electronic prescribing. tion litigation on asbestos. The asbestos Enact Medical Liability Reform litigation continues to dampen investment in manufacturing. Passage of legisla- Congress should enact legislation tion that will ensure compensation for making the medical liability system fair, those actually injured and stop litigation predictable, and timely. Reforms should in- that destroys jobs is critically important. clude the adoption of standards that ensure that injured patients are compensated Make the Medical Liability System Fair, fully and quickly for their economic losses, Predictable, and Timely while limiting recoveries for non-eco- The most significant step govern- nomic damages to a reasonable amount. ment should take to improve the medical Taken together, these steps would sig- liability system and reduce its costs to U.S. nificantly reduce the current burden that high healthcare costs impose on U.S. manufacturers, particularly those small and

64 U.S. DEPARTMENT OF COMMERCE manufacturers would be to adopt stan- Conduct an Analysis of the Inventory dards that ensure injured patients are OMB should, in coordination with compensated fully and quickly for their the Council of Economic Advisers, the economic losses, while limiting recoveries Commerce Department, and other agen- for non-economic damages to a reason- cies, evaluate the proposed reforms and, able amount. where appropriate, implement those re- In addition, the administration and forms on a priority basis. This evaluation Congress should undertake a long-term ef- should include an assessment of the cost fort to ensure an appropriate balance in of compliance and the economic impact the tort system between plaintiffs’ and de- of current rules, particularly on small and fendants’ interests. As questions of tort li- medium-sized businesses, as well as the ability are frequently adjudicated at the cost to the taxpayer and to the consumer state level, any such effort would ulti- of administering those regulations. The mately require close cooperation with the objective of the review should be to deter- states to ensure the best approach and a mine whether there might be a less costly higher degree of consistency. means of achieving the benefits Congress Reduce the Costs of Regulation intended by authorizing such regulations. and Legislation That analysis should extend to the agencies that implement the rules as well. This The cost of regulation on the U.S. effort could involve broadening the analy- economy has been the subject of ongoing sis done under section 610 of the Regula- reviews since the late 1970s. OMB reviews tory Flexibility Act, which currently ap- of proposed regulations, and statutes such plies to small businesses. as the Paperwork Reduction Act, have contributed to that effort. In addition, the Conduct a Regulatory Impact Analysis of New Rules Bush administration has slowed the increase in regulatory costs produced by Lastly, OMB should rigorously apply new regulations reviewed by OMB by 70 its recently developed guidance on regula- percent compared with the previous ad- tory impact analysis to any proposed rules ministration. that would influence the costs imposed Nonetheless, overall, the cost of regu- on the manufacturing sector, particularly latory compliance has risen significantly as they affect small and medium-sized over time. To combat these rising costs, businesses. As a part of this effort, the OMB should lead a comprehensive three- newly established assistant secretary for step process to reduce the burden of regu- manufacturing and services should task lation on manufacturing enterprises: the new Office of Industry Analysis to work with OMB and other agencies to re- Establish an Inventory of Potential fine the analytical tools needed to assess Regulatory Reforms that Would Lower the impact of proposed rules and regula- the Cost of Manufacturing tions on economic growth and job cre- To establish an inventory of potential ation in the manufacturing sector and reforms that would reduce the cost of other areas of the economy. compliance on the manufacturing sector, OMB should seek public comment on existing rules and afford the opportunity to propose particular reforms. The request for public comment and the nomination of reforms should address existing regulations, guidance documents, and paperwork requirements.

MANUFACTURING IN AMERICA 65 Enact a Comprehensive Energy most important steps that President Bush Plan That Encourages has proposed and on which Congress Conservation, Improves should act are: Infrastructure, and Expands Increase Electricity Supply and Domestic Production Modernize the Legal Framework According to the National Associa- Governing Electricity Production tion of Manufacturers, about one-third of Congress should modernize the legal the United States’ energy, including 40 framework governing electricity produc- percent of the natural gas and 30 percent tion and transmission to lessen the of the electricity, is consumed by manu- chance of disruptive blackouts and ensure facturers. Energy shortages, price spikes, the delivery of ample and affordable sup- and blackouts disrupt the economy; dis- plies of electricity. The provisions should courage investment in energy-dependent establish mandatory and enforceable relia- manufacturing industries, such as chemi- bility standards, encourage expanded in- cals and plastics; and inhibit manufactur- vestment in transmission and generation ers in those sectors from planning with facilities, eliminate transmission bottle- confidence and hiring new workers. necks, reform outdated laws, promote Given the significant increase in U.S. open access to the transmission grid, pro- energy costs, enacting a comprehensive mote regional planning and coordination, plan to encourage conservation, improve protect customers, and help develop new infrastructure, and expand domestic pro- technologies. duction is fundamental to the future of Facilitate Adequate and Economical American manufacturing. Adopting a Supplies of Natural Gas comprehensive energy plan, particularly Congress should facilitate adequate one that addresses the need for expanded and economical supplies of natural gas by natural gas production and distribution, eliminating the regulatory obstacles to the would help reduce the cost in some man- development of natural gas resources on ufacturing sectors considerably. Such ac- federal land and to the construction of tion would offer a particular benefit to liquefied natural gas terminals and other those manufacturing industries, such as infrastructure, simplify the permit process plastics, that depend on natural gas both and facilitate the construction of an eco- as a source of power and as an input into nomically viable natural gas pipeline from their manufactured goods. Alaska, and encourage additional deep- President Bush has proposed a com- well gas development on the outer conti- prehensive national energy policy that nental shelf. would, if enacted by Congress, modernize and expand our electricity infrastructure, A Clean and Affordable Diversity of modernize and increase conservation and Fuels for Electricity Production energy efficiency, ensure a clean and af- Congress should moderate future de- fordable diversity of fuels for producing mand growth for natural gas by ensuring electricity, increase domestic energy sup- a future for clean-burning coal and nu- plies, and increase the development and clear power, and providing tax incentives deployment of new technology. to increase the production of electricity In short, Congress should pass Presi- from renewable sources such as wind, dent Bush’s energy plan to reduce the cost solar, biomass, and landfill gas. of energy to U.S. manufacturers. From the perspective of U.S. manufacturers, the

66 U.S. DEPARTMENT OF COMMERCE New Technology Investing in Innovation Congress should encourage further The discussion above and the views of research and development in new energy manufacturers highlight the need to bol- technology, particularly the funding of ster further the development of new tech- President Bush’s hydrogen fuel initiative nologies that fuel productivity gains and to develop technology for commercially improve U.S. security and the U.S. stan- viable hydrogen-powered fuel cells and a dard of living. The following recommen- new generation of hydrogen powered ve- dations are designed to ensure that the hicles to help reduce U.S. dependence on United States remains the most competi- foreign oil. tive and productive economy in the world. Promote Pension Reform Review Federal R&D Funding for The administration will work with Generic Technologies, Congress to make fundamental changes in Engineering, and the Physical the funding rules that will put under- Sciences to Encourage Better funded plans on a predictable, steady path Coordination and Focus on to better funding. Improvements in the Innovation and Productivity- funding rules should set stronger funding Enhancing Technologies targets, foster more consistent contribu- Since taking office, President Bush has tions, mitigate volatility, and increase provided a renewed focus on federal re- flexibility for companies to fund up their search and development funding. For fis- plans in good economic times. The ad- cal year 2004, he proposed a record $123 ministration will continue to work with billion, which represented an increase of Congress and the private sector to address more than 34 percent over funding levels this issue. that existed when he took office. Continuing this effort to enhance government funding of research and development activities is crucial to the continued U.S. success in manufacturing. Also needed is a review of current federal R&D programs important to manufacturing, to ensure that there is an appropriate focus on innovation and productivity-enhancing technologies. The Commerce Department’s Technology Ad- ministration, in coordination with the Assistant Secretary for Manufacturing and Services should conduct this review with other affected agencies, through the Na- tional Science and Technology Council’s Interagency Working Group on Manufac- turing R&D, and the private sector. The review should consider the need for additional investment in core R&D programs for generic technologies, engineering, and the physical sciences, especially in interdisciplinary scientific en- deavors. The model followed should be

MANUFACTURING IN AMERICA 67 the same one that has been used over the measurements and standards, and manu- past 50 years to develop the major tech- facturing information technologies. It nologies influencing the U.S. economy would also address the need for new in- today (semiconductors, computers, net- dustry-university-government research work communications, biotechnology, dedicated to high-priority manufacturing and now nanotechnology). This model is R&D needs, knowledge diffusion, and ed- based on government funding of basic sci- ucation of the next generation of manu- ence and early-phase generic technology facturing technologists and leaders. research, followed by massive investment Strengthen the U.S. Patent and in applied R&D by the private sector. Trademark Office Identify Priorities for Future Patents have always been key to re- Federal Support for Advanced warding manufacturing innovations, but Manufacturing Technology— their importance has been magnified by Create an Interagency Working the fact that the application of new tech- Group on Manufacturing Research nology has become one of the key ingre- and Development dients in successfully competing in manu- To improve the effectiveness of fed- facturing globally. Delay in the issuance of eral investment in manufacturing research a patent can mean the difference between and development, a new interagency success and failure in today’s marketplace. working group should be established The USPTO currently runs the risk of within the National Science and Technol- seeing its processing times erode. The ad- ogy Council. This interagency working ministration has proposed legislation that group would serve as a forum for develop- would significantly enhance the ability of ing consensus and resolving issues associ- the USPTO to meet the needs of U.S. man- ated with manufacturing R&D policy, pro- ufacturers. Congress should pass this legis- grams, and budget guidance and direction. lation to ensure that the USPTO can con- The working group should identify tinue to serve the needs of manufacturers and integrate requirements, conduct joint by protecting their intellectual property program planning, and develop joint and increasing the availability of new strategies for the manufacturing R&D pro- products and services in the marketplace. grams conducted by the federal govern- Strengthen Partnerships to ment. Among the responsibilities of this Promote Manufacturing group would be to review all federal man- Technology Transfer ufacturing R&D programs and establish priorities designed to improve U.S. manu- Robust research and development ac- facturing technology. tivities are essential steps in reinforcing The review would be aimed at identi- the process that has provided U.S. manu- fying the timely and critical early-stage facturing with its competitive edge. developments needed to provide a funda- These activities, however, should be mental foundation for industrial research matched with an equally vigorous effort and development and the commercializa- to ensure that the technology developed tion of related applications. The review is diffused broadly throughout the manu- would be comprehensive, covering a wide facturing sector, particularly to small and breadth of manufacturing innovation medium-sized manufacturers, which will technologies, such as supply chain inte- benefit most because of their own limited gration, interoperability technologies, capacity for independent research and development.

68 U.S. DEPARTMENT OF COMMERCE The PCAST report on technology reach of programs designed to provide transfer of federally funded R&D, released technical assistance to standards agencies, in May 2003, provides 10 recommenda- national metrology institutes, and re- tions for strengthening technology gional metrology organizations in the de- transfer.2 These recommendations will pro- veloping world, particularly in significant vide valuable insight for strengthening potential export markets. technology transfer to the manufacturing Ensure the Reliability of the community. Critical Infrastructure That Is Vital Implementing these recommenda- to Manufacturers tions will require a comprehensive effort, led by the National Institute of Standards The United States’ most advanced and Technology. As a part of that effort, manufacturing industries and the infra- NIST should take the lead in identifying structures that they depend on—power, and promulgating best practices in intel- communications, and transportation in lectual property management, cooperative particular—are increasingly dependent on R&D agreements, and partnering arrange- sophisticated, distributed automated con- ments needed to enhance the benefits and trol systems. Typical of these are the con- delineate the obligations associated with trol systems that manage the electric such cooperative efforts. Participation power grid; similar systems control the from existing groups such as the Federal production and distribution in critical in- Laboratory Consortium, the Interagency frastructure industries such as oil and gas, Working Group on Technology Transfer, water, chemicals, pharmaceuticals, metals and others should be solicited in this and mining, pulp and paper, and durable comprehensive effort. goods manufacturing. Protecting these critical control infrastructures from fail- Expand Cooperative Technical ure, either by accident or by malicious in- Assistance Programs on tent, is essential to the long-term security Standards of the manufacturing sector—and the na- In an increasingly globalized econ- tion as a whole. Therefore, the following omy, the capacity to compete success- steps should be taken: fully will depend on the ability of indi- Promote Standards to Better Protect vidual manufacturers to satisfy global as Industrial Control Systems well as U.S. standards. Most U.S. manu- The federal government should work facturers understand the importance of vigorously and hand-in-hand with the pri- achieving these goals and have invested vate sector and state and local agencies to heavily in satisfying not only product encourage and enable standards develop- standards, but quality and environmen- ment organizations in the United States to tal standards as well. establish needed security standards for in- The importance of standards in man- dustrial control systems. ufacturing will only increase with the demands placed on manufacturers hoping to Support the Research and Development compete for a place in global supply that Underpins Critical Infrastructures— chains. Indeed, in many respects, interna- and Quickly Transfer the Results of That R&D to the Private Sector tional standards will define access to the global marketplace. To ensure that stan- As part of the administration’s em- dards with a potential to affect the access phasis on improving homeland security, of U.S. manufacturers to markets around the federal government today is providing the world are set objectively, based on sound science, NIST should expand the

MANUFACTURING IN AMERICA 69 dramatically expanded support for the re- that are helping manufacturers to be more search and development that is necessary competitive and expand markets. to protect the nation’s critical infrastruc- Through this coordination, the Com- tures that U.S. manufacturers and the U.S. merce Department can more closely link economy and society at large depend the technical and business staff employed upon so heavily. In addition, the adminis- by the MEP centers located around the tration should ensure that the manufac- country with trade promotion specialists turers and users of industrial control sys- in the Commerce Department’s Interna- tems are involved with—and are kept tional Trade Administration who are informed about—the latest research ad- working with the proposed new Assistant vances from the Department of Homeland Secretary for Manufacturing and Services. Security, the Commerce Department, and In addition, the ITA has experts with in- elsewhere. depth knowledge of and connections with various sectors of industry—automotive, Support a Newly Coordinated textiles and apparel, energy, aerospace, Manufacturing Extension machinery, metals, and microelectronics, Partnership and Create a National to name a few. With a direct teaming of Virtual Network of Centers of MEP field agents and these sector experts, Manufacturing Excellence the program can be a more effective na- Since its inception as a pilot program tional resource to help small manufactur- in 1988,3 the Manufacturing Extension ers compete and succeed in the global Partnership (MEP) has provided many marketplace. small U.S. manufacturers with useful busi- Additionally, MEP should hold a rec- ness services to become more competitive ompetition for all MEP centers, with a and productive. MEP’s nationwide net- focus on effectiveness and cost-efficiency. work serves to promote lean manufactur- MEP should also explore methods, with ing techniques such as zero-defect quality Congress, for statutory authority to re- programs. The program makes it possible ceive direct programmatic funding from for even the smallest firms to tap into spe- private sector entities. cialists from across the country with man- Wherever possible, MEP should also ufacturing and business expertise in plant encourage applicants to identify areas of operations and on manufacturing floors. sector-specific expertise that could qualify MEP clients have experienced more them as a “center of excellence.” MEP growth in labor productivity over a five- should encourage co-location with univer- year period than similar non-client firms.4 sities, community colleges, and ITA assis- MEP was originally intended to be tance centers to foster cooperation, comprised of 12 federally supported cen- knowledge transfer, greater efficiency, and ters, with federal funding ending after six manufacturing exports. The Technology years. In its 15 years of operation, the pro- Administration would lead the establish- gram has expanded away from this origi- ment of these centers by partnering with nal design to include 400 locations, and other organizations—including govern- Congress has removed the sunset provi- ment at all levels as well as private sector sion.5 Given advances in manufacturing organizations. and technology, it is appropriate to evaluate MEP operations and take steps for con- tinuous improvement. The administration proposes to coordinate MEP fully with other Commerce Department programs

70 U.S. DEPARTMENT OF COMMERCE Encourage the Small Business Strengthening Education, Innovation Research and Small Retraining, and Economic Business Technology Transfer Diversification Programs to Focus on Manufacturing To remain globally competitive, education and worker training strategies must Two federal programs in particular be at the top of the national priority list. exist to provide funding to small busi- The administration successfully passed the nesses to pursue R&D: the Small Business No Child Left Behind Act in 2001, and is Innovation Research (SBIR) and Small now working to fully implement this Business Technology Transfer (STTR) pro- landmark education reform. The adminis- grams. While results to date have been tration is also investing $1 billion over unclear, these programs can be a catalyst five years to improve math and science for greater innovation within small manu- education. facturing enterprises. SBIR and STTR In addition, under President Bush’s should place a higher priority on manu- leadership, the Departments of Commerce facturing R&D topics that would greatly and Labor have worked together through- leverage innovation in small and out the country to link workforce devel- medium-size manufacturing companies. opment efforts with economic develop- Explore New Avenues for ment efforts. Important initiatives include Leveraging the Unique the Department of Commerce’s Economic Capabilities of U.S. National Adjustment Program and the Department Laboratories and Universities for of Labor’s new 21st Century Workforce the Benefit of Small and Medium- Initiative, which strive to strengthen re- sized Manufacturers training systems that maintain the U.S. skills advantage in manufacturing. The The National Institute of Standards Department of Labor’s Employment and and Technology, in collaboration with Training Administration invests approxi- other federal agencies, and national labo- mately $10 billion a year in an array of ratories, should explore the opportunity workforce investment programs. for establishing cooperative research pro- Building on that record should take grams on innovative manufacturing tech- the form of the steps set out below. nologies among national laboratories, universities, the SBIR program, community Enhance Workforce Skills colleges, and state and local technology- Essential for Employment in development associations. The objective Manufacturing Enterprises of the should be to develop a working model of Future such arrangements that would provide the Manufacturers across the country rapid diffusion of research successes into raised significant concerns about whether the private sector, provide access for small America was training the next generation entrepreneurial businesses to sophisticated of workers required to meet the needs of research tools, and provide training op- an increasingly high-tech workplace as portunities, such as for future nanotech- well as to develop the manufacturing in- nologists and nanomanufacturers. The dustries of the future. There was clear sup- current pace of technological change port for the development of improved vo- places a premium on expediting such ini- cational/technical training at both the tiatives. NIST should report its findings to secondary and post-secondary level, as the Secretary of Commerce in 2004. well as for programs designed to improve

MANUFACTURING IN AMERICA 71 the skills of career-changing adults inter- In the near term, Congress should ested in manufacturing jobs. There was enact the Secondary and Technical Educa- also support for improvements in basic tion Excellence Act to provide high-qual- math and science education, such as the ity technical education at the community current five-year, $1-billion initiative for a college level. This law would ensure that new math and science partnership pro- students learn the necessary skills to gram that will strengthen math and sci- make successful transitions from high ence teaching and education at all levels. school to college and from college to the It is important to define the starting workforce. It would provide funding, point for improving the skills and prepara- through the Department of Education, tion of the U.S. workforce. Toward that for states to identify technical programs end, the Department of Labor, in conjunc- of study linked to high-wage, high-skill tion with the Departments of Commerce careers that could be adopted by commu- and Education, should undertake a bench- nity colleges in cooperation with local mark analysis of the existing skills of the high schools. U.S. workforce and the future needs of the Establish a High School and U.S. manufacturing sector. The effort Technical Education Partnership should be designed to inform both pro- Initiative grammatic changes at the federal level and suggestions for curricula at the local level. Congress should pass legislation cre- The analysis should address ways that ating a coordinated high schools and federal programs that support basic educa- technical education improvement pro- tion for elementary and secondary stu- gram, utilizing secondary and technical dents will prepare them to enter the work- education state grants, as proposed in the force without the need for significant president’s budget for fiscal year 2004. remedial education. The analysis should This program would provide high-quality catalog the basic academic skills needed technical education through partnerships for individuals entering the manufactur- between high schools and postsecondary ing workforce and assess the extent to institutions. Such an initiative, adminis- which primary and secondary education tered by the Department of Education, in the United States provide those skills. would support secondary and postsec- The second step in the analysis goes ondary career and technical education to the specialized training needed to suc- programs in high-demand occupational ceed in the manufacturing environment areas. The high school component would of the future. Historically, U.S. schools, include a challenging academic core to particularly in secondary education, pro- ensure that students in the program meet vided a number of opportunities for voca- state achievement standards and obtain a tional training. Over time, these opportu- clear pathway to further education be- nities have declined, and the educational yond high school, through apprenticeship system has relied more heavily on special- or postsecondary technical certificates and ized vocational-technical schools, at both associate or baccalaureate degree pro- the secondary and post-secondary level, to grams. Such an initiative will ensure that fill in the gap. The analysis should exam- students are being taught the necessary ine whether the existing system of voca- skills to make successful transitions from tional-technical education is sufficient to high school to college and college to the meet the needs of the U.S. manufacturing workforce. sector and should propose recommendations for change where needed.

72 U.S. DEPARTMENT OF COMMERCE Establish Personal Reemployment What is needed is an interagency Accounts federal task force, chaired by the Assistant In any period of economic adjust- Secretary of Commerce for Economic De- ment, the most significant challenge is velopment, to coordinate the efforts of how best to ensure that workers who lose relevant federal agencies, particularly the their jobs can successfully re-enter the Departments of Labor and Education, in workforce. The federal and state govern- addressing the structural economic chal- ments provide a number of programs de- lenges faced by manufacturing-dependent signed to help workers find new jobs with communities. The task force would en- training and re-employment assistance. sure that all federal agencies work to- Toward that end, President Bush has gether, coordinating resources and strate- proposed a Personal Reemployment Ac- gies to best provide a range of assistance count initiative to assist Americans who to eligible communities. More specifi- need the most help getting back to work. cally, the task force would provide a This innovative approach to worker ad- means of rapid response, identifying justment would offer accounts of up to communities where the employment base $3,000 each to eligible individuals to pur- is substantially dependent on only a few chase job training and key services, such manufacturing companies and the com- as child care and transportation, to help munities that are at a significant risk of them look for a job and get back to work economic dislocation. quickly. As a further incentive, recipients Given that early intervention and would be able to keep the balance of the planning are critical for communities at account as a cash reemployment bonus if risk, the first step the task force should they become reemployed within 13 take is to identify criteria for determining weeks. The Bush administration has in- when a rapid response is needed. The task cluded Personal Reemployment Accounts force would then work with the commu- in its legislative proposal to reauthorize nities identified under these criteria to and reform the Workforce Investment Act. develop market-based development policies that seek to retain manufacturing Coordinate Economic Adjustment jobs in a community, while beginning for Manufacturing Communities the efforts to diversify the economic base Communities are hard hit when local of the community. manufacturing declines, particularly when Improve Delivery of Assistance for a local factory accounts for much of the and Retraining of Displaced employment in a city or town. Just as in- Workers dividuals may need retraining to reenter the workforce, communities must, at The challenges unfolding in manu- times, develop alternative bases of eco- facturing and in the job market represent nomic development. a significant change from years past. In- The federal government already has a stead of individual industries facing par- number of programs available that can be ticular adjustment issues due to stronger used to develop the competitiveness of import competition, the U.S. economy in communities and support innovation in general is adjusting to fundamental manufacturing. The challenge for commu- changes underway in the world economy. nities often involves sorting out the pur- While that process is particularly acute in poses and requirements of those federal the manufacturing sector, it extends programs and how they might best be em- broadly throughout the U.S. economy. ployed or tailored to local circumstances.

MANUFACTURING IN AMERICA 73 Current worker adjustment programs, electronics, motor vehicles, communica- in general, take one of two forms. The tions equipment, aerospace, plastics and first involves the traditional suite of un- pharmaceuticals. These sectors, and the employment insurance and related pro- manufacturing industry in general, are grams that are designed with the individ- undergoing a transformation as a result of ual worker in mind. That individual’s technological advances, requiring workers employment prospects may or may not be to adopt and perform new skills. Through related to more fundamental changes un- collaborative efforts, the High Growth Job derway in the economy. The alternative Training Initiative will identify those skills form is the suite of trade adjustment assis- and work with institutions to develop suc- tance programs that fund extended unem- cessful training models. ployment and retraining for eligible work- In addition, Congress must pass the ers. Here, eligibility is defined in terms of Bush administration’s plan to strengthen whether the employee can point to some the Workforce Investment Act. Annually, direct trade impact that has displaced him the Department of Labor spends $15 bil- or her from a job. lion on the nation’s “One-Stop” employ- Neither of the current programs fully ment and job training system. Over 3,800 addresses the sort of adjustment under- One-Stop centers provide services that en- way in today’s economy. What that calls able workers to transform their skills in for is a fundamental reassessment of both order to gain employment in emerging types of programs to see how they might and growing industries. The administra- best be integrated into a coordinated ap- tion is seeking to strengthen this system proach to adjustment, reemployment, and through the re-authorization of the Work- retraining. Toward that end, the Com- force Investment Act. Among the changes merce and Labor Departments, with the sought are to make funding more accessi- assistance of the Department of Educa- ble through consolidation, to make the tion, should review the existing programs system more responsive to business needs, and provide recommendations on how and to strengthen accountability. best to integrate them into a coherent program that is dedicated to addressing the needs of workers affected by the ongoing adjustment in the rapidly changing economic environment. This effort should build on the work currently underway through the Labor Department’s High Growth Job Training Initiative. That initiative facilitates collaboration among employers, industry leaders, business associations, educators, community and technical colleges, and the public workforce system to tailor training programs to meet local workforce needs. As part of this initiative, the Depart- ment of Labor is working with the manufacturing industry and others to conduct a nationwide review of workforce challenges. Key manufacturing sectors include

74 U.S. DEPARTMENT OF COMMERCE Promoting Open Markets President Bush has taken the lead in and a Level Playing Field promoting economic growth and open trade among America’s trading partners. American manufacturers support an The coming year presents a number of sig- open trading system in which both they nificant opportunities to reinforce that ef- and their competitors face the same rules. fort, including G7 finance ministers’ Leveling the playing field internationally meetings, the G8 economic summit that will require a three-part strategy: the United States will host in June 2004, 1. It will require the encouragement and the prospect of concluding trade of economic growth and the pursuit of agreements with a number of significant trade agreements that eliminate barriers to U.S. trading partners. exports of U.S. manufactured goods. As President Bush has indicated, the 2. The strategy should include the ag- goals of raising growth and increasing sta- gressive enforcement of current trade bility can best be accomplished in an inter- rules, particularly in the context of the national financial system that relies on the World Trade Organization, to ensure com- principles of free trade, free capital flows, pliance. and market-based flexible exchange rates 3. It should reinforce current efforts among the major economies. to promote exports of U.S. manufactured In addition, the following steps goods and services in growing foreign should be taken: markets. Increasingly, those efforts must be adapted to the needs of U.S. manufac- Encourage the Growth and Development turers and service providers, particularly of Foreign Capital Markets small and medium-sized businesses, by fo- Efficiently functioning capital mar- cusing on their ability not just to enter kets are key to promoting economic foreign markets, but also to become a part growth. The United States should pro- of global supply chains. mote market-based prices and interest The following recommendations rates, including the phase-out of govern- build on President Bush’s strong commitment subsidies and directed lending, in ment to ensure free and fair trade. They order to allocate capital more efficiently, represent a further step toward fulfilling raise productivity, and encourage eco- the three-part strategy outlined above. nomic growth. Encourage Economic Growth and Negotiate Liberalization of Markets for Open Trade and Capital Markets Financial Services in All Trade Agreements Abroad Consistent with the Bush administra- One of the key features hampering tion’s proposal in the ongoing WTO nego- both the prospects for a stronger recovery tiations, the United States should press for in U.S. manufacturing and ensuring a bet- the elimination of all barriers to trade in ter balance in U.S. trade is the slow eco- financial services within the WTO and as nomic recovery among many major U.S. a part of any bilateral or regional free trading partners. The United States should trade arrangement, subject to prudential encourage the adoption of growth-ori- measures. Removing such barriers and in- ented economic policies as a means of troducing competition to the markets for spurring growth and expanding markets financial services not only creates new for U.S. manufacturers. market opportunities for U.S. services companies that serve U.S. manufacturers,

MANUFACTURING IN AMERICA 75 but also serves as a necessary predicate for Negotiate the Elimination of Trade- efficiently functioning capital markets distorting Subsidy Practices that are key to economic growth. Current international trade rules prohibit export subsidies, but they do not Negotiate Trade Agreements That limit the means by which governments Benefit U.S. Manufacturers can confer a competitive advantage by Most manufacturers believe that the subsidizing production at home. In future most effective step that the U.S. govern- trade agreements, the United States ment can take to promote a level playing should pursue the approach adopted by field is to eliminate the barriers that in- the administration in the context of WTO hibit market access for U.S. exports and to negotiations that seek to expand the exist- discipline the unfair trade practices that ing prohibitions to include a broader other countries use to afford their firms range of subsidies as well as strengthen an unfair competitive advantage in the the rules against government financing of global marketplace. They also understood the private sector, including government that doing so means strengthening en- involvement in, or distortion of, capital gagement in the process of trade negotia- markets that insulate foreign firms from tions with America’s trading partners. competition. In particular, future negotia- The following steps would ensure tions should pursue the elimination of the that such negotiations focus on what border adjustability of indirect taxes to counts for U.S. manufacturing: address the disadvantages to countries re- Pursue the Elimination of Foreign Tariff lying primarily on direct taxes. and Non-tariff Barriers to Exports of U.S. Enhance the Effectiveness of Trade Manufactured Goods Enforcement Tools Among the highest priorities estab- As the Bush administration has done lished by Congress in passing trade pro- in the context of the WTO negotiations, motion authority was the elimination of the United States should seek improve- tariff and non-tariff barriers to the export ments in the tools available for the en- of U.S. manufactured goods through bilat- forcement of trade agreements. Dispute eral, regional, and multilateral agree- settlement procedures should encourage ments. The Bush administration’s pro- the prompt resolution of disputes, as well posal on non-agricultural market access in as a reading of trade agreements that is the context of the ongoing WTO negotia- consistent with the negotiators’ intent. tions represents a model to be pursued in The administration should also pursue all negotiations. It would ensure the elim- (within the WTO, bilateral or regional ination of all tariffs on manufactured free trade arrangements, and other fora goods worldwide, thereby eliminating the such as the current steel negotiations un- current disparity between U.S. tariff levels derway in the Organization for Economic and higher tariffs imposed by major trad- Cooperation and Development) stronger ing partners on manufactured goods. Pur- mechanisms for countering trade prac- suing a counterpart strategy for non-tariff tices that are not subject to existing or fu- barriers is essential, particularly in indus- ture trade disciplines. tries like the automotive sector, where tariff barriers are already relatively low and non-tariff measures have become a significant means of barring U.S. access to foreign markets.

76 U.S. DEPARTMENT OF COMMERCE Enforce U.S. Trade Agreements would involve the aggressive investigation and Combat Unfair Trade Practices of allegations of theft of intellectual prop- Affecting U.S. Manufacturers erty that would violate commitments American manufacturers are entitled made under TRIPS or similar provisions of to the benefits of the agreements that U.S. bilateral or regional agreements, particu- negotiators reach at the negotiating table. larly allegations in which American man- They are also entitled to the aggressive in- ufacturers are compelled to divulge intel- vestigation of unfair trade practices that lectual property as a condition of market undercut those agreements, even where access or investment. such actions are not subject to specific Establish an Office of Investigations and trade disciplines. Compliance within the Commerce There are a variety of ways in which Department U.S. trade agencies could improve their Congress created the position of As- approach to the enforcement of trade sistant Secretary of Commerce for Market agreements and their response to foreign Access and Compliance in order to im- unfair trade practices. They include the prove the Commerce Department’s focus following steps: on compliance with trade agreements as Reinforce the Efforts of the National well as on their negotiation. The Assistant Intellectual Property Enforcement Secretary works closely with the USTR and Coordination Council the Trade Policy Staff Committee agencies To the extent that U.S. investment in to identify and pursue the elimination of research and development provides a foreign trade practices that violate U.S. competitive edge in the marketplace, the trade agreements or distort markets to the protection of the intellectual property de- disadvantage of American manufacturers veloped by U.S. manufacturers, which em- and other sectors of the U.S. economy. To bodies the product of that research, be- improve the Commerce Department’s comes critical to the future of the ability to support the USTR and investi- manufacturing sector. The National Intel- gate allegations of trade agreement viola- lectual Property Enforcement Coordina- tions and market-distorting practices, the tion Council—made up of the Commerce Assistant Secretary for Market Access and Department (including the USPTO), the Compliance should establish an office of United States Trade Representative, the investigations and compliance. That office Bureau of Customs and Border Protection, should be staffed with skilled investigators and the Department of Justice—is respon- trained in the development of the factual sible for ensuring a coordinated approach basis for potential enforcement action, to such efforts. It is time to reinforce the particularly in those areas that have a sig- council’s mission in two important re- nificant effect on market access for U.S. spects. The first should be to promote the manufactured goods. protection of U.S. intellectual property Establish a Task Force within the abroad by expanding cooperative efforts Commerce Department’s Import with developing country trading partners Administration to Pursue the to encourage the full implementation of Elimination of Foreign Unfair Trade their obligations under the WTO’s Agree- Practices ment on Trade Related Aspects of Intellec- Foreign unfair trade practices that tual Property (TRIPS). One measure could distort markets represent a unique subset include the placement of U.S. intellectual property experts within certain countries to provide in-country support. The second

MANUFACTURING IN AMERICA 77 of trade barriers. Current trade arrange- Reinforce Efforts to Promote the ments have significantly reduced the visi- Sale of American Manufactures in ble tariff and non-tariff barriers to trade Global Markets worldwide. They do not, however, in U.S. exports of manufactured goods every instance, impose disciplines on have fallen significantly in the past two other forms of intervention in markets, years. Although the pace of economic such as subsidies, that governments may growth abroad appears to be accelerating, use to confer a competitive advantage on an expanded export promotion strategy their firms. Unchecked, such actions not should help ensure U.S. manufacturers only can injure U.S. manufacturers, but have access to foreign markets that U.S. also can significantly undercut the bene- negotiators have opened. The following fits of the trade agreements for U.S. pro- steps are designed to both improve the co- ducers while undermining support for the ordination of and accountability for U.S. global trading system in general. export promotion activities, as well as to The existing international trade rules, focus those efforts in a way that is consis- as well as their counterparts in U.S. law, tent with the current challenges facing generally require that an industry prove U.S. exporters of manufactured goods. The injury from unfair trade practices in the recommendations include: context of either an antidumping or countervailing duty action before the U.S. Enhance the U.S. Government’s Efforts on Behalf of U.S. Manufacturing by government can take remedial action on Consolidating Commerce Department its behalf. Furthermore, antidumping and Export Promotion Functions countervailing duties at best only act indi- Consolidation of all Commerce De- rectly to help eliminate the underlying partment export promotion functions unfair trade practices at the heart of U.S. under a new Assistant Secretary for Trade industry’s complaints. Promotion, who would serve concurrently The Assistant Secretary for Import as the director general of the Commercial Administration should form a task force Service, would represent a solid first step to investigate allegations of such trade toward improving the promotion of ex- practices and develop a strategy for pursu- ports of manufactured goods in global ing their elimination. This would elimi- markets. That consolidation would im- nate the underlying distortions and prove coordination and ensure accounta- thereby reduce the use of anti-dumping bility for the implementation of the Na- and countervailing duty actions. As part tional Export Strategy. of that effort, the task force should review the implementation of current trade rem- Accelerate Implementation of the edy rules, such as the procedures govern- President’s National Export Strategy ing new shipper reviews. The Commerce Consistent with the legislation creat- Department should further establish an ing the Trade Promotion Coordinating office within Import Administration to co- Committee (TPCC), the administration ordinate cases involving non-market published a comprehensive approach to economies in order to develop an experi- improving the delivery of government ex- enced core of investigators familiar with port promotion services. The National Ex- the facts of such investigations and to en- port Strategy contains a series of innova- sure consistency in terms of the method- tions designed to improve the promotion ological approach. of U.S. exports. Given the sharp decline in U.S. exports in the recent past, the Com- merce Department, as chair of the TPCC, should accelerate the implementation of

78 U.S. DEPARTMENT OF COMMERCE those innovations to improve the achieve these objectives and to promote a prospects for American manufacturers private-sector based approach to standards seeking new markets abroad. development in other nations. The initiative should be accelerated and given a Implement a Global Supply Chain Initiative to Promote Access to the high priority by the various Commerce Global Marketplace Department offices involved. Manufacturers at every roundtable re- Update and Reauthorize U.S. Export inforced the importance of focusing on Control Laws access not just to export markets, but to Manufacturers in some sectors identi- global supply chains that would take fied U.S. export control laws as an impedi- American manufactured goods into the ment to their competitiveness in interna- international stream of commerce. The tional markets. Although necessary, such Commerce Department, in conjunction controls should be focused on truly sensi- with the TPCC, should develop and im- tive goods and technologies consistent plement a joint public-private global sup- with U.S. national security concerns. The ply chain initiative to promote access by United States should work to ensure that America’s small and medium-sized manu- such controls are applied uniformly by facturers into global supply chains. our multilateral export control regime As part of the initiative, the Com- partners. The administration should con- merce Department should assess the bene- tinue its support for the early passage of a fits of establishing new venues in major revised Export Administration Act that foreign commercial centers to enhance would take into account the changes in the services offered to U.S. exporters while technology and the international market- in the country and to provide for on-the- place, as well as defense-acquisition prac- ground expertise, including market re- tices. search capabilities. The administration should also re- Promote Global Recognition and Use of view the existing structure of the U.S. for- U.S. Technical Standards eign-trade zone program to determine how it could be enhanced to provide a One significant means of expanding greater incentive to manufacture in the the access of small and medium-sized U.S. United States. The Commerce Depart- manufacturers to global supply chains is ment, which is responsible for administer- to encourage the adoption of U.S. techni- ing the existing program, should do a cal standards in world markets for manu- benchmark analysis of how other coun- factured goods. With U.S. standards in tries make use of their foreign-trade zone place, a small or medium-sized U.S. manu- mechanisms to determine whether there facturer is, in effect, already “export are features of those programs that the ready,” saving the manufacturer from the U.S. government should consider imple- expense of satisfying more than one tech- menting, particularly as a means of lower- nical standard. Recognition and use of ing the cost of such programs for small U.S. standards would have the additional and medium-sized businesses in the benefit of reducing the ability of foreign United States. governments to use technical specifications as a means to bar access to their Notes markets for manufactured goods. Secretary 1 The research and experimentation tax Evans launched a global standards initia- credit is commonly referred to by manufactur- tive in spring 2003 that was designed to ers as the R&D tax credit. 2 President’s Council of Advisors on Science and Technology, Technology Transfer of Federally Funded R&D (Washington, D.C.: President’s

MANUFACTURING IN AMERICA 79 Council of Advisors on Science and Technol- 16 percent more growth in labor productivity ogy, May 2003). over a five-year period than similar non-client 3 The Manufacturing Extension Partnership firms. The productivity growth of the 1,559 was created with the enactment of the Om- firms studied translates into $484 million in ad- nibus Trade Act of 1988 (Public Law 100-418). ditional value-added at client firms. 4 Researchers at the Census Bureau’s Center 5 The Technology Administration Act of for Economic Studies found that manufacturing 1998 (Public Law 105-309). extension clients experienced between 3.4 and

80 U.S. DEPARTMENT OF COMMERCE Appendix List of Manufacturing Roundtables and Participants

Cynthia Johnson High Point, N.C., April 23, 2003 Agilent Technologies Industry focus: Juri Matisoo TEXTILES AND FURNITURE Semiconductor Industry Association Participants: Fred Nichols Keith Crisco National Association of Asheboro Elastics Manufacturers Diane Howell Kayser-Roth Corporation Willis Moore Rockford, Ill., May 12, 2003 Unifi, Incorporated Industry focus: Jerry Rowland HEAVY EQUIPMENT, TOOL National Textiles AND DIE, MACHINERY Anderson Warlick Participants: Parkdale Mills Eric Anderberg Dial Machine Corporation Bruce Braker San Jose, Calif., May 8, 2003 Tooling and Manufacturing Industry focus: Association of Chicago IT EQUIPMENT, Bob Brunner TELECOMMUNICATIONS, Illinois Tool Works COMPUTERS Thomas Burenga Worksave, Inc. Participants: Gerald Busse Bob Armistead Rockford Toolcraft, Inc. Aracor Michael Cayley Philip Fok MIDACO Corporation Solectron Allan Curran Daryl Hatano Royal Products Semiconductor Industry Association Lloyd Falconer Greg Hines Seward Screw Products Solectron

MANUFACTURING IN AMERICA 81 Mary Rose Hennessey Wells Lindsey NIU Biz Coalition for Manufacturing Manufacturing Service Corp. Michael Hetzel Nick Masi Americas for ProQC International Masi Associates Bill Hickey David Niven Lapp, Mickey Steel Corp. Dohnam Craft Phil James Steve Sasala Ingersol Production Co. Greater Waterbury Chamber of John Kaminski Commerce E.D. Etnyre & Company Mark Stuart Alan D. Kinsler National Association of Sellstrom Manufacturing Manufacturers Bill Lee Bruce Thompson Navagation Consulting Group Projects Incorporated Richard Lingus Joe Vrabely Rockford Consulting Group, Ltd. Atlantic Steel & Processing, LLC Mike Lynch Illinois Tool Works Manchester, N.H., May 29, 2003 Howard Newel Hammil Tool Industry focus: Alan Petrucci IT EQUIPMENT, BA Die Mold, Inc. TELECOMMUNICATIONS, Dan Provonsano COMPUTERS Teletool Manufacturing Participants: James J. Zawacki Raymond Boissoneau GR Spring & Stamping, Inc. Electropac Company Mark Buck Hypertherm Washington, D.C., May 20, 2003 Marc Giroux Industry focus: Corning, Inc. MACHINERY Kedar Gupta Participants: GT Equipment Technology Jay Carlson James (Giff) Kriebel G&R Manufacturing BAE Systems Richard Demsey Gerry Letendre Demsey Manufacturing Co., Inc. Diamond Casting & Machine Chris Gemino and Robert Heche Company Gaynor Electric Co., Inc. Hong Yu Bob Hawie Metrobility Optical Systems Hawie Manufacturing Frank Johnson Manufacturing Alliance of Connecticut George LaCapra Quality Rolling & Deburring Rich Larkin Brown Larking & Co., LLC

82 U.S. DEPARTMENT OF COMMERCE Len Poli Milwaukee, Wis., May 29, 2003 M. Carder Industries Industry focus: Kenneth Shead FOOD PROCESSING, IDS Boeing PACKAGING, HEAVY Don Wainwright EQUIPMENT Wainwright Industries Participants: James Buchen Wisconsin Manufacturers and Summit, N.J., June 30, 2003 Commerce Industry focus: Mark Hardwick PHARMACEUTICALS, P&H Mining Equipment BIOTECHNOLOGY Joe Morrissey Participants: Conflex, Inc. Joseph Cherry Rick Patek CR Bard Telsmith, Inc. Joe Fusco Steven Polonowski Novus Fine Chemicals Krones, Inc. Stephen Greene Steve Tyler G&W Laboratories CNH William Healy Mike White Health Care Institute of New Jersey Rite-Hite Corporation Michael Katz Cenogenics Christian Schade St. Louis, Mo., June 13, 2003 Medarex Industry focus: CHEMICALS, AVIONICS, BIOTECHNOLOGY Washington, D.C., June 24, 2003 Participants: Industry focus: Bill Bachman MANUFACTURING IN 2020 Bachman Machine Company Participants: Robert Burns Arden Bement Patriot Machine NIST, Department of Commerce Stewart Dahlberg Ron Blackwell J.D. Street & Co. AFL-CIO Gerald Daniels Cary Crouse Engineered Support Systems Delphi, Inc. Kimberly Hayden Tom Duesterberg Supreme Tool & Die Manufacturers Alliance/MAPI Ray McCarty Steven Empedocles Missouri Chamber of Commerce Nanosys, Inc. and Industry Juan Enriques-Cabot Mike Mittler Harvard Business School Mittler Brothers Machine & Tool Company Terry Lisenby Nucor Steel, Inc. Martha Morris IBM

MANUFACTURING IN AMERICA 83 Leo J. Reddy Steve Prout National Coalition for Advanced Alpha Q Manufacturing John Salce Ross E. Robson Hygrade Precision Technologies Shingo Prize for Excellence in Bruce Thompson Manufacturing Projects, Inc. George Scalise Semiconductor Industry Association Amram Shapiro Los Angeles, Calif., July 7, 2003 Pittiglio, Rabin, Todd & McGrath Industry focus: William Strauss Federal Reserve Bank of Chicago MINORITY-OWNED AND Michael Tieman SMALL MANUFACTURERS Red Hat Software Participants: Tim Timken, Jr. Candance Chen Timken Corporation Power Clean 2000, Inc. Bruce Tompkins Maria de Lourdes Sobrino Institute of Industrial Engineers Lulu’s Dessert Frank Vargo Frank Villalobos National Association of Barrio Planners, Inc. Manufacturers Linda Wong Jim Zawacki Community Development FR Spring and Stamping Technologies Center John Zysman University of California at Berkeley Columbus, Ohio, July 8, 2003 Industry focus: New Britain, Conn., July 7, 2003 METALS, TIRES, PLASTICS Industry focus: Participants: AEROSPACE, MACHINERY Lowell Dunckel Participants: Goodyear Lou Auletta Steve Giangiordana Bauer, Inc. RTI International Metals Murry Gerber Mitchell Hecht National Association of International Steel Group Manufacturers, Small and Medium Robert Stevens Manufacturers Group Impact Forge Frank Johnson John Vaught Manufacturing Alliance of Tri-Cast Connecticut Bill Lee The Lee Company Mick Mauer Sikorsky Aircraft Group Ted Malkowski Continental Machine Company Al Mulvey Pratt & Whitney

84 U.S. DEPARTMENT OF COMMERCE Trenton, N.J., July 8, 2003 Detroit, Mich., July 9, 2003 Industry focus: Industry focus: CHEMICALS AUTOMOTIVE PARTS Participants: SUPPLIERS Ashok Balar Participants: Clariant Corporation Christopher Bates Hal Bozarth Motor & Equipment Manufacturers Chemical Industry Council of New Association Jersey Jason Brewer W. Dexter Brown E&E Manufacturing National Starch and Chemical Ron Cutter Company TRW Automotive William Fee Neil DeKoker Magnesium Elektron, Inc. Original Equipment Suppliers Ron Fenn Association Polarome International Sylvia Vogt Charles A. Lynch Robert Bosch Corporation New Jersey Commerce and John Voorhorst Economic Growth Committee Denso International Roger Madden Church & Dwight Salvatore Monte Washington, D.C., July 10, 2003 Kenrich Petrochemical, Inc. Industry focus: Ron Munson Church & Dwight FOUNDRY Participants: Gerald Pechulis Valero Energy Michael Beyersdorfer Sawbrook Steel Casting Company Gene Reinhardt Dow Chemical G. Edward Curtis Harrison Steel Casting Company Jeff Stoller New Jersey Business and Industry Shane Downey Association American Foundry Society Ed Van Ek Jim Lajeunesse C.J. Holt Bronze Craft Jim Mallory Non-Ferrous Founders Society Bill Martin Neenah Foundry Joe Mayer Copper Brass Fabricators Council Raymond Monroe Steel Founders Society Russell Symmes Aluminum Foundries Fred Wilton Wilton Armetale Company

MANUFACTURING IN AMERICA 85 Chicago, Ill., July 10, 2003 Minneapolis, Minn., July 14, 2003 Industry focus: Industry focus: HIGH TECHNOLOGY MEDICAL DEVICES Participants: Participants: Shail Godambe Daniel B. Garry Motorola, Inc. 3M Anthony Hilvers Keith Guggenberger IPC Starkey Labs Richard Paullin Stephen Oesterle Illinois District Export Council Medtronic Inc. Candy Renwall Marge Searing Chicago Software Association Advanced Medical Technology Ramesh Seth Association S.I. Tech, Inc. Phillip Vierling Mike Skarr EMPI Naperville Chamber of Commerce Paul J. Wagner Robert Weskamp Minnesota Wire and Cable Wes-Tech, Inc. Ray Willis Zuchem, Inc. New Orleans, La., July 22, 2003 Industry focus: ENERGY, ELECTRICITY, Des Moines, Iowa, July 11, 2003 OIL AND GAS EQUIPMENT Industry focus: Participants: GENERAL Guy Barone MANUFACTURING Xenetech, Inc. Participants: Chris Bollinger Ralph Burchfield Bollinger Shipyards, Inc. Firestone Tires Murphy Bourke Daniel B. Garry Gulf Island Fabrication 3M William Coyle Alan Oak Bilco Tools, Inc. Goodrich Leo Guidroz Bob Jennings Oil Stop, LLC EFCO Von Hatley Christopher Nelson Louisiana Department of Economic Kemin Industries Development Rick Kelly Pellerin Milnor Corporation Allen Porter Allen Process System

86 U.S. DEPARTMENT OF COMMERCE Brett Reagan Washington, D.C., Aug. 14, 2003 Point Eight Power, Inc. Industry focus: Rodder Russo Stabil Drill Specialties WORKFORCE AND Arthur Zatarain EDUCATION TEST Automation & Controls Participants: Sandra Carney-Talley Aerospace Industries Association Washington, D.C., July 24, 2003 Edward Dooley Industry focus: Air-Conditioning and Refrigeration AUTOMOBILE Institute MANUFACTURING Phyllis Eisen National Association of Participants: Manufacturers Edward Cohen James Hughes Honda Northrop Grumman Steve Collins Steven Mandes Automotive Trade Policy Council National Institute for Metalworking Josephine Cooper Skills Alliance of Automotive Dan Meckstroth Manufacturers Manufacturers Alliance Marie Kissel Branka Minic DaimlerChrysler Manpower, Inc. Curt Magleby Tony Raimondo Ford Motor Company Behlen Manufacturing Tim McCarthy Michael Smeltzer Association of International Manufacturers Association of South Automobile Manufacturers Central Pennsylvania Mustafa Mohatarem Richard Walker General Motors National Tooling and Machining Harland Reid Association Nissan Doug West Toyota

MANUFACTURING IN AMERICA 87 Ft. Lauderdale, Fla., Aug. 19, Washington, D.C., Sept. 5, 2003 2003 Industry focus: Industry focus: FOREST PRODUCTS AEROSPACE Participants: Participants: George Glatfelter II Carlon Aaron Glatfelter Company Hialeah Metal Spinning Donna Harman Dan Becker American Forest and Paper Boeing Association Reynaldo Blanco Kenneth Jastrow II Florida Air Transport Temple-Inland, Inc. Stan Bodner John A. Luke, Jr. Greater Miami Aviation Association MeadWestvaco Corporation Ken Cooksey Henson Moore Enterprise Florida American Forest and Paper Association Michael Fatig Honeywell, Inc. Arnold M. Nemirow Bowater, Inc. Ken Krauter New Port Director Bill Lewandowski Aerospace Industries Association Sam Plummer GEAR Technologies Jim Roubian HEICO Corporation Kenneth Sitomer VHL Aircraft Inc. Al Stimak Metal Essence James Swanson Swanson Tool

88 U.S. DEPARTMENT OF COMMERCE