Testimony

Manufacturing in the USA: How U.S. Trade Policy Offshores Jobs

Joint Economic Committee
United States Congress

Introduction1
Too many U.S. policymakers, from Capitol Hill to the various executive branch agencies in Washington, tend to focus on foreign policies and foreign barriers when considering how best to improve the competitive prospects for U.S. firms. The presumption is that the major impediments to the success of U.S. firms are foreign born. Closed foreign markets, complex laws and regulations, overt flaunting of the trade rules, subtle protectionism, and unfair trade are the primary culprits that subvert the success of U.S. firms, discourage investment and hiring, and encourage offshoring of production. Indeed, that is the premise of today’s hearing, as inferred from its description on the Committee’s website.

But that premise is myopic and, frankly, irresponsible. It reinforces arguments for nonsensical policies, such as preserving our own barriers to trade and investment, which are nothing more than costs to U.S. businesses and families. Policies that raise the cost of doing business in the United States — such as our tariff regime and the trade remedies duties that the U.S. government imposes on broad swaths of industrial inputs — encourage manufacturers to at least consider moving operations abroad, where those materials are available at better prices.

Governments are competing for business investment and talent, which both tend to flow to jurisdictions where the rule of law is clear and abided; where there is greater certainty to the business and political climate; where the specter of asset expropriation is negligible; where physical and administrative infrastructure is in good shape; where the local work force is productive; where there are limited physical, political, and administrative frictions. This global competition in policy is a positive development. But we are kidding ourselves if we think that the United States is somehow immune from this dynamic and does not have to compete and earn its share with good policies. The decisions made now with respect to our policies on immigration, education, energy, trade, entitlements, taxes, and the role of government in managing the economy will determine the health, competitiveness, and relative significance of the U.S. economy in the decades ahead.

Policymakers and Media Mislead the Public about Trade and its Benefits
We live in a globalized economy where more and more U.S. jobs depend upon transnational collaboration — through integrated supply chains and cross-border investment. Most Americans enjoy the fruits of international trade and globalization every day: driving to work in vehicles containing at least some foreign content; communicating, shopping, navigating, and recreating on foreign-assembled smart phones; having higher disposable incomes because retailers like Wal-Mart, Best Buy, and Home Depot are able to pass on cost savings made possible by their own access to thousands of foreign producers; earning paychecks on account of their companies’ growing sales to customers abroad; and enjoying salaries and benefits provided by employers that happens to be foreign-owned companies. Nearly 6 million Americans work for foreign subsidiaries in the United States.

Still, too many Americans are of the view that exports are good, imports are bad, the trade account is the scoreboard, the trade deficit means the United States is losing at trade, and it is losing because our trade partners cheat. Many point to the trade deficit as the obvious explanation for the much exaggerated death of U.S. manufacturing. According to polling data, Americans are generally skeptical about trade and its impact on jobs, manufacturing, and the U.S. economy. And come to think of it: why shouldn’t they be? After all, the public is barraged routinely with misleading or simplistic coverage of trade issues by a media that is too often heavy on cliché, innuendo, and regurgitated conventional wisdom, and lacking in analytical substance or balance. And demagogic politicians only fan the flames of misconception and misgiving.

The Obama administration has not been particularly helpful about correcting these misperceptions. In fact, the president is prone to using these scoreboard metaphors to describe trade, exhorting U.S. exporters to “win the future” or to secure foreign market share before other countries’ firms get there or to beat the Chinese in developing this technology or that. This encouragement, with its incessant emphasis on exports as the benefits of trade and imports as its incidental costs, only reinforces the misconception that trade is a zero-sum game with distinct winners and losers. But trade does not lend itself to scoreboard metaphors because both parties to a trade are made better off. There are no losers, else the transaction wouldn’t occur.

Policy Myopia
The centerpiece of the administration’s almost indiscernible trade policy is the National Export Initiative, with its goal of doubling U.S. exports over five years (to $3.12 trillion by the end of 2014). That would be fine, except that nowhere in the administration’s 68-page plan to double exports is the word “import” mentioned, except with respect to the section that speaks about strengthening the trade remedies laws to better discipline “unfair” imports. Some of the components of the NEI — such as streamlining U.S. export control procedures and concluding and signing trade agreements — are laudable ideas. But the plan is simply not good enough.

As currently executed, the NEI systemically neglects a broad swath of opportunities to facilitate exports by contemplating only the export-oriented activities of exporters. It presumes that U.S. exporters are born as exporters. But they are not. Before those companies are exporters, they are producers. And as producers, they are subject to a host of domestic laws, regulations, taxes, and other policies that handicap them in their competition for sales in the U.S. market and abroad.

According to a World Economic Forum survey of 13,000 business executives worldwide, there are 52 countries with less burdensome government regulations than those of the United States. Those regulations impose additional costs on U.S. businesses that sell domestically and abroad. As put by Andrew Liveris, chairman and CEO of the Dow Chemical Company, “How we operate within our own borders, what we require of business here, often puts us at a competitive disadvantage internationally.” By neglecting these domestic impediments, the administration pretends that the obstacles to U.S. competitiveness and export success are all foreign-born.

The policy reform focus must be broadened to include consideration of the full range of home grown policies — such as taxes, regulations, tariff policy, and contingent protectionism — that affect U.S. producers and put them at a disadvantage vis-á-vis foreign competitors.

As producers first, most U.S. exporters are consumers of capital equipment, raw materials, and other industrial inputs and components. Many of the inputs consumed by U.S. producers in their operations are imported or the costs of the inputs are affected by the availability and prices of imports. Indeed, “intermediate goods” and “capital equipment” — items purchased by producers, not consumers — accounted for more than 55 percent of the value of all U.S. imports last year — and 57 percent through the first half of 2011. That fact alone indicates that imports are crucial determinants of the profitability of U.S. producers and their capacity to compete at home and abroad. Yet the NEI commits not a single word to the task of eliminating or reducing the burdens of government policies that inflate import prices and production costs.

The president exhorts U.S. exporters to “win” a global race, yet he ignores the fact that the government’s hodgepodge of rules and regulations has tied their shoes together.

If the administration were serious about helping U.S. companies become more competitive and making the NEI a long-lasting institution committed to U.S. international competitiveness, it would compile an exhaustive list of laws, regulations, policies, and practices that are undermining the stated objectives of increased competitiveness, economic growth, investment, and job creation through expanded trade opportunities.

Near the top of that list would be America’s self-flagellating treatment of imported intermediate goods and other industrial inputs required by U.S. producers to make their final products. Last year, U.S. Customs and Border Patrol collected $32 billion in duties on $2 trillion of imports, over $1 trillion of which were ingredients for U.S. production — such as chemicals, minerals and machine parts. Normal tariffs and special trade remedies duties (i.e., antidumping and countervailing duties) added roughly $15-20 billion to the overall price tag, which would have been even higher had companies not been compelled to shutter domestic operations and, in some cases, relocate abroad on account of the higher input costs.

President Obama understands this dynamic. Last year, when signing into law the Manufacturing Enhancement Act of 2010 (a bill to temporarily reduce or eliminate duties on certain imported raw materials) the president said:

The Manufacturing Enhancement Act of 2010 will create jobs, help American companies compete, and strengthen manufacturing as a key driver of our economic recovery. And here’s how it works. To make their products, manufacturers — some of whom are represented here today — often have to import certain materials from other countries and pay tariffs on those materials. This legislation will reduce or eliminate some of those tariffs, which will significantly lower costs for American companies across the manufacturing landscape — from cars to chemicals; medical devices to sporting goods. And that will boost output, support good jobs here at home, and lower prices for American consumers.

Yet, the president’s National Export Initiative contains provisions to “strengthen” the antidumping law, which will further frustrate domestic producers’ access to imported inputs.

Antidumping Reform Would Encourage Domestic Investment and Hiring
The U.S. antidumping law still enjoys support in Congress and within pockets of the executive branch. Although some of that support can be chalked up to politicians representing the narrow interests of influential constituencies that have mastered the use of the antidumping and its highly misleading rhetoric, much more support stems from a fundamental misunderstanding of the purpose, history, mechanics, and consequences of the law.

Too many policymakers passively accept the anachronistic rationalizations proffered by the steel industry, labor unions, other big antidumping users, and their hired guns in Washington. Too many buy into the idealized imagery of a patriotic, upstanding American producer working tirelessly to ensure the preservation of well-paying jobs for hard-working Americans, but is suffering the ravages of unscrupulous, predatory foreign traders intent on destroying U.S. firms and monopolizing the U.S. market.

What politician could oppose a law presumed to protect that kind of a company against that kind of a scourge? But that is really a caricature, a myth. When the curtain is peeled back to expose the operation of the antidumping law, one can see a very different reality. Antidumping measures always raise the costs of firms in downstream industries that rely on the affected imports, and always claim domestic firms as victims. The law is often used as a tool by domestic firms waging battle for supremacy over other domestic firms, completely defying the foundational “us vs. them” premise upon which the AD status quo has come to rest. Sometimes foreign-owned firms are the petitioners and U.S-owned firms are the respondents. Rarely do antidumping restrictions lead to job creation or job restoration in the domestic industry, which is the most common claim of those seeking protection. And never is the allegation of “unfair trade” substantiated, or even investigated. Myth and misinformation explains the persistence of the U.S. antidumping regime.

In recent years, as U.S. producers of hot-rolled steel, saccharin, polyvinyl alcohol, nonmalleable cast iron pipe fittings, and silicon metal were “winning antidumping relief” from import competition and being liberated to raise prices, their U.S. customers — producers of appliances, auto parts, foodstuffs, pharmaceuticals, buildings, and solar panel components — were bracing for disruptions to their supply chains and inevitable increases in their costs of production.

In the period from January 2000 through December 2009, the U.S. government initiated 304 antidumping cases. Of those 304 initiations, final antidumping measures were imposed in 164 cases. Intermediate goods — inputs consumed by U.S. producers in the process of adding value to make their own downstream products — accounted for 130, or 79.3 percent of the decade’s antidumping orders. Yet, in none of those cases were firms in downstream consuming industries given a seat at the table. Under the statute, the authorities are required to ignore any potential impact of AD measures on downstream industries — and on the economy at large.

The 130 antidumping measures on intermediate goods can be broken out further to distinguish the 99 cases involving inputs used by manufacturers of goods and the 31 cases involving inputs used by non–goods-manufacturing producers, such as construction firms, utilities, and mining and drilling operations. Both sets of import-consuming producers suffer the costs and consequences of antidumping restrictions. Both pass some of those costs down the supply chain to the next level of consuming firms or end users in the form of higher energy costs, higher food prices, higher apartment and office lease rates, and higher input prices.

But the industries that rely on the inputs in the 99 manufacturing cases are those that are most likely to export. It is the companies in those industries which the president exhorts to “win the future.” It is those firms who are competitively disadvantaged at home and abroad on account of the wayward U.S. antidumping regime.

What is most striking about these cases is the asymmetry between the size and economic importance of the petitioning industry and the adversely affected downstream industries. For 35 of the 99 AD orders imposed on manufacturing inputs, the entire petitioning industry consisted of just one firm. Yet the ensuing trade restrictions affected dozens or hundreds of downstream firms in numerous industries. For example, in 2005, on behalf of a single producer, the U.S. government imposed antidumping measures on imports of a widely used industrial ingredient called purified carboxymethylcellulose (CMC) from Finland, Mexico, the Netherlands, and Sweden. CMC is an input for production processes in 17 downstream industries (according to USITC descriptions). Those combined industries accounted for $172 billion of exports and 2.6 million employees in 2010. In stark contrast, U.S. exports of CMC in 2010 amounted to only $35 million. Yet the tail wags the dog.

In 2003, on behalf of a sole domestic producer, antidumping duties were imposed on imports of the artificial sweetener saccharin from China. Saccharin has widespread uses in the production of various food and beverage products, pharmaceuticals and medicines, as well as cleaning compounds. U.S. producers in these downstream industries accounted for $249 billion in U.S. exports in 2010 and employed 1.9 million workers. Meanwhile, U.S. exports of saccharin in 2010 came to slightly more than $7 million.

The fact that a single U.S. producer of a crucial manufacturing input can prevail in its efforts to limit its customers’ access to alternative sources of supply should raise some eyebrows among policymakers. The fact that it is routinely the case that the antidumping law affords suppliers the ability to assert market power over their customers without any consideration of the economic consequences should be a wake-up call for those who fancy themselves stewards of sensible economic policy.

U.S. Foreign Trade Zones Encourage U.S. Production — Stop Undermining Their Appeal
Under the U.S. Foreign Trade Zones program, some of the costs inflicted on downstream, import-consuming firms can be mitigated. (Of course, the program wouldn’t be necessary if U.S. duties were recognized as just another cost of production and set, optimally, at zero.) Among the aims of the FTZ program is to encourage manufacturing activity in the United States (and to discourage manufacturers from shuttering domestic operations and moving offshore as a result of the burden of paying U.S. customs duties).

FTZs are usually manufacturing plants or facilities physically located within the United States, but considered outside U.S. territory for the purpose of customs duty payment. Goods that enter FTZs are not subject to customs duties (including antidumping or countervailing duties) until they leave the zone and are formally entered into the commerce of the United States. If those goods are used as inputs to a further manufacturing process, the rate of duty applicable to the final product is assessed. If the goods are exported from a FTZ, with or without further processing, no duties are imposed because the product never officially “entered” the United States.

With respect to products made from materials and components subject to AD or CVD duties, the standing regulations require FTZ operators to get advance approval from the Foreign Trade Zones Board if the intention is to sell those final products in the United States. That requirement does not apply when the final product is going to be exported from the FTZ, which provides some incentive to downstream U.S. firms to keep production in the United States by operating as a FTZ.

But now the Obama administration — at the behest of the antidumping petitioners’ bar and organized labor, and despite its own exhortations to U.S. companies to double exports, invest in America, and put Americans back to work — is proposing to seal off that channel of sanity and compromise. New regulations would require advance approval even if the final product was going to be exported.

The requirement of advance approval from the FTZ Board, which is administered within the Import Administration — the same agency at the Commerce Department that simultaneously assists protection-seekers in crafting their AD/CVD petitions, while gleefully implementing and administratively adjudicating the antidumping and countervailing duty laws — will tip the balance in favor of outsourcing production for many firms in many industries. Any benefits of continuing to produce in the United States will be diminish next to the rising costs and uncertainty of doing so.

Thus, companies like Dow Corning, which uses silicon metal to produce silicone components for solar panels, will have that much more incentive to shutter operations in Kentucky and set up shop in Canada or elsewhere, where silicon metal is available at lower world market prices, so that it can compete in foreign solar panel markets with Chinese, Japanese, Canadian, and European rivals.

Asking American firms to invest and hire, while simultaneously pushing policies to raise the cost of those activities, reflects either profound cynicism or incompetence.

Conclusion
At a time of growing concern over the competitiveness of U.S. firms, when even this administration claims to be looking for ways to streamline regulations and reduce other burdens on businesses so that they will invest and hire, it is hard to believe that reform of the U.S. tariff schedule, with its $20 billion burden on U.S. producers has been ignored. It is utterly absurd that antidumping reform has not only been overlooked, but that Commerce has proposed to strengthen the law as part of the NEI. Likewise, it makes no economic sense to subvert the purpose of the U.S. foreign trade zones program, which is intended to encourage domestic economic activity and to dissuade offshoring of production.

The fact is that antidumping measures, as well our normal MFN tariffs, represent a huge drag on the competitiveness of downstream, value-added U.S. producers and a subsidy to foreign downstream, valued-added producers. None other than U.S. Trade Representative Ron Kirk made that point in the U.S. WTO case against Chinese raw material export restrictions earlier this year. He said:

China maintains a number of measures that restrain exports of raw material inputs for which it is the top, or near top, world producer. These measures skew the playing field against the United States and other countries by creating substantial competitive benefits for downstream Chinese producers that use the inputs in the production and export of numerous processed steel, aluminum and chemical products and a wide range of further processed products.

These raw material inputs are used to make many processed products in a number of primary manufacturing industries…These products , in turn become essential components in even more numerous downstream products.

How can President Obama be serious about improving U.S. competitiveness when his Commerce Department is seeking to strengthen antidumping rules and the Foreign Trade Zones Board is moving to foreclose, or at least complicate, zone activities that use inputs subject to AD/CVD to make final products that are exported? How can we allow the president to throw nearly $100 billion in subsidies to solar, windmill, and lithium ion battery technology, while his policies make it more difficult to secure the necessary ingredients to produce and compete in those industries?

Let me conclude with an observation from the astute, mid-19th century French economics writer Frederic Bastiat. In 1850, he wrote:

Between Paris and Brussels obstacles of many kinds exist. First of all, there is distance, which entails loss of time, and we must either submit to this ourselves, or pay another to submit to it. Then come rivers, marshes, accidents, bad roads, which are so many difficulties to be surmounted. We succeed in building bridges, in forming roads, and making them smoother by pavements, iron rails, etc. But all this is costly, and the commodity must be made to bear the cost. Then there are robbers who infest the roads, and a body of police must be kept up, etc.

Now, among these obstacles there is one which we have ourselves set up, and at no little cost, too, between Brussels and Paris. There are men who lie in ambuscade along the frontier, armed to the teeth, and whose business it is to throw difficulties in the way of transporting merchandise from one country to the other. They are called Customhouse officers, and they act in precisely the same way as ruts and bad roads.

With no intended disrespect to CBP officers or employees — it’s only a personification of bad policy — this is what we have done. We have overcome the physical barriers — the bad roads, the swamps, the oceans, and shallow harbors — only to erect our own barriers. In a perfect world there would be no duties at all. The costs of imports, including duties, are production costs for firms and living expenses for families. Policies that portend to improve prospects for U.S.-based production and U.S. families should aim to reduce those costs, not increase them.


Notes:
1 Citations for quotes and statements of facts can be found in the source materials from which this statement was derived, including: Daniel Ikenson, “Economic Self-Flagellation: How U.S. Antidumping Policy Subverts the National Export Initiative,” Cato Trade Policy Analysis No. 46, May 31, 2011; Daniel Ikenson, “A Tariff-Reduction Plan for U.S. Jobs,” Wall Street Journal, September 10, 2011; Daniel Ikenson, “One Expensive Job Forward, Two Existing Jobs Back,” Cato-at-Liberty Blog Post, September 9, 2011.