Yesterday, the House Homeland Security Committee voted unanimously to approved H.R. 5935, a bill requiring certain federal agencies to use American-made steel for public works projects.  Sponsored by Rep. Pete Visclosky (D-IN), the bill (known as the “America Steel First Act of 2008”) requires construction projects executed by the departments of Defense, Homeland Security, and Transportation to use 100 percent American steel unless an exception applies.

As ManufactureThis noted last fall, pipe made in China has been used in the construction of a border fence between the United States and Mexico. In response, Rep. Visclosky introduced the bill, explaining, “The American Steel First Act will combat unfair steel imports by requiring the increased use of domestic steel products in federal projects.  It will give our steel industry a boost, create much-needed American jobs, and save lives.”

  In April AAM field coordinator Mickey Bolt testified on this very subject before the Congressional Steel Caucus.  In his prepared testimony, he noted:
“While the American steel pipe and tube industry was closing down…DHS was using American taxpayers’ money to purchase pipe from Chinese manufacturers, securing the future of pipe workers in China, not the U.S.  This is wrong. In my view, the application of the Buy American Act was passed with the intent that American taxpayers’ money should be used to support American industries and American workers — and not to support subsidized industries in China.  The pipe that was used in the construction of the border fence should have been produced by U. S. manufacturers and by USW members, instead of being outsourced to China.  This example highlights the problem of giant contractors only being concerned with securing the cheapest goods to maximize profits, regardless of the quality of the product, or whether it was domestically produced.”

As ManufactureThis  earlier this week, dumped Chinese steel has adversely affected U.S. steel pipe producers.  Legislation requiring that national security work be sourced from reliable domestic producers seems a logical step toward retaining a strong American defense industrial base.  ManufactureThis commends the Homeland Security Committee for recognizing this.

##

File this under “Less Than Encouraging”: the New York Times reports that the dodgy firm contracted to supply bullets and ammunitions to U.S. military efforts in Afghanistan has supplied both obsolete, decaying munitions from the former Soviet Bloc and “tens of millions” of rifle and machine gun cartridges manufactured in China.  The procurement of these munitions poses a “possible violation of American law.”

  In January, a federal contract worth up to $300 million was awarded to a little known Miami firm, AEY Inc., to supply munitions to Afghanistan’s army and police forces.  According to an investigation by the Times, “the company has provided ammunition that is more than 40 years old and in decomposing packaging…Much of the ammunition comes from the aging stockpiles of the old Communist bloc, including stockpiles that the State Department and NATO have determined to be unreliable and obsolete.”  Much of the Soviet stockpiles were supplied from aging munitions piles previously assumed to have been destroyed.

In addition to 40-year-old Soviet bullets, several millions rounds were purchased from Albanian stockpiles of Chinese-made ammunition.  In recent years, the U.S. has contributed $2 million to destroy excess small-caliber weapons and 2,000 tons of ammunition in Albania.

Essentially, AEY’s 22-year-old president Efraim Diveroli managed to land several contracts with the U.S. military to supply munitions to Afghanistan’s police and army.  His company was one of 10 firms that submitted bids in time for a September 2006 deadline, which led to a series of weapons contracts.  According to the New York Times, AEY has also provided supplies to the American military in Iraq, including a “$5.7 million contract for rifles for Iraqi forces.”

Aside from the disheartening corruption at the center of AEY’s bogus munitions sales, there’s the issue of circumventing domestic suppliers.  There are U.S. firms that would happily fulfill these procurement needs rather than see U.S. taxpayer dollars sent overseas—and to shady contractors.  Unfortunately, when procurement is awarded to foreign competitors, it helps put U.S. companies out of business.  In late 2007, for example, the renowned 140-year-old Winchester Arms factory in New Haven, Connecticut closed its doors.

There’s a reason that Congress passed the Berry Amendment to ensure that preference for defense procurement is given to domestically manufactured goods.  It simply makes sense to support one’s home factories.

##

  Well, some people thought this week’s Strategic Economic Dialogue (SED) with China was a smashing success.  A smiling Treasury Secretary Henry Paulson was quoted in USA Today as saying the talks succeeded in “creating a foundation” for future achievement, while Chinese Vice Premier Wang Qishan deemed the meetings “highly successful.”

But laying the groundwork for some hypothetical future success really just means changing the bucket under a leaking pipe.  It doesn’t necessarily fix the plumbing.  As AAM Director Scott Paul said in the same USA Today article what’s needed is a “more robust approach from Washington”—one that specifically puts China on notice regarding continued violations of world trade law.

Ironically, the shuffling of paper that constituted the bulk of this week’s meeting did little to quiet Congressional discontent.  Sen. Debbie Stabenow (D-MI) had already co-authored a letter to Secretary Paulson signed by 10 other Senators that urged action on China’s undervalued Yuan in order to ensure that its value is “determined by markets, not government interventions.”  The various Senators believe that if China “plays by the same rules, our manufacturers can compete and thrive in the global economy.”

Stabenow and company concluded by noting that U.S. manufacturers cannot “afford further delay in addressing the misaligned [Yuan].”  The distortions caused by this currency manipulation have directly contributed tomoer than 1.8 million U.S. jobs lost since 2001.

In a “China Index” released yesterday, Sen. Sherrod Brown (D-OH) noted more problems from unbalanced trade with China.  Chief among these were the 581,000 manufacturing jobs that the U.S. has lost just since the first SED meeting in December 2006—which means that more than 4% of U.S. factory jobs have evaporated in less than a year and a half.

It’s not just lost jobs that concern Sen. Brown, though.  His index also noted 457 Chinese products recalled in the same brief period, a reminder that China’s unregulated production poses more than job worries for American consumers.

Nero fiddled while Rome burned, and ManufactureThis frets that cheery chit-chat and endless dialogues with China merely extend an unhappy status quo.  As Scott Paul noted in a Bloomberg article this morning, yet another bureaucratic SED meeting simply “squandered another opportunity to make U.S.-China trade more balanced and market-driven.”  It’s action that’s needed, not words.
##

  This morning, the New York Times reported that China is now actively lecturing the United States for its lack of “market regulation” in the mortgage crisis and for its failure to “halt the dollar’s unchecked depreciation” that has caused “soaring oil and food prices.”

This constructive criticism offers a rather fun way to start the fourth round of the Strategic Economic Dialogue (SED), which is taking place today and tomorrow in Annapolis. 

There’s rich irony in the Chinese lecturing the U.S.  As AAM Director Scott Paul pointed out on CNBC yesterday, the Chinese continue to brazenly flout world trade law, no matter how great the resulting distortions of the international market.

  With that said, ManufactureThis thought it might be fun to offer a brief preview of this week’s SED talks.  Specifically, Treasury Secretary Henry Paulson said the meetings would focus on five areas.  Below are those five sections, with a helpful reminder about why these issues actually matter to the world community:

“Managing financial and macroeconomic cycles.”
China utilizes numerous questionable subsidies to artificially boost production, including $27 billion in energy subsidies since 2000 for its steel producers.  If Secretary Paulson and his Chinese counterparts want to equitably manage “macroeconomic cycles,” they would start by ensuring that China does not continue to dump steel on the world market.  

“Developing human capital.”
China’s human rights abuses are notorious, as are the woefully inadequate labor conditions in many factories, including slave labor.  Rather than token efforts, Beijing must stop bashing heads in Tibet and begin to reform the institutionalized child labor (and other unacceptable practices) so rampant throughout its rural provinces.

“The benefits of trade and open markets.”
Despite a minor appreciation of the Yuan since 2005, Beijing continues to undervalue its currency by as much as 40%.  Such massive intervention in world currency markets is clearly one-sided—the exact opposite of a free, open trade.  With the EU and Japan joining U.S. calls for a significant rise in the Yuan, Beijing must commit to lifting its currency peg, or else face sanctions.

“Enhancing investment.”
China has been reluctant to open its market to foreign financial services, and has only approved one foreign securities joint venture—for Credit Suisse.  It’s hard to call this enhanced investment equitable.  Unless U.S. financial firms are given greater access to China’s market, sanctions must again be considered.

“Advancing joint opportunities for cooperation in energy and the environment.”
While the Environmental Protection Agency estimates that 25% of all California air pollution comes from China, the U.S. is considering sweeping measures to cut greenhouse emissions.  If Beijing honestly shares in such concerns it will demonstrate movement to share in such efforts.

##
 

  Typically in recent years, companies have moved manufacturing operations overseas in an effort to reduce production costs.  Cheap labor, weak environmental standards, and a host of questionable subsidies have all combined to make production in countries like China seem attractive to the bottom line.

According to a piece by the Wall Street Journal’s Tim Aeppel, however, soaring oil prices are threatening to rebalance that equation.  Aeppel cites CIBC analyst Jeff Rubin, who notes that “the cost of shipping a standard, 40-foot container from Asia to the East Coast has already tripled since 2000 and will double again as oil prices head toward $200 a barrel.”  These rising transportation costs “are now the equivalent of a 9% tariff on goods coming into U.S. ports, compared with the equivalent of only 3% when oil was selling for $20 a barrel in 2000.”

Aeppel says that, for many U.S. manufacturers, “oil prices that have hurtled past $130 a barrel have been the tipping point.”  Such heavy shipping costs mean domestic manufacturers are scrambling to source production closer to home.  One example is Emerson, the St. Louis-based maker of electrical equipment, which recently shifted some production from Asia to Mexico and the U.S., all in an effort to “offset rising transportation costs by being closer to customers in North America.”

Though rising oil prices may help to somewhat recalibrate trade flows, it’s not certain that U.S. manufacturing workers will reap the rewards.  With Emerson as but one example, CIBC’s Rubin suggests that Mexico cold be “the biggest winner of all.”  While increased transportation costs may dissuade producers from large-scale Chinese imports, Mexico could take up the slack and become the preferred low-wage, environmentally lenient export platform.

But don’t cry for China just yet.  They’re still running a $20 billion monthly trade surplus with the U.S.
##

As AAM Executive Director Scott Paul noted this morning, the monthly U.S. trade deficit reached $60.9 billion in April 2008, the highest level in 13 months.  In a brief statement he said:

  “As the trade deficit rises, manufacturing jobs continue to decline.  We hope this will serve as a wake up call for Congress and the Administration to stop unfair foreign trade practices like currency manipulation, dumping and subsidies, and reform our trade policies to ensure that we are shipping more products—and not jobs—overseas.  Senators Obama and McCain should make reducing the trade deficit and reforming our trade policies a priority in 2009.  This is an issue that matters to voters in battleground states throughout the industrial heartland of our nation.”

##

  The latest monthly U.S. jobs report showed a loss of 49,000 jobs in May—with more than half of those (26,000) coming in the manufacturing sector alone.  After five straight months of job losses, and a seemingly endless freefall for manufacturing jobs, it seems palpable that something is amiss in the U.S. machine.

But what specifically is ailing us?  A rather obvious start would be the continuing loss of good-paying manufacturing jobs.  As one of the historical engines of growth for the U.S. economy, manufacturing is clearly linked to the success or failure of the U.S.  As was said many times in the 20th Century, “So goes General Motors, so goes America.”

The problem for manufacturing, though, is that U.S. trade policy has taken the wrong course.  This is the candid admission of Robert Cassidy, the former assistant U.S. Trade Representative for both Asia and China.  Cassidy was the lead negotiator for China’s 1999 Market Access Agreement, which paved the way for China’s accession to the World Trade Organization (WTO). 

Essentially, Cassidy was one of the chief architects of the plan that steered the U.S. into more global waters.  And now, he’s regretful, asking “whether the agreements we negotiated really lived up to our expectations.”  A “sober reflection” has led him to conclude that they “did not.”

So what went wrong?

According to Cassidy: “We failed to address the underlying fundamental market distortions that skew the benefits toward the few while leaving the rest of the economy less well off… The premise on which our trade agreements are negotiated is at best flawed, if not broken.” 

But what does that mean in practical terms?  Since China entered the WTO in 2001, the U.S. trade deficit with China has tripled, from $83 billion to $256 billion.  That massive increase in imports has also directly contributed to 1.8 million lost U.S. jobs, according to the Economic Policy Institute (EPI).

  As Cassidy explains it, upon joining the WTO, “China made unilateral concessions to reduce and, in some cases, eliminate barriers to entry for US goods and services.”  These concessions were projected to raise “US exports of goods to China… thus creating jobs in the higher-paying export sector.”  But in actual fact, U.S. exports to China have only grown “from a very low level.”

Cassidy notes that the real beneficiaries of increased U.S. trade are the multinational companies that have moved to China and the financial institutions that have financed them.  As he acknowledges, “Sourcing from China…has allowed companies to cut costs and increase profits, as reflected in increased corporate profits.”

Cassidy sees serious downsides as a result:
-“It is doubtful that the US economy or its workers are better off.”
-“US manufacturing jobs have declined by more than 2.5 million since China joined the WTO in 2001.”
-“Wages have been stagnant and real disposable income for three-quarters of US households has been stable or declining.”

Even more disconcerting according to Cassidy is that “the problem extends to nearly all trade agreements since they are based on the flawed premise that free trade benefits the economy. The premise is flawed and broken since free trade does not exist in a ‘free market’ petri dish where all other factors are neutral.”

The bottom line is that countries like China have “adopted an export-led development strategy, the centerpiece of which is a currency that is undervalued by 20-80%, with the consensus leaning toward 40%.”  China also has “internal barriers to trade” that “restrict US exports.”

The bigger question is why, if our trading partners have embraced export-led strategies, why doesn’t the U.S.?  With our mushrooming trade deficit ($709 billion in 2007), it’s clear that the U.S. has, in effect, settled on an outsourcing-focused strategy. 

Cassidy concludes by suggesting that “the next administration has to take a hard look at the trade agreements currently on the table…and ask: Who benefits? The answers should lead to a fundamental reassessment of what needs to be included in those trade agreements so that the benefits flow to broader and more equitable segments of the economy.”

  ManufactureThis couldn’t have said it better.  But we thought we’d let one of the people who set us on this path tell us where we’re going, and why we need to change course.

##

While campaigning in Michigan earlier this year, Sen. John McCain said that lost U.S. manufacturing jobs “aren’t coming back.”  Instead, McCain has ardently championed a new, post-industrial economy—one that will lift displaced manufacturing workers to new heights of specialized service work.  It’s unclear whether these projected service jobs are immune, though, to the outsourcing that has claimed everything from call center jobs to x-ray technicians.  However, Sen. McCain has consistently suggested that American workers will transition to rewarding, intellectualized work in the new “Information Age.”

Minnesota Public Radio recently noted that this particular worldview was already in place in 2000 when the Senator dismissed the concerns of a laid-off paper mill worker.  The unemployed worker regretted that his son would not have a chance to share in the family tradition of working at the local mill, to which McCain retorted “I’m sorry that I wanted better for your son.”

  McCain may have underestimated both the pride of achievement and economic security offered by a modern paper mill, though.  Not only do mill jobs provide healthcare and benefits, but some positions pay as much as $70,000 per year—a comfortable middle class living.

The merits of a reliable mill job also offer more than might immediately meet the eye.  As the New York Times discussed in a piece today, two downsized New York paper mill workers labored for more than six years to re-launch the upstate plant that had employed their family for three generations.  Newton Falls paper closed in 2000, but Andy Leroux and Levi Durham Jr., two of its longtime employees, dedicated much of their free time to preserving the shuttered plant’s infrastructure and to locating new owners who might want to restart operations.  While supporting themselves with construction and auto repair jobs, the two made a point of returning to the mill to lubricate machines, dust crevices and corners, and shovel heavy rooftop snow in order to keep the mill functional in case it could eventually return to production.

As they explained it: “In our hearts, we never considered the mill closed.  To us, the mill was idle. There’s a difference between closed and idle… If you were there the day this place closed, you had people working their hearts out to make the best paper possible. We knew we had something special.”

When Newton Falls closed, it was one of about 600 paper mills operating in the U.S.  Of those 600, another 150 or so have closed since, affecting communities throughout the country.

Fortunately, Leroux’s and Durham’s hard work paid off.  In 2006, they located someone interested in buying the plant; in September, 2007, Newton Falls re-opened as a full-time paper mill.

Currently, the Newton Falls Fine Paper company is one of the largest private employers in New York’s St. Lawrence County, with pay ranging from $15-22 an hour.  Workers also receive medical and dental insurance as well as 401(k) plan.  A county official said that the mill “is a huge stabilizing factor in the community” and contributes roughly $18 million a year to the economy, including a $4 million payroll.  This has meant increased business and earnings for the surrounding community, with the owner of a nearby general store expanding his business and a neighboring motel transitioning to year-round service.

It would be nice to bring Sen. McCain along for a visit to the Newton Falls mill.  Not only would he see manufacturing jobs that have indeed come back, but he’d likely recognize the spirit of indomitability, ingenuity, and enterprise that built the United States as an industrial power in the first place.

##

  In the New York Times today, Louis Uchitelle notes a wee bit of a problem that could begin to ripple across the U.S. economy this summer.  And no, it’s not “the housing bust, the credit crunch, shrinking consumption, rising unemployment and faltering business investment”—any of the culprits cited for recent woes.  No, this is a slightly different bit of a cash crunch…

Uchitelle’s concern is that, while the economy has slowed in recent months, state and city governments have continued to spend money allocated in budgets that were passed before things began to get dicey.  And so, as he sees it, “state and city governments have yet to shrink the economy; indeed, they have even managed to prop it up. They have quietly maintained their spending at pre-crisis levels.”

The problem, though, is that on July 1, new fiscal year budgets start coming on line.  Many of these municipal governments are now warning of impending cuts in spending due to declining tax revenues.  And so, the states and cities will no longer be able to draw on “rainy-day savings” to compensate for spending lost at the national level.

Where does Uchitelle see these spending gaps falling?  He explains that “When librarians, lifeguards, teachers, transit workers, road repair crews and health care workers disappear, or airport and school construction is halted, the economy trembles.”

The essential point, then, is the interconnectivity of the U.S. economy. Simply put, lost jobs mean lost tax revenue, which means lost services for unemployed workers.. 

Much of the pain of this declining employment can be seen in the manufacturing sector, which has suffered the loss of 3.5 million good-paying jobs since 2000.  In heavily industrial states like Michigan, the ripple effect of lost jobs is more pronounced: one in eight Michigan residents now receive food stamps, according to the New York Times.

Tightening the noose is manufacturing’s unique ability to generate additional jobs.  Manufacturing offers a tremendous “multiplier” benefit, creating four spin-off jobs in the local economy for every manufacturing job.  But when viewed in reverse, one sees that each lost manufacturing job (like the 280,000 that have been lost in Michigan alone since 2000) can also mean the loss of four other dependent jobs.

Manufacturing’s linkages run deep into the overall economy.  As Uchitelle and many others rightly worry about a shrinking economy, it would seem wise to consider manufacturing premium ability to create jobs.  And so, a national policy of supporting and promoting manufacturing should be an urgent priority.  Hopefully this message will reach our elected officials rather soon.
##

  Yesterday, the Financial Times quoted John McCain as warning that a Clinton or Obama administration would mean “more federal regulation, more government control of the economy, and more government spending.”  He also worried that a Democratic administration would follow the wrong path on trade policy by, as the Times put it, “exploiting public resentment of foreign trade rather than focusing on how to make the U.S. more competitive.”

According to the Financial Times, McCain did acknowledge that “more must be done to help people who lost jobs because of globalization” and that he “promised more rigorous enforcement of trade agreements to protect U.S. interests.”

But in such points we begin to see some of the hypocrisy of Sen. McCain’s overall position on trade.

If indeed Sen. McCain favored rigorous enforcement of trade agreements, he would no doubt start by addressing culprit number one—the regime in China that brazenly flaunts world trade law for its own gain.  When entering the WTO in December 2001, China foreswore the very lucrative (and illegal) practice of currency manipulation.  And yet Beijing continues to undervalue its currency by as much as 40%.  Unfortunately, John McCain is one of a handful of Senators who has steadfastly refused to take action on the currency issue.

Wantonly violating world trade law for one’s own gain is a clearly protectionist act.  Or, conversely, it is a rather egregious swipe at free trade.  And so it’s hard to see how Sen. McCain can favor open markets while simultaneously supporting Beijing’s one-sided policies.

But that’s not the only contradiction in the McCain bag.  There’s a strange irony in Sen. McCain warning about Democratic imprudence with money while pursuing exactly the policies that have led to a $711 billion trade deficit in 2007.  More than a third of that shortfall, $256 billion, comes just from a mushrooming bilateral deficit with China.

U.S. manufacturers are put at a consistent disadvantage when countries like China utilize dumping, subsidies, and currency manipulation to undercut them.  The most unfortunate result is 3.5 million lost U.S. manufacturing jobs since 2000.  No doubt these displaced workers are feeling the pinch in their wallets, and McCain’s talk of low taxes will be of relatively little comfort until they again find good-paying jobs.

Far better would be for Sen. McCain to adopt a long-range plan that encompasses modernization of American manufacturing while addressing the cheating of countries like China that is displacing U.S. workers in the first place.

##