The Competitive Edge -- What The New Congress Has In Store For Manufacturing

Don't expect any tax relief from the Democrat-led Congress, but a renewed emphasis on R&D is likely.

The Democrats' takeover of Congress will certainly raise the level of attention to issues affecting manufacturing. Many Democrats (and a good number of Republicans) grounded their campaigns, at least in part, on the need to do more to protect our domestic manufacturing base and improve its operating environment.

Whether the rhetoric translates into constructive action will likely be a function of the two parties' willingness to work cooperatively for such a common purpose. Given the heated partisanship of recent years and the fierce battle looming for the 2008 presidential election, chances are not good that such a new era of comity will materialize, and it almost certainly would be short if it did. Nonetheless, a number of crucial issues will be debated and voted on, especially in 2007 before the presidential election brings gridlock. Here are some of the likely results as I see them heading into the new year:

Taxes: U.S. manufacturers now pay the second-highest corporate tax bill in the developed world, and also see their international competitiveness undermined by the rebate of value-added taxes on exports by most of their major trading partners. Relief on either front is highly unlikely in the new Congress as the majority will probably concentrate on ways to raise revenue, such as socking it to the oil companies for windfall profits and finding ways to demagogue the issue of high CEO salaries and corporate profits. The president will veto any tax increase, making new taxes highly improbable. One initiative the president might possibly accept is some form of carbon tax or narrower gasoline tax to address both environmental concerns and the perceived need for cutting the deficit, a priority for the new majority. Both parties agree on the need to restore the research and experimentation tax credit, and a carbon tax might satisfy the Democrats' campaign pledge to "pay as you go" for any tax relief.

Research and Innovation: Another area for possible cooperation also involves research. The campaign program of the House Democrats included measures to "double funding for the National Science Foundation" and other federal research targeted at the manufacturing-sensitive physical sciences and to "educate 100,000 new scientists, engineers and mathematicians." New funding would have to be offset by new taxes.

Energy Policy: Although both the president and Congressional Democrats are on record as favoring "energy independence," there are still fundamental disagreements on how to achieve this goal. Supply side measures, such as opening up new areas for drilling, are highly unlikely in the new Congress. Some new support for researching and subsidizing biofuels, propelled in part by the potent farm lobby, is more likely in 2007.

Trade: Free-trade advocates took a severe hit in the 2006 elections. Six Senate (and even more in the House) supporters of the Central American Free Trade Act were replaced by trade skeptics. Any new free-trade agreement will face an uphill battle in the new Congress. Pressure will increase on the president to take firmer action to reduce the trade deficit with China.

Regulation and Other Structural Costs: One area where the new Congress will be active is health care. While a key objective for new House and Senate leaders is rolling back the costs of pharmaceuticals, they also want to expand health-care coverage and will ask employers to pay for this. Any action to reduce tort, regulatory or other benefit costs is improbable.

Overall, manufacturers will be playing more defense when the new Congress takes office. Shoring up domestic research capabilities, getting firm with the Chinese mercantilists and putting manufacturing competitiveness back into a central place in the national debate are all welcome changes. However, manufacturers will have to redouble their efforts to win any breakthroughs on structural costs and regulations.

Dr. Duesterberg is president and CEO of the Manufacturers Alliance/MAPI, an executive education and business research organization in Arlington, Va.

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