Viewpoint -- A Policy Step Forward for Manufacturers, But More Needs to be Done

Aug. 19, 2010
'We need to create a national tax climate that does not place U.S. manufacturers at a competitive disadvantage in the global marketplace.

Last week, President Obama signed the U.S. Manufacturing Enhancement Act of 2010 (H.R. 4380), aimed at easing costs for U.S. manufacturers by reducing tariffs on materials used to make the products they sell. The legislation is welcome relief as manufacturers continue to navigate the rising cost of raw materials in an increasingly challenging economic environment -- 72% of manufacturers and distributors predict a spike in raw materials this year, according to McGladrey's 2010 Manufacturing and Wholesale Distribution Study.

Manufacturers of all sizes will use the vital tariff suspensions contained in the legislation to obtain raw materials, proprietary inputs and other products that are not available in our nation. Without the suspensions, the costs of these companies' products would inevitably increase, forcing them to pass their costs on to consumers. This would hinder competitiveness and translate into lost jobs and higher prices for Americans.

The Act will also create more demand for our goods globally. A pick-up in U.S. exports could not come at a better time given the recent signs of a slowdown and concerns about a possible double-dip recession. The National Association of Manufacturers (NAM) says studies show these provisions can increase production by $4.6 billion and support almost 90,000 jobs.

This is a positive step forward for manufacturers, but it's only the tip of the iceberg. Managing the U.S. trade deficit requires that exports grow faster than imports -- particularly for capital goods. July numbers indicate the trade balance appears to be going the other way. Achieving the goal of doubling the amount of U.S. exports in the next five years -- as announced by President Obama earlier this year -- will require policy changes to provide more export incentives and more access to foreign markets through free trade agreements.

  • Free Trade Agreements (FTAs): Three pending FTAs with Columbia, Panama and South Korea have been stalled in Congress since the new administration took office. Enacting these FTAs will lower tariffs to zero and increase market access for U.S. manufactured goods. The benefits are clear. We need look no further than the countries with which we already have agreements. The balance of trade in manufactured goods with those countries showed a surplus in 2008 of $21 billion.

    Unfortunately, while we stand on the sidelines, other countries around the world are vigorously negotiating and approving FTAs. Canada concluded its FTA with Panama in May. The European Union just signed an agreement with Peru and is actively negotiating with Canada, Brazil, Argentina, India and Vietnam, among other countries. As Canada and the EU expand their list of free-trade partners, U.S. manufactured goods become less competitive in global markets and we lose the promise of new jobs, new growth and new opportunities.
  • U.S. Export Control System: Another key policy need is the modernization of the U.S. export control system. The current system still operates under a Cold War mentality. Defense Secretary Robert Gates noted "its rules, organizations, and processes are not set up to deal effectively with those situations that could do us the most harm in the 21st Century." We need a sensible export control policy that guarantees our security, but does not burden legitimate exports.
  • Corporate Tax: We need to create a national tax climate that does not place U.S. manufacturers at a competitive disadvantage in the global marketplace. Currently, we have the second highest corporate tax rate in the world, just below Japan. While we have been complacent, the rest of the world has steadily lowered tax rates to drive growth.
  • The Research and Development (R&D) Tax Credit: The R&D tax credit serves as a negotiating chip between the parties in Washington. It has been renewed 14 times since 1986. While we constantly haggle over it, the rest of the world is making their R&D tax credit programs permanent and stronger. Right now we have the dubious distinction of the lowest R&D tax credit in the world - zero - since it hasn't been renewed for 2010.
  • Lower Taxes for Individuals and Small Businesses: We need to institute permanent lower tax rates for individuals and small businesses. The looming expiration on Jan. 1 of the 2003 and 2005 tax cuts, referred to as the "Bush tax cuts," will hit hard the businesses that are responsible for the bulk of new job creation. Tax policy needs to support the capital formation that encourages new businesses and expansion.

We as manufacturers are highly supportive of the step taken by the administration and Congress to approve H.R. 4380, and thank them for their efforts. But we recommend the additional pro-growth manufacturing steps outlined above to improve our ability to compete globally and maintain our country's position in the decades to come as the world's manufacturing leader.

Tom Murphy is executive vice president of manufacturing and wholesale distribution for McGladrey. You can learn more about Tom and his manufacturing and wholesale distribution insights on McGladrey'smanufacturing blog.

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