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California Summit Highlights Thorny Manufacturing Challenges

March 6, 2016
Trade policies and excessive regulation are among the factors holding back a full American manufacturing recovery, industry leaders tell a Northern California manufacturing summit.

On February 19th, the Northern California Manufacturing Summit was held in Sacramento. The purpose of the summit was to review problems and suggest solutions that will accelerate job creation and new investment in the manufacturing sector in California’s capital region.

Brian O’Shaughnessy, chairman of Revere Copper Products, discussed a “Tax Policy for Manufacturing Competitiveness.” He stated, “Since 2000, more than 30% of the manufacturing facilities Revere ships product to in the USA have shut down as their production moved offshore. It wasn’t just the cheap labor offshore, it was the currency manipulation and Value Added Taxes (VATs) that nearly every other country has, but we don’t. Currency manipulation worldwide averages almost 40% to the U. S. dollar, and VATs average 17% worldwide. The U. S. relied on tariffs on imports before the income tax was established, and tariffs protected domestic manufacturing and farm production.”

He pointed out that while tariffs have been reduced as part of the many trade agreements we’ve signed in the past 30 years, VATs have been allowed because they are border adjustable consumption taxes, imposed on imports and not exports. The effective trade barriers have remained constant because of the VATs being imposed. These consumption taxes have been a factor in increasing our trade deficits with our trading partners, which was $505 billion in 2015. He next presented the potential benefits of a U. S. system of border adjustable consumption taxes as contained in a bill introduced by Sena Cardin, details of which are too complex for this short article.

Next, Michael Stumo, CEO of the Coalition for a Prosperous America, presented “An American Trade Strategy: Core Analysis.” He said, “Our current trade goals are misleading and wrong: more exports, rather than net exports; more trade, without regard for balance of trade, global supply chains, but not domestic supply chains which increase our prosperity, lowering tariff barriers, without addressing cheating through currency misalignment, increased border taxes, state-owned enterprises, etc.; help export supported jobs, but not create net new jobs. America has no strategy to win in terms of being a successful producing and exporting nation, focusing upon domestic supply chains that grow wealth, jobs, innovation and wages. Unilateral trade disarmament makes us losers. We should want to win and not be ashamed of pursuing our national interest.”

An economy that builds only F-35s is unsustainable – productive capacity is what wins real wars.
—Greg Autry, University of Southern California

He pointed out that “free trade is supposed to produce balance and address foreign mercantilism, but our trade policies enable mercantilism...We cut tariffs and opened our markets, but other countries didn’t. Instead, they played a new game consisting of rampant global currency devaluation, replacing tariffs with consumption taxes (VATs), subsidizing industries or state-owned enterprises, and establishing industrial policies to favor their domestic supply chains.”

He concluded with the recommendation: “Develop and implement a national strategy to win the international competition for good jobs, sustained economic growth and strong domestic supply chains.”

Greg Autry, adjunct professor of Entrepreneurship, Marshall School of Business, University of Southern California, discussed “National Security Concerns with the Current U.S. Trade Regime.” Among the highlights of his presentation was his statement, “An economy that builds only F-35s is unsustainable – productive capacity is what wins real wars. Sophisticated systems require complex supply chains of supporting industries. They require experienced production engineers and experienced machinists.” He added that we cannot rely on China to produce what we need for our military and defense systems. “The Atlas V and Orbital Antares both use Russian lower stage engines. Virtually all U. S. military satellites are launched with Russian engines. We should not be relying on Russia’s Mr. Putin to launch our satellites and space vehicles and provide us a seat to get to the international space station. ”

He pointed out that our technical superiority in military systems will not assure our national security any more than the technical superiority of Nazi Germany’s aircraft and tanks did for them. Economic superiority is what matters. The manufacturing industry of the U. S. out produced Germany during WWII and the Soviet Union in the Cold War. We wouldn’t be able to do the same for a future war as China has become the shop floor for too many American manufacturers.

Autry stated, “Wall Street’s new favorite, Jack Ma, founder of Chinese company Alibaba Group Holding Ltd, is a danger to American interests by the fact that Alibaba overtook Amazon as the world’s largest online retailer by market capitalization in 2014. There has been considerable skepticism of Mr. Ma’s independence from the Chinese government, and in reality, stockholders really don’t own part of Alibaba. It isn’t a private company like Amazon. It is a shell company set up in an offshore tax haven, and the real owner behind Alibaba is the Chinese government.

In contrast, he said, “It was the wealth he created at Amazon that enabled founder Jeff Bezos to now lead Blue Origin, which was selected by the United Launch Alliance to finish development of a new engine to replace the Russian made RD-180 rocket engine used by ULA’s Atlas 5 rocket.”

In conclusion, he warned that China has expanded their claim to territorial waters to include territory claimed by all of its immediate neighbors -- Taiwan, South Korea, Vietnam, Japan, the Philippines, Japan and even New Zealand and Australia.

California Lags in Adding Manufacturing Jobs

After the morning break, I provided a brief overview of California manufacturing. California lost 33.3% of manufacturing jobs between 2000 and 2009 compared to 29.8% nationwide and 25% of its manufacturing companies. California lags in manufacturing job growth at a 2% rate compared to the national 7.6% rate and a GDP growth rate in manufacturing of 11.2% in California compared to a. 22.6% GDP growth in the U. S. as a whole. Mexico, Canada, China, and Japan are the top four export markets for California, and California represents 11% of total U. S. exports.

The greater Sacramento region is comprised of five counties, but most of the manufacturing is concentrated in Sacramento and Placer counties. I highlighted the region's advantages of being home base for federal and state agencies as well as state government, being the most affordable of California’s major metro areas, having a talented workforce, two major utilities (PG&E and SMUD), having a mild climate and relative seismic safety, and being a central location in the western U.S. for air, roadway, rail, and waterway transportation.

Catherine Houston, Rapid Response and Women of Steel Coordinator for the United Steelworkers (USW) District 12, was the next speaker on "How 'Buy Local' Government Procurement for Public Infrastructure Projects Can Provide Environmental & Economic Benefits." The Rapid Response is member-to-member education and political program, and Women of Steel represents 100,000 working women in the steel industry. District 12 represents workers n California, Alaska, Arizona, Colorado, Hawaii, and Idaho.

She said that the USW supports AB 32: California’s Comprehensive Climate Policy that incorporated cap and trade, low carbon fuel standard, renewable energy program, advanced clean car standards, and energy efficiency in buildings, appliances, and industry.

“There is a hidden carbon cost of importing metals,” she stated. “According to the Iron and Steel Institute stated, 'Since 1990, the North American steel industry reduced the CO2 intensity per ton of steel produced by 37%. Today the industry operates with the lowest energy consumption per ton of steel produced in the world. She added, "90% of the world’s goods are transported by sea. Maintaining business as usual will result in an estimated 250% growth in carbon emissions by 2050.

She recommended that California have a “Buy Green, Buy Local” campaign for major infrastructure and construction projects and all government-backed contracts should look to use California-made materials in contrast to awarding contracts to a company that imported the steel and used Chinese labor as was done for the San Francisco-Oakland Bay Bridge. She said, “The USW is building support by providing a 'Buy Green, Buy Local' toolkit, recruiting business partners/support, recruiting environmental partners, activating the USW Rapid Response Network, meeting with legislators and government officials, and broadening their base of grassroots support.”

Real Unemployment Dwarfs Media Reports

During lunch, keynote speaker Dan DiMicco, chairman emeritus of Nucor Steel Corp., spoke on “Extremely Challenging 2009- 2015 Economic/Steel Market Conditions.” He led off by stating that the AISI Weekly U.S. Steel Mills Capacity Utilization went from about 90% down to 30% in the depths of the recession and has only recovered to a little over 60%. He then shocked the audience with facts about the real state of our economy and our unemployment rate. “There are still nearly 2 million less jobs than there were at the start of the Great Recession in December 2007! We lost 8.7 million jobs from December 2007 to the “trough” reached in February 2010. The manufacturing industry lost 20% of its jobs, and the construction industry lost 19% of its jobs. Because our recovery has been much slower than the previous recessions of 1974, 1981, 1990, and 2001, the gap in recovery of jobs compared to these recessions is much higher even 96 months out of the recession.”

He stated, “In contrast to the misleading U-3 unemployment rate of 4.9% for January 2016 that is reported in the news media, the U-6 rate was 11.8%. The government’s U-6 rate is more accurate because it counts ‘marginally attached workers and those working part-time for economic reasons.’ However, the actual unemployment is worse because the participation in the workforce has dropped from 66.0% to 62.7%. In other words, if the December 2015 Civilian Labor Force Participation Rate was back to the December 2007 level of 66.0%, it would add +8 million people to the ranks of those looking for jobs. If you add the people that have dropped out of labor force to the U6 number of people, we really have nearly 25 million people without full-time jobs.”

DiMicco said, “We got in this position from 1970 until today because of failed trade policies allowing mercantilism to win out against true Free Trade. The idea that we could be successful and create better tomorrows by having little or no manufacturing and all services is a failed theory — a miserably failed mindset and economic model! Real and lasting wealth is, and always has been, created by innovating, making and building things—all 3-- and servicing the goods producing sector not by a predominance of servicing services! Manufacturing supply chains are the wealth creation engine of our economy and the driver for a healthy and growing middle class! The result has been that manufacturing’s share of GDP shrank from over 20% in 1980 to 9.9%, causing the destruction of the middle class. It created the service/financial based bubble economy ( scheme type financial instruments.)”

We need to recapture American independence through investment in our country’s people, infrastructure, and energy independence, and by reversing the deficit-driven trends that currently define our nation’s economic policy.
—Dan DiMicco

He added, “We have had 30 years of massive increases in inefficient and unnecessary government regulations. These regulations, for the most part, in the past have been put in place by Congress and the Executive Branch. However, today they are increasingly being put in place by unelected officials/bureaucrats as they intentionally by-pass Congress.”

He said, “Creating jobs must be our top priority, and we need to create 26-29 million jobs over the next 4-5 years. There are four steps we can take to bring about job creation:

  •  Achieve energy independence.
  •  Balance our trade deficit.
  •  Rebuild our infrastructure for this century.
  •  Overhaul America’s regulatory and tax nightmares.

In conclusion, DiMicco said, “We need to recapture American independence through investment in our country’s people, infrastructure, and energy independence, and by reversing the deficit-driven trends that currently define our nation’s economic policy."

Harry Moser, founder and president of the Reshoring Initiative, was the second keynote speaker discussing “Bringing Manufacturing Back Home.” He stated, “The Reshoring Initiative’s goal is to level the uneven playing field that American manufacturers have in the global marketplace by enabling companies to calculate the hidden costs of outsourcing offshore. Most companies only apply rudimentary cost models, such as purchase price variance or landed cost and ignore 20% or more of total costs. The trends of producing near the consumer and bringing back manufacture of products that will be sold or assembled here are helping to increase reshoring, but not fast enough.”

He explained that the Reshoring Initiative “provides free Total Cost of Ownership (TCO) software, an online library of 3,000+ reshoring articles, statistics from TCO and library databases, a case study template for posting cases, solutions to major supply chain problems, and motivation for skilled manufacturing careers as manufacturing comes back.”

He briefly described the TCO calculator works and shared a few case studies, commenting that California ranks first in number of cases (34) of companies reshoring but 12th in number of jobs created. California companies include Flextronics for electronic products, Karen Kane apparel, and Ortho Mattress. He stated, “The bleeding stopped in 2014 with a 70% decrease in offshoring and a 400% increase in reshoring.”

He concluded with the recommendation that California “Start a program to accelerate reshoring adapting method used in the programs in Pennsylvania and Mississippi to make California the leader in reshoring. The possible team could be: Manex and CMTC, CALED, California Manufacturing and Technology Association (CMTA), Suppliers, and the Reshoring Initiative and Coalition for a Prosperous America.”

After this last presentation, Michael Stumo invited attendees to stay for a breakout session in small groups to select the top two issues through discussion and pair-wise voting. The top two issues voted by the group were “manufacturing strategy” and “trade strategy.” The groups felt that if California had an overall strategy to support manufacturing, then taxes and regulations would be brought into alignment to benefit manufacturers. Workforce development would only be critical if manufacturing were flourishing and not decreasing.

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