THE DETERIORATION OF THE U.S. INDUSTRIAL BASE

Lax Enforcement of Trade Laws and the Effect on the U.S. Economy 

In recent years, the U.S. manufacturing sector has experienced enormous job losses and the flight of countless factories and companies overseas. If our political leaders allow this trend to continue, America faces the very real possibility of losing much of its basic manufacturing capability.  Beginning in August 2000, U.S. manufacturers shed jobs for 43 months in a row, and, despite an improving overall economy, have seen stagnation in employment ever since. The United States has lost almost 3 million manufacturing jobs since July 2000 – almost 17 percent of all manufacturing jobs in this country.  The very future of U.S. manufacturing has been placed in doubt by the severity of this trend, and the time is long overdue for a serious plan to save this vital sector of our economy.  

Rigged and Unfair International Trading Rules Are a Key Cause of the Crisis 

            While U.S. manufacturers have been adversely affected by a variety of factors, none has been more consistently harmful or injurious than the uneven playing field they face in international trade.  Through many years of flawed choices, political expediency and questionable trade priorities, we have allowed the deck to become stacked against U.S. manufacturers.  Key inequities include: 

• Unfair tax rules:  Tax rules in the global trading system place American companies at an enormous disadvantage.  These rules allow countries that employ a value added tax ("VAT") – like almost all of our trading partners – to rebate the VAT on exports, while imposing this tax on imports.  Meanwhile, the United States is prohibited from rebating the income taxes paid by its exporters, or from imposing such taxes on imports.  The result is to essentially subject U.S. producers selling abroad to double taxation, while allowing foreign producers to sell here tax-free. There is no legitimate economic basis for this distinction, which, by one estimate, gives European manufacturers a 25 percent cost advantage on export sales – as compared to export sales by U.S. producers.  For decades, Congress has identified this as a key priority for our trade negotiations, but nothing has ever been done about it.

• Attacks on U.S. trade laws:  Many foreign firms "compete" in this market by dumping their products or taking advantage of government subsidies.  The only deterrent against this activity in the U.S. market is our trade laws – particularly the antidumping and countervailing duty laws.  Weakening these laws is literally the top priority of many of the worst trade law offending nations in ongoing international negotiations – including the Doha Round of WTO negotiations and other talks such as those to establish as Free Trade Area of the Americas.  Any further weakening of U.S. trade laws would likely mean the end of a significant part of the U.S. manufacturing base.
• Broken WTO Dispute System.  Our basic fair trade laws – and indeed the sovereign ability of the United States to enact laws to aid its manufacturing base – are under assault at the WTO.  In decision after decision, WTO panels have found U.S. laws to violate WTO commitments – based on new obligations "invented" by the panels or by "second guessing" the factual and legal interpretations of U.S. administrators.  The effect has been to undermine U.S. law in key areas – including neutering the safeguard law, undermining the Section 301 law, and calling into question critical appropriations and tax measures enacted by Congress on behalf of U.S. manufacturers.  Reforming the WTO to gain back the ground we have lost on unfair trade rules and in other areas will be critical to any effort to save our manufacturing sector.
• Currency manipulations:  A number of our trading partners – particularly China and Japan – are manipulating the currency markets to keep the dollar artificially high, and their own currencies artificially low.  By playing the currency markets in this manner, countries like China and Japan effectively subsidize their exports to the United States, and place a tariff on U.S. shipments to them.  This manipulation is taking place on a massive scale.  By some estimates, China's yuan is undervalued by as much as 40 percent vis-à-vis the U.S. dollar.
• Regulatory disparities:  While U.S. manufacturers must meet the strictest regulatory standards in the world (including in the area of environmental, labor and other work rules), manufacturers abroad often conduct their operations without meeting even the most basic standards in this area.  This provides an enormous and in many cases unsustainable cost advantage to foreign production.  It makes absolutely no sense to have gone through the process in this country of defining basic regulatory standards that help define "fair competition," and then turn around and set up international rules that allow these same standards to be ignored internationally.  That is a recipe for failure of our manufacturers, and failure of the standards the country has fought for years to establish.

We Need to Act Now on a Strong Pro-Manufacturing Agenda

             In addition to addressing regulatory and other hurdles under domestic law that are hampering the success of U.S. manufacturers, we need to put in place an aggressive agenda to fix the rules of the game internationally.  In particular, we need to: 

• Recognize the seriousness of the issue:  We cannot pretend that the problems facing our manufacturing base are simply cyclical in nature, or that foreign producers are somehow more "productive" than their American counterparts.  The global trading system is riddled with distortions that not only hurt U.S. companies, they also hurt consumers by preventing resources from being used in the most efficient manner.
• Recognize the strength of our bargaining position:  Any country with an annual trade deficit of nearly $800 billion should be able to set the agenda in trade negotiations.  By making clear that we will limit access to this market if necessary, we can exert tremendous leverage in trade negotiations.
• Demand fair treatment on taxes:  The United States should state, firmly and decisively, that it will not agree to any new trade agreement that doesn't fix the current distortion in favor of the VAT.
• Block currency manipulations:  The United States must do more than "jawbone" about the effects of currency manipulation.  It should demand that this practice be stopped, cut off market access for those who engage in it, and aggressively pursue legal action (such as a 301 case) against market-distorting behavior in this area.
• Defend U.S. trade laws and reform the WTO:  The United States should require that rights lost in past WTO dispute decisions be restored in future negotiations, should demand changes in the WTO dispute resolution system, and should reject any new agreement that would require weakening U.S. trade laws.
• Work to establish greater parity in regulatory standards:  A truly global market requires at least minimum common regulatory standards.  We should work to establish such standards and ensure that they are enforceable with respect to those selling in our market.