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Prepared Testimony of
Under Secretary of Commerce for International Trade
Grant D. Aldonas
Before the House Committee on Small Business

April 9, 2003

Thank you, Chairman Manzullo, Congresswoman Velazquez, and Members of the Committee for the opportunity to join you in a discussion of the challenges facing American manufacturers. Mr. Chairman, under your leadership, the Committee has proved a consistent advocate for American small businesses, particularly the many small and medium-sized firms that represent the heart of American manufacturing.

President Bush, Secretary Evans, and I believe in the importance of America’s small and medium sized enterprises to the health of the American economy and to our future. Our mandate at the Department of Commerce and the International Trade Administration (ITA), which I lead, is to create an environment in which all enterprises, including small businesses and entrepreneurs, can flourish. In order to achieve that, one hundred percent of our resources are directed toward ensuring that America’s small and mid-sized manufacturers can compete and win in the global economy.

Competitiveness of American Manufacturing

Mr. Chairman, let me begin with a point on which I know this Administration and members of the Small Business Committee agree B that the manufacturing sector in America is the foundation on which much of the rest of our economy is built. Census Bureau statistics reflect that fact. Manufacturing generates 16 percent of the national gross domestic product and directly employs 18 million Americans, 14 percent of all workers.

What those statistics do not capture, however, is the extent to which manufacturing drives much of the rest of the economy. Much is made of the rise of the service sector over the last twenty years. It is an area of undeniable strength and competitive advantage in the U.S. economy. But, we should not overlook the fact that much of the growth in the service sector has come from outsourcing functions that American manufacturers used to perform for themselves.

Let me give you a concrete example from my own experience. While in private practice, I had the privilege of advising a number of the major American high-tech manufacturers. In the mid- to late- 1980s, virtually every one of those enterprises handled all of their own shipping and customs brokerage. With that went a variety of administrative and compliance costs. Today, we see major firms like UPS provide those services at a much lower cost. The ability of a UPS to offer those logistical services on a scale no manufacturing firm could match helped U.S. manufacturers and exporters to reduce their costs significantly.

What it also meant was that jobs and statistics that used to show up in the manufacturing column in our national income accounts now show up under the heading of services. For our present discussion, we should draw two practical points from that restructuring of the U.S. economy over the past two decades. The first is that the process of restructuring has strengthened our ability to compete worldwide in both manufacturing and services. The efficiencies gained through that restructuring represent hard won results that continue to drive increases in productivity, which ultimately drives our rising standard of living.

The second point we should understand is who our service industries serve B they serve our manufacturing base, as well as other sectors of our economy, and in the absence of a strong manufacturing sector, our service industries would suffer as well. The fact that recent slowdowns in the services sector mirrored similar slowdowns in manufacturing activity is no coincidence. In short, manufacturing activity drives economic growth beyond the 16 percent of GDP reflected in Census Bureau statistics, which underscores the importance of understanding the competitive challenges our manufacturing sector faces today in global markets.

Now, what is undeniable and what brings us together today is the fact that American manufacturing is facing one of the most significant competitive challenges it has faced. The recession in manufacturing that President Bush inherited began at least 18 months before the recession overtook the economy as a whole. The sharp decline in economic growth in Asia following the Asian financial crisis meant a sharp fall in demand for the capital goods that represent areas of U.S. manufacturing excellence. The 40 percent appreciation in the dollar from 1997 to 2001 reflected the underlying strength of the U.S. economy, but also put American manufacturers under increasing pressure both in terms of the competitiveness of their exports and in terms of the competition they faced here at home. Indeed, the fact that Europe and Japan trailed us into the recession and still have yet to recover (e.g., European economic growth in 2002, without the contribution of a growing British economy, was 0.3 percent) has meant a stiff challenge for American manufacturers that relied on those markets for a share of their own growth.

Does the fact that our manufacturing sector faces those challenges mean that this important sector of the economy is unable to compete in world markets? In my view, the World Economic Forum’s 2002 Global Competitiveness Report answers that question directly. The report named the United States as the most competitive economy in the world. The report highlighted America’s significant levels of research and development, innovative business community, strong venture capital markets, and commitment to innovation and technological advancement.

Each and every one of the factors cited by the World Economic Forum’s report underscores the basic strength of our manufacturing sector. Throughout our history, the manufacturing sector has seized opportunity and pursued the latest science. In fact, manufacturing accounts for approximately two-thirds of private research and development expenditures. This has resulted in sustained technological innovations and tremendous productivity gains, which in turn have fueled higher wages, living standards, and economic growth.

That record of innovation, both in products and manufacturing processes, and in business and financial management, has yielded continuing gains in productivity. With rising productivity, the business pages of our newspapers generally focus on jobs lost and take that as a weakness in American manufacturing. What that overlooks is that productivity gains are the most fundamental indicator of a nation’s economic health.

Let’s take steel, for example, which is an industry that has received a great deal of attention as a result of the President’s efforts to ensure that we eliminate a 50-year legacy of government distortion in the marketplace that propped up an enormous amount of excess steelmaking capacity worldwide. There is no doubt that the steel industry has undergone considerable change over the last 20 years, as much due to domestic competition from innovative mini-mills domestically as from subsidized competition from abroad. That restructuring in response to competition is ongoing today.

Again, much of the focus is on the loss of jobs in the industry. Employment in the steel industry in 1972 was 568, 000. By 2002, this past year, employment in the industry had fallen to 188,000 or about one-third of the number employed 30 years ago. The President has shown leadership in encouraging restructuring within our industry, while at the same time, addressing those foreign government practices that precipitated much of the crisis in the U.S. steel industry. This Administration has also worked in concert with Congress to reinforce the worker adjustment programs that benefit those employed in the steel industry and those whose pensions continue to depend on the industry’s health.

There is one fact, however, that we should not overlook B and it is a fact that foreshadows the revival in American steel and American manufacturing generally. Today, with less than one-third of the personnel it employed 20 years ago, the American steel industry produces more steel than it ever has in the past. What the American steel industry has done, despite all of the criticism to the contrary, is increase its productivity by 132 percent over the past 30 years, which is exactly on par with the increase in productivity (134 percent) in the rest of American manufacturing. That fact alone rebuts much of the criticism leveled at the U.S. steel industry on the ground that it has not responded to the challenges it faces in global markets.

It also rebuts those who have written off the American steel industry as an industry of the past. Frankly, based on my understanding of the ongoing changes in the industry and the continuing drive to lower costs, the American steel industry is meeting the commercial challenges it faces. The steel industry that comes out of this current period will be stronger, healthier, and very much a part of America’s economic future.

The reason I focus on steel is not because it has drawn so much attention over the past two years, and I know this is a particular focus of yours, Mr. Chairman. I focus on steel to underscore the fundamental point that steel is very much a part of the American manufacturing sector. Indeed, steel lies at the heart of American manufacturing.

I say that to emphasize that the challenges facing the steel industry are precisely the challenges facing the rest of the manufacturing sector in America. My impression is that whatever disagreements you may find within the manufacturing sector regarding the relief the President granted under section 201, those differences are small in comparison to the near unanimity among all U.S. manufacturers about the common challenges they face in today’s global markets.

It is those common concerns that I intend to address with the remainder of my testimony. Before I do, however, I want to add one further point that adds to the urgency of addressing the competitive challenges our manufacturers face. The President’s and Secretary Evans’ interest in manufacturing is not based on economics alone.

Today, as we meet, you can turn on any television and watch the men and women of our armed forces liberate the Iraqi people. Watching our forces topple (literally, based on the latest press reports of U.S. soldiers helping Iraqi citizens tear down statutes of Saddam Hussein) the horrible regime in Baghdad should drive home the point that our safety and security B and in many instances the safety and security of people half a world away B depend on the ingenuity, innovation, and success of America’s manufacturers. That is true of military hardware and advances in technology on display in Iraq. It is also true of the less immediately visible advances in biotechnology that help combat bioterrorism or the diagnostic and surveillance equipment that will help ensure both our safety here at home while allowing us to maintain an open economy on which our strength depends.

For President Bush, Manufacturing Matters

With that as context, let me assure you that President Bush and the Secretary know, as you do, that manufacturing matters. It matters to our economic health, job creation, continued growth, and our security. That is why the President’s economic and growth program focuses on issues of particular importance to American manufacturers.

First and foremost, the President directly confronted the recession he inherited upon taking office. Beginning in the spring of 2000, we experienced several economic setbacks. The equity markets collapsed, and an energy crisis gripped the west. Business investment dropped off sharply in response to an excess capacity bubble, unemployment rose, and corporate scandals began to cast a dark shadow over the financial sector. And of course, there were the events of September 11th, from which we are continuing to recover.

In the face of these challenges, the President made economic growth his highest domestic priority. In 2001, President Bush successfully pressed for and passed the largest tax cut in more than two decades, which resulted in sustained spending by American consumers. In addition, our nation’s manufacturers asked that we lower the cost of reinvesting in their businesses and conducting research and development. The President delivered on that request. He produced a sharp cut in tax rates, and asked Congress to accelerate the remainder of those cuts to stimulate business investment.

Because of this swift action, the economy grew by a rate of almost three percent last year and, nationwide, incomes are rising faster than inflation. Interest rates are lower than they have been in 37 years, allowing Americans to refinance their homes and adding billions to their pocketbooks and to the economy. Home ownership B a central part of the American dream B rose to 68 percent. In addition, productivity rose 4.8 percent in 2002, the largest increase since 1950.

Now, the President is intent on fostering increasing levels of growth in the business community. He has asked Congress to accelerate the remainder of his 2001 tax cuts to stimulate business investment. He has asked Congress to eliminate the double-taxation of corporate income, which will free an estimated $20 billion for our economy and make business investment a far more attractive proposition. And he has asked Congress to increase expensing limits for small businesses. Mr. Chairman, as both you and the President know, small businesses serve as the backbone of our economy. They need an increase in the expensing allowance from $25,000 to $75,000.

Critics of the President’s plan have fostered the view that it focuses solely on business interests. That, of course, is completely false. You do not have to look any further than the innovative savings proposals presented with the President’s budget to know that the President has focused on tax reforms and tax simplification that would directly benefit individuals at all levels of the U.S. economy.

That said, to the extent that a number of reforms proposed by the President directly address concerns registered by American manufacturers, you have to ask why the critics object. For example, the American economy is made up of approximately two-thirds consumer spending and one-third business investment. While consumer spending has remained strong over the last two years, business investment has lagged. It has become increasingly difficult for American manufacturers to obtain capital for expansion and productivity enhancing investments that will allow them to compete globally. Frankly, that should come as no surprise to this committee, which I am sure, understands that taxing business income at an effective rate of 70 percent, due to taxation of such income once when it is earned and again when it is distributed to shareholders, is a huge disincentive to invest in American manufacturing.

In short the President’s economic and growth proposals focus on that sector of the economy that most needs a push at this point B business investment. And it does so in ways that addresses many of the chief complaints of American manufacturers regarding their cost of capital, which directly influences their ability to raise their productivity and their ability to compete globally.

I know that the House passed the President’s economic package in its entirety. For the benefit of American manufacturers, America needs you to press forward with these important reforms in the final package. For America’s countless small businesses and manufacturers, it will provide much needed incentive for capital formation and investment, while also empowering businesses to make decisions based in economics and not the tax code.

We also need your continued support for the other strand of the President’s economic program – expanding trade. President Bush has fostered a two-pronged approach to trade that serves our manufacturer’s best interests. The first prong involved obtaining Trade Promotion Authority so that the President could reassert America’s leadership in international trade negotiations.

The President has acted on his promises in that regard. In the first two years of his Administration, the President has seen the successful launch of a new round of global trade talks in the World Trade Organization. To further the interests of our manufacturers, the President has tabled a proposal for lowering tariffs on industrial goods that would end the inequities in the current trade regime by ensuring that all WTO members eliminate tariffs on all manufactured goods. Currently, the average U.S. tariff on such products is less than 2 percent, while the average tariffs in most of the rest of the world are in double digits, many times the U.S. rate. The President’s proposal would eliminate that imbalance and open new markets for American manufactures.

The President has completed long-delayed free trade agreements with Chile and Singapore. He has reinvigorated talks designed to complete a hemisphere-wide Free Trade Agreement of the Americas. And, he has launched new talks with our Central American trading partners, Morocco, Australia, and the members of the South African Customs Union. These last three can serve as particularly important models of how trade and economic development policies can work together to produce a higher standard of living for the developing world, as well as new markets for our manufacturers.

The second prong of the President’s strategy is one I am particularly proud of because it involves the many fine colleagues I have the pleasure to work with at the Commerce Department and other trade promotion agencies, such as the Export-Import Bank, the Overseas Private Investment Corporation, the Trade and Development Agency, and the international office of the Small Business Administration.

At the outset of the Administration, we launched a benchmarking study of how to improve our trade promotion. That led to the publication of a National Export Strategy in 2002, with 65 separate recommendations for improvement in our processes. I am pleased to report that we are providing the Committee with our first follow-up report on implementation of the recommendations and to allow you to measure that progress on behalf of America’s manufacturers.

This effort has involved the dedication of much of the 2400 employees of the International Trade Administration, as well as a large number of colleagues in other trade promotion agencies. None of that would have been possible without the consistent focus of the President and Secretary Evans. And, none of that would have been possible without the consistent support of the Small Business Committee throughout the process.

Many of those efforts have paid off in particular for small and medium-sized exporters. For example, the President’s e-government program included an "International Trade Process Streamlining Initiative." Under that initiative, we will work to enhance Export.gov, the government’s existing online portal for small business export assistance information. We intend to create a seamless environment for small and medium-sized enterprises to research markets, gather trade leads, and conduct a majority of their export transactions online. That electronic backbone for our exporters in the manufacturing sector will provide more timely and accurate export information and result in cost savings for U.S. businesses by reducing the amount of time they spend trying to get information and filling out applications and forms.

The President’s Manufacturing Agenda B Addressing the Competitive Challenges Facing American Manufacturing

While I believe that the President’s economic plan and our ongoing initiatives at the Department will address many of the immediate needs of our nation’s manufacturers, I also know that President Bush and Secretary Evans are not satisfied even with the strong record of economic growth the economy has registered despite the multiple challenges it has faced in the last two years. I know that President Bush and Secretary Evans will not be satisfied until we have done everything we can to create conditions that will allow manufacturers to maximize their competitiveness and spur economic growth.

One thing both the President and the Secretary have consistently emphasized is that the government cannot create jobs. It is the private sector that creates jobs. Government’s role is simply to create the environment in which individual initiative, innovation and effort are rewarded. In other words, it is our responsibility to ensure an environment in which the private sector can succeed in creating jobs and economic growth that raises the standard of living for all Americans.

One need not look further than the most recent Census Bureau statistics to see the need for us to mobilize on behalf of the manufacturing sector to create that environment. Manufacturing has yet to recover fully from the recession. According to the Census Bureau, shipments of manufactured products decreased 1.5 percent in March 2003, the largest decrease since February 2002, and investment by these firms into new manufacturing equipment declined by 7 percent in 2001. Machine tool consumption dropped 24.9 percent in January 2003, compared to the previous month. Just last week, the Commerce Department announced that new orders for manufactured goods dropped 1.5 percent, which is the largest drop since September 2002.

In addition, we are all aware of the significant job losses in manufacturing. I am particularly concerned by the loss of engineering talent and experience. Our nation’s manufacturers employ some of the best and brightest scientific minds, and their work has contributed to our national prosperity and economic growth. The loss of their technology expertise and innovation could produce a ripple effect in our economy.

Given the critical importance of our manufacturing base, the President and Secretary Evans are committed to ensuring that our manufacturers have what they need in the way of economic policy that will allow them to drive growth, innovation, and ultimately success. Toward that end, Secretary Evans, in a speech during Manufacturing Week in March in Chicago, outlined an aggressive Administration agenda that will cement the role of manufacturing as a driving force in increasing productivity, economic growth, and living standards.

First, Secretary Evans has asked me to lead a comprehensive look at both the challenges and opportunities facing American manufacturing. I will rely on many of the bureaus within the Commerce Department whose activities are immediately relevant to American manufacturing for much of the legwork, including representatives from the Economic and Statistics Administration, National Institute of Standards and Technology, Patent and Trademark Office, Minority Business Development Agency, and others. We intend to reach out to the manufacturing sector across the country through a series of field hearings designed to ensure that we gain a broad cross-section of views from all industries within the manufacturing sector. I intend to ensure a particular focus on the needs of small and medium-sized enterprises as a part of that outreach.

We will work in close consultation, as well, with our manufacturers’ customers, the financial community, academia, states and local communities both to discern the challenges we face and to identify the best practices within both the private sector and government to encourage a vital manufacturing sectors. We will coordinate efforts with the White House and the President’s Council of Advisors on Science and Technology. We will also utilize the expertise of other agencies on their particular issues, consulting with the Treasury Department on tax matters, for instance, and the Labor Department on developing a flexible, well-trained workforce equal to the manufacturing sector’s needs.

Gathering information from all these sources, we expect to develop recommendations for private sector action, government initiatives, and further work. Working together with organizations such as the National Association of Manufacturers that represent a broad cross-section of the manufacturing industry, we aim to have an interim report on the state of manufacturing by summer and a final report in the fall. I also anticipate working with this committee, and others in Congress, to discuss our findings.

Needless to say, we will have a very full plate. For instance, we have heard from countless American manufacturers that rising health care costs are affecting their competitiveness. The President heard those concerns and responded. He has proposed to expand the number of community health care centers, extend prescription drug benefits to retirees at lower cost, and reform medical malpractice laws so that awards compensate victims rather than trial lawyers. Yet, we’re not finished. We will continue to examine what we can do to stabilize the cost of health care for employers.

America’s manufacturers have asked this Administration for stronger intellectual property protection and funding for federal science programs. Again, the President heard those concerns and responded. We redoubled our efforts at the Department of Commerce to eliminate piracy of intellectual property abroad, and we are improving the speed and quality of patent and trademark processes at home. The President also proposed increasing federal research and development funding by more than 25 percent to $123 billion for 2004. But again, the President is not satisfied. Secretary Evans has asked us to determine whether these proposals will be sufficient to meet the needs of our manufacturers.

As a final example, I would like to highlight what the President has done in response to manufacturers’ requests that he encourage a reliable supply of low cost energy, reform the New Source Review program on power plant emissions, and ensure science-based air quality standards. The President offered a National Energy Policy, an assessment of the New Source Review program, and an aggressive strategy to cut greenhouse gases over the next ten years based on sound science. Nonetheless, the President still believes that we can do more, and Secretary Evans has asked us to look at these issues along with the others.

I think it is also important to stress that when we find issues that need to be addressed, we do not intend to wait until there is a final report to begin our efforts to address those challenges. That process has, in fact, already begun. Let me give you just one example.

As we started the process of examining the challenges facing our manufacturers, one issue that they identified for immediate action was the issue of product standards. Foreign product standards B the process of their development and the effect of their technical regulations B have become an increasingly important barrier for U.S. exports. Some nations use divergent standards peculiar to their nation or region, redundant testing and compliance procedures, unilateral and non-transparent standard setting exercises, and a confusing thicket of other standards-related problems that can result in artificial impediments to trade.

To address this concern, one month ago, I was pleased to join Secretary Evans and Deputy Secretary Bodman to announce a new Department of Commerce Standards Initiative. The eight-point initiative will ensure that standards do not unfairly inhibit American companies from entering new markets. While assessing the situation, we will work to develop training programs so that staff in foreign markets can recognize and respond to standards issues; expand our early warning system to disseminate market intelligence and information on standards developments in key foreign markets; partner with the proposed President’s Export Council subcommittee on technology and competitiveness; and, host a series of industry-specific roundtables to gather input from U.S. industry on the most pressing standards issues and priority foreign markets.

Given that standards and standards-related technical regulations are pervasive features of global commerce, affecting an estimated 80 percent of world commodity trade, this effort is significant. And in confronting this issue head-on, the President has charged his Administration with reducing the barriers to trade caused by foreign governments’ policies on standards and technical regulations.

The Manufacturing Agenda is the President’s Agenda

What I hope my testimony has underscored for the Committee is that, from product standards to tax and health care reform to energy policy and to trade negotiations, the American manufacturing agenda is our agenda. This Administration understands that for generations, American companies have been able to produce the highest quality goods, efficiently and economically. In the process, manufacturers have provided good jobs for millions of skilled American workers, raised our standard of living and standards of living throughout the world, and played a central role in securing our safety and liberty.

Given that history, it’s not surprising that both the Administration and the Committee, under your able leadership, Mr. Chairman, are both committed to the health and vitality of American manufacturing. Bluntly, to be America, and to do what America has always done, our manufacturers must not only compete in global markets, but succeed. Our job is to create the conditions that will allow that to happen.

Once again, Mr. Chairman, I want to thank you for the opportunity to appear before the Committee and for your foresight in holding this hearing. I appreciate frequent advice and consultation we at the Commerce Department have had with you and all members of the Committee and their staffs. Working together, I have no doubt that we can affect real change and enable America’s manufacturers and workers to compete in the global marketplace.

I look forward to your questions.

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