US at Disadvantage Regarding Value-Added Taxes, While Community Colleges Could Play Key Role

What exactly is the state of US manufacturing? And what is needed to really get it going again? Those questions are not as easy to answer.

Manufacturing it seems did play a key role in leading the US economy out of the Great Recession of late 2008 and most of 2009. But recent revisions to the manufacturing data from the Federal Reserve change that perspective. With those data revisions, as exclusively reported by Supply Chain Digest, US manufacturing output is still below peak 2007 levels, and is now just about 3% above 2012 levels, meaning growth has been a very weak 1% or so annually over the past three years. (See Recent Data Revisions from the Federal Reserve Cut US Manufacturing Growth Since 2012 in Half.)

Supply Chain Digest Says... Not that this should be news to most of us in the supply chain, but even today many company's do not fully account for the full costs of sourcing from overseas. What do you say? Click here to send us your comments Click here to see reader feedback

Incredibly, the US shed 5.7 million manufacturing jobs from 2000 to 2010 - more than a third of the manufacturing workforce - as companies abandoned plants and workers in favor of low-cost foreign countries and probably to a lesser degree saw technology-led gains in productivity.

While US manufacturing employment has grown slightly since 2010, it is nowhere near levels seen before the recession.

Writing last week in the Wall Street Journal, reported Bob Tita identified nine strategies for getting US manufacturing back on track, as summarized below:

Make Exports More Valuable: Under one proposal, companies that export goods from the US would accumulate certificates equal to the value of their exports. But companies that wanted to import goods would have to purchase certificates from exporters. So, this is sort of like a "cap and trade" program for US trade.

US exporters, with a cash cushion from the sale of their certificates, could offer US-made goods to foreign customers at lower prices, making them more competitive and shrinking the trade deficit over time. Meanwhile, foreign-made items imported into the US would become more expensive to reflect the cost of import certificates, making US-made goods more cost competitive with cheap imports.

Impose a Value-Added Tax: A VAT is used by some 130 countries, and involves putting a tax on each step along a production chain as a product or material increases in value or is consumed.
How does this help domestic manufacturing? Almost all countries with VATs waive them on exports but impose them on imports, at an average rate of about 17%.

"Right now we're the sucker, because everybody else is charging the tax on [U.S.-made goods] coming into their countries, but we don't charge it on their stuff coming to the U.S.," says Harry Moser, president of the Reshoring Initiative.

If adopted, A VAT would need to be coupled with an elimination or reduction of existing taxes on businesses, including payroll taxes for Social Security and Medicare. Likewise, consumers would need tax relief to make up for the higher prices they would face for most purchases.

Deal with an Overvalued Currency: The US dollar's status as the world's reserve currency is hurting demand for US-made goods in global markets, keeping the dollar about 15% more than it otherwise would be.

That makes U.S.-manufactured goods more expensive in other countries, but imports are cheaper in the US, giving foreign governments an incentive to keep their own currencies below the dollar.

There is no easy way to reduce the value of the dollar (even massive quantitative easing is not having much of an impact), but one idea is called using "market-access" charges.

A base-rate charge of 0.5% could be applied on all foreign-originated inflows of money into US investments. The rate would gradually climb to about 2%. Further increases would be linked to increases in the trade deficit, which is about 3% of US GDP.

If the deficit remains unchanged even with the fee, there might be a 0.25% increase in the fee every six months. When the deficit retreats, the fee would fall. The fee revenue could be used for government-funded research to help manufacturing.

Look at the True Cost of Offshoring: Not that this should be news to most of us in the supply chain, but even today many company's do not fully account for the full costs of sourcing from overseas.

"Companies often don't weigh costs for transportation, as well as expenses for dealing with reduced product reliability, undependable supply chains and the need to hold more inventory in case overseas deliveries are delayed," Tita writes.

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Some argue that the federal Worker Adjustment and Retraining Notification Act, which requires companies conducting mass layoffs to provide workers 60 days' notice, should be amended such that if layoffs are the result of a company moving production overseas, those companies should have to analyze the total cost of offshoring. While this wouldn't stop companies from moving, it would require them to provide an explanation of their expenses, and would raise awareness of the total costs of offshoring.

Purge Duplicate Regulations: When federal agencies impose new rules, they rarely repeal old ones or check to see if another agency has a similar or conflicting regulation. Over decades, this has resulted in layers of rules for environmental protection, workplace safety and financial reporting that are often redundant or outdated.

The National Association of Manufacturers estimates that regulatory compliance costs manufacturers about $139 billion annually.

While this seems to be a well-recognized issue, nothing is done to change the status quo.

Look at More than Jobs: Governments typically look at the jobs impact of US manufacturing, and thus may not embrace robotics and other automation that might reduce manufacturing jobs. But that is a mistake, if the US wants to grow its manufacturing base.

"Analysts say policy makers should do more to encourage investments in manufacturing technology and automation, even if it initially seems to undermine manufacturing-employment growth," Tita writes. "US incentives for investments in factory automation and research generally lag behind other countries' efforts."

A 2012 study ranked the U.S. 27th out of 42 countries in research-and-development tax credits.

Turn Community Colleges into Career Factories: Despite low manufacturing payrolls in the past decade, companies continue to have difficulty finding welders, machinists and other skilled craft workers to replace retiring employees.

Some companies are collaborating with community colleges to design job-training programs specifically for those companies' needs, similar in a sense to the apprentice programs popular in Germany and other countries in Europe.

A plan pending in Congress would double down on those efforts by authorizing the creation of 25 "manufacturing universities." The Commerce Department's National Institute of Standards and Technology would award selected schools $20 million over four years to implement plans for improving manufacturing in their states.

Spend More on Manufacturing R&D: The government also needs to spend more on applied research to solve specific problems in manufacturing and bringing new products to market, Tita says. Most government funding for research is directed at developing new ideas and theories. As a result, early research breakthroughs that often occur in the US are turned into new products such as flat-screen TVs and lithium-ion batteries in other countries.

The fledgling National Network for Manufacturing Innovation is the US's best attempt so far at closing the gaps in homegrown applied research. The Obama administration wants to start 15 regional institutes that combine the research capabilities of universities and corporations on developing solutions and new technologies for specific industries, including 3D manufacturing, lightweight metals, composite materials and textiles.

Eight of the 15 institutes have opened, with the bulk of the funding coming from corporate participants.

Create Regional Centers of Expertise: The US won't be able to produce high-tech, high-margin products if it continues to cede the ability to perform more basic manufacturing work, advocates argue. The U.S. has already relinquished whole industries such as garment manufacturing and consumer electronics to other countries.

One proposed solution is to create regional centers of exp ertise. In this approach, a region looks to leverage an existing set of skills or an industrial legacy, such as machining or casting metal.

Many of these ideas seem to make a lot of sense - why don't we act?

What is your reaction on these nine ideas for invigorating US manufacturing? Which ones have the most promise? Let us know your thoughts at the Feedback section below.

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