American Dragon
Winning the global manufacturing war using the universal principles of fewer, faster and finer.
This article is an excerpt from Chapter 9 of Michael McKeldon Woody’s new book, American Dragon. Woody’s book tells the story of how American companies can win back business using the principles of fewer (smaller orders and/or more customized products), faster (getting product to the customer as quickly as possible) and finer (manufacturing a safe, high-quality product) to exploit the weaknesses of foreign competitors, drive sales higher and create American jobs.
Don’t Weaken Buy American Laws—Strengthen Them
For the 10th anniversary of the September 11 terrorist attack, the U.S. Transportation and Security Administration purchased 70,000 commemorative bracelets to give to their employees as a tribute to those who died in the tragedy. The bracelets were made in China and purchased under an exemption from legislation that was passed to ensure the government buys from U.S. manufacturers.
Most people don’t know that the federal government has signed trade agreements—including the Government Procurement Agreement of the WTO—that supersede state-level Buy American legislation. What is Buy American legislation? It requires state agencies to grant a preference to U.S. products or services when putting a project out for bid. A number of states already have such laws, and the concept is a reasonable one. Does it mean that all state purchases will be U.S.-made goods or services? No, but it helps.
In return for allowing U.S. companies access to government contracts in other countries, past trade agreements have granted overseas companies access to U.S. federal and state government contracts. This federal trade policy trumps state laws. In fact, some state-level Buy American legislation carries wording that the state preference for U.S. made cannot supersede federal law. Fortunately, foreign companies purposely blocked from state bids by Buy American laws have no direct recourse in U.S. courts. Only the federal government can take such action, and it is highly unlikely that it would.
At a federal level, there are three laws that require U.S. government purchasing agents to give a preference to U.S. manufacturers—the Buy American Act, the Berry Amendment and the Buy America Act. The Buy American Act, passed in 1933, is the most wide-ranging domestic preference statute of the three. The Berry Amendment is related exclusively to purchases by the Department of Defense. The Buy America Act (not to be confused with the Buy American Act) applies only to mass transit projects funded at least partly by federal grants with a value of over $100,000. All three require that a preference be given to domestic manufacturers, but all have provisions that allow for foreign sourcing when a U.S. alternative is either unavailable or too expensive.
Given these provisions, one wonders why the power of federal, state and local governments to establish a preference for U.S.-made products and services in federal government bids would be traded away as a concession in international trade deals. I realize the horse may have already left the barn on this one, but government should be extending these types of preferences, not trimming them. Not only does Buy American legislation create or maintain U.S. jobs, it also sends the message that our federal, state and local governments value U.S. manufacturing. And if only a limited percentage of state government purchases stay in the U.S. because of these laws, then it is business worth having for U.S. manufacturers.
In spite of the obvious benefits, constituencies opposed to Buy American laws make strikingly similar arguments against them. Here is a recap of the arguments typically made and why those arguments are wrong.
Argument No. 1: Buying American would raise the costs of the project.
Yes, the price of the project may be higher, but if all companies bidding for the project are under the same Buy American constraints, then the playing field would be level for all of those bidders.
We must also consider the total cost to the city, state or federal government. If the price to the government entity for the Buy America project is X-percent higher, is that X-percent premium covered by the taxes paid by the U.S. workers employed because of the Buy American provision? Conversely, if those jobs are lost due to the lack of the Buy American provision, what is the cost to the government entity of unemployment and other benefits?
Thus, although the price of the project may be higher, the difference between the higher price and the actual cost to government may be ameliorated, or eliminated, by these other factors.
Argument No. 2: It’s impractical; some intermediate parts may not be available here in the U.S.
Yes, that’s possible in some cases. However, both the Berry Amendment and Buy American Act have loopholes that allow federal government agencies to buy overseas if the price from U.S. vendors is too high or the product is not available domestically. And these waivers are used often. In a report released by Sen. Chris Murphy (D-CT) in May 2015, it was reported that the Department of Defense alone had granted over 307,000 waivers to the Buy American Act between 2007 and 2015, amounting to over $176 billion in purchases. Most of the waivers were granted because the products purchased were to be used overseas.
As for the Berry Amendment, a loophole already exists that allows the Department of Defense to buy outside the U.S. if the value of the contract is below $150,000. One of the dirty little secrets of government procurement is that purchasing agents will sometimes split one large contract into several smaller contracts—each below the $150,000 threshold—to avoid the need to source from a U.S. manufacturer. Given wriggle room like this, can one really believe that it’s impractical to buy American?
Argument No. 3: Since working conditions are deplorable in most low cost manufacturing countries, by buying there we help create better living conditions for the
jobless in those countries.
This is a public relations argument often used by multi-national manufacturers, brands and big box retailers to justify offshoring. It’s ironic when large corporations characterize their sourcing model as a form of philanthropy for developing nations, when what the sourcing model truly reflects is the slogan “always the low price.” For example, it’s apparent that apparel importers started sourcing in Bangladesh not to help the Bangladeshi people, but to buy at the lowest possible price. It is only since the Tazreen factory fire that those same companies are now touting their sense of “social responsibility” for the people of Bangladesh as the reason for not moving their apparel purchases to another country (or back to the U.S.).
Of course, anyone with a shred of empathy is concerned about the poor in developing countries. But should that concern drive government purchasing policies? Should U.S. government procurement be a form of social welfare for other countries? Is that not the role of foreign aid?
Argument No. 4: We should let the free market rule and buy where the goods are cheapest. In the long run, it’s better for all.
See my previous comments concerning Ricardo’s theory of competitive advantage [If you produce X efficiently and I produce Y efficiently, then I shouldn’t waste my labor producing X, and you shouldn’t waste your labor producing Y. If each of us does what we do most efficiently, then we can trade X for Y and vice versa, and we’ll both be better off in the long run]. It’s a great theory—in a perfect world. Let us also remember that China is a strategic threat to the U.S., so the trade policy tail should not be wagging the foreign policy dog.
Argument No. 5: Government preference for “Made in USA” is protectionist trade policy—China cites Buy America rules as justification for their own discriminatory policies.
This is a spin-off from the “comparative advantage” argument, often used by multi-nationals more interested in selling into China than rocking the boat with China. If China didn’t have Buy American laws as an excuse for their own trade barriers, they would find another whipping boy.
Argument No. 6: If it’s good to buy USA-made, isn’t it even better to buy Texas-made? And if it’s good to buy Texas- made, isn’t it better still to be Dallas-made, etc.?
Hoover Institution economist David Henderson actually made this weak “reductio ad absurdum” argument for a John Stossel column written in November 2011. Why is it weak? Because the debatable proposition is not whether it is good to buy “Made in USA;” rather, it’s whether it is in the best interest of the U.S. and its citizens for U.S. government purchasing policy to establish a preference for products made in the USA under reasonable circumstances. This is a more nuanced proposition than the one set up by Henderson.
There is no downside to government-mandated Buy American laws as long as that mandate ensures flexibility if the comparable U.S. product is much more expensive or simply not available here in the U.S. Sadly, the point may soon be moot. The Trans-Pacific Partnership trade agreement currently being negotiated may add a number of low-cost manufacturing countries in the Pacific Rim to the list of nations that are not subject to Buy American laws.
To add insult to injury, when the fiscal year 2016 National Defense Authorization Act was unveiled in the House in spring 2015, the proposed bill that came out of committee raised the Simplified Acquisition Threshold for Berry Amendment purchases from $150,000 to $500,000. Instead of all Department of Defense purchases over $150,000 being subject to the Berry Amendment, the new threshold would allow any purchase below $500,000 to be open to imports, creating potentially serious consequences for many smaller U.S. manufacturers who rely on defense contracts. I was personally involved in the lobbying effort in the House that reversed this decision, and remain involved in attempting to change the Senate version of the bill that also contains the increased threshold. Only time will tell if our efforts are successful. Remarkably, I have seen no metrics during this process that show how raising the threshold would provide any savings for the Department of Defense.
Ramp Up Port Inspections
Lumber Liquidators is one of the largest providers of flooring for homes and businesses in the U.S. In March 2015, a segment on the CBS News program 60 Minutes reported that laminated flooring purchased from Lumber Liquidators, and installed in possibly as many as hundreds of thousands of homes, contained formaldehyde levels 20 times over the legal limit. Children are the most likely to be affected by these high levels of formaldehyde. The laminated flooring was made in China.
Chapter 6 dealt with the importance of making FINER product to more effectively compete with overseas competitors. However, government also has a role to play on this issue. U.S. manufacturers jump through a number of regulatory hoops to ensure that their products meet government-mandated guidelines for product safety. Yet the government agencies that are tasked with ensuring that unsafe imports do not reach the consumer are able to test only a small percentage of the food and products that arrive at our ports from overseas.
According to the Consumer Product Safety Commission (CPSC) budget request for fiscal year 2016, more than 80 percent of consumer product recalls in 2013 involved imported product. $723 billion in products under CPSC’s jurisdiction—nearly $2 billion per day—were imported into the U.S. during that same year. Yet the CPSC staffs fewer than five percent of U.S. ports. The CPSC admits that they have neither an adequate number of product inspectors at ports nor the computer targeting systems that would allow them to better identify non-compliant products.
In their fiscal year 2016 budget request, the CPSC asked for 50 additional inspectors and an improved technology targeting system that would allow them to “analyze 100 percent of incoming import product lines under the CPSC’s jurisdiction and designate high-risk entries before those imports reach U.S. ports . . .” Total estimated cost for the program? $36 million. Seems like a bargain to me. These requests should be granted not only to ensure that unsafe imported products don’t make it to our store shelves, but also to help level the playing field for U.S. manufacturers. Overseas companies know they have a good chance of beating the odds when they ship unsafe products into our country. Let’s change the odds in our favor by adequately funding CPSC port inspections.
Inspection of imported food is perhaps an even bigger problem. In October 2012, Bloomberg News reported on shrimp from Vietnam, headed eventually to the U.S., being stored in dirty plastic vats filled with ice made from tap water that even the Vietnamese Health Ministry states should be boiled before drinking. The same story described tilapia from China that had been partly fed with feces from pigs and geese. Yet less than two percent of all food brought into the country is physically inspected.
In its budget request for fiscal year 2016, the FDA asked for a $109.5 million increase in its budget to enhance oversight of both domestic and overseas companies. Clearly, Congress will go over that request with a fine-tooth comb. When it comes time to make the inevitable cuts, funding for the inspection of imported food should receive the highest priority.
Stop Trying to Pick “Winning” Industries
In the fall of 2010, former Red Sox pitcher Curt Schilling and his start-up video company, 38 Studios, were lured from Massachusetts to Rhode Island with a $75 million loan from the state’s Economic Development Corporation. A press release from the governor’s office read, “38 Studios presents Rhode Island with a tremendous economic development opportunity. This investment creates 450 high-paying jobs, provides job opportunities for our college graduates in a fast-growing industry, and will attract other interactive and entertainment companies to Rhode Island.” By May 2012, the company had collapsed and the state of Rhode Island was on the hook for as much as $110 million.
The 38 Studios deal is a near perfect example of why government economic development efforts should not be focused on selecting companies in particular industries that are considered “advanced” or high tech. There were, no doubt, a number of small to mid-size manufacturing companies in Rhode Island that could have used a small piece of that $75 million to expand their facility and hire more employees. But economic development efforts always seem to focus on the brass ring of “advanced” industries. During the time that the 38 Studios deal was imploding, I was aware of a Rhode Island manufacturer—with a multi-million-dollar order in hand from a big box retailer—who could not get a loan to expand his factory. Clearly, a better bet for the Rhode Island EDC would have been to make a loan 1/10th the size of the 38 Studios loan to this company. I suspect they didn’t think their product was glamorous enough.
And if you think the federal government can do a better job at picking winners, the Solyndra debacle proves otherwise. In 2009, the U.S. Energy Department provided the California-based manufacturer of solar panels with a $536 million loan guarantee to build a new fabrication plant that would employ hundreds. By August 2011, the company had filed for Chapter 11 bankruptcy protection. The government recouped 20 percent of the investment, but $385 million was lost. Records showed that as the company was spiraling downward, politicians in D.C. were more concerned with the political fallout than with the massive loss of jobs.
It is apparent that government typically does a poor job of picking winners when it comes to loaning money to companies in “advanced” industries. Yet, in the triumph of hope over experience, they continue to try. Meanwhile smaller companies in basic manufacturing industries have trouble getting a modest loan. This isn’t to say that companies in high-tech industries should not be supported; only that economic development efforts should not slight basic manufacturing in favor of high tech industries. In fact, they shouldn’t look at industry at all.
Government sponsored economic development efforts should focus less on industry and more on business model. For example, it’s safer to place a small bet on a basic manufacturer that understands the principles of fewer, faster, finer than to place a large bet on a company in an advanced industry. Every city and town, in every state in this country, is looking to corral that glamorous high-tech company, and it’s tempting to swing for the fences. But if state and local governments really want to help manufacturers, they should look for solid singles and doubles hitters, regardless of the industry—especially if that mid-size manufacturer has implemented fewer, faster, finer.
Invest In Education And Infrastructure
Winter 2015 was particularly tough in Rhode Island, and one of its main side effects—potholes—shines a light on the dismal state of our country’s infrastructure. A 2013 report card on America’s infrastructure, prepared by the American Society of Civil Engineers, graded our bridges at C+, noting that one in nine of our roadway bridges is structurally deficient and that the average age of the over 600,000 bridges in this country is 42 years. Inland waterways, which carry the equivalent of 51 million truck trips each year, received a D- grade due to the generally poor condition of locks and channels that need dredging. The condition of our roads was graded D, transit systems D, energy grid D+ and aviation D. Because the state of our infrastructure has a direct relationship with our ability to compete globally, it must be addressed. Aging infrastructure is a sure sign that we have lost our edge as a world leader.
In a document prepared for The American Road and Transportation Builders Association, James Pinkerton and Bob Patterson make a compelling case for the past and future importance of government funded infrastructure. They take the reader through the historical and political figures, from George Washington to Dwight D. Eisenhower, who had the vision and tenacity to ensure that the U.S. had the world’s best waterways, railroads and highways. And they take us through the slow steady decline since the 1970s, linking our deteriorating infrastructure with the loss of manufacturing jobs.
Pinkerton and Patterson [authors of A Vision of American Strength: How Infrastructure Built the United States] note that “perhaps the most far-reaching consequence of the collapse of U.S infrastructure has been the corresponding loss of manufacturing jobs and the waning of America’s middle class. When a country scrimps on infrastructure, or kills big public projects, it also sidelines its manufacturing sector. That overlooked side effect has weakened America by marginalizing the 65 percent of the U.S. workforce without college degrees, whose livelihoods, since the days of Henry Ford, have largely depended on making material things.”
Meanwhile, in the American Society of Civil Engineers report, the conditions of our public school facilities received a D grade. Much has been written about the “knowledge gap” between available jobs and the unemployed, and that gap must be bridged. But bridging it begins with a better school environment. As a nation, we will never produce better students until we provide better school buildings, better equipment and a clean, safe environment in which to learn.
In many respects, developments in the high technology sector of our economy have blinded us to the dangers of our crumbling infrastructure. Garry Kasparov and Silicon Valley investor Peter Thiel, in a 2013 Financial Times op-ed, wrote that “we can now use our phones to send cute kitten photos around the world or watch episodes of The Jetsons while riding a century-old subway; we can programme software to simulate futuristic landscapes. But the actual landscape around us is almost identical to the 1960s.”
Encourage Corporate Patriotism
In August 2014, the Walgreens store chain announced they were going to complete their purchase of a smaller European rival and move their corporate headquarters to Switzerland in order to take advantage of the European country’s lower tax rate. Public reaction, largely fueled by social media, was swift and vehemently opposed to the maneuver. Days after the announcement, Walgreens reversed course and decided against the maneuver, known as a tax inversion.
In a tax inversion deal, a U.S. company acquires a (usually) smaller company in another country with lower tax rates, “merges” with that company, and moves its nominal headquarters to the lower tax country. It’s not illegal. However, if a U.S. based company does a tax inversion deal—which helps them avoid U.S. taxes—should they still be considered a U.S. company? Not in my book. They may still market themselves as though they are a U.S. company, but if your headquarters isn’t in the U.S. you’re no longer a U.S. company. What spiked the social media uproar was that Walgreens had traditionally positioned itself as a “Main Street USA” company, and would have certainly continued to do so after the financial maneuver.
Walgreens’ decision to forego its tax inversion was, in many ways, a big win for the Made in USA movement. I’m guessing that Walgreen’s board and management were spooked by the social media backlash that ensued from their announcement. That backlash is enabled (and ennobled) by the entire Made in USA movement which has rallied a critical mass of Main Street Americans who resent it when multinational companies drape the American flag over their shoulders while offshoring jobs and seeking overseas tax havens. Of course, there is nothing illegal about tax inversions or offshoring; just don't take those actions while marketing your company as a Main Street American brand and expect folks in the Made in USA movement to swallow it. We aren’t that naïve—and we’re clearly not shy about whipping up a storm.
Shortly after the adverse publicity of the Walgreen saga, the Obama administration tightened tax rules to make tax inversions less lucrative and more difficult to execute. He or the next president might also consider taking a tip from “Strategic Capitalism” and champion what Richard D’Aveni calls “corporate patriotism.” D’Aveni notes that in the push toward globalization we have lost sight of placing national needs over corporate needs. Present and future administrations should consider using their bully pulpit to help reverse that trend.
Government will never be the answer to regaining our edge as manufacturers. Policies and programs change with each administration, and there is no consistent overarching plan. But government can take the above steps to provide small to mid-size manufacturers a business environment less skewed in favor of overseas competitors. Just give us something approaching a level playing field, Washington, D.C., and we’ll take care of the rest.
Michael McKeldon Woody is president and founder of International Marketing Advantages, Inc., a consulting firm specializing in strategic marketing and international business in Providence, Rhode Island, and CEO of textile manufacturer Trans-Tex LLC. Previously, he was an executive with former industry supplier, the Quill Company. Woody served four years on the PPAI board and was chair in 1999. In 2013, he was honored with PPAI’s Distinguished Service Award.
Get your own copy of American Dragon: Winning the Global Manufacturing War Using the Universal Principles of Fewer, Faster, and Finer by Michael McKeldon Woody at special member pricing of $15.98 at www.shop.ppai.org/books.