Comments Regarding Causes of Significant Trade Deficits for 2016 Docket No. ITA-2017-0003 I am William A. Jones, President and CEO of Penn United Technologies, Inc. of Cabot, Pennsylvania, north of Pittsburgh. I am grateful to Secretary Ross and the Department of Commerce for this opportunity to testify on behalf of our company. Foreign mercantilism and counterproductive US trade policy are having a tremendous negative impact on domestic manufacturing and the US trade balance. These two factors, not our inability to compete against foreign producers, are the major cause of the decline of manufacturing in America and the unsustainable US trade deficit. That is why effective trade reform is vitally important today. Penn United is a medium-sized manufacturer with 620 employees. We specialize in high precision manufacturing solutions. The major supply chains served by Penn United include defense, telecom, aerospace, auto, medical, oil & gas, fluid handling, and others. Our company would be at least twice as large and employ twice as many people in family sustaining jobs if not for unfair trade. Indeed, our entire machining and toolmaking industry, which is critical to America s economic, military, and national security, is a mere fraction of what it was a few decades ago and it continues to decline. The focus of my testimony today is on domestic manufacturers competing in the US market against foreign producers. I focus on this because the US market is the most important market for small and medium domestic manufacturers and the one most impacted by foreign mercantilism, which should not be the case. (Obviously, the unfair trade practices I describe below significantly undermine our competitiveness throughout the vital global market as well.) Precision carbide components comprise approximately 40% of our business. Chinese manufacturers are becoming increasingly competitive in this product line. We recently lost to a Chinese competitor $5-7M of annual business with one of our largest domestic customers. Their price was 30-50% below ours on various parts for this customer.
Page 2 of 5 Government subsidies, value added tax rebates, and undervalued currency are the reasons for our Chinese competitor s significant cost advantage. Low labor rates in China are not the primary cause of their lower price. Chinese mercantilism and poor US trade policy are the main reasons. Raw material (carbide powder) is approximately 18% of our cost. The price of this material in the international market is the same for us and our Chinese competitor. However, almost all of the global carbide powder supply comes from China, and the Chinese government regularly subsidizes Chinese producers with raw materials free or at a reduced cost. Wages account for 12% of our cost; benefits (healthcare insurance, retirement, vacation, etc.) are an additional 6%. While Chinese wages are one-third to onefourth of ours, low wage rates cannot explain the drastic cost advantage their companies have in our market after transporting products across the Pacific Ocean. In China, manufacturing employees also often receive government-subsidized housing. Plant, equipment, and utilities (overhead) are 34% of our cost. In our high tech precision manufacturing sector, equipment costs are very high because high-speed precision machine tools rapidly become obsolete. To stay competitive in our industry requires regular investments in faster, better equipment. The Chinese government regularly provides plant, equipment, and utility subsides to Chinese manufacturers. Regarding any illegal trade subsidies provided by their government to our Chinese competitors, neither our company nor our industry associations can afford the cost to hire trade enforcement lawyers to establish what these subsidies may be and to seek legal remedies. Moreover, as our trade laws provide remedies only on a product-specific basis, they are of little use for companies like ours that produce parts to the unique and continuously changing specifications of individual customers. So while we applaud the administration s focus on trade law enforcement, we also need an economy-wide solutions. Sales, administration, and general expenses are 20% of our cost. We do not object to the portion of this spent to comply with US safety and environmental regulations; however because of China s weak regard for industrial safety and environmental protection our Chinese competitors spend hardly a fraction of what we spend on this.
Page 3 of 5 In addition, one way or another, the Chinese government has maintained an undervalued currency for several decades. Due to the continued growth of the China s economy and the country s vast foreign reserves holdings, the renminbi should be stronger today than it is. But it is weaker today than at its peak in 2007-8. As a result, China continues to run persistent trade surpluses with the world and with the United States in particular. Though no specific technical reason is being put forth to object to China s present currency regime, one of its obvious effects is to delay China s compliance with its obligation under the international economic regime (IMF Article 4) to permit its currency to correct the imbalances in trade and payments (i.e. the current account). China's currency policies obviously continue to thwart the intent of the international regime it has agreed to uphold. The longer this goes on, the longer the current US-China trade imbalance will continue to grow and the greater will be the cumulative damage to America. Inaction by the US government is what allows this to continue. The cheap RMB also provides a powerful attraction luring American and other investors to invest in China rather than elsewhere. Obviously, this diminishes our ability to attract sufficient investment to generate stronger economic growth and rebalance trade here in the US. We must recognize and respond to the reality that China s industrial policy weak currency, state-ownership, massive subsidization to industry, cheap credit and tax breaks to money-losing enterprises is fundamentally inimical to the success of a free-market economy like ours. China s policies have the effect of picking winners and losers in our economy in a way that we would object to if our government were doing it. Finally, whatever our tax burden may be, our Chinese competitor pays no taxes when it sells in the US. Plus, it receives a 17% border adjusted tax (BAT) rebate from the Chinese government when it exports its products to our customer here. (We pay both US tax and the Chinese BAT when we ship into China.) BATs are also a problem when we compete in foreign markets. Because virtually all of the nations that compete with us have a BAT, we are taxed twice when we compete in foreign markets while our competitors are taxed only once we pay US taxes and the foreign BAT; they pay only the foreign BAT because their home country BAT is rebated when they export. This BAT problem is the major cause of Penn United s continued loss of electronics work and specifically the automotive industry electronics business to Mexico and China.
Page 4 of 5 In the 80s and 90s, precision computer and automotive electronics accounted for more than 60% of our business. Then in their 5-year plan, the Chinese Communist government strategically targeted the precision electronics industry and began to heavily invest government subsidies to acquire it. We could not compete with their companies when they were backed by the full financial might of the Chinese government. As a result, this sector now accounts for only 20-30% of our business and it is increasingly difficult to hold on to that. If it were not for China s predatory trade practices, we could successfully compete and grow in this market sector. Thus, it is easy to see how our Chinese competitor can beat our prices by 30-50%. It is also clear that simply reducing employee compensation, taxes, and regulations in the US will never enable us to overcome Chinese mercantilism and the faulty US trade practices that allow it to disadvantage us. Due to the unfair price advantage countries like China have over us, several of our large multinational customers have demanded that we offshore our manufacturing operations. They want us to transfer our technological expertise to our foreign competitors (often demanded by China) and train them to do the work we do. These customers were quite upset when we refused because we are not interested to keep their business by laying off most of our employees and becoming service reps for foreign producers. We lost a great deal of their business as a result. To grow manufacturing in America again and bring the US balance of trade under control requires more than trade law enforcement. We need comprehensive solutions to combat comprehensive and constantly varying foreign industrial subsidies. We need solutions for foreign currency undervaluation as well as US dollar overvaluation. We need tax reform that effectively eliminates the competitive disadvantage imposed on domestic manufacturers by foreign BATs, probably by creating a US border adjustable consumption tax and using the proceeds to finance the elimination of the payroll tax burden born by both workers and employers. Domestic producers like us are not protectionists. We want a smarter government that focuses on balancing trade, combats foreign oversupply and overcapacity, and grows our economy. We are not afraid to compete with foreign companies, and we don t want our government to provide unfair trade advantages to help us compete in the global economy. We believe in competition, but we want a level international trade playing field so that when we truly are the most competitive producer we do not get cheated out of
Page 5 of 5 our fair share of the market by foreign mercantilist practices and handicaps place on us by our own government s flawed tax and trade policies. It is now common for us to bid jobs at little or no margin just to hang on to our customers and employees. This keeps us from raising wages and benefits as we wish and forces us to greatly reduce our R&D and capital expenses budgets, which will ultimately make it harder for us to compete in the future. We are not willing to give up on manufacturing in America. We will continue to fight in the hope that the US government will take effective action to level the playing field, especially in the US market. If our trade problems are not addressed, improvements in domestic policies alone will only slow down, not halt and reverse the rate at which manufacturers are leaving America or going out of business. Thank you for considering my remarks.