Who Represents Domestic Manufacturers?

Pressure is mounting on the National Association of Manufacturers to demonstrate that it is something more than the National Association for Multinationals. So far, the going has been tough for domestic manufacturers who keep hoping that NAM will become their trade advocate.

NAM, by far the biggest lobbyist for manufacturers in Washington, D.C., has been mired in conflict over trade
policy. It is torn between multinational manufacturers that benefit from operating in China and other low-cost countries and domestic manufacturers that bleed jobs and profits under the onslaught of subsidized imports from markets like China that they often find closed to their products.

NAM officials increasingly do speak about China’s currency policies and the restrictive regime that prevents the yuan from reaching its true value. Domestic manufacturers believe the yuan is undervalued by as much as 40%, creating a huge advantage for Chinese exports and a major barrier to U.S. exports to China (See “Gaining Currency,” Forward, March/April 2006). But the association has yet to recommend stronger action. In March, for example, the NAM board deferred taking a position on H.R. 1498, the China Currency Act of 2005, the leading bill in Congress that defines currency manipulation as an illegal export subsidy and permits the use of countervailing duties as a remedy.

If the trade association does not act strongly, it risks further alienating the approximately 10,000 small and medium-sized domestic manufacturers that make up the bulk of NAM’s 13,000 members. Manufacturers on both sides of the controversy acknowledge that NAM has balanced competing interests on bread-and-butter domestic issues such as taxes, the environment and energy. And the Domestic Manufacturing Group, an unofficial ad hoc group of NAM members that want to maintain a strong domestic manufacturing sector, credits NAM with becoming more responsive since the DMG started raising concerns two years ago.

“They’ve increased their trade enforcement advocacy on our behalf quite a bit [the last couple of years],” says David Frengel, director of government affairs for Penn United Technology Inc., in Cabot, Pennsylvania, that consults with manufacturers on technology and equipment. “It isn’t where we want it to be yet, but that’s because we haven’t finished the process.”

Adds John Dunn, vice president and global advisor for Festo Corp., the U.S. arm of a German multinational that helps manufacturers with automation design and products, “What we need is a more balanced approach to get the Congress and the administration to start taking a second look at things that we should be doing to enhance manufacturing in America, because if we lose that, we’re going to lose our way of life.” Dunn says NAM should focus less on advocating free-trade agreements and more on what the United States needs to do to compete in the global marketplace. “We’re getting killed,” he says

BRIDGING THE GAP

John Engler, who assumed the presidency of NAM in 2004, says the organization tries to represent all members’ interests.

“I know that I have, as president of the NAM, spent more time with small and medium-sized businesses than has been the case in the past,” Engler says.

Members tend to agree on most issues, such as the need for the United States to lower the cost of health care, energy and litigation, he says. He disagrees with criticism that NAM’s trade priorities are skewed in favor of multinational companies.

“I think on trade you see that criticism more,” Engler says. “The belief is that because [the big members] are global, their views are dominant. That’s not really the case at all. To that extent, I take issue with the characterization [of an imbalance].”

Officials representing domestic manufacturers occupy several positions on NAM’s board, as well as its committees and working groups. But most key positions at NAM are held by officials from multinational companies. For example, the board’s chairman and vice chairman, and the chairmen of the Trade and Technology Policy Group, the International Economic Policy Committee and the IEPC’s China Policy Subcommittee represent multinational companies that manufacture in China and other countries.

Indeed, many domestic manufacturers feel snubbed, left out of the real action decided by the big guys. Some grumble that the bigger membership dues paid by larger manufacturers give them more of a say—the big companies contribute 70% of NAM’s membership fees. Others feel that the key to influencing NAM is much like the old Woody Allen quip, “Eighty percent of success is showing up.”

“Every week there’s a variety of meetings at NAM,” Dunn explains. “If you don’t have the dollars to fund having representation there, your voice isn’t heard. You can send your voice in so to speak. You can write an e-mail. But it’s not the same thing as being there in person. So it’s harder for the smaller companies, because a lot of them can’t afford to have the same level of presence as the very large companies.”

The biggest point of contention is the China currency issue. Domestic manufacturers want NAM to endorse the China Currency Act, while many multinational NAM members oppose the bill because it would reduce the benefit of their manufacturing presence in that Asian nation. Last September, a divided NAM refrained from taking a position and, instead, put its weight behind amending another bill, H.R. 3283, the U.S. Trade Rights Enforcement Act. This bill is considered weaker, but is seen by NAM as a necessary first step to clarify that countervailing duty law should apply to non-market economies, such as China. NAM’s board, recognizing that H.R. 3283 was not really the answer to currency manipulation, also directed its staff to met with the Bush administration to explore “new tools” to combat currency manipulation.

Since then, domestic manufacturers have continued to press NAM to take a stronger position. A special NAM working group created to explore additional options has been meeting with a variety of administration officials and has not yet found a single viable alternative to H.R. 1498.

“This is a test to see just how much NAM is able to really represent small manufacturers,” Frengel says.

If so, NAM arguably is failing the test. In March, NAM’s divided board delayed consideration of H.R. 1498 pending Chinese President Hu Jintao’s visit to Washington, the release of a new Treasury Department report on whether China engages in currency manipulation, and a meeting of U.S.-China Joint Commission on Commerce and Trade, a high-level forum that aims to resolve trade frictions.

Frank Vargo, NAM’s vice president of international economic affairs, says that if there has not been significant progress from these events, then a meeting of NAM’s influential International Economic Policy Committee will be convened in June to reconsider the currency situation. That could mean supporting specific legislation or some other approach. Typically, a recommendation of the IEPC leads to NAM board approval, but there are no guarantees, especially on a controversial issue like this one.

“We have some members who think [the China Currency Act] is the answer to everything,” Vargo adds. “We have others who think it would start a trade war. And we have yet a third group that says it’s a lot of smoke and no fire.”

Frengel says he’s satisfied that ongoing conversations over the China currency crisis were elevated to a discussion at the board level in March. That will give the arguments of the domestic manufacturers more weight at IEPC.

Nevertheless, Frengel says he’s worried that NAM ultimately will support a China trade package that does not adequately tackle the currency manipulation problem. Indeed, NAM asked Senate Finance Committee Chairman Charles Grassley (R-Iowa) to incorporate Senate and House versions of the U.S. Trade Rights Enforcement Act into his China trade package—an approach that could have left hanging the stronger H.R. 1498. NAM did not lobby for H.R. 1498 to be included because the organization “will only advocate for those things where we have an agreement [on the board],” Vargo says.

In the end, neither H.R. 3283 nor H.R. 1498 was included. Grassley and Sen. Max Baucus (D-Mont.) in late March introduced the U.S. Trade Enhancement Act of 2006, which would restrict government loans to the offending country, call on the International Monetary Fund to resolve currency imbalances and redefine manipulation as “fundamental misalignment.”

“When a country has a 40% advantage in trade, the punitive sanctions in Grassley-Baucus amount to a slap on the wrist,” says one of MSCI's lobbyists in Washington. For its part, NAM says the bill “seeks to add more teeth to currency issues and trade enforcement,” but adds that the bill fails to go far enough as it “does not address one of the most important trade issues: the application of countervailing duties to offset subsidies in non-market economies such as China.”

From the multinational point of view, the best way to address the concerns of all manufacturers, including domestic ones, is for the United States to continue pushing hard for countries to live up to their commitments under the free trade deals, says Jim Jarrett, vice president of worldwide government affairs at California microchip maker Intel Corp. and a NAM board member.

“We need to have a very aggressive attitude toward enforcing trade agreements,” whether it involves protecting intellectual property or reining in unfair subsidies, Jarrett says. Indeed, the U.S. government “has been very good” at trade enforcement, and NAM is rightly stressing the need for it to continue, he adds.

ENGLER’S ANGLE

NAM’s profile and clout have risen since Engler assumed the presidency. The former Republican governor of Michigan has tightened NAM’s ties to the GOP leadership in Congress and the White House. NAM’s cozy relationship with the Republican Party, however, poses a problem for some members, especially those that represent non-partisan business constituencies. They understand the political benefits for now, but wonder whether it could backfire if the Washington power pendulum swings the other way.

Among Engler’s specific changes is NAM’s position on U.S. Supreme Court nominees. Last year, for the first time, NAM supported two nominees to the high court—John Roberts and Samuel Alito—moves that some considered inappropriate and a poor use of resources.

Engler says it makes sense to back the justices since most caseloads deal not with hot-button social issues, but with corporate problems such as employment law and property rights. Manufacturers benefit from judges who provide certainty on such issues because certainty reduces litigation costs, Engler says.
The U.S. today confronts a litigation cost of more than 2% of GDP—nearly twice what is spent on research and development, he says, adding, “That should be reversed.”

Engler stresses that domestic and multinational manufacturers agree on these and other business issues, such as the need to address soaring natural gas costs and high corporate taxes. NAM’s four overriding priorities, he says, are goals virtually all members support: Cut production costs in the United States, modernize the workforce, level the international playing field, and promote innovation and a friendly investment climate.

Frengel agrees that NAM represents all manufacturers well on domestic non-trade issues. But others potentially could be so turned off by NAM’s trade policies that they leave the organization.

INSIDE OR OUT?

One alternative is the U.S. Business & Industry Council that has emerged as a small but vocal rival to NAM, with about 1,500 members, mostly small and mid-sized manufacturers.

“We really think that NAM has been so compromised on trade policy that all NAM members who are concerned about maintaining a strong domestic manufacturing base should leave the organization and join the USBIC,” says the group’s research fellow, Alan Tonelson.

The big reason that domestic manufacturers tend to be hurt by free trade agreements is that they usually make their money by selling parts to the larger manufacturers, Tonelson says.

As manufacturing moves offshore, allowed in large part by trade agreements, the multinationals’ entire supply chain tends to move as well, he says. Hence, USBIC’s reasoning goes, NAM’s gung-ho support for free trade deals, egged on by its multinational members, is damaging to producers at home.

“If [domestic manufacturers] keep supporting NAM, it seems clear to us, they’re simply feeding the enemy,” Tonelson says. “We see no hope that NAM can be changed from the inside. I wish the NAM reformers well, but I do think that because time is short, the biggest contribution that NAM members could make toward changing U.S. trade policy is leaving NAM and making clear they left NAM because of its trade policy decisions. That would send the loudest message not only to Washington policymakers, but to the NAM leadership.”

USBIC advocates imposing import surcharges on all imported manufactured goods. Such tariffs would comply with the World Trade Organization since they would hit all industries, Tonelson says. Sweeping tariffs, most heavily hitting exporting countries that run the biggest trade surpluses with the United States, would reduce the flood of imports and re-introduce domestic production for goods in this country, USBIC reasons. Tonelson concedes the group has yet to line up sponsors in Congress, “but we keep working on them.”

Frengel prefers to work inside NAM.

“We believe that NAM is a good organization and serves an important purpose for domestic and international manufacturers,” he says. “We believe that NAM is not going to go away as a powerful force.”

Taking the battle outside NAM would be a long, expensive and difficult road, he says.

“You don’t [make controversial changes] in a big organization quickly and easily,” Frengel says. “But we are very pleased with the progress we’re making to bring some balance in NAM’s trade policies. We’re seeing changes in attitudes. We just haven’t seen results in Congress yet.”