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S. HRG. 113–262 

REBUILDING AMERICAN MANUFACTURING 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

ECONOMIC POLICY 

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING THE ROLE THAT U.S. MANUFACTURING PLAYS IN THE 

ECONOMY, ECONOMIC GROWTH, AND EMPLOYMENT; ALSO HOW ‘‘INDUSTRIAL COMMONS’’, SUCH AS CLUSTERS, SUPPLY CHAINS, AND 

PUBLIC–PRIVATE PARTNERSHIPS, AFFECT U.S. MANUFACTURING 

DECEMBER 11, 2013 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

KAY HAGAN, North Carolina 

JOE MANCHIN III, West Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

MIKE CRAPO, Idaho 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

TOM COBURN, Oklahoma 

DEAN HELLER, Nevada 

CHARLES YI, Staff Director 

GREGG RICHARD, Republican Staff Director 

DAWN RATLIFF, Chief Clerk 

TAYLOR REED, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

SUBCOMMITTEE ON ECONOMIC POLICY

JEFF MERKLEY, Oregon, Chairman 

DEAN HELLER, Nevada, Ranking Republican Member 

JOHN TESTER, Montana 

MARK R. WARNER, Virginia 

KAY HAGAN, North Carolina 

JOE MANCHIN III, West Virginia 

HEIDI HEITKAMP, North Dakota 

TOM COBURN, Oklahoma 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

MIKE CRAPO, Idaho 

ANDREW GREEN, Subcommittee Staff Director 

SCOTT RIPLINGER, Republican Subcommittee Staff Director 

(II)

C O N T E N T S 

WEDNESDAY, DECEMBER 11, 2013 

Page 

Opening statement of Chairman Merkley ............................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Heller ................................................................................................... 2 

WITNESSES 

Suzanne Berger, Raphael Dorman–Helen Starbuck Professor of Political 

Science, and Cochair, MIT Production in the Innovation Economy Commission, Massachusetts Institute of Technology ..................................................... 4 

Prepared statement .......................................................................................... 27 

Leo Hindery, Jr., Chairman, Smart Globalization Initiative, New America 

Foundation ............................................................................................................ 6 

Prepared statement .......................................................................................... 38 

Derek Scissors, Resident Scholar, American Enterprise Institute ...................... 7 

Prepared statement .......................................................................................... 43 

Julie Skirvin, General Counsel, Oregon Iron Works ............................................ 9 

Prepared statement .......................................................................................... 49 

(III)

(1) 

REBUILDING AMERICAN MANUFACTURING 

WEDNESDAY, DECEMBER 11, 2013 

U.S. SENATE, SUBCOMMITTEE ON ECONOMIC POLICY, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Subcommittee met at 3:38 p.m., in room SD–538, Dirksen 

Senate Office Building, Hon. Jeff Merkley, Chairman of the Subcommittee, presiding. 

OPENING STATEMENT OF CHAIRMAN JEFF MERKLEY 

Chairman MERKLEY. I call this hearing to order. Thank you all 

very much for your patience. We are starting a few minutes late, 

and I hope we will have plenty of time to explore this important 

topic of manufacturing. 

When I became Chair of this Subcommittee, I knew that I wanted to spend as much time as possible to focus on manufacturing because if we do not make things in America, we are not going to 

have a middle class in America. Manufacturing is the heart of an 

economy that provides good living-wage jobs to working families. 

Growing up, I experienced firsthand the power of the manufacturing economy. My father worked as a millwright at a saw mill. 

We were never rich, but on a single working man’s salary, it was 

possible to own a home, have food on the table, and for my parents 

to save a little bit to help send the children to college. So these 

jobs, these manufacturing jobs, can make all the difference between 

a firm financial foundation for a family and the absence of one. 

Unfortunately, over the last couple of decades, jobs like these 

have been disappearing from our Nation’s shores. According to the 

Bureau of Labor Statistics, in the 12 years between 1998 and 2010, 

the United States lost more than 5 million manufacturing jobs. 

Similarly, between 2001 and 2012, we lost more than 50,000 factories. This crisis in manufacturing is a huge challenge and must 

be addressed if we are to sustain a thriving middle class. 

The good news is we have recently made some progress toward 

reversing this trend. Since the end of the Great Recession in 2009, 

our economy has added back more than half a million manufacturing jobs. In my home State of Oregon, we have seen headlines 

like, and I quote: ‘‘Manufacturing leads job gains in Clackamas 

County.’’ 

But I note from the discussions I have had with manufacturers 

around the State, both during my Made in Oregon tour in 2012 and 

in my day-to-day work, that there are a lot of positives to be seen 

in Oregon and America regarding manufacturing right now. But 

2 

there are many challenges. Are we developing the robust research 

and development and supply chain infrastructure so necessary to 

today’s world of high-tech manufacturing? How do we make sure 

our middle and high schoolers are being exposed to manufacturing 

careers and hands-on education in an era of shrinking budgets and 

fewer electives? And how do we make sure our workers are prepared not just for traditional manufacturing jobs but for the growing world of high-tech manufacturing? 

Do our manufacturers have sufficient access to capital that is 

needed for long-term growth? And how does the U.S. compete with 

other countries that may have lower labor or environmental standards without entering a race to the bottom? How do we make sure 

that we have enforcement action when other countries provide 

massive subsidies to State-backed industries? 

These are just a few of the questions I hope we explore today. 

There is no doubt that we have a lot of work to do once again to 

see a thriving manufacturing sector. There is also no doubt that we 

stand to gain a huge payoff for our economy and our middle class 

if we do so. 

With that, I will turn to Senator Heller for his opening statement. 

STATEMENT OF SENATOR DEAN HELLER 

Senator HELLER. Mr. Chairman, thank you, and thanks for holding this hearing. I am pleased that our Subcommittee continues to 

focus on jobs in the middle class. I want to thank those of you here 

with us on the panel. Being here today does make a difference, so 

thank you very much for taking your time to spend that time with 

us. 

For too long, job creation has received second-class treatment by 

Congress. With Nevada continuing to lead the Nation in unemployment, Congress must develop policies that spur job growth, especially in industries like manufacturing. Manufacturing is critical to 

the American economy. Its continued strength is key to putting 

Americans back to work. While Washington hesitates to act, America’s manufacturers are shutting down and jobs are being lost. 

While Nevada is known for traveling, gaming, and mining, manufacturing represents an important segment of our economy by employing more than 56,000 workers at 1,800 manufacturing companies. I would also note that the average wage for manufacturing 

employees in Nevada is $52,000 a year, which is $10,000 more than 

the average salary in the State. Unfortunately, Nevada’s manufacturers are continuing to struggle in this recession. Just a few 

months ago, a headline in my hometown newspaper read, ‘‘Manufacturing sector’s rebound likely is not near.’’ The article went on 

to highlight that Nevada has lost 10,000 manufacturing jobs during 

the recession and has only regained 1,000. By industry sector, that 

is the second largest job loss in the State. 

While it cannot be done overnight, it is my hope that Washington 

can get serious and implement an agenda to strengthen American 

manufacturing and create American jobs. I believe that the key to 

ensuring Americans continue to have access to high-quality manufacturing jobs is not to enact burdensome regulations or a protectionist agenda but to expand economic freedom. This goal can be 

3 

accomplished by simplifying our Tax Code so that businesses are 

encouraged to locate and remain in the United States by ensuring 

that we are effectively educating our children and by supporting 

policies that foster fair competition and open access. 

As a Nation, we are encouraged by realities of this growing global and technological economy, and Congress must develop policies 

that ensure that the U.S. remains at the forefront of these dynamic 

changes and create jobs here in America. 

Thank you, Mr. Chairman. I look forward to the testimony from 

our witnesses. 

Chairman MERKLEY. With that, I am going to introduce the witnesses. I have already asked Senator Warren if she would like to 

make an opening statement. She said no, let us jump right in, so 

we will do so. I am so delighted to have all of you and your contribution and your expertise to address these issues. 

Suzanne Berger is the Raphael Dorman–Helen Starbuck Professor of Political Science at the Massachusetts Institute of Technology. She cochairs the MIT Production in the Innovation Economy Commission, otherwise known, I think, as the PIE Commission, a 20-member faculty group that studies innovation in manufacturing in industrial countries. The reports of the PIE Commission have just been published in ‘‘Making in America: From Innovation to Market’’ and ‘‘Production in the Innovation Economy’’, 

both in 2013. Professor Berger is also author of ‘‘How We Compete: 

What Companies Around the World Are Doing To Make It in Today’s Global Economy’’, and other books and articles on the political economy. She served as the head of the Department of Political 

Science and director of the MIT International Science and Technology Initiatives. She is a member of the American Academy of 

Arts and Sciences and received the Legion d’Honneur. 

Leo Hindery is chair of the U.S. Economy/Smart Globalization 

Initiative at the New America Foundation, cochair of the independent Task Force on Jobs Creation, founder of Jobs First 2012, 

and a member of the Council on Foreign Relations. He is the 

former CEO of AT&T Broadband and its predecessors Tele-Communications, Inc., and Liberty Media, and is currently an investor in 

media companies. Thank you, Leo, for coming from New York, and 

thank you, Suzanne, for coming from Boston. 

Derek Scissors is a resident scholar at the American Enterprise 

Institute, AEI, where he studies Asian economic issues and trends. 

In particular, he focuses on the Chinese and Indian economies and 

U.S. economic relations with China and India. He is also an adjunct professor at George Washington University where he teaches 

a course in the Chinese economy. Before joining AEI, Mr. Scissors 

was a senior research fellow in the Asian Studies Center at the 

Heritage Foundation. He also worked in London for Intelligence 

Research, Ltd., taught economics at Lingnan University in Hong 

Kong, and served as an action officer in international economics 

and energy for the U.S. Department of Defense. He has a bachelor’s degree in economics from the University of Michigan, a master’s degree in economics from the University of Chicago, and a 

doctorate in international political economy from Stanford University. You did not have as far to come, but we really do appreciate 

4 

you making it through this big snowstorm that we are experiencing 

here in D.C. 

Julie Skirvin is general counsel of Oregon Iron Works, the parent 

company of United Streetcar. Her experience at the company also 

includes leading the business development team at United Streetcar. She is also on the board of Drive Oregon, an entity that supports the growth of the electric vehicle and the electric mobility in 

Oregon. Early in her law career, she was deputy district attorney 

for Multnomah County in Portland. She is a graduate of Willamette University College of Law and Oregon State University. Julie, 

thank you very much for coming and for filling in for Bob Beal, the 

CEO of Oregon Iron Works, who was not able to be with us. 

Before we proceed, I would like to extend my appreciation to the 

UC–Hastings Law Professor Joel Paul and Ryan Costello of Click 

Bond, Inc., from Nevada, who prepared testimony for the hearing, 

but the hearing was canceled due to the Government shutdown, so 

we lost a couple folks along the way. They were not able to join 

us this time, but I will ask that their testimony be entered into the 

record, and the Chairman will do so since there is no objections. 

Chairman MERKLEY. We will keep the record open for 7 days for 

witnesses and Members to submit additional materials as well as 

for questions for the record, which we would kindly ask that our 

witnesses respond to as promptly as possible. 

With that, we now turn to our testimony. Dr. Berger. 

STATEMENT OF SUZANNE BERGER, RAPHAEL DORMAN– 

HELEN STARBUCK PROFESSOR OF POLITICAL SCIENCE, 

AND COCHAIR, MIT PRODUCTION IN THE INNOVATION 

ECONOMY COMMISSION, MASSACHUSETTS INSTITUTE OF 

TECHNOLOGY 

Ms. BERGER. Senator Merkley, Senator Heller, Senator Warren, 

I am very honored to have been invited to talk about a 2-year 

study that we have just conducted at MIT, and we asked basically 

one question. What kinds of manufacturing do we need in the 

United States in order to get full value out of our innovation? 

We know that innovation is strong in the United States, and our 

question is: How do we get the benefit of that innovation in the 

form of economic growth, in the form of good jobs for American 

workers, in the form of new companies and enhanced profits for our 

existing companies? 

We look at new companies that have been created over the last 

25 years, a company like Apple where Apple and other companies 

like it specialize in R&D, design, and distribution, but have no production at all, no production in the United States, and no production within the four walls of their own company, and yet they still 

earn the lion’s share of the profits from products like iPad and 

iPhone. And the question is: Could we all do Apple? Is this the 

model for the future of the American economy? Do we really need 

manufacturing at all in order to get the benefits of innovation? 

And this is the question we started with, and the way in which 

we conducted the study was through surveys of manufacturing establishments, through studies of startup companies in the United 

States, through studies of Main Street manufacturers, and by going 

and interviewing in Fortune 500 companies in the United States. 

5 

And the question we asked in each one of them was: When you 

have an innovation, a new idea, whether it comes from an R&D lab 

or it comes from the shop floor, how do you get it to market? How 

do you get it into the hands of a customer? Where do you find the 

skilled workers? Where do you find the capital? Where do you find 

the suppliers, the facilities, the additional technical expertise that 

you need? 

And I think the bottom line of all of this research—and we did 

talk to about 260 companies in the course of it, not only in the 

United States but also in China and Germany. The bottom line is 

that while we are great on innovation, there are real problems 

about scale-up. And the problems about scale-up have to do with 

missing inputs. We find real problems in capital markets. We find 

real problems in the skills and the formation of the new skills that 

the most advanced manufacturing companies need. We see a variety of ways in which holes have opened up in the industrial ecosystem. 

And it is the comparisons that we have been able to draw between, let us say, a Main Street manufacturer in Ohio and a comparable mid-sized German company that really point to these holes 

in the ecosystem, the market failures that really are blocking scaleup of our own innovation. 

A Main Street manufacturer, when he has a great idea in Ohio, 

has a problem. There are no longer any local bankers in the United 

States, as you know, whereas the German manufacturer still has 

local and regional banking. There are real problems about who is 

training the workforce. There are real problems about suppliers. 

And if we look at the origin of all these problems, we think that 

it really dates back to the 1980s at a time in which financial markets put real pressure on manufacturing companies to become more 

asset light, and that meant getting rid of plants, getting rid of 

workforces, and all that was reflected in improvements in stock 

prices very rapidly. 

The reason that these enormous changes in corporate structure 

matter is today we have a much more fragmented industrial system. Think about DuPont when it invented nylon in the 1930s and 

1940s. It had the plants to move that production into. It had no 

problem about capital markets. It had cash. It was able to retrain 

its own workforce because it knew those workers would be there 

for lifelong careers. And in every one of these dimensions, the industrial system has changed in the United States. 

So, in conclusion, I would say we believe that we are at the moment of great opportunity, a new window for American manufacturing. We have lower energy prices. We have a lot more realism 

about the real costs of outsourcing and offshoring. But if we are 

really going to consolidate this advantage and make this a real opportunity, we really need to think about how to bridge these gaps 

in the ecosystem, and that is going to require new private–public 

partnerships that we begin only now to see emerging. 

Thank you. 

Chairman MERKLEY. Thank you very much, Dr. Berger. 

And we now turn to Mr. Hindery. Thank you. 

6 

STATEMENT OF LEO HINDERY, JR., CHAIRMAN, SMART 

GLOBALIZATION INITIATIVE, NEW AMERICA FOUNDATION 

Mr. HINDERY. Thank you, Senator. Just as like coals to Newcastle, your own enthusiasm for this sector is what guides the four 

of us. 

One of the challenges I think we have had in this country since 

about 1980 is we have failed to appropriately size the sector. We 

speak with passion about the sector, but we do not size it. Right 

now, as you know, we have about 8 percent of women and men in 

the civilian labor force in manufacturing, and work we have done 

suggests that this figure needs to be closer to 20 percent. With an 

objective in mind, I think it is easier to contemplate remedial policies. 

The other thing that has mired us down is the absence, the fundamental absence, of a national manufacturing policy. Nineteen of 

the G20 Nations have a very precise, very articulated manufacturing policy that coordinates the policies of their Federal-type 

Governments. We alone uniquely do not have such a national policy. 

We also, as Dr. Berger has mentioned, have put ourselves at 

what is called the SME level, the mid-sized level, in a capital 

drought. We hear often that the lack of capital to grow is the biggest challenge for the so-called feeder manufacturers for the largescale manufacturers. It is certainly my hope that the Dodd-Frank 

rules will reopen the banking community to lending to the midsized manufacturers. But in the interim, it would help to see a program similar to the Small Business Credit Initiative that we 

passed in 2002 as part of the Small Business Jobs Act. Another initiative of this sort would be incredibly helpful right now. 

The other thing that would be helpful—and, Senator Warren, 

something that you have commented on, I know, a number of times 

is far greater use of public development banks. Twenty-five percent 

of the world’s loans now come from this category of lending, and 

30 percent of the loans made within the entire European Union. 

We also do not use our Export-Import Bank relatively as much as 

do the other G20 Nations. 

Of the other potential solutions, the one that comes to mind most 

immediately for me is a National Infrastructure Bank, and in my 

written comments we offer solutions that we spent a great deal of 

time on as to how such a Bank might be developed, Senators, that 

would primarily employ the fiduciary capital of the States and our 

larger municipalities in ways that the Federal Government’s involvement would be scored at zero vis-a-vis the Federal deficit. Specifics of that are found, again, in my written comments. 

The significant challenge that confronts us if we do not have our 

own National Infrastructure Bank is that with the need for infrastructure redevelopment being so high, we will soon see otherwise 

foreign monies coming in to resuscitate our vital seaports, roads, 

and airports. It is imperative, in my opinion, that an American Infrastructure Bank be part of the agenda of today’s hearing. 

I certainly, Senator Merkley, agree, as does Dr. Berger, about the 

need of helping students transition into manufacturing-related careers. I am of an age personally that saw a pathway readily available to me as a student, but this is no longer the case today. Many 

7 

countries, as we know, use the promise of free training and education in this category to achieve the positive employment outcomes that Dr. Berger spoke about. 

Finally, I must talk about the need for fundamental reform of 

our major trading relationships, and I mean all of our trading relationships. The imbalances that have occurred represent a panoply 

of challenges confronting us, and Dr. Scissors speaks to them better 

even than I do. But just our trade deficit with China alone costs 

us about $40 billion in lost wages each year. 

I am of a mind that the fundamental challenge confronting us in 

trade now is even greater than the challenge confronting us in our 

Federal deficit. We know that China and other countries in Asia 

especially now use unfairly gained trade advantages, and we are 

seeing them show up suddenly in places like Brazil and Bangladesh. And, Chairman Merkley, as you have endorsed, it should 

be easy to include the cost of these subsidies, these back-door advantages, in our antidumping duty calculations. But getting our 

trading relationship with China right is an imperative and where 

we need to start because it is now a model being adopted by other 

developing Nations, all to the detriment of the U.S. manufacturing 

sector. 

Let me just finish by saying that it is important, Senators, that 

we speak about the net export position of this country. The Administration, in my opinion, has spent way too much time talking 

about gross exports when net exports are what really matter. 

We certainly should, if we encounter it, call out currency manipulators. China continues to be one, in my opinion. There are serious questions continuing about China’s Indigenous Innovation Act, 

probably the most protectionist act we have seen of its sort ever. 

And I am gravely concerned, as a closing comment, about the pending Trans-Pacific Partnership. The free trade negotiations there I 

think are intellectually and economically flawed in trying to treat 

these countries as ‘‘one-size-fits-all.’’ 

A real pleasure. Thanks, Senators. 

Chairman MERKLEY. Thank you. 

Dr. Scissors. 

STATEMENT OF DEREK SCISSORS, RESIDENT SCHOLAR, 

AMERICAN ENTERPRISE INSTITUTE 

Mr. SCISSORS. Thank you, Mr. Chairman, and thank you for your 

kind introduction. As you indicated, I will be speaking from the 

global perspective, and the first thing that you see from the global 

perspective is that the global perspective and, hence, my testimony 

do not matter very much. 

Notwithstanding that I just shot myself in the foot, that needs 

to be said. If you measure the size of an economy by aggregate 

wealth rather than gross domestic product—because gross domestic 

product is a terrible measure of everything—you get the United 

States at about $70 trillion, and you get China and Japan under 

$25 trillion each. That estimate is imprecise. Nonetheless, the advantage that we have is about $40 trillion or more. 

I do not mean to say that that means everything is fine. What 

I mean to say is that means what we do here matters much more 

than what everyone else does. And even though I am going to focus 

8 

on what everyone else does, I think that is something that we need 

to remember, that our actions matter more than everyone else’s actions, not only because it is our country but because we are much 

bigger than everybody else. 

Now, the international perspective to me offers two major observations, one of which I will pursue in detail, one of which I will not. 

The one that I will not, I will just make from the outset, is I worry 

about American monetary policy. I agree with my colleagues that 

we do not have excess credit in manufacturing for small and medium manufacturers. That is not what I mean. I mean that we 

have a pattern that we see overseas in Japan and in China where 

long periods of very loose monetary policy kills corporate competitiveness, because getting access to money is no longer about how 

good your project is, no longer about good your companies is. It is 

just, hey, there is all this money floating around, who are the people I know? 

So we are not at that point yet, but we have seen in our major 

manufacturing competitors loose money has hurt them in the long 

term—not 2 years of loose money, not 3 years of loose money, but 

a long period of loose money. And I would like that to be considered 

in our domestic policy as well as the macroeconomic effects which 

are considered on a more routine basis. 

The second major observation I want to make is that competition 

is the lifeblood of prosperity. Taking away competition in this country is never going to benefit us. It will only benefit a few. It will 

not benefit the whole. That also applies to overseas markets. The 

more competition we have in overseas markets, the better for everyone, including the United States. 

There is, if we are looking overseas—which, again, is secondary 

to being at home—the single biggest problem in competition that 

I identify would be Chinese subsidies. By subsidies, I do not just 

mean money. We normally think of subsidies as somebody handing 

over money to someone else. And I do not think the United States 

should think of it that way either—either at home or overseas. The 

biggest subsidy that you can have, violating that competition requirement that I spoke of, is pervasive in China. It is regulatory 

protection from competition. That is, China seals off major sectors 

from competition and reserves them for its State-owned enterprises: coal, oil, shipping, steel. There are a dozen more. 

Once you do that, once you say that State-owned enterprises 

must dominate these areas, everything else is a detail. Wages, 

land—it does not matter. You have ensured that your companies 

cannot go bankrupt and foreign companies can only succeed to the 

point that you allow them. So to me, that is something to think 

about around the world—protection from competition. 

There is, of course, also financial transfers that occur in China 

and elsewhere through the banking sector, but the protection from 

competition is the most fundamental problem that we face overseas, particularly in China. 

Now, let me also say what some of the impacts on the U.S. are. 

We tend to focus on imports. It is true that the Chinese subsidize 

their exports in various ways, and that creates an unlevel playing 

field. It is also true that our consumers benefit from those subsidies. Where nobody in the U.S. benefits and nobody overseas benVerDate Nov 24 2008 14:18 Oct 20, 2014 Jkt 046629 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\12-11 REBUILDING AMERICAN MANUFACTURING\HEARING\121113.
9 

efits is when China closes its own market. So that I would prefer 

to focus on U.S. exports to China, notwithstanding Leo’s comments, 

because there is no benefit to the U.S. for Chinese subsidies in 

their home market; there is no benefit for them blocking competition; there is no benefit from U.S. goods and services being kept 

out at all. 

In addition, we have a third problem, which is competition in 

third markets. The Chinese presence in global markets has become 

much larger. I have a data set that tracks Chinese outward investment. You can see all the transactions if you want to see what they 

are doing, and what that means is, as Leo hinted, the Chinese are 

exporting their model. And when you do not have any protection 

in your home market—sorry, any competition in your home market, that gives you a big advantage in other markets. That is a disadvantage. American firms have to compete here. Chinese firms do 

not have to compete at home. They have better access to revenue; 

they have better access to customers. So I would focus on the impact on the U.S., the blocking of the Chinese market, and the growing problem of competition in third markets. 

There is not much time here. I am going to give an extremely 

boring recommendation which completes the circle of me saying my 

testimony is not that important, so it is unimportant and boring. 

That is a great one-two punch. I think I might be ready for the 

Congress. Sorry. I had to make that comment. 

We need to start measuring Chinese subsidies. We talk again 

and again and again about how the Chinese are unfair traders, and 

I agree with that talk in a number of respects. But we do not actually document it. We just assert it. We cannot negotiate with them. 

We cannot go to the WTO. We cannot take well-informed, unilateral action unless we actually know what they are doing. And that 

applies, of course, to China because they are the biggest violator 

here. But they are not the only one. Far from it. 

So in stressing that theme of violating competition and looking 

overseas and saying our access to foreign markets is being blocked 

hurts the country, we need to document that. And it is dull. It is 

not an exciting new program to announce. But it is what is going 

to enable us to take all those corrective steps that we need to take. 

Thank you. 

Chairman MERKLEY. Thank you very much, Doctor. And your 

self-evaluation may not be shared by all of us, because I found it 

very interesting and many questions to pursue there. Thank you. 

And I am so delighted to have an individual from Oregon come 

join us who is involved in manufacturing on the ground and may 

have some real-life experiences to share in this context. 

STATEMENT OF JULIE SKIRVIN, GENERAL COUNSEL, OREGON 

IRON WORKS 

Ms. SKIRVIN. Thank you, Mr. Chairman and Members of the 

Committee, for having this opportunity to address this hearing 

today on a topic that is so important to Oregon Iron Works and 

United Streetcar and other manufacturers across the country. And 

it is nice to have a home State Senator here in the room this afternoon. 

10 

What some of you may not know is that I represent United 

Streetcar, who is the first manufacturer of modern streetcars in 

more than 60 years manufactured in America. 

Oregon Iron Works is a diverse company. We fabricate demanding hydroelectric, bridge, and civil construction trades applying 

modern manufacturing techniques. We fabricate space launch complexes, missile defense systems, the silos that support and defend 

this country against attack, marine craft for the Navy and our Special Forces, nuclear containment casks for storage of spent fuel, 

and our newest venture the manufacturing of modern American 

made streetcars. United Streetcar was organized in 2005, and I am 

pleased to share today that we are completing a streetcar every 6 

weeks. We have delivered seven streetcars this year to the city of 

Portland and the city of Tucson, and our next delivery will be in 

the amazing town of Washington, DC. We are working with DDOT 

currently to coordinate the delivery of the first car. 

This new company has created a hundred jobs in the Clackamas 

area in a difficult recession time. Those are family wage jobs with 

good benefits. In creating a new supply chain, we have sourced 

over 350 parts and equipment for suppliers across 32 States and 

including 140 in Oregon. You can imagine the challenge and work 

required to create a new supply chain for an industry that has 

been absent from the U.S. for more than 60 years. We are pleased 

to be a part of the recovery of manufacturing jobs in the United 

States. Since August, 66,000 jobs in manufacturing have been 

added to the U.S. economy. Since 2010, 700 manufacturing jobs 

have returned to Clackamas, Oregon. 

One of the key components and challenges that we face is ensuring a supply of skilled workers. Many young people entering the 

workforce now are unskilled, and they are not ready to work. Those 

skilled workers need access to training, and the public education 

system should place more emphasis on technical training in high 

schools. There are some examples of stellar programs in our area. 

We work with Benson High School, Portland Community College, 

and Clackamas Academy for Industrial Sciences. But these are too 

few, and too many schools and public officials downplay the important role that technical career paths and technical training can 

take and support our U.S. economy. What we need is the necessary 

funding and the respect that those programs deserve. 

Another important area in education is public and private partnerships, similar to what my colleague indicated in her written testimony. We are currently working with Clackamas Community College and the Workforce Investment Council in Clackamas County 

to identify new hires that have aptitudes in these areas and also 

to identify and train our newly hired skilled workers to enhance 

their skills and our workforce. 

We applaud the Manufacturing Jobs for America Initiative, 

which you, Chairman, helped to lead, that focuses on workforce 

training because that is an essential step in developing the source 

in the technical arena. 

Access to capital is a critical component of rebuilding American 

manufacturing. In forming United Streetcar, our owners invested 

more than $10 million of private money into our facilities, equipment, test track, the overhead catenary providing power for the 

11 

streetcars, and our maintenance facility. But not all small businesses have access to capital to expand into new markets and to 

grow. So to increase the small businesses’ and manufacturers’ ability to have access to capital is critical. 

Finally, investment in America’s infrastructure is critical to rebuilding American manufacturing. Investment in basic infrastructure in this country is necessary through reauthorization of MAP– 

21, finishing the fine work on WRDA, and fully funding the trust 

fund. 

Infrastructure projects support middle-class jobs through manufacturing. Families across the country rely on those jobs for their 

livelihood. 

I want to thank you very much for the opportunity to speak here 

today, and I would welcome any questions that you have. 

Chairman MERKLEY. Well, thank you very much. So we will 

enter a period of questions. We will take 5 minutes back and forth. 

I know Senator Warren is going to try to rejoin us. 

But I want to start out, Dr. Berger, with your insights regarding 

Apple. You said that the project was first motivated by looking at 

Apple basically not having any internal infrastructure for making 

anything, so they are doing their R&D, and then they are contracting out. And I think you called it ‘‘whether the Apple for all 

was the appropriate model.’’ But I believe that was much—and correct me if I am wrong, but that was largely Apple’s model before 

they decided to move much of their manufacturing or all their manufacturing to China, that they still outsourced their production. 

And so what really was the reason that they said, ‘‘You know 

what? Let us move it to China’’? Was it the issues that we faced 

domestically in regard to access to capital and trained workers and 

supportive infrastructure? Or was it the inducements from abroad 

and China’s famous brand strategy and all that goes with that? 

Ms. BERGER. So when I mentioned Apple I was using that as an 

example of the most successful of the new big companies that have 

emerged in the United States over the last 30 years. There are also 

companies like Cisco, Qualcomm, and others that have the same 

model of focusing on the R&D design and distribution part of the 

function and having production take place somewhere else and 

most often in somebody else’s factories. 

With respect to the specific decisions of Apple, as you know, 

Apple is a very secretive company, and so we did not have access 

to knowledge about their own decisions. But, of course, the new 

products that have made Apple’s fortune over the past years are 

ones that were from the very beginning produced in China, in 

Shenzhen. And I think that what we are looking at is a model in 

which initially people believed that labor costs in the United States 

should really drive their decision. And when I talked before about 

greater realism in people’s understanding of the real costs of outsourcing and offshoring, I think we had a wave of companies that 

believed that they were going to, by moving their operations out of 

the United States, significantly reduce their costs. And they have 

now realized how small a part of the overall cost equation labor 

costs actually are and how transportation and quality and conformance and responsiveness to changes in your market and your cusVerDate Nov 24 2008 14:18 Oct 20, 2014 Jkt 046629 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\12-11 REBUILDING AMERICAN MANUFACTURING\HEARING\121113.
12 

tomers’ desires, how much larger those factors are in the total success picture. 

I think finally with respect to Apple and other companies like 

them, I think it is very unlikely that those jobs will return to the 

United States, and not because of labor costs. I think it is because 

the Chinese have gotten really very good at doing things like rapid 

product introductions. There is now a very rich ecosystem in 

Shenzhen among the manufacturers producing Apple’s products. So 

I do not think there is a great likelihood that those jobs will come 

back. I think our hopes have to be that the new jobs that we 

produce in the United States will actually stick here. And I think 

that the changes we need to make with respect to the industrial 

ecosystem are ones that will make companies and workers want to 

stick here, just as German manufacturers, in fact, remain in Germany for the skills and for the other characteristics of their ecosystem. 

Chairman MERKLEY. Mr. Hindery, you indicated you might like 

to add a little something to that? 

Mr. HINDERY. I do. This is an area that Dr. Berger and I differ 

quite greatly on, Senator, and I would like to comment. 

In 2010, the machinists union offered to take every one of the 

Chinese jobs that manufacture the iPhone and the iPad and move 

them to the State of Oregon and promised similar quality and similar delivery costs. Ninety percent of the cost differential at the 

onset—and we know this from work done by Microsoft—between 

the original Apple goods being manufactured in China and the 

same goods if manufactured in the U.S. had nothing to do with 

labor. It was all subsidies. As the Doctor says, or described, Apple 

is secretive as heck. So Microsoft did the analysis essentially for 

Silicon Valley and concluded that 90 percent of the differential is 

illegal subsidies of all sorts—currency, finance, siting, everything. 

And my concern is if we do, in fact, wish to size this sector and 

if we do, in fact, conclude that we need a much larger sector on the 

order of two or three times larger, we will not get there by looking 

over our shoulders and not trying to recapture the jobs that have 

left us, in my opinion illegally. Apple and the Machinists Union 

could have worked an accommodation, I promise you, that would 

have had every iPad and every iPhone manufactured instead in 

Clackamas, Oregon, rather than in Shenzhen. 

Chairman MERKLEY. Thank you. When I come back, I will follow 

up on the subsidies part. But I want to turn now to Senator Heller. 

Senator HELLER. Thank you. And thanks again, everybody, for 

taking time. 

Leo, do you think our tax structure is competitive? 

Mr. HINDERY. Senator, I do not. I think it lacks the proper incentives, and it actually has disincentives built into it. We should have 

an R&D policy, Senator, that rewards R&D that produces jobs in 

America. We should as a Congress explore the VAT, the valueadded tax, our current absence of which makes us uncompetitive 

against most of the G20. And the fundamental tax rate for corporate America continues to be too high. 

In my written comments, Senator, I lay out a number of things, 

but the easy answer is that we are not—with our current tax structure—our manufacturing sector’s best friend. 

13 

Senator HELLER. I noticed that in your written comments. That 

is why I wanted to bring that up. I think that our corporate tax 

rates here in this country make us very uncompetitive, and perhaps—and you also speak of tax reform as being essential. Obviously we discuss that here in Washington, DC, but we do nothing 

about it. But we do spend a lot of time discussing it. 

A theme across the board here has to do with a National Infrastructure Bank, and there is movement, introduced by Senator 

Blunt, Senator Warner, myself, and several others, of trying to leverage about $10 billion in Federal funds. We believe we could leverage those to about $300 billion over a period of time. My State, the State of Nevada, needs about $10 billion in roads, bridges, and highways. Their budget is about $7 billion, so you can 

imagine how far behind they are in infrastructure needs. But what 

needs are in Nevada, of course, go to Oregon and across this country, and we believe that there is a need for an infrastructure bank. 

Could any of you speak on that more or do you have any more 

insight of the need and the effort? Leo. 

Mr. HINDERY. Senator, I would argue that the ultimate size of 

that Bank needs to be almost $1 trillion. What cannot happen, at 

least in my opinion, in this Congress—and, frankly, perhaps in any 

Congress—is we cannot establish a National Infrastructure Bank 

in a way that further burdens the Federal deficit of this country. 

The best community to participate in the National Infrastructure 

Bank is the fiduciary community, for example, the State of Nevada 

pension plan, the municipal plan in the city of Las Vegas, and similar plans in Portland and in the State of Oregon. And what we 

have tried to come up with is a structure where, for roughly a 3- 

percent real rate of return, the public fiduciary community of the 

United States could be the primary source of funding for the Bank. 

And if you thoughtfully, Senator, constructed the soft Federal guarantee at the very bottom, it would be scored at zero; we have done 

work with the staff to show that it would be scored at zero. You 

would never actually touch a Federal dollar. 

And if for example the Nevada State pension plan opted in and 

the State of Oregon, Senator, opted out, then a project in the State 

of Nevada would have a preference over Oregon, or vice versa. So 

there is an incentive for all 50 States to participate in the bank. 

But what we cannot do, in my opinion, is persist in this short-term 

approach of sort of block grants through the Department of Transportation. That is simply not a Bank. It fails in scale, it fails in 

focus, and it fails in developing—something that we know for the 

country has to occur. 

Senator HELLER. Thanks for your insight. 

Dr. Berger, I have another question for you having to do with 

banks. You mention in your written testimony that local banks are 

no longer plentiful, and I would agree with that. Nevada has lost 

about half of its community banks in the last 5 years, and the impact that that has had on small- and medium-sized manufacturers 

has been big. Big banks lend to big manufacturers, but nobody is 

lending to the smaller manufacturers. What can we do to help expand some of these community banks and get some competition in 

there so that they are not devoured? That is what is happening. We 

are being devoured by the larger banks. And at one time, you 

14 

know, we had 100 community banks. We have 50 community banks 

today, and that has a huge impact on these manufacturers. 

Ms. BERGER. So we have noticed this in our research as well, and 

it was particularly in the comparison between the German manufacturers and the U.S. manufacturers that we were seeing in Ohio, 

Arizona, Massachusetts, and Georgia, that when the German manufacturers, when we talked to them about how they were able, for 

example, a machine tool maker who had been working in the auto 

sector and decided that it would be good to branch out into making 

machine tools for medical devices or machine tools in solar and 

wind, the first thing they would do is talk to their local bank. They 

have local banks, they have regional banks. And that was an enormous factor in their ability to diversify, to take legacy capabilities 

that they had in their firm, but to scale up in new sectors. 

And that is what we just did not see in the companies we were 

looking at. They had new projects, but all they have are the retained earnings from the previous year’s profits, and that is why 

when you see an innovation in one of these companies, the resources get dripped in slowly, slowly, slowly. It does not move to 

market quickly, and it does not create many new jobs exactly because of this difficulty of accessing capital. 

Senator HELLER. Thank you. 

Chairman MERKLEY. So I wanted to return to this core question 

about—thank you very much, Senator Heller. 

Senator HELLER. Thank you. 

Chairman MERKLEY. He has a conflict to attend to, so I am going 

to carry on by myself for a while. 

Mr. HINDERY. He is also a slow walker. 

[Laughter.] 

Chairman MERKLEY. Back when we were having the last round 

of discussions about trade agreements here in the U.S. Senate, I 

proposed an amendment that essentially required the U.S. Trade 

Representative to exercise its power under WTO to do counternotifications. Essentially China was required to do notifications of 

the subsidies it provides under WTO. It had not done so. And 

under the WTO agreement, it says that another party can then 

post counternotification. So within what seemed like a few hours, 

although it was probably a week, of entering that amendment, our 

U.S. Trade Representative did publish a list of counternotifications, 

and on that list were a whole series of items that were essentially 

famous brand strategies. There were solar and renewable energy 

strategies, there were paper strategies, and there were famous 

brand strategies, which goes right to the heart of why I was asking 

about what moved Apple, because the famous brand strategy was 

the concept if we can do everything possible to move a famous 

brand to China, their supply chain will follow, and their competitors will follow. So it may be kind of the loss leader, if you will. 

And there are many stories about how Apple was courted in terms 

of early invitations, pre-built factories, and so on and so forth. So 

that is the piece I wanted to understand a little better. 

But you have mentioned, Dr. Scissors, that we need to be able 

to measure the Chinese subsidies. As you have looked at those— 

and I know there are many, many different forms of them—could 

you start maybe by talking about some of those strategies that 

15 

were revealed through the counternotifications and maybe also 

some of the ones that are less formal, like if you do not manufacture here, we will not let you market here in China, or if that is, 

in fact, an issue? 

Mr. SCISSORS. Let me just say I thought your legislation and the 

ensuing USTR response were a wonderful step forward because 

subsidies had been ignored, even though they are at the heart of 

the Chinese economy and the heart of the distortion of our trade 

relationship with China that had been ignored for years before 

that. So that was great. And I do not mean this as a criticism of 

USTR at all. That list is sadly incomplete, and it is incomplete because they feel like they are struggling with an absolutely gigantic 

problem. 

As you noted, the Chinese do not notify properly when they do 

notify. You kind of look at the list and say, ‘‘That is what your notifying us about? Because I have got 10,000 others over here that 

you have not mentioned.’’ And so the problem on the American side 

is difficult. It is not something that can be solved in a week. 

As I said, with regard to—you were concentrating on famous 

brands. That naturally attracts attention and for good reason, because as you mentioned, the brands bring along other companies 

with them. So the Chinese correctly saw that there were industries, 

textiles, which were already—China was already a part of, but also 

consumer electronics that have long supply chains and who moves 

them is the head of the chain, somebody like Apple, somebody like 

Qualcomm. 

Those are important factors. I would not necessarily consider 

them the most important because they do not distort the entire 

Chinese economy. That is what is going on there. When you do not 

allow competition, you have changed the whole nature of the game. 

We are in a situation now where American auto firms, for example, are doing very well with their business in China, but it is 

skewed because their production in China is given advantages over 

exports from the United States or other places of production, and 

their production in China is under threat because the Chinese 

would like to brand the production themselves. They want to say, 

‘‘Hey, we used to be the minority partner of this famous brand. 

Now we are the majority partner of this famous brand.’’ 

So I think, my—I am taking too long for the answer, but we took 

a step in the right direction. We have a lot more work to do. The 

big thing would be to try to quantify what the cost is to American 

firms and workers of barriers to competition. Famous brands are 

certainly a part of that. I would not make them the biggest part 

because they are particular to certain areas and not an economywide issue. 

Chairman MERKLEY. So if I were to mention some of the different 

categories—and one is land that is often taken from peasant agriculture work with very little compensation, and one is subsidized 

interest capital and sometimes even a negative real rate of interest, 

and then there are other forms of grants, et cetera. What are kind 

of the top three that the USTR and all of us should focus on in trying to understand the competition from China? 

Mr. SCISSORS. Well, I think the first thing is that you have to 

know in the sector you are dealing with—and this is across the 

16 

whole economy—are private firms, domestic private firms, Chinese 

private firms, foreign firms, foreign imports, are they allowed to actually outcompete Chinese State firms? If you are not, no matter 

what you do, if we know how incompetent certain Chinese State 

firms, they would never go out of business—and they never do— 

that has got to be the biggest subsidy. 

I use numbers like trillions in my written testimony because that 

is the amount of money that is being transferred under the rubric 

of, ‘‘Our State firms cannot go out of business. They have to control 

the majority of the market. The rest, OK, knock yourselves out.’’ 

The second one is financial transfers, because the cost of capital 

is extremely low for State-owned enterprises. It is essentially zero 

if they need to. And sorry to get a little technical here, Chinese 

money supply—remember I said that China’s wealth is $40 trillion 

less than ours? Their money supply is bigger than ours. They have 

so much money in circulation that it overwhelms the size of their 

enterprises and the size of all the enterprises competing with them, 

which means their banks can just loan what are essentially infinite 

amounts of money. 

Every single Chinese green energy firm of any size is a loss 

maker at the moment. It does not matter. They never go out of 

business. There is an infinite amount of money heading in that direction. So that would be number two. 

And the third one you put your finger on. In some cities you cannot get land. You want to operate in certain cities, you are a foreign entity, you cannot get the land. It is not available to you. If 

you are domestic private Chinese entity, you can get it. It is incredibly expensive. If you are a State-owned enterprise, it is free. 

And so I would not say that is an economy-wide problem, but in 

certain cities where land is very expensive, it is a killer because 

you cannot operate there and State-owned enterprises can operate 

there at no cost. 

Mr. HINDERY. Can I just—— 

Chairman MERKLEY. Yes, Mr. Hindery. 

Mr. HINDERY. Senator, could I just add two quick ones? Environmental, which is something you are most aware of as a Senator 

from the State of Oregon, is clearly an identifiable subsidy, their 

failure to meet even reasonable world standards on effluents and 

emissions. And you have to add to that not just the underlying low 

wages but also low-grade labor standards, something that you have 

talked about on numerous occasions. Where I admire Dr. Scissors’ 

work is it is complicated but it is not hard to calculate all of these 

subsidies, and work he has done and work we have done, and others, we just need to do it. And it runs the panoply, and Derek 

spoke to the Big Three. I would just throw in, as I said, environmental and labor standards as an adjunct to labor wages. 

Chairman MERKLEY. Well, certainly that goes to this question of 

the race to the bottom that sometimes can occur within an international trading regime. And by that I mean you have manufacturers who are searching for the place that has the least cost in any 

form of environmental systems and the least cost in labor. 

Now, as Dr. Berger pointed out, the world is changing, and 

hands-on labor is—I am expanding on what you said, so correct me 

if I am on the wrong track here. But essentially we have more and 

17 

more computer-driven robotics that can do just about anything the 

human hand can do, and, therefore, the differential in labor costs 

is less of a factor than it might have been even 10 years ago. Is 

that a fair way to put it? 

Ms. BERGER. Yes, and I would say that even 10 years ago, people 

overestimated how important labor costs would be, even in their 

equations 10 years ago. There was a lemmings-like movement toward outsourcing in which people miscalculated how much advantage they could get sheerly from cheap labor. And I think that people are pulling back from that sort of calculation today. 

Chairman MERKLEY. So just last year, I was at a technology conference and talking to venture capitalists, and they basically said 

our model is this: R&D here, but start from day one to plan the 

manufacturing in China. And, in essence, I thought that is so destructive to our ability to actually create jobs in manufacturing 

here in America. 

Ms. BERGER. Can I just add on that that in the startup companies that we studied, companies that were reaching the point when 

they could commercialize products in semiconductors and above all 

in renewable energy, we saw the same movement to China. But 

now companies are moving to China not for the cheaper labor. Venture capital is insisting that you go to China simply because what 

you now have are these very competent supply chains. You have 

an explosive market for energy, so renewable energy, whereas in 

the United States exactly because we have a relatively stable energy market, many of these firms feel that they will have better 

customers or a larger market in China because of the explosive demand. And, second, we are finding that actually the Chinese at this 

point have become pretty capable manufacturers. So the story now 

is quite different than 10 years ago. 

Chairman MERKLEY. Yes, Leo. 

Mr. HINDERY. Senator, I find the comments that you heard in 

Silicon Valley immoral, and I wonder if regarding R&D tax credits, 

which in the Valley they use to develop products and then move 

the related jobs overseas, the R&D tax credit couldn’t be substantially higher for a company who committed to keeping workers and 

developing jobs in the United States. Right now we have the perversity of using the base R&D tax credit to do what Dr. Berger 

talks about, and then they run overseas with the new jobs being 

created. 

Chairman MERKLEY. Well, if you can indeed have the R&D subsidized here in the U.S. by the U.S. Government and the manufacturing subsidized overseas by the Chinese Government, you have 

a pretty sweet arrangement. 

Mr. HINDERY. It is a sweet and immorally sweet deal. 

Chairman MERKLEY. Yes. Dr. Berger. 

Ms. BERGER. Thinking about the R&D tax credit, when we are 

looking at startup companies, they really do not have any revenues. 

So our R&D tax credit is really of no use to them, and it is actually 

of little use to the Main Street manufacturers either, because what 

they do does not get counted as really being ‘‘R.’’ And so it really 

is a research and experimentation credit. And so you really have 

to—and particularly because innovation today mainly comes out of 

public and university laboratories. I just wonder whether, you 

18 

know, trying to actually implement something like Leo has suggested, whether that would really make very much difference in 

the actual location of production. 

I think there we need a different set of changes in tax incentives. 

When you look at the Main Street manufacturers, they are paying 

full corporate taxes in the United States because they have no way 

of recycling their revenue through foreign—and they are in an entirely different situation than multinational corporations who often 

end up paying, as we know, something like zero in the United 

States. 

So we have a tax system now that just treats the Main Street 

manufacturer in a very different way and in a much more onerous 

way than the large corporations. 

Chairman MERKLEY. Thank you. 

Dr. Scissors. Then I want to turn this over to Senator Warren. 

Mr. SCISSORS. I am again in the position of demeaning 20 years 

of my own research by saying China is a symptom. It is not—what 

we need to do here is first is primarily here. The Chinese have 

much higher corporate debt levels than we do. They have much 

higher local government debt levels than we do. We focus here on 

the Federal deficit, which is a huge problem, but we should not get 

carried away that the Chinese are doing all this at no cost. It is 

not just visible costs you can see in their air and their water. It 

is also financial costs. 

So I am not worried about endlessly unbeatable Chinese competition. What I think we do need—and I agree with my colleagues 

here—is fundamental changes here. Energy innovation has a possibility of changing the competitive balance between the U.S. and 

China. It cannot stop like, hey, you know, we discovered shale gas, 

it is all over now, it will be fine. We have to continue to innovate 

in energy. But we are in a much better place to do that than they 

are because they do not have any small energy companies that innovate. They do not allow them. 

So we have a big advantage there. If we were to engage in fundamental tax reform, not nibbling away—my colleagues have talked 

about this, and I agree. It has to be fundamental. That could also 

change the competitive balance. 

Another thing, as I mentioned earlier, when you have a long period of zero interest rates, you start having a lending environment 

that does not mean anything. Cost of capital means nothing. I do 

not care about—I know you, if your project has a tiny little return, 

I will take it because, whatever, you know, my borrowing costs are 

so small. When you have real interest rates, you get real projects 

that get funded, and people start looking for value. 

So big things like monetary policy, tax policy, energy innovation, 

that is what is going to boost the U.S. position. I am not worried 

about the Chinese. I am more worried about us. 

Chairman MERKLEY. Thank you. 

Senator WARREN. Thank you, Mr. Chairman. I apologize for 

being in and out. This is a conversation that we started a couple 

of months ago. I learned a great deal then, and I very much wanted 

to be here for all of the continuation of it, but we have got flood 

insurance on the floor, though, right now in the Senate. A flood on 

the floor. And so I had to be there for part of it. 

19 

So I want to thank you, but I want to go back to something we 

have talked about before, and this is about the notion of the German model of manufacturing, the idea that there are high-wage, 

high-skilled jobs, and that that is where we are aiming. We are not 

aiming for the Chinese jobs. We are aiming for the German jobs 

that help us build a strong and robust middle class. But the question is: How do we get there? And we were once there. We are just 

not there now. 

And so, Dr. Berger, you talk about how it is that German firms— 

you talk about this in your research and in your book—can bring 

innovation to markets so much faster than we can here in the 

United States. You talked about some of this in your testimony. 

And I made a note of the things you talk about: relatively easy access to suppliers, local research institutions, university–industry 

collaborations, a lot of things that right now small- and mid-sized 

manufacturing just does not have access to. 

So my question is, and it is for all of you, but I want to start 

with Dr. Berger: What are the changes we could make in Federal 

policy that would help support this kind of environment of sort of 

chain that would help support mid-sized manufacturing? 

Ms. BERGER. I think that if we move to—when we give public 

funds, we should be giving public funds in whatever form, whether 

tax credits or subsidies, not to individual companies, as we so often 

do today when communities give tax breaks to a company that will 

move into town, and that is a process that leads to one community 

basically competing with another. I think we should be trying to 

support institutions like the new National Additive Manufacturing 

Innovation Institute that has been set up in Youngstown or like 

SEMATECH or like some of these other institutions in which we 

are encouraging coalitions, teams of small and medium enterprises, 

large manufacturers, universities, and a variety of different—community colleges and large universities, to come together, and in 

which the withdrawal of any single partner would not kill the institution. 

What we have seen in SEMATECH, the consortium of semiconductor manufacturers, is that some partners have moved—some 

companies have moved out; others have moved in. But this institution encourages roadmapping that allows companies to reduce their 

risk by combining some of their efforts, and it allows companies to 

sponsor pre-competitive research together. It has kept the semiconductor industry as a very vital part of the American economy. 

There are 250,000 jobs in that industry, an industry that in 1987 

looked like it was about to disappear under the pressure of Japanese competition. 

So initially the Federal Government actually supported that, but 

now it is basically supported by private companies and to some extent by the State of New York. It also needed, however, special 

antitrust protection, so that was another part of our effort there. 

Senator WARREN. Good. Was there anyone who wanted to add to 

this? Mr. Hindery. 

Mr. HINDERY. Senator, three quick comments. If you are a company that is dependent on a supply chain, your great fear is that 

the chain will be rolled up behind you. And our failure to enforce 

our trade laws creates that palpable fear. When you talk to the 

20 

SMEs about what is really holding them back, they say two things: 

one is a changed competitive environment out of their control; and 

something you are familiar with especially on a personal level, 

which is access to credit. 

The big banks might get back to lending to this category. I am 

not sure, which is why I spend so much time on the Small Business 

Initiative, development banks, Export-Import Bank, things of that 

sort, which are institutions that we can direct more readily their 

behaviors. 

The one closing comment, when you had stepped out, I mentioned to Senator Merkley, in 2010, following a dinner in Silicon 

Valley, the Machinists Union promised Apple that they would take 

every Chinese job and move it to the State of Oregon and promised 

a comparable product. 

Chairman MERKLEY. If only we could turn the clock back and 

make that happen. 

[Laughter.] 

Mr. HINDERY. And it was an offer made by Tom Buffenbarger to 

Steve Jobs, and it was rejected. And it was rejected in very large 

part because Jobs knew that he could continue to go to the well in 

China for subsidies if the prospect was that Chinese jobs would 

head back to the U.S. This sense that every solution can be found 

in high-tech manufacturing also troubles me greatly. If I want to 

see manufacturing grow from 12 million jobs to 24 million and 

higher, then I look to my colleague from Portland. Those jobs, these 

are hands-on jobs. These are the jobs that Senator Merkley’s father 

and I had growing up. And they are good jobs. We do not have to 

always be talking about the high, high end of manufacturing, because if we only do so, then we are going to be leaving millions of 

American women and men behind. 

Senator WARREN. Thank you. 

Ms. Skirvin, would you like to weigh in on this? 

Ms. SKIRVIN. Yes. Thank you for the question, Senator Warren. 

It is important to fund public education and to enhance and focus 

on technical training at the high school level, but even through programs like STEM to go to a lower level to encourage children at 

the youngest levels in the areas of math and sciences and really 

look at their attributes and their capabilities and encourage them 

in the technical arena or engineering. We should encourage public– 

private partnerships, and Workforce Investment Councils and community colleges to enhance their technical programs. We are doing 

some of that locally to identify new hires and take that opportunity 

to give them more skills, but funding and support of those programs is very important. 

Senator WARREN. Good. And, Dr. Scissors, did you want to add 

anything, or are we good here? 

Mr. SCISSORS. I think we are good. 

Senator WARREN. OK. Good. I wanted to give you a chance if you 

wanted to. 

Can I just keep going? Is that all right, Senator? Thank you. 

I want to talk about something else, and you alluded to it here, 

Mr. Hindery and Dr. Berger both, in your prepared testimony. You 

talked about the question about access to funding, and I very much 

appreciate the point that you make about looking for alternative 

21 

ways to fund. But I want to go back to the heart of this, and that 

is, right now the Fed discount rates are available to the largest financial institutions in this country, and they are effectively at zero. 

So the question is: How do we get these larger financial institutions to start lending to smaller manufacturers again here in the 

United States? Mr. Hindery, can I start with you? 

Mr. HINDERY. I think an enormous opportunity was missed, Senator, in that there was no ‘‘quid’’ for the ‘‘quo’’ in the bailout. There 

are reserve requirements that could be lessened for lending to the 

SME community. And for certainly the next year or so, we are 

going to continue to discuss the vagaries of Dodd-Frank and other 

aspects of the reform. 

I think that you have to ask these banks to get back to lending, 

and whether you do it through reserve relaxations or just a demand for the benefits that continue to flow from the Federal Government to their bottom lines, we need some balance here. 

I do think that if you look—and you used the example, Senator, 

with Dr. Berger of Germany at the very specifics of the German development bank, that would have been a chapter in my book. Their 

development bank is stunning. It is size-insensitive. It goes deep 

into the chain, and it is not just the Mercedes Benzes of the world 

and the Audis that can attract German development monies. It is 

down deep into the SME community. We need to do that. We also 

need to have a much more vital Export-Import Bank that uses an 

SME track as part of the approval process. 

Senator WARREN. You know, and I will pick up on that, because 

the point about the Export-Import Bank, even there, whether or 

not it is getting enough funding down to the smaller manufacturers, do you want to comment on that? 

Mr. HINDERY. I know the Export-Import Bank well, and it does 

not at all achieve that objective. It really only does whatever Boeing asks it to do, and it does not go down deep into the supply 

chain. I believe that if you want an Export-Import Bank loan, then 

you should have to respect the entire supply chain, for it is the taxpayers’ money after all. 

But the other issue, Senator—and, again, I regret that you had 

walked out, is our great need for a National Infrastructure Bank. 

If we can keep it from increasing the Federal deficit, get it properly 

sized, as Senator Merkley often talks about, toward $1 trillion, and 

put a Made in America or domestic content requirement on it, then 

that is millions of instant new manufacturing jobs that would be 

created. 

Senator WARREN. Dr. Scissors. 

Mr. SCISSORS. Again, I will give you the global perspective on 

this, and I realize there are a lot of American policy issues that I 

am sort of touching on. I do not mean to. I mean to just talk about 

the global side, and let us just use Japan, because they are the 

longest period. The Japanese banking system is terrible now, and 

it never got any better. And it is impossible for it to get any better. 

I mean, Japanese banks have moved offshore and become very good 

banks. But there has not been any improvement in Japanese domestic capital allocation, and let us just think about this logically. 

Let us say we are making milk and we set the price of milk to a 

penny. What are you going to be doing in that situation? Who is 

22 

going to be lending? Who is going to have the milk innovation? 

When you have no prices, you cannot have a functioning market. 

So what I would urge—and, again, this is the international perspective—is when you are thinking about how to get credit to 

where it should go, to the most productive companies, you cannot 

do that when you have no real prices. You cannot do it. So proposals that are made, whatever they are, should be in the context 

of normal interest rates. And if for macroeconomic reasons, for 

whatever reasons, we cannot get there for 3 or 4 years, OK. But 

without that, it will not work. The Japanese have tons and tons of 

money; they have tons and tons of Government options on that sort 

of financing; and their banking system is awful because you cannot 

have—sorry to be—I am getting a little nerdy here. You cannot 

have financial intermediation when you do not have a price. You 

cannot have a banking system when you have an interest rate that 

is the base interest rate that is set to zero, a banking system that 

finds good projects. 

So all I want to do, without saying anything about U.S. policy 

options, they need to be explored in the context of going back to 

normal interest rates, 10, 15, 20 years ago. That is where the Federal Government can make a difference. Otherwise, you are just 

swimming in this sea of liquidity and nothing really happens. 

Senator WARREN. You make a very fair point about this and 

about the effect of interest rates. But we cannot use that as an excuse to obscure that there seem to have been structural changes in 

how lending occurs in the United States, and that the smaller financial institutions as a proportion of their capital are disproportionately engaged in small business lending, because small business lending has to be crafted in a—they tend to be one-offs. You 

have to understand the business that you are lending to. 

Large financial institutions as a proportion of their capital in 

play are moving—it appears that they are less enthusiastic about 

doing small business lending than they were a decade ago. And a 

decade ago, they were less enthusiastic than a decade before that. 

So as we see a shift in the banking industry, where we see so 

much more concentration in the larger financial institutions and so 

much squeeze on the smaller financial institutions, it has an echo 

effect in manufacturing in squeezing access to capital. So these 

things are interactive. It does not take away from your point. But 

your point is not the only change that is going on at this level, and 

that is the part I just wanted to explore. 

You look like you wanted to say something more, Dr. Berger. 

Ms. BERGER. Yes. I would say that was has happened is that 

when we talk about local banks, the local banks now are national 

banks that have purchased the local banks. So there no longer is 

someone who knows local industry. There is no longer a person 

who can actually appreciate the circumstances of the small and medium manufacturer that they are talking to. And so the scene has 

changed entirely in a way that makes it really difficult for this national bank that may be locally present in Ohio to actually understand local industry well enough even to make reasonable decisions 

about who to lend to and how to lend to them. So I think we have 

had a structural change, and so that is the one we have to fix. 

23 

The other point I would like to make is that the same financial 

market pressures that led to the fragmentation of American industry from the 1980s on are still eating up American manufacturing. 

One of the promising companies that we saw in Ohio was a company called Timken that makes tapered bearings, power transmissions, and steel. And in May, we learned that two of their 

shareholders—this is the California State Teachers retirement pension fund plus Relational Investors, another activist asset firm— 

have demanded that this firm actually split into two. This is exactly the same process that we have seen since the 1980s. Why? 

Because investors want pure play investments. So this company, 

which is more or less one-third a specialty steel company, twothirds a bearing transmission company, and which believes that 

there are synergies in production between these two activities, is 

actually being broken up by investors. We have seen this again and 

again across the manufacturing sector. And I think this has really 

had—I mean, I am not talking about the particular circumstances 

of this company, but this is a process that continues and that has 

very negative effect. 

Senator WARREN. Mr. Hindery, as long as the Chair is going to 

indulge me here. 

Mr. HINDERY. Timken Roller Bearings, is in Hamilton County, 

Ohio. In the last decade, Hamilton County experienced more unemployment than any other county in the United States because of 

the transfer of production out of the United States to Chinese roller 

bearing companies, and the splitting up of the company which is 

being talked about today is simply a desperation Hail Mary pass. 

This company was one of the great American companies, and it 

was emasculated by unfair China trade, pure and simple. Under 

China’s Indigenous Innovation Act, you cannot readily buy Timken 

bearings in China today. 

Senator WARREN. So, Mr. Chairman, forgive me, I have been 

called away again. I do want to say that this point on finance, it 

is not only whether or not finance serves to help support the manufacturing we need, but whether or not finance has actually helped 

destroy much of the manufacturing we need. And so I appreciate 

your very thoughtful comments on that. Thank you. And thank you 

all. And I apologize that I am not here for every word of this. This 

is terrific. 

Thank you, Mr. Chairman. 

Chairman MERKLEY. Thank you very much, Senator Warren. 

We are going to conclude in a few minutes, but in the course of 

getting there, I want to draw back in the on-the-ground experience 

that Ms. Skirvin represents. You noted in your conversation, you 

said, ‘‘We need a lot more people who are ready to work.’’ I was 

involved in a conversation recently where folks were saying, ‘‘How 

can it be that this is really a problem?’’ Because we see folks who 

are so ready to work, they are working two or three jobs at minimum wage trying to support their family. There seems to be a 

work ethic there. But I think they are referring to the challenge 

of folks coming up maybe out of high school or community college 

into the manufacturing sector, and they are not prepared to show 

up on time or to pass a drug test. Is that the gist of it? Or would 

you like to expand on that? 

24 

Ms. SKIRVIN. Thank you, Mr. Chairman. With regard to ready to 

work, the employable workforce typically does not have the necessary skills to enter the workforce and perform the work needed 

in the technical jobs. Young people coming out of high school do not 

have hands-on training. They do not have basic shop math skills 

that are truly necessary to form a foundation for a technical worker 

to be a machinist or to be a welder. Employable workers are willing 

to work, but do not have skills, knowledge, and hands on experience to qualify for the positions. Sometimes we have problems with 

qualifications in other ways, but the emphasis really is that we 

want to identify those people with those aptitudes for technical 

skills and open doors for them, reach out to them through partnerships with the community colleges, like Clackamas Community 

College, and the Workforce Council, and identify people with attributes in the technical arena and create opportunities for them 

to obtain technical training and skills. 

Chairman MERKLEY. So it really is not an issue of work ethic or 

discipline. It is an issue of being prepared and knowing how to basically have an affection for and an ability to utilize tools in the 

manufacturing setting. 

Ms. SKIRVIN. It is. I have been a member of our team for over 

10 years now and worked on the missile defense program, and the 

pride that people take in forming silos and silo interface vaults to 

defend this country is amazing. It is very humbling to be on our 

shop floor when we are doing that work. They take it very seriously, and they are dedicated. They work through holidays. They 

travel on weekends to go to the site and support the work that 

needs to be done. And I think creating those opportunities and 

identifying those young people that have that work ethic is something that we need to do and do more outreach on all levels. 

Chairman MERKLEY. So do we need to radically modify No Child 

Left Behind in this regard? I say that in the context of what we 

have seen in schools throughout Oregon—at least this has been my 

impression—is that in the face of competing for a set of—the reputation of the school is based on a couple key tests and how their 

students perform. Anything that is not bearing upon the success of 

that school on those tests has essentially been unfunded, from art 

to music to gym to shop classes, or as we now call them, ‘‘career 

technical education.’’ And I think about how when I was growing 

up—and I still live in the same community now—the kids in the 

community, working-class community, they built things in their garage, and they built things in part because their parents built 

things, their dads built things. They worked on cars. They built 

mini-bikes. They built go-karts. They grew up using tools. And that 

was complemented by shop classes starting in junior high school. 

So I had wood shop, I had metal shop. I am sure there are still 

some treasures sitting in my parents’ basement that only a mother 

could treasure. 

[Laughter.] 

Chairman MERKLEY. But we do not have that now because kids 

come home. And they are not in the garage making things with 

tools. They are on the computer in all sorts of different ways. And 

then there is not any shop classes. So I have proposed a BUILD 

Act which essentially is about funding career technical education or 

25 

shop classes in junior high and high school. And I think there is 

also a place here for STEM—science, technology, engineering, and 

mathematics—to play as well and get kids excited in robotics and 

a whole series of things of how math applies. I think the two are 

complementary. But that then creates a foundation for folks who 

say, well, I really want to pursue that welding course at the local 

community college, and then I will be ready to build things, the 

great variety of things that you make in Clackamas. 

Any insights about that? 

Ms. SKIRVIN. Senator, I absolutely agree with you. There is always room for improvement, and having a niece and nephew, attending middle school and high school, it has been difficult to see 

the lack of opportunities for those types of classes when they and 

their friends demonstrate those aptitudes. It is incumbent upon the 

family and parents to encourage and support access to these opportunities in the absence of them being available. Absolutely, I think 

funding those types of programs at the middle school level and also 

at the high school level, and even lower, is essential, and encouraging and developing those skills in our community with our children at an early age and encouraging them as a viable path forward, whatever it takes. 

Chairman MERKLEY. Thank you very much. 

Dr. Berger, you used a phrase. I was searching for it, but it is 

the—is it the ‘‘culture of innovation’’ or the ‘‘community’’? What 

was the term? 

Ms. BERGER. Ecosystem? 

Chairman MERKLEY. Ecosystem. Thank you. Ecosystem. Do you 

see this as a key challenge in the ecosystem, the lack of kind of 

hands-on tool experiences in junior high and high school? 

Ms. BERGER. I think it is absolutely critical that we provide those 

opportunities to students to have hands-on experience. In fact, at 

MIT, which is a university, our motto is ‘‘Mens et manus,’’ ‘‘Hand 

and mind.’’ And we can see even among our students across fields 

the pleasure in actually making things. And this is certainly, I 

think, one of the real strengths of American life and American culture. And I believe that the problems with recruiting people for the 

manufacturing workforce have to do with the insecurity of those 

jobs and low wages in those jobs. 

I totally agree with Leo Hindery. Everybody is not going to be 

working in advanced manufacturing or highly automated plants. A 

lot of people are going to be making things with their hands, and 

this is something I think people like doing and that we need to provide opportunities for. 

I would just like to mention that, as part of our research, we did 

a survey and got responses from 1,000 manufacturing establishments to see if they were finding workers with the skills they needed, and we asked them one question, basically: How long did it 

take you to fill your last vacancy? Three-quarters of the factories 

responded that they could do it in less than a month. So overall 

we still do have a lot of people who actually can fill the jobs that 

we have. 

The other 25 percent of the companies that were having more 

trouble, often wanted skills that were not available. But the problem that you actually mentioned about bad behaviors, bad work 

26 

ethic, or cannot pass the drug test, that turned out to be a very 

small part of the problem of filling the jobs, even in the 25 percent 

that had trouble. So it is kind of an urban myth, I think, that this 

is really a significant fact. 

Chairman MERKLEY. Well, thank you, and I want to turn to the 

last connection between the ecosystem and the work on the ground, 

and that is, we talked about the skill sets, but the other is financing. And we have heard a little bit about Germany where I believe 

two-thirds of the funding comes through bank loans. In the U.S. it 

is more bonding. And so what is your experience in terms of the 

challenges? Your company has many, many projects, a sizable company for Oregon, and you undertake new projects, like the streetcar. Any insights as we wrestle with this question of access to capital? 

Ms. SKIRVIN. Yes. Thank you, Senator. Oregon Iron Works, as 

you said, is a diverse company, and we are in industries that have 

higher risk, such as the marine industry. In searching for a surety 

and bonding capacity to bid and have the capacity to bid on these 

jobs and enter markets and continue to grow as a manufacturer, 

we actually had to go outside the U.S. market for our bonding capacity. The lack of access in the U.S. was hindering our ability to 

grow our business. One of the reasons why Oregon Iron Works is 

so successful is because of our diversification, and our innovation 

in the Marine Division in the Nuclear Division, or in missile defense. So we are always learning in the different areas that we are 

working in, and the market and what is available for opportunities 

to do work is going up and down. 

To be diversified and to have the ability to grow into different industries like United Streetcar, companies must have access to risk 

management from a financial standpoint, with insurance, access to 

capital, and also with sureties. 

Chairman MERKLEY. OK. That raises more questions than we 

have time for, but we are touching on a whole lot of different aspects of the American economy and international economy. And so 

this is very important to those of us here in the Senate as we wrestle with creating living-wage jobs and a foundation for families to 

thrive and certainly as we also ponder the investment that we need 

to make for the success of the ongoing next generations in both the 

education side and the infrastructure side. 

Thank you very much for your testimony. We will keep the 

record open for questions, as I mentioned at the beginning, and 

with that I adjourn the Subcommittee. 

[Whereupon, at 5:05 p.m., the hearing was adjourned.] 

[Prepared statements supplied for the record follow:] 

27 

PREPARED STATEMENT OF SUZANNE BERGER 

RAPHAEL DORMAN–HELEN STARBUCK PROFESSOR OF POLITICAL SCIENCE, AND

COCHAIR, MIT PRODUCTION IN THE INNOVATION ECONOMY

DECEMBER 11, 2013 

Chairman Merkley, Senator Heller, Members of the Subcommittee and Committee, thank you for the opportunity to testify today about the challenges and opportunities for rebuilding American manufacturing. 

My presentation today builds on findings from 21⁄2 years of research at MIT on 

the role of manufacturing in getting innovation into the market place. The research 

was conducted by a group of 20 MIT faculty from disciplines ranging from engineering, social sciences, management, to biology. The United States is a powerhouse of 

new ideas, new technologies, new products and processes. Many people question, 

though, whether we need production capabilities located in the United States in 

order to reap the full benefits of these innovations in the form of good new jobs, 

strong companies, and sustainable economic growth. Many of the companies that 

have been most profitable over the past two decades are ones with R&D, design, 

and distribution in the U.S., but which outsource their manufacturing around the 

world. Without production capabilities in the U.S., can we generate new growth and 

jobs? Is this a model that would allow us to grow new industries in sectors like 

biotech, medical devices, and new materials where there seems to be a tighter connection between R&D and production? Can we even sustain innovation without 

manufacturing capabilities in the U.S.? The bottom line finding of our research is 

that manufacturing does play a vital role in commercializing innovation. To move 

our economy onto a trajectory of sustainable growth and creation of new good jobs, 

we need to bring innovation from across the country—from high-tech start-ups, 

Main Street manufacturers, Fortune 500 companies—at greater rate and speed into 

the market. The critical policies to accelerate these processes are private–public 

partnerships to rebuild the industrial ecosystem. 

At the time the MIT research began in 2010, pessimism about the future of production in the United States was sweeping across the country. Millions of manufacturing jobs had disappeared over a decade. People were questioning whether U.S. 

manufacturing could ever compete with Asian low-wage production. The trade deficit in advanced technology products was deepening—equal to 17 percent of the total 

U.S. trade deficit by 2011. It seemed that even high-tech sectors of industry were 

doing better overseas than here. 

Everyone agreed that the U.S. needed a higher rate of good job creation, but no 

one seemed to know where jobs could come from. Could manufacturing jobs come 

back? The brightest corporate superstars, like Apple, were locating production 

abroad and still reaping the lion’s share of profits within the U.S. Was this going 

to be the American model for the future? In emerging technology sectors, like batteries, solar, and wind, even when the startups were created in the U.S. out of U.S. 

innovations, commercialization of the technology was taking place abroad. What 

could Americans do to leverage their strengths in new science and technology to rebuild a dynamic economy? Would production capabilities at home be needed to capture the flow of benefits from invention and entrepreneurship? Which capabilities? 

And how could they be created and sustained? 

The point of departure for the MIT Production in the Innovation Economy research was recognizing that innovation is critical for economic growth and for a vibrant and productive society. Our question was: what kinds of production do we 

need—and where do they need to be located—to sustain an innovative economy? As 

Professor Richard Freeman, a Harvard economist, has put it, a person knows it’s 

a manufactured product when he drops it on his foot. But for most valuable activities today, the traditional line between ‘‘manufacturing’’ and ‘‘services’’ has become 

so blurred that it no longer serves to distinguish separable and distinct activities 

or end products. Whether in a giant like Apple or in a small Ohio company that 

makes half-sleeves to repair pipelines and sends its technicians along with the product to stand on the oil platforms and shout down instructions to the divers, the activities that create most value, that is, the ones that are most difficult for others 

to replicate, are bundles of an object you could drop on your foot and of services. 

We focused on those bundles, and we structured our inquiry to locate opportunities 

and dangers for American prosperity in the changes that have taken place over the 

past 30 years in the linkages between an innovation and the broad range of production processes that bring it to market. 

There are many serious reasons to worry about the fate of manufacturing in the 

United States. Virtually every week brings a new report diagnosing the state of 

manufacturing and emphasizing different aspects of its critical significance for the 

28 

economy. One of the key danger points identified in these reports is the declining 

weight of the U.S. in the global economy. Even though the U.S. share of world manufactured output has held fairly steady over the past decade, economists have pointed out that this reflects good results in only a few industrial sectors. And even in 

those sectors, what appear to be productivity gains may be the result of underestimating the value of imported components (Houseman 2010). A close look at the 

composition of a worsening trade deficit shows that even in high-tech sectors the 

U.S. has a deteriorating picture. While the output of U.S. high tech manufacturing 

is still the largest in the world and accounted for $390 billion of global value added 

in high-tech manufacturing in 2010, U.S. share of this world market has been declining, from 34 percent in 1998 to 28 percent in 2010, as other countries made big 

strides ahead into this market segment. Jobs are another huge concern. The great 

spike in unemployment over the past 5 years was disproportionately due to loss of 

manufacturing jobs. And as the economy revived, such jobs were slow to return. 

Many of them never will. Over the long postwar years of prosperity, manufacturing 

jobs had been especially valuable to workers and valuable for middle-class opportunity because they paid higher wages and had better benefits than other jobs available to people with educational qualifications of high school or less. New manufacturing jobs now often come with lower wages and fewer benefits attached. National 

security is also linked to the health of manufacturing through the procurement of 

new weapons and the maintenance and replacement parts for the many generations 

of equipment still in service. The wave of disappearance of many small- and medium-sized suppliers creates worrisome and still relatively unknown degrees of dependence on foreign suppliers for U.S. military contractors. Across the entire industrial landscape there are now gaping holes and missing pieces. It’s not just that factories stand empty and crumbling; it’s that critical strengths and capabilities have 

disappeared that once served to bring new enterprises to life. Economic progress 

may be preceded by waves of creative destruction, as Joseph Schumpeter claimed. 

But we need to know whether the resources that remain are fertile enough to seed 

and sustain new growth. 

Today digital technologies and borders open to the flow of ideas, goods, and services make it possible to build international partnerships for bringing innovation into 

production and into the market. For U.S. innovators there are unprecedented new 

opportunities to draw on production capabilities that they do not have to create 

themselves. But there are also long-term risks in these relationships, and they go 

far beyond the loss of any particular proprietary knowledge or trade secret. The 

danger is that as U.S. companies shift the commercialization of their technologies 

abroad, their capacity for initiating future rounds of innovation will be progressively 

enfeebled. That’s because much learning takes place as companies move their ideas 

beyond prototypes and demonstration and through the stages of commercialization. 

Learning takes place as engineers and technicians on the factory floor come back 

with their problems to the design engineers and struggle with them to find better 

resolutions; learning takes place as users come back with problems. And in the challenges of large-scale production, companies like 3M and Gillette find a terrain for 

innovation that allows them to reap higher profits. 

There are reasons to fear that the loss of companies that can make things will 

end up in the loss of research that can invent them. When we visited the laboratory 

of MIT Professor Tonio Buonassisi, a leading researcher on solar cells, he pointed 

out all the leading-edge equipment that came from tool makers located within a few 

hours of Cambridge, Massachusetts. Much of the machinery had been made in close 

collaboration between the lab and the instrument companies as they handed ideas 

and components and prototypes back and forth. Used for the first time in the lab, 

these tools were now being marketed to commercial solar companies. The news on 

the U.S. solar industry was looking worse and worse as the economy stalled, as 

stimulus spending on renewable energy ended, and Chinese competitors hung in, despite losses and low margins. If the local equipment makers Buonassisi worked with 

were to collapse it would mean real trouble for research, for the scientist relied on 

working with them to make new tools faster for more efficient and cheaper cells. 

Even in a fragmented global economy with instant connection over the Internet to 

anywhere in the world, the ties that connect research in its earliest stages to production in its final phases remain vital. 

The MIT Production in the Innovation Economy Study: Objectives and 

Methods 

The approach of the MIT Production in the Innovation Economy project was to 

focus on one broad question: how production capabilities here and abroad contribute 

to sustaining innovation and realizing its benefits within the United States. We organized our research to discover what it takes to sustain innovation over time and 

29 

what it takes to bring innovation into the economy. We approached these questions 

from multiple angles, looking at innovation in products, in processes, in combinations of products and services; at innovation in startups, in large multinationals, in 

Main Street small- and medium-sized manufacturers, in European and Asian partners and competitors, in hotspots for new technologies, like the biotech cluster of 

Cambridge, Massachusetts, in traditional manufacturing country, like Ohio, and in 

new manufacturing areas in the Southwest, in Arizona, in China, and Germany. 

To retrace the pathways through which an invention or a new idea about a product or a way of improving a product or process get made into goods and services 

for sale in the market, much of our research was conducted in firm-level interviews. 

National Science Foundation statistics state that in 2006–8, 22 percent of all U.S. 

manufacturing firms reported ‘‘a new or significantly improved product, service or 

process’’ (NSF 2012) but we did not know what they were doing or how they were 

doing it. There is data, too, on the high-risk venture and corporate funding of 

startups, but no systematic account of how these firms find the full range of inputs 

they need on the road to commercializing their innovations. In the interviews with 

senior managers we could trace out in concrete detail the trajectories along which 

each company moved as it attempted to make its ideas into profits. Where did the 

company get the inputs it needed to bring innovation into production? Did it find 

these inputs at home or abroad? Where and why did it decide to locate each of its 

operations? Which parts of its production activities does it believe it needs to keep 

in close proximity to its R&D in order to bring a product to market and to maximize 

the gains from its own innovation? In the case of innovations growing out of existing 

process or product technologies, our interviews in companies allowed us to track 

interactions between the innovators and the manufacturers in great detail from the 

point at which the new idea came into play through production into the hands of 

customers. 

In all PIE interviews (see Table 1) teams of MIT researchers raised basically the 

same questions, with wording adapted to the context and circumstances of each 

company. The interview template prompted each researcher to ask: Tell us about 

two or three new ideas—new products, new processes, improvements on old products or processes—that you tried to bring to market over the past 5 years. What 

did you do to try to move it from the stage of being an idea (in a lab, in an R&D 

center, on the shop floor, in your head) into a product that was sold in the market? 

Where did you find the capital for the various stages of scale-up? Did you self-finance? Or get venture capital? Or bank loans? Or corporate partners? Where did 

you find engineers and workers with the right skills? Where did you find technical 

know-how? Where did you find suppliers? How did you decide what to do in-house 

and what to outsource? How did you decide where to locate production? What failed 

and why? What policies make a difference for a company like yours? 

30 

The first group in our interview population were American-based multinationals 

that figure among the largest global investors in R&D. Ten of the firms in our sample rank in the top 100 of the Fortune 500 companies. Over the past 30 years these 

companies have changed from almost entirely U.S. based operations to organizations 

carrying out R&D and production around the world. 

A second research focus was the population of new companies that grew out of 

patents that had been created in MIT laboratories and licensed by the MIT Technology Licensing Office over the years 1997–2008. There were 189 of them. The researchers set aside the pure software start ups and zeroed in on the 150 companies 

that were engaged in some form of production. These are starts-ups that are especially well-positioned to succeed, because they emerge from very strong research 

labs, because they take their first steps in the world in an extremely dynamic regional hub of innovation with many complementary resources in close proximity, 

and because they have far better access to early-stage high risk capital than do 

firms in much of the rest of the country. At those points in the scale-up process 

where these firms, even with all their relative advantages, find serious difficulties 

in obtaining the inputs they need for getting their products into the hands of customers, we can anticipate that the ‘‘average’’ new American firm based on innovative technologies will also be having trouble, so there are important lessons to be 

learned from their experience. There are, of course, many reasons firms might fail 

to find resources to scale-up, relating to the market, or competitive landscape, or 

the product, or management. 

31 

The research team learned that these highly innovative companies were usually 

able to obtain funding through relatively long periods (even up to 10 years) of early 

phases of scaling up through early market demonstration. But many of them when 

they came to the stage of moving to full-scale commercialization could not find finance in the U.S. As many of them made the transition from venture funding to 

high-volume manufacturing, they had to look for foreign investors and often moved 

abroad to manufacture their products. 

32 

The third target population within the PIE company sample were small- and midsized U.S. manufacturers. To figure out how to raise the water-level of all kinds of 

innovations—product, process, service, incremental, radical, repurposing, business 

model—flowing into the economy, we need to look beyond Silicon Valley and Cambridge, Massachusetts. PIE researchers started from the population of the 3,596 

manufacturing companies in the U.S. which had doubled their revenues and increased head count between 2004 and 2008 and had more than $5 million in annual 

revenues and more than 20 employees. These companies were presumably viable, 

hence ones in shape to potentially carry forward new products and processes into 

the market. In Arizona, Georgia, Massachusetts, and Ohio we carried out interviews 

with 53 of these firms. To this group we added 43 similar firms that we discovered 

through other branches of our work. 

33 

Innovation is not only in patents. The novel activities of established small- and 

medium-sized manufacturers rarely correspond to the OECD’s Frascati Manual and 

‘‘Oslo’’ definitions of ‘‘research and development.’’ But there’s also a hidden wealth 

of innovation in process, business organization, and manufacturing across America 

in firms of all sizes. Some have leading-edge innovations (and patents). But for most 

Main Street manufacturers, the major innovative activity is repurposing technologies developed in one sector for uses in different products and processes. A 

third-generation CEO of a Midwest company that makes steel components, for example, told us of developing special lighter steel he had used in construction and 

experimenting with bringing it into new work he was doing in defense contracting. 

For an important group of Main Street manufacturers, their role in innovation is 

as suppliers providing vital components and services to enable scale-up in other 

companies. One such company, Mass Tank in Middleboro, Massachusetts, exemplifies the pattern. It’s a 50-employee firm that does its main business in fabricating 

tanks and selling tank inspection services for chemical, food, pharmaceutical, and 

water industries. But it is also working with five start-ups in the region and going 

back and forth with their engineers developing new materials and components that 

may someday be part of a blockbuster new product that Mass Tank will have helped 

these innovators to bring to market. In these suppliers, the greatest strength is a 

combination of design and fabrication capabilities. 

But even the strong Main Street manufacturers we studied were not growing fast 

and were not creating many new jobs. Much of the reason why, we discovered, was 

that all scale up of new ideas depended on their internal resources. They were not 

finding any complementary capabilities they could draw on in the industrial ecosystem as they tried to develop new components. There are few local banks with 

local knowledge left in the U.S. to fund such scale up. Connections with community 

colleges, trade associations, research consortia are weak or not present. All these resources are plentiful on the landscape of German companies. As we wondered why 

the contributions to innovation of the Main Street manufacturers did not lead to 

greater profits and faster growth, the comparison with Germany was inevitable. An 

Ohio machine toolmaker is not going to take off like Microsoft or Facebook, but 

there are great underexploited possibilities for such firms also. We considered what 

it would take to galvanize more innovative activity within Main Street manufacturers, a faster uptake of new technology, and a tighter enabling connection with new 

start-ups across the economy. 

34 

The fourth group of firms in the PIE sample were foreign: mainly German and 

Chinese. Germany is one of the world’s richest and most advanced industrial societies. China is still a poor-to-middle income country with rather low productivity 

and few companies that compete in world markets on the basis of unique products 

or processes. Yet both of these very different countries have companies that are 

world-beaters in scaling up innovation to market. In both Germany and China we 

found compelling examples of innovative manufacturing and scale-up that challenged many of our ideas about why innovative companies in the U.S. so often falter 

before attaining the size and capacity to reach large numbers of customers. The 

strength of German companies goes well beyond defending niches against low-cost 

competition with incremental advances. They create new businesses through the 

transformation of old capabilities and their reapplication, repurposing, and commercialization. The U.S. Main Street manufacturers we interviewed usually had only 

their own material, human, and financial resources to draw on when they tried to 

scale-up an innovation. They are ‘‘home alone.’’ In contrast when the German firms 

expand into new sectors, they draw not only on strong legacy resources, but also 

on easy access to a rich and diverse set of complementary capabilities in the industrial ecosystem: suppliers, trade associations, industrial collective research consortia, industrial research centers, Fraunhofer Institutes, university–industry 

collaboratives, technical advisory committees. The differences in the density and 

availability of resources in the German and U.S. ecosystems explain much of the 

differences between the fate of manufacturing in the two countries. 

The China interviews showed firms emerging with remarkable innovative capabilities in manufacturing. China’s great initial assets were cheap factor prices— 

cheap land, labor, capital, and an undervalued currency. Low-cost labor allowed Chinese companies in apparel and footwear to make huge inroads in Western markets. 

But today the PIE research team found Chinese firms in emerging industries like 

renewable energy. These are firms that excel in scale-up to mass manufacturing not 

because of low-cost labor, but because of their ability to move complex advanced 

product designs into production and commercialization. The huge China market is 

of course a major draw for investors of all nationalities. But even in those industries 

in which the main customer markets are still in the West, as for consumer electronics, photovoltaic cell and module production, American and European innovators 

are turning to Chinese partners. Increasingly the reason is the solid capabilities in 

knowledge-intensive scale-up they find in China. These capabilities involve reverse 

engineering and reengineering a mature product to make it more rapidly and efficiently; making designs into new-to-the-world products and processes; and indigenous product innovation. In each of these categories PIE researchers interviewed 

Western companies and their Chinese partners and walked through the Chinese 

plants with engineers to track how exactly innovation was being produced. 

Two other research groups formed within PIE to analyze critical inputs to bringing innovation to market: jobs and skills and advanced manufacturing technologies. 

For these research modules, the project used surveys as well as interviews. The 

group working on jobs and skills talked with companies, community colleges, high 

schools, and labor market programs across the country. Their sample of close to 900 

manufacturing establishments is the first nationally representative data on what 

skills are needed and shortages occur. Since production workers account for over 40 

percent of all those employed in manufacturing, the team focused on whether there 

is a shortage of skills in this population, as many have claimed. What skills do your 

workers need? employers were asked. Basic reading, writing, and math? To use a 

computer? To work in teams? To take independent initiatives? Have skill requirements increased significantly over the past 5 years? How long does it take to identify and hire the right candidate? The median answer was 4 weeks. Just under 20 

percent of the establishments had some long-term vacancies (over 3 months) equal 

to 5 percent or more of their core production workers. The analysis drilled down into 

the job categories and firm types where there do seem to be problems finding candidates with the right skills. The problems centered in jobs requiring skills not generally available in the region; jobs requiring advanced math skills; and very small 

companies. Further probing showed that firms with few or no connections to other 

companies in their area and few or no connections to local schools also had more 

hiring issues. The research group conducted interviews in regions with programs 

that have brought together industry, schools, and Government funding to work on 

these problems with some success. 

The team working on advanced manufacturing technologies queried engineering 

colleagues across the country in order to try to locate the potential sweet spots for 

technologies that could radically speed up the passage of new goods and services 

from the lab bench to market. Using the surveys and interviews, the team identified 

and ranked the promise of seven major technology groups. These technologies could 

35 

accelerate growth and energy efficiency by transforming manufacturing. Today, 

manufacturing is a lengthy and often inefficient process in which the raw materials 

which nature provides are pushed through stages of fabrication, assembly, and 

warehousing and emerge as goods for sale in the market. In a future which new 

technologies could enable, manufacturing might become a rapid process in which 

human-designed and engineered materials would be pulled by demand through continuous manufacturing and customization to meet specific and differentiated human 

needs. Today manufacturing remains highly centralized and concentrated in large 

factories and components and finished goods are transported at great cost and with 

high impact on the environment through long supply chains. Trends to offshoring 

and outsourcing have made manufacturing plants bigger and the distances goods 

traverse even longer. Tomorrow we can imagine technologies that would ‘‘destroy 

the tyranny of bulk’’ and distribute manufacturing, thus making it possible to manage capacity and demand flexibly through networks of small, localized manufacturers linked by Internet. 

The Great Transformation: The New Corporate Structures of the American 

Economy and the Origins of the Production Problem 

Fifty years ago, at the high water mark of American economic dominance in the 

world, 29 percent of U.S. workers were employed in manufacturing (January 1960), 

wages of the manufacturing workforce had been rising for decades, and innovation 

and manufacturing moved together in lockstep to produce a vast new stream of 

products for the market. Invented in the USA meant made in the USA. New products were first scaled-up, standardized, mass produced, and brought to high levels 

of performance and reliability in the advanced industrial countries in which they 

were invented. Only when production matured and the good became a commodity 

did manufacturing shift to less-developed countries with less-skilled workers. 

Today invented in the USA no longer means made in the USA. Given the capabilities that now reside abroad, the next generations of consumer electronic products 

designed in the U.S. are likely still to be made in Asia—even if wages continue to 

rise there. In some industries today, it would be very difficult to do early-stage manufacturing in the U.S., because the technical expertise, the workplace skills, equipment, and the most advanced plant lay-outs are no longer present in the country 

or have degraded and fallen behind state-of-the-art elsewhere. 

It’s not only in ‘‘mature’’ industries like apparel that manufacturing has moved 

overseas. It’s in newer sectors, like solar cells, wind turbines, and batteries. In the 

past chip design and chip fabrication had to be carried out within the four walls 

of the same company; today chip designers can send files of digital specifications to 

semiconductor fabrication plants anywhere in the world for production. Apple can 

define, design, and distribute iPods and iPhone and iPads in the U.S. without having any significant production facilities here at all. 

How did this new global economy of fragmented research, development, production, and distribution come into being? What does it mean for the future of the U.S. 

economy? There were multiple causes of this transformation including many taking 

place outside the U.S., like the rise of emerging market competitors and large new 

consumer markets. But what stands out in the PIE analysis is the impact of a 

tectonic shift in corporate ownership and control that took place well before 

globalization or Asian development had come into full play. The driver was financial 

market pressure for higher quarterly returns from companies that were less diversified, ‘‘asset-light,’’ and organized around core competence. From the 1980s the large 

vertically-integrated corporations that had long dominated American manufacturing 

began to shed many of their business functions from R&D and design through detailed design to manufacturing and after-sales services. These activities had all once 

been joined under one corporate roof. By 2013, however, very few large American 

companies remain with vertically integrated structures. Companies like General 

Electric or Procter & Gamble with a wide range of different businesses under one 

corporate roof and a predominant preference for integrating research through production are the exception. 

First among the business functions that companies started moving out of their 

own corporate walls was manufacturing—for that shift produced reductions in 

headcount and in capital costs that stock markets immediately rewarded. Advances 

in digitization and modularity in the 1990s made it possible to carry out this strategy and to outsource production to manufacturing subcontractors like Flextronics 

and Jabil and eventually to foreign suppliers and contractors like Taiwan Semiconductor Manufacturing Company, Quanta, and Foxconn. 

Out of those changes in corporate structure have come not only great new opportunities, but also some of the most difficult hurdles we face today in trying to move 

U.S. innovation into the market. Here we can only list some of these challenges: 

36 

• Vertically integrated enterprises used to organize and pay for educating and upgrading the skills of much of the manufacturing workforce. They had the resources to do this. And long job tenure meant companies could hope to recoup 

their investment over the course of the employees’ careers. Many of the employees who were trained in big companies or in vocational schools they supported 

ended up working for smaller manufacturers and suppliers. Today, American 

manufacturing firms are on average smaller, and have fewer resources. They 

do not plan to hold on to their employees for life. They cannot afford to, or, in 

any event, do not, train. How do we educate the workforce we need? 

• Vertically integrated enterprises like AT&T used to support long-term fundamental research in centers like Bell Labs and Xerox PARC and Alcoa Research 

Lab, each employing thousands of scientists and engineers. As corporate structures have been resized, basic research has been drastically cut, these centers 

have mostly disappeared, and corporate R&D is now far more tightly linked to 

the near-term needs of the business units. How should we fund a strong stream 

of basic and precompetitive research today? If much cutting-edge research no 

longer is taking place within companies—but in universities or small start-ups 

or in Government labs—how can we propel these innovations through to commercialization? How can we diffuse new technologies into established companies? 

• When innovation grew out of large firms, they had the resources to scale up 

to mass commercialization. In the thirties, a corporation like DuPont not only 

invested for a decade in the fundamental research that led to nylon, but once 

the lab had a promising product, DuPont had the capital and the plants to 

bring it into production. Today, when innovation is more likely to emerge in 

small spin-offs or out of university or Government labs, where do the scale up 

resources come from? How available is the funding needed at each of the critical 

stages of scale up: prototyping, pilot production, demonstration and test, early 

manufacturing, full-scale commercialization? When scale-up is funded mainly 

through merger and acquisition of the adolescent start-ups and when the acquiring firms are foreign, how does the American economy benefit? How do 

American taxpayers who paid for much of the research at the origin of the process benefit? 

• Big American corporations used in effect to provide public goods through 

spillovers of research, training, diffusion of new technology to suppliers, and 

pressure on State and local governments to improve infrastructure. These 

spillovers constituted ‘‘complementary capabilities’’ that many others in the region could draw on, even if they had not contributed to creating them. As the 

sources of these ‘‘complementary capabilities’’ have dried up, large holes in the 

industrial ecosystem have appeared. How can these capabilities be recreated 

and sustained in order to maintain a terrain favorable for innovation? 

As the PIE researchers looked across the interviews and surveys we carried out 

in the project, we saw the holes in the industrial ecosystem as the single most challenging obstacle to creating and sustaining production capabilities in the United 

States that enable innovation to come to market. What we have come to think of 

as ‘‘holes’’ might be less picturesquely described as ‘‘market failures’’ or as absence 

of ‘‘complementary capabilities’’ that companies can draw on to supplement their 

own resources when they seek to develop their new ideas. These holes in the industrial ecosystem are ones that have been hollowed out by the disappearance of large 

numbers of suppliers under pressure from global competition and by the disappearance of local capabilities once provided by large corporations as part of their own 

business operations. As national banks have bought up local banks, local bankers 

with intimate understanding of local manufacturing have become an endangered 

species—making it harder to get bank loans. Critical suppliers have dwindled in 

numbers. In small firms as well as large defense contractors, we found companies 

considering the costly option of internalizing some of the functions their suppliers 

currently perform, for fear that what’s become a single-source supplier will go out 

of business. These are concerns even for current production. But the difficulties are 

far more challenging when a company seeks to develop a new or improved product 

or process. New inputs are needed, like different skills, finance, and components 

that firms cannot efficiently produce all by themselves. Even startup companies 

with great novel technologies and generous venture backing cannot do it all inhouse: they need to find suppliers, qualified production workers and engineers, expertise beyond their own. Established Main Street manufacturers in the regions we 

visited find little beyond their own internal resources to draw on when they seek 

to develop new projects. They’re ‘‘home alone.’’ This environment is far different 

from that of the German manufacturers we interviewed who are embedded in dense 

37 

networks of trade associations, suppliers, technical schools, and applied research 

centers all within easy reach. 

What’s To Be Done? Pathways for Growth 

There is much work to be done on all fronts to renew the production capabilities 

that the United States needs in order to gain full value from its innovation. The 

PIE research, however, points to one objective as most urgent: rebuilding the industrial ecosystem with new capabilities that many firms of all kinds could draw on 

when they try to build their new ideas into products on the market. New research 

suggests that it’s the colocated interdependencies among complementary activities, 

not narrowly specialized clusters, that over time produce higher rates of growth and 

job creation, and they do so across a broad range of industries, not just in high-tech 

or advanced manufacturing. The examples we have observed in the PIE research 

of trying to create public goods—or semipublic, or club goods—in the industrial ecosystem is the approach that may pay the greatest dividends. 

The cases we have studied in detail are extremely diverse, but the institutions 

they have set in place involve a few common principles. The key functions that such 

mechanisms perform are convening, coordination, risk-pooling and risk-reduction, 

and bridging. They are public goods that the market does not generate. There are 

initiatives in which a private company or a public institution performs a convening 

function. The initiative usually starts with the ‘‘convenor’’ putting new resources on 

the table for use by others on condition that they too contribute to the pot. One wellknown example is the SEMATECH Consortium that the semiconductor manufacturers and equipment makers formed in 1987 with financing both from the U.S. Federal Government and industry. SEMATECH today functions with funds from its 

members. By bringing companies together for roadmapping next generation chips, 

SEMATECH reduces the costs and risks of each company as it moves along the 

Moore’s Law trajectory. New York State’s investments in new fabrication facilities 

and new nanotechnology research in upstate New York at the College of Nanoscale 

Science and Engineering at the State University of New York, Albany, create common resources that the industrial partners can use. 

Another example came from our Ohio interviews: the Timken Company, a manufacturer of tapered bearings and of specialty steels, initiated a partnership with the 

University of Akron and transferred Timken’s coatings laboratory, its equipment, 

and several of its key researchers to the university. With resources from the company, the university, and the State, new graduate degree programs are starting; a 

new consortium on coatings and engineered surfaces has been created that is open 

to other corporate members; and a set of promising coatings technologies that had 

been ‘‘stranded’’ in a bearings company can now be developed as potential start-ups 

in which both the university and the corporate consortium members can invest. Potentially, companies from outside the region might join, but much of the value from 

participation will derive from face-to-face presence in the labs at the University of 

Akron, from being able to use university labs (funded at least in part with public 

money) instead of keeping these facilities in-house, and from the chance for local 

companies to hire graduates. In these cases the ‘‘convenors’’ hold out the lure of the 

use of common facilities and expensive equipment and training and proximity to 

cutting edge researchers. In contrast to tax breaks, which many States hand out, 

new resources are embedded in institutions that do not stand or fall on the participation of any one member. 

Sometimes the lead in creating new coordination was taken by a private company. 

In other cases, coordination comes from a public intermediary. In Springfield, Massachusetts, the Hampden County Regional Employment Board (REB) is mandated 

by Federal job training legislation to work with firms, localities, and educational institutions in the operation of the Workforce Investment Act. When the local machining association faced a shortage of skilled workers as the result of the closing of several large companies that had previously trained apprentices, it approached the 

REB. The REB brought the firms together with five vocational high schools and two 

community colleges. The connections between the schools and the companies had 

been thin and intermittent. With active intervention from the REB, the parties 

started to work on curriculum development; on training programs for supervisors 

and for unemployed workers; on organizing career fairs and firm visits to encourage 

high school students to consider machining jobs; and the gaps began to close. 

Risk-reduction and risk-pooling are among the original functions for all forms of 

insurance and standard setting, and virtually all trade associations develop these 

functions to a greater or lesser extent for their members. For example, as we traced 

out the network mentioned above that connects Mass Tank to start-up companies 

in the New England region, we discovered that Mass Tank itself depends on a trade 

association, the Steel Tank Institute, for standards, testing, expertise, and insurVerDate Nov 24 2008 14:18 Oct 20, 2014 Jkt 046629 PO 00000 Frm 00041 Fmt 6621 Sfmt 6621 L:\HEARINGS 2013\12-11 REBUILDING AMERICAN MANUFACTURING\HEARING\121113.
38 

1 ‘‘A Reality Check on American Manufacturing’’, Bloomberg Businessweek, September 10–16, 

2012. 2Table B-1, et al., of the August 2012 BLS Employment News Release, http://www.bls.gov/ 

news.release/pdf/empsit.pdf. 3 ‘‘Made in America’’ special advertising section, Bloomberg Businessweek, September 10–16, 

2012. 

ance. The dangers of leaky tanks create enormous potential hazards—and lawsuits—and no small company on its own could afford adequate insurance from the 

regular insurance market. By working with the Environmental Protection Agency 

to develop safety standards, the Steel Tank Institute has been able to offer its members technology, testing, and insurance that covers them. 

These very old uses of association for risk-pooling today are being put to new purposes in harnessing them to innovation and to commercializing innovation in the 

United States. The first of the National Manufacturing Innovation Institutes, the 

National Additive Manufacturing Innovation Institute (NAMII) in Youngstown, 

Ohio, offers companies, universities, and Government agencies a way to distribute 

the risks of investing in new technologies while still deriving many of the potential 

benefits. As one industrial partner from a metal-working company expressed his 

perception of the risks: ‘‘We don’t make plastic toys, so we couldn’t justify investing 

in-house in a technology like this that may just be a flash in the pan. But just suppose it does work out and we’re not close enough to it to have a voice in shaping 

its development . . . what then?’’ For those firms that do already have proprietary 

stakes in additive manufacturing there are yet other risks, and some forms of association with NAMII can help protect against them. For a region like Northeast Ohio 

and Southwest Pennsylvania, there’s the enormous promise of technologies that 

could revitalize many of the small- and medium-sized manufacturers but no way of 

finding a single industrial champion that would have an interest in carrying the 

project. The gains from 3-D printing, if it ever succeeds in overcoming its many current limitations, would be harvested by a multiplicity of users across diverse industrial sectors. When gains from innovation are significant but distributed thinly 

across many firms, it’s unlikely that any single one of them will invest enough to 

bring it to life. NAMII offers potential ways to induce collaboration and spread its 

risks that could bring a new technology to life and inject new vitality into the regional economy. 

The cases we have described as exemplifying new approaches to rebuilding the 

industrial landscape are so new that we cannot know if any one of them will ultimately work or not. If we believe, nonetheless, that they have a real chance, it’s 

because what’s held manufacturing in the United States in the last resort—even as 

so much turned against it—was the advantage firms gain from proximity to innovation and proximity to sophisticated users. Even in a world linked by big data and 

instant messaging, the gains from colocation have not disappeared. If we can learn 

from these ongoing experiments in linking innovation to production, new streams 

of growth can flow out of industrial America. 

PREPARED STATEMENT OF LEO HINDERY, JR. 

CHAIRMAN, SMART GLOBALIZATION INITIATIVE, NEW AMERICA FOUNDATION

DECEMBER 11, 2013 

The Manufacturing Imperative 

The importance of the manufacturing sector to America and the American economy is, to most policy makers and economists, hard to dispute, yet over just the past 

12 years U.S. manufacturers have cut 30-plus percent of their workforce, or more 

than 6 million workers. The manufacturing sector’s contribution to GDP has fallen 

to around 12 percent from nearly 23 percent in 1970.1 2

In a compelling statement in defense of the importance of manufacturing to domestic job creation and maintaining America’s competitiveness and national security, Rich Harshman, President and CEO of Allegheny Technologies Inc., wrote: 

‘‘You can’t just have a service sector as the underpinning of a successful, diverse, 

and globally competitive economy. The type of economic diversification that can support a middle class and meet our international obligations mandates that the U.S. 

be a successful manufacturer.’’ 3

The attributes and implications of the manufacturing sector are compelling: 

1. Largest multiplier effect. Manufacturing has by far the largest employment 

multiplier of all sectors of the economy, at least three times that of any service 

sector, including the hallowed financial services sector. 

39 

4 Ben Casselman, ‘‘Job Gap Widens in Uneven Recovery’’, Wall Street Journal, November 11, 

2013. 5 Joseph Stiglitz, ‘‘Making Globalization Work’’, 2006, pp. 245–68. 

6Paul Krugman, ‘‘The Mutilated Economy’’, New York Times, November 7, 2013. 7Michael Mandel and Diana G. Carew, ‘‘Manufacturing in the App Economy: How Many Jobs 

Should We Aim For?’’ Progressive Policy Institute, May 2012. 8See, S.1709 Coons-Kirk bill on the subject, cosponsored by Sherrod Brown, at http:// 

www.coons.senate.gov/newsroom/releases/release/senators-coons-kirk-introducebipartisan-billto-create-a-national-manufacturing-strategy. 9See, S.355, Merkley-Enzi bill to require USTR to do a counternotification of subsidies for 

any country 2 years in a row that does not meet its WTO requirements to notify on subsidies. 

2. Productivity powerhouse. Manufacturing productivity growth is consistently 60 

percent greater than in the private, nonfarm economy as a whole. 

3. Better wages and benefits. Manufacturing employees earn, on average, 23 percent more than workers in other parts of the economy. 

4. Source of innovation. Manufacturers are responsible for more than 70 percent 

of all business R&D. 

5. Diversified employment. And ethically, manufacturing employs workers at all 

skill and educational levels and reduces income inequality. 

Yet even as we meet here today, the meager real economic recovery which we are 

experiencing has, in relative terms, substantially further disadvantaged production 

and nonsupervisory workers. 4

Size of the Manufacturing Sector 

What we have consistently failed to do in America since about 1980 is appropriately ‘‘size’’, so to speak, the sector. 

Right now, the U.S. manufacturing sector employs about 12 million workers, or 

just 8 percent of the U.S. civilian labor force. However, work we’ve done shows that 

the sector needs to represent more on the order of 20 percent of total U.S. employment, otherwise periodic consumer-credit driven bubbles will continue to plague our 

economy while concurrently we will never bring to bay our several hundred billion 

dollar a year trade deficit in manufactured goods. 

It’s actually far more important that policy makers focus on our manufactured 

goods trade deficit, with its myriad adverse economic, social and defense implications, than on the more nuanced Federal budget deficit. In fact, it’s almost impossible to fix the budget debt without fixing the trade deficit. 5 Because, when you try 

to do that as we have for the last 3 years, the results of the austerity on jobs and 

the economy, especially for hard working lower-income Americans, has been devastating. 6 And we know, verifiably, that eliminating the trade gap in manufactured 

goods can be achieved without materially reducing Americans’ standard of living. 7

A National Manufacturing Policy 

Perhaps the primary reason for America’s dramatic decline in manufacturing is 

that unlike every one of its large trade competitors, the U.S. does not have an articulated all-of-government national manufacturing policy. U.S. Government policies 

related to access to financing, R&D and investment tax credits, taxes, foreign subsidies, and domestic procurement must be integrated into a dynamic cohesive strategy. Mandating the U.S. Government develop a coherent strategy is an idea that 

has been proposed by a number of members of Congress and the Senate, and it’s 

something that is long overdue. 8

In considering a national manufacturing strategy, it is not simply enough to identify what the U.S. should be doing. Countries like Singapore, China, and others already prepare their own national economic strategies, where they indicate certain 

preferred sectors into which they deploy significant subsidies to build at home and 

attract companies from abroad. The U.S. should not turn a blind eye to foreign 

country’s economic strategies, and rather should make a defensive economic strategy 

a key part of any national manufacturing strategy. This defensive strategy should 

focus on identifying key subsidies and unfair trade practices, like discriminatory 

technology standards, being used to build up local industries to the detriment of 

U.S. businesses and workers. And our trade enforcement agencies should get serious 

about forcing the disclosure of the subsidies and unfair trade practices and bring 

cases to stop them. 9

Access to Financing 

While commercial bank lending to the Nation’s large multinational manufacturers 

is fairly robust, more than a quarter of the small- and medium-sized manufacturers 

(or SMEs) still cite ‘‘lack of capital to grow’’ as their biggest challenge, precisely at 

40 

10Parija Kavilanz, ‘‘Manufacturers to Banks: We Need Money Now’’, CNNMoney. 11 Jose de Luna-Martinez and Carlos Leonardo Vicente, ‘‘Global Survey of Development 

Banks’’, The World Bank—Policy Research Working Paper 5969, February 2012. 12Michael Lind and Daniel Mandel, ‘‘Made in America Bonds’’, New America Foundation, 

March 22, 2010. 

the time they need loans to hire more workers, buy new equipment and aggressively 

market themselves. 

The banks’ expressed reservation, as if out of the movie ‘‘Casablanca’’, is that 

these SMEs are ‘‘too dependent on short-term contract work’’, 10 which of course is 

what largely defines most manufacturing SMEs. 

Part of the problem is our largest national banks’ focus on short-term financialism 

and the attractiveness to them of generating revenues through secondary-market 

trading rather than from primary market capital raising and on-the-ground lending. 

The Dodd-Frank Act’s reforms to ban proprietary trading, if meaningfully implemented, should help reorient the major banks away from betting on the ups and 

down on markets, and instead focus on raising capital for customers. More should 

be done as well. 

Programs such as the State Small Business Credit Initiative, passed in the 2010 

Small Business Jobs Act, also appear to offer a successful, flexible model that the 

Congress may wish to revisit and expand. States like Michigan have used the 2010 

Act to fund collateral support programs, while others have used it to support loan 

losses by banks, allowing them to make loans that would otherwise not get made. 

The U.S. also needs to be more realistic in its approach to public development 

banks. All of the world’s leading industrial Nations—except the United States—have 

important public development banks, which in the aggregate account for 25 percent 

of the assets of the world’s banking system and 30 percent of the financial assets 

in the banking system of the European Union. 11

Specifically to this point, all of the world’s leading industrial Nations, except the 

U.S., have important public development banks: Japan relies on Japan Development 

Bank; Germany on Kreditanstalt fuer Wiederaufbau (KfW); South Korea on Korea 

Development Bank; Brazil on Brazil Development Bank (BNDES); Canada on Business Development Bank of Canada; and of course China on China Development 

Bank. And by not deploying public capital to support manufacturing, the U.S. is 

putting our businesses at a competitive disadvantage and allowing foreign countries 

to pull jobs overseas, which is especially the case if the U.S. does not aggressively 

enforce illegal subsidy cases through WTO and U.S. domestic trade remedy law. 

These countries also use their export-import banks far more aggressively than the 

United States uses its, often notably to make ‘‘matching loans’’ to help offset foreign 

competition. 

Another way to provide this funding is through a ‘‘Made in America Bonds’’ 

(MABs) program modeled on the Build America Bonds program that was created by 

the American Recovery and Reinvestment Act of 2009. 12 As proposed by Michael 

Lind and Daniel Mandel of the New America Foundation, Made in America Bonds 

would be a new class of tax credit bonds issued by States, local governments, and 

other authorized entities, especially municipalities, to encourage the establishment 

and expansion of manufacturing in the United States. 

Important aspects of the MAB program should be (a) ‘‘employment impact statements’’ to determine which proposed new manufacturing initiatives are most likely 

to create and support U.S. jobs and (b) ‘‘Made in America’’ requirements, since no 

single measure would do more to help resuscitate U.S. manufacturing employment 

than an all-of-government buy-domestic procurement requirement. 

Another aspect of maintaining a level playing field with respect to access to capital relates to State-owned and State-invested enterprises (broadly defined as SOEs) 

operating on other than commercial considerations. The U.S. needs to establish a 

legal structure to prevent anticompetitive practices, and to then ensure that when 

they occur, there are specific legal remedies available. 

We of course have laws against unfair trade—most notably the Sherman Antitrust 

Act passed almost 125 years ago and the Clayton Antitrust Act passed roughly 25 

years later. But vis-a-vis the new world of foreign investment by SOEs, especially 

given China’s ‘‘go out’’ strategy designed to promote its SOEs’ foreign investments 

and activities, there is in reality little in current law to adequately ensure that U.S. 

workers, businesses and investors have a level playing field to compete for the ownership and control of important national economic resources. Compare this to Canada, which recently passed a foreign investment law that allows the Government 

to review foreign investments in light of their impacts on Canada’s national economic strategy. 

41 

13 United Steelworkers Union, Position Paper: ‘‘Ensuring Competitive Markets’’, June 2013. 14http://www.whitehouse.gov/the-press-office/2012/01/24/remarks-president-stateunionaddress 15Leo Hindery, Jr., and Michael Lind, ‘‘America Needs a VAT’’, Los Angeles Times, May 24, 

2010. 

Should a major Chinese or Vietnamese SOE seek to establish operations in the 

U.S. market directly or through takeovers of U.S. firms, there is now the real risk 

that such SOE could, given its below-market State-supported cost-of-capital and 

other behavior, unfairly compete with U.S. businesses, workers, and investors, all 

without running afoul of our current antitrust laws. It’s past time to update our foreign investment laws to ensure a level playing field, and the United Steelworkers 

have proposed some interesting ideas in their important position paper ‘‘Ensuring 

Competitive Markets.’’ 13

The 2012 Task Force on Jobs, which I cochaired with USW President, Leo Gerard, 

also identified three investment incentives that should be made part of any overall 

access-to-capital initiative, including: 

• First, extend and expand Treasury’s 1603 Cash Grant Program for manufacturing-centric renewable energy production. 

• Second, extend the Advanced Manufacturing Tax Credit (Section 48c) of The 

American Recovery and Reinvestment Act (ARRA) in order to prompt further 

investments in qualified advanced energy projects at manufacturing facilities. 

• Third, expand the Loan Guarantee Program of Title 17 of the Energy Policy Act 

of 2005 to include ‘‘energy-efficiency’’ investments. 

Permanent R&D and investment tax credits directly linked to job creation would 

also play an important role in industrial revitalization. Such tax credits would help 

rehabilitate and renovate existing manufacturing facilities, provide incentives for 

purchasing new equipment, and jump-start new technologies and process-development. 

Tax Reform 

President Obama has said many times that, ‘‘It’s time to stop rewarding businesses that ship jobs overseas, and start rewarding companies that create jobs right 

here in America.’’ 14

Two actions would significantly improve the financing prospects and the global 

competitiveness of the manufacturing sector: 

• First, reduce the corporate tax rate from 35 percent to between 25 and 28 percent while getting rid of the corporate ‘‘tax expenditures’’ that have nothing to 

do with retaining existing jobs and creating new ones. 

• Second, enact a value-added-tax (VAT) to offset the significant tax disadvantages now faced by American corporations on account of the VATs used by most 

trading partners, but not by the U.S. Right now, in order to attract overseas 

investment and retain domestic production, our major foreign competitors without exception use a lower corporate income tax combined with a VAT, the result 

of which is net higher taxes on U.S.-made products sold both at home and 

abroad. 15

Building Our Physical Infrastructure 

A key foundation of the manufacturing sector—and a widely recognized public responsibility—is infrastructure. Moving materials and goods—and workers—around 

the country and to market requires roads, rapid transit, bridges, ports, and airports 

that serve 21st century needs. Right now, however, the U.S. is sorely underinvesting 

in infrastructure, and what’s especially needed, for manufacturers of all sizes and 

for the Nation, is a new large National Infrastructure Bank, ideally with the following principle characteristics: 

• The Bank should be an independent financial institution owned by the Federal 

Government with overall capitalization of at least $1 trillion and with its primary source of leverage being the large State and municipal pension plans. 

• As its equity-capital base the Bank should have a soft Federal guarantee equal 

to about one-tenth of its total capitalization, which, if thoughtfully designed, 

will not need to be ‘‘scored’’ and thus added to the Federal deficit. 

• Using its authorization to make and guarantee loans, leverage private capital, 

and issue general-purpose bonds, the NIB should be allowed to fund a broad 

range of infrastructure projects beyond traditional roads, rails, and runways. 

42 

16 Nelson D. Schwartz, ‘‘Where Factory Apprenticeship Is Latest Model From Germany’’, New 

York Times, November 30, 2013. 17S.1675, ‘‘Preparing Students for Success in the Global Economy Act’’, Senator Jeff Merkley, 

et al. 18 Economic Policy Institute, September 30, 2013. 19 Joel Paul, ‘‘Fair Wages for Free Trade’’, Huffington Post, October 10, 2012, http:// 

www.huffingtonpost.com/joel-richard-paul/fair-wages-for-fair-tradelbl1944379.html. 

• Governance should be by an independent, nonpartisan board of (i) executives 

who are expert in infrastructure, (ii) labor leaders, and (iii) public policy experts. 

• Projects in the States and for the local governments whose pension plans participate in capitalizing the Bank should have preference over those of States 

and local governments which elect not to participate. 

• Finally, the Bank should only fund projects which adhere to ‘‘buy domestic’’ 

(Made in America) requirements that are consistent with the United States’ 

international trade agreements. 

The Defense Production Act, which is up for reauthorization next year, might, if 

DOD’s understandable concern about quick delivery of time-sensitive goods can be 

addressed, might serve as a meaningful complement to an all-of-Government National Infrastructure Bank. 

One further comment I must add is that maintaining mostly local, public control 

of our infrastructure is critical. Resuscitating America’s infrastructure cannot become a mechanism for outsourcing control over some of our major rehabilitated 

roads and bridges and, especially, some of our vital seaports and airports to private 

investors, whether they’re from Wall Street, Beijing, or Abu Dhabi. Of particular 

concern, at least to me, is the proposal, yet again being advanced by former Treasury Secretary Bob Rubin, that China’s big banks be given a major role in upgrading 

our important infrastructure. 

Building Our Human Infrastructure 

Abundant, pertinent skills are integral to the robustness of a Nation’s manufacturing sector, and skill setting must be part of any national manufacturing policy. 

Currently, far too many young Americans are growing up without the opportunity 

to obtain the skills and the interest at young enough ages to develop promising careers in manufacturing. 

By the time students get out of middle school, if they’ve not developed sufficient 

science, technology, engineering, and math skills—i.e., so-called ‘‘STEM’’ skills—it 

may well be too late for them in the increasingly highly automated world of advanced manufacturing. Yet we know that working with your hands at almost any 

level is a great way to establish living wage careers in the manufacturing sector. 

Many countries use the promise of free education and training for local 

workforces—and apprenticeship programs 16—to attract investors to move factories 

and associated jobs abroad. The U.S. can’t sit idly by without further eroding our 

global competitiveness. 

Expanding STEM education as well as career and technical education—and providing professional development and support for teachers and school leaders to promote high-quality instruction—is critical to restoring the human infrastructure of 

the U.S. 17 As we are hopefully winding down our involvement with foreign wars, 

we need to redouble our training efforts here at home as we did in the immediacy 

of the end of the Second World War. 

Trade Enforcement 

Any effort aimed at revitalizing manufacturing in America must include fundamental reform of our trading relationships. For example, our annual trade deficit 

in manufactured goods just with China costs us about $40 billion in lost 18 wages. 

Much has been written about how China has unfairly gained trade advantages 

through its abysmally low direct-labor costs, low-grade environmental and labor 

standards and currency manipulation. These same conditions are now drawing 

American manufacturing jobs to even less developed countries, like Vietnam and 

Bangladesh. As trade scholars such as Hastings trade law professor Joel Paul have 

argued for and policy leaders like Subcommittee Chairman Merkley have endorsed, 

it should be easy to include the cost of both adequate wages and sustainable production methods within the calculation of the cost of production in antidumping duties 

which should incentivize foreign companies to raise wages, workplace safety, and 

environmental compliance proactively. 19

Less appreciated, however, are the variety and magnitude of the other measures 

China, for example, uses to game the system. Since some of these unfair practices 

43 

20 August 4, 2010, letter to President Barack Obama by Senators Sherrod Brown (D-OH), 

Olympia J. Snowe (R-ME), Charles E. Schumer (D-NY), Debbie Stabenow (D-MI), Jim Bunning 

(R-KY), Arlen Specter (D-PA), Susan M. Collins (R-ME), Ron Wyden (D-OR), Benjamin L. 

Cardin (D-MD), Robert P. Casey, Jr. (D-PA), and Carl Levin (D-MI). 21Leo Hindery, Jr., ‘‘U.S.–China: How Long China’s Doormat?’’ Huffington Post, August 24, 

2010. 22Leo Hindery, Jr., ‘‘China Trade: A ‘Target Rich Environment’ ’’, Huffington Post, March 20, 

2012. 23 Ibid. 

are already being adopted by countries such as Brazil and Vietnam, getting right 

America’s trade relationship with China is particularly critical. These so-called 

‘‘trade advantages’’ include: China’s regulations to block foreign firms from selling 

their products to Government agencies; technical standards that prevent or hinder 

the Government and local businesses from buying U.S. goods; and rules that force 

Western companies to give up technological secrets in exchange for market access. 

Of the many possible responses to the persistent trade abuses that are happening 

in China and elsewhere, six that particularly stand out are as follows: 

1. The Administration’s focus should not be, as it states, growing gross exports. 20

All that matters is our net exports position, which currently remains massively 

negative. 21

2. The next required Semiannual Report on International Economic and Exchange Rate Policies from the Treasury Department must be objective and designate any country as a currency manipulator that meets the standard. Thereafter, the USG needs to go after all of that country’s illegal subsidies. 

3. The USG should not enter into new investment treaties with countries like 

China until those countries are fully WTO-compliant. For example, there are 

still serious questions about China’s Indigenous Innovation Production Accreditation (IIPA) Program. In the interim, the USTR should bring a Section 301 

case against the IIPA Program. 22

4. The ‘‘one size fits all’’ premise behind the proposed Trans-Pacific Partnership 

FTA negotiations—which would include Brunei and New Zealand equally 

alongside China and Japan—is deeply flawed, both intellectually and economically, and should be revisited. 

5. Congress needs to pass a bill similar to the Reciprocal Market Access Act of 

2011 (H.R. 1749) and its Senate counterpart (S.1766) which would eliminate 

the distinction that exists between traditional tariff barriers and the muchlarger nontariff barriers that prevent fair market access by American suppliers. 23

6. Finally, ‘‘trade agreement enforcement’’ should be moved from the U.S. Trade 

Representative’s office to a fully enabled and funded office in the Justice Department. At a minimum, the new Assistant Secretary of Commerce for Enforcement and Compliance should be named the head of the Interagency Trade 

Enforcement Committee and made independently accountable to Congress for 

the ITEC’s trade enforcement agenda. A top-to-bottom review of the USG’s 

trade enforcement capabilities, including budgetary, should be initiated. 

Conclusion 

Getting our manufacturing policy right means taking actions both here and 

abroad. We have to adopt a national manufacturing policy, build our physical and 

human infrastructure, close tax loopholes that drive manufacturing abroad, and 

fight for a level playing field in international trade. Although the Obama administration has made some progress, the United States is still tolerating far too many 

selfish, shortsighted behaviors that are hurting the middle class and its workers, 

creating a large and unsustainable trade imbalance in manufactured goods, and 

crippling our economic vitality and national security. 

PREPARED STATEMENT OF DEREK SCISSORS 

RESIDENT SCHOLAR, AMERICAN ENTERPRISE INSTITUTE

DECEMBER 11, 2013 

Large economies should always get their own house in order first. American private wealth is by far the world’s highest, on the order of $45 trillion ahead of JaVerDate Nov 24 2008 14:18 Oct 20, 2014 Jkt 046629 PO 00000 Frm 00047 Fmt 6621 Sfmt 6621 L:\HEARINGS 2013\12-11 REBUILDING AMERICAN MANUFACTURING\HEARING\121113.
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1 Credit Suisse, ‘‘Global Wealth Report 2013’’, October, 2013, https://publications.creditsuisse.com/tasks/render/file/?fileID=BCDB1364-A105-0560-1332EC9100FF5C83 2 ‘‘We’re the Phone Company: We Don’t Care, We Don’t Have To’’, Saturday Night Live via 

Stop the Cap, http://stopthecap.com/2012/08/23/were-the-phone-company-we-dont-care-wedont-have-to/ 3Zhao Huanxin, ‘‘China Names Key Industries for Absolute State Control’’, China Daily, December 19, 2006, http://www.chinadaily.com.cn/china/2006-12/19/contentl762056.htm 

pan’s and China’s. 1 This staggering achievement has been due overwhelmingly to 

American policies, not foreign. The challenges facing the U.S. economy, and manufacturing in particular, can and should be addressed primarily by American policy. 

As a secondary matter, manufacturing is now a global activity and foreign actions 

play a role. Among the many global factors, the single most important is Chinese 

subsidies. The People’s Republic of China’s (PRC) manufacturing sector is the only 

one of comparable size to the U.S. It is driven by Government intervention, rather 

than genuine commercial competition, and this intervention harms American manufacturing companies and workers. 

The harm is usually identified as large-scale U.S. imports from China. In fact, the 

main problems are barriers to American exports to the PRC and, perhaps soon, a 

growing battle in third markets. For the last decade, Beijing has acted as if competition is good for everyone except Chinese firms on their home turf. 

The best American policy does not, and indeed is unable to, imitate the PRC’s 

anticompetitive actions. Instead, the U.S. should document Chinese regulatory and 

financial subsidies, then take a sequence of steps—multilateral, bilateral and, if ultimately necessary, unilateral—to reduce them. The PRC will remain a competitor 

regardless of whether its new Government returns the country to the path of market-driven reform. But wise choices by the U.S. could help move China further from 

an unpleasant challenge to American manufacturing and closer to the intriguing opportunity many hope for. 

Barriers to Competition 

Competition is the foundation of economic prosperity. It cuts prices, raises quality, 

and drives innovation. Even limited competition offers considerable benefits along 

these lines. For an economy as a whole, whether a national economy or the world 

economy, the more competition the better. Conversely, anticompetitive behavior by 

companies or Governments is always harmful to the economy as a whole. 

Monopolization is the most basic form of anticompetitive behavior. Monopolies can 

extend over specific goods or services or a specific region. Monopolies don’t innovate, 

and the quality of their goods and services is generally substandard due to lack of 

incentive to improve. 2 Very close to outright monopolization is guaranteed market 

shares. Here, there is more than one firm but some or all participants are guaranteed business. If any portion of such industries is competitive, it is only a slice. 

The second main form of undermining competition is through prices. These can 

be sales prices, of course, but there are also a number of input prices that can be 

manipulated. Wages (the price of labor) can be distorted, as can borrowing costs (the 

price of capital), the price of land, power, water, telecom services, and so on. A determined and effective Government has many tools to limit competition. 

These and other tools are all subsidies. There are always individuals or firms who 

benefit from limited competition. They may receive outright regulatory protection, 

such as a guaranteed market share. They may receive Government transfers to offset their labor costs. They may be able to borrow at low prices, or receive free land 

or power. Subsidies can be financial in nature, but they do not have to be. Indeed, 

regulatory protection is more fundamental. 

Regulatory Protection 

The PRC has legitimate and sizable comparative advantages. It has a solidly capable labor force with wage rates that are still relatively low compared to many of 

its peers. It now has plenty of capital. And China is hardly the only country in the 

world to engage in large-scale subsidies. The U.S., for one, has subsidized some farm 

goods despite being the world’s biggest agriculture surplus country. It is in the size, 

range, and effectiveness of its subsidies that the PRC is unmatched. 

For a set of major industries, the principal subsidy is regulatory shelter from competition. By central Government decree, the State is required to control these industries to various extents. At the top of the list, where the State must have ‘‘absolute’’ 

control, are armaments, aviation, coal, oil and petrochemicals, power generation and 

distribution, shipping, and telecom. The State should also lead in autos, construction, IT, machinery, and metals. 3 Though it is not formalized, State entities also 

control nearly all of insurance, media, railways, and some smaller sectors. 

45 

4Liu Jin, ‘‘Construction Machinery Industry on the Road to Recovery’’, China Economic Net, 

May 16, 2013, http://en.ce.cn/Insight/201305/16/t20130516l24390213.shtml 5For instance in autos, see: Han Tianyang, ‘‘Another Call for Consolidation’’, China Daily, 

January 28, 2013, http://www.chinadaily.com.cn/cndy/2013-01/28/contentl16178732.htm 6Zhao Huanxin, op cit.; Zhang Xiang, ed., ‘‘China To Nurture 7 New Strategic Industries in 

2011–2015’’, Xinhua, October 27, 2010, http://news.xinhuanet.com/english2010/china/2010- 

10/27/cl13578293.htm.; Central Huijin Investment Ltd., ‘‘Investments’’, http://www.huijininv.cn/hjen/investments/investmentsl2008.html?var1=Investments; Grant Turner, Nicholas 

Tan, and Dena Sadeghian, ‘‘The Chinese Banking System’’, Reserve Bank of Australia, September 2012: 53–64 http://www.rba.gov.au/publications/bulletin/2012/sep/pdf/bu-0912-7.pdf.; 

Mu Xuequan, ed., ‘‘China Launches New State-Owned Railway Corporation’’, Xinhua, March 14, 

2013, http://news.xinhuanet.com/english/china/2013-03/14/cl132234204.htm; Chinese Government, ‘‘State Tobacco Monopoly Administration’’, news release, http://english.gov.cn/2005- 

10/03/contentl74295.htm; and Towers Watson, The Chinese Insurance Market, No. 19 (Shanghai, China, March 2012), http://www.towerswatson.com/en/Insights/Newsletters/Asia-Pacific/ 

The%20Chinese%20Insurance%20Market%20Newsletter/2012/The-Chinese-Insurance-MarketNewsletter-No19. 7See, for example, Yongheng Deng, et al., ‘‘Incentives and Outcomes: China’s Environmental 

Policy’’, National Bureau of Economic Research, February 2013, http://www.ires.nus.edu.sg/ 

workingpapers/IRES2013-004.pdf. 

In addition, there are ongoing consolidation efforts, to address what Beijing calls 

‘‘disorderly’’ competition. 4 The solution is to contract the total number of firms, 

while increasing the combined market share of remaining State-owned enterprises 

(SOE’s). 5

Nonstate firms have not been able to enter any of these industries, nor could 

nonstate firms already in the industry succeed beyond a certain, unspecified point. 

In contrast, SOE’s can only fail to the extent of being absorbed by other SOE’s, the 

State share as a whole is not permitted to shrink. Such SOE’s have no final obligation to ostensible creditors and certainly cannot go bankrupt. For these sectors and 

companies, nothing else matters—wages, borrowing, land are all details when success is essentially guaranteed for some and barred for others. 6

Beijing’s mandates are exacerbated by analogous provincial goals. Provincial leaders listen to the central Government when they want to and when they absolutely 

have to. That is: not all the time. 7 Unfortunately, the provinces are almost always 

pleased to accept the demand for State dominance of major industries. They typiVerDate Nov 24 2008 14:18 Oct 20, 2014 Jkt 046629 PO 00000 Frm 00049 Fmt 6621 Sfmt 6621 L:\HEARINGS 2013\12-11 REBUILDING AMERICAN MANUFACTURING\HEARING\121113. 12111305.eps
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8 Alan Chu, ‘‘China by the Numbers: Understanding China’s Provincial Priorities’’, PwC LLP, 

http://www.pwc.com/us/en/view/issue-13/understanding-chinas-provincial-priorities.jhtml. 9Keith Wallis, ‘‘Orders Climb at China’s Shipyards, But Rebound Favours a Few’’, Reuters, 

September 18, 2013, http://www.reuters.com/article/2013/09/18/china-shipyardsidUSL4N0GD1LS20130918. 10Wang Zhaoxing, ‘‘Integration of Foreign Banks’’, China Daily: Europe, June, 2, 2012, 

http://europe.chinadaily.com.cn/business/2012-06/02/contentl15456078.htm 11Wing Thye Woo, ‘‘China Meets the Middle-Income Trap: The Large Potholes in the Road 

to Catching-Up’’, Journal of Chinese Economic and Business Studies, Volume 10, Issue 4, 2012, 

http://www.tandfonline.com/doi/abs/10.1080/14765284.2012.724980#preview and ‘‘State Capitalism’s Global Reach: New Masters of the Universe’’, The Economist, January, 21, 2012, 

http://www.economist.com/node/21542925. 12 ‘‘Zhou Xiaochuan: Real Interest Rate To Stay Negative for Now’’, China.org.cn, March, 14, 

2011, http://www.china.org.cn/china/NPClCPPCCl2011/2011-03/14/contentl22133432.htm. 13 ‘‘Chinese Zombies Emerging After Years of Solar Subsidies’’, Bloomberg News, September 

9, 2013, http://www.bloomberg.com/news/2013-09-08/chinese-zombies-emerging-after-years-ofsolar-subsidies.html and Adam Jourdan, ‘‘China Milk Makers Including Yili, Mengniu To Get 

State Support’’, Reuters, September 22, 2013, http://www.reuters.com/article/2013/09/22/uschina-dairy-idUSBRE98L03F20130922. 14Liyan Qi and Grace Zhu, ‘‘Researcher Puts China’s Local Government Debt at $3.3 Trillion’’, Wall Street Journal, September 17, 2013, http://online.wsj.com/article/ 

SB10001424127887324665604579080683134844374.html and Xinhua, ‘‘Corporate Debt Reaches 

‘Alarming Levels’ ’’, China Daily, May 18, 2012, http://www.chinadaily.com.cn/business/2012- 

05/18/contentl15328186.htm. 15 All loan data taken from National Bureau of Statistics, China Monthly Statistics, Beijing 

PRC. 

cally want more, to add sectors such as agriculture and environmental protection 

to the monopoly list. 8

Alternately, they want their SOE’s to be the major players in the industries set 

aside by Beijing. Of course, this breeds a sort of competition, political—it is always 

someone else who should close down excess capacity. This is far from healthy—immense amounts of resources are wasted as provinces seek to best each other in the 

battle of subsidies. Perhaps the most perverse example is in shipping, where State 

regulatory protection and provincial competition have kept 1,500 shipyards open, 

even though fewer than 100 have won orders in the past year. 9

Financial Subsidies 

On top of all this, the single most important area of control for the State is banks, 

both national and local. Competition in banking is suppressed—there is exactly one 

large domestic private bank and the foreign share of banking assets is under 2 percent and still managing to fall. 10 Not only is banking itself tightly controlled, the 

control gives the State a gigantic lever to influence the rest of the economy. 

State banks lend for political not commercial reasons, as dramatically demonstrated by the surge in lending in 2009 as the global crisis struck home and profit 

opportunities disappeared. They loan overwhelmingly to State firms, with estimates 

of the State share still in excess of 80 percent of formal borrowing from all 

sources. 11 Interest rates on these loans are often less than producer inflation, so 

that the real cost of borrowing is negative. When loan payments actually bite, most 

State firms have the option not to repay. 12

Not all SOE’s are deemed worthy of an endless supply of credit but most are, at 

least for some periods. These range from industries targeted for expansion, such as 

green energy, to those losing vast amounts of money and targeted for consolidation, 

such as parts of the food industry. 13 Many unsuccessful SOE’s receive a seemingly 

permanent bailout. The subsidies are enormously wasteful and have led to daunting 

debt problems. 14 Nonetheless, it is naturally quite difficult to compete with any 

firms getting so much nearly free capital. 

A proper estimate of the size of the subsidy would involve a great deal of work, 

especially given lack of financial and corporate transparency. At the end of 2012, 

the People’s Bank reported outstanding loan volume of $12.93 trillion. 15 On the 

order of $10.3 trillion was loaned to SOE’s and almost all of that on noncommercial 

terms—at near-zero costs or with optional repayment. This certainly does not constitute a $10 trillion subsidy, since there would be a large amount of lending under 

a commercial banking system. But the amount of capital affected by Chinese subsidies and used by SOE’s is approximately $10 trillion. 

About half of this has been rung up since 2009, thanks to the loan spike after 

the crisis. While a rigged banking system is not a guarantee of success the way regulatory protection is, the quantity of money involved qualifies as an powerful distortion of competition. Domestic bonds and stock markets are also heavily biased toVerDate Nov 24 2008 14:18 Oct 20, 2014 Jkt 046629 PO 00000 Frm 00050 Fmt 6621 Sfmt 6621 L:\HEARINGS 2013\12-11 REBUILDING AMERICAN MANUFACTURING\HEARING\121113.
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16Pierre Pessarossi and Laurent Weill, ‘‘Choice of Corporate Debt in China: The Role of State 

Ownership’’, China Economic Review, Volume 26, September 2013, pp. 1–16, http:// 

www.sciencedirect.com/science/article/pii/S1043951X13000242 and Henk Berkman, Rebel A. 

Cole, and Lawrence J. Fu, ‘‘Improving Corporate Governance Where the State Is the Controlling 

Block Holder: Evidence From China’’, The European Journal of Finance, June 13, 2012, pp. 1– 

26, http://www.tandfonline.com/doi/abs/10.1080/1351847X.2012.671784#.UkGqRoashcY. 

17Derek Scissors, ‘‘The U.S. Should Be Wary of Fake Chinese Economic Reform’’, The Heritage Foundation, August 12, 2013, http://www.heritage.org/research/reports/2013/08/usshould-be-wary-of-fake-chinese-economic-reform. 18Derek Scissors, ‘‘The Facts About China’s Currency, Chinese Subsidies, and American 

Jobs’’, The Heritage Foundation, October 4, 2011, http://www.heritage.org/research/reports/ 

2011/10/the-facts-about-chinas-currency-chinese-subsidies-and-american-jobs. 19 Robert Johnson and Guillermo Noguera, ‘‘The Value-Added Content of Trade’’, VoxEU.org, 

June 7, 2011, http://www.voxeu.org/article/value-added-content-trade-new-insights-us-chinaimbalance. 

ward SOE’s, further inflating their access to capital. 16 (This is a considerable problem for the Chinese economy, but less important as a subsidy than loans.) 

A new group of Chinese Communist Party leaders was named in fall 2012, a new 

Government took over in March of this year. As a result, the fall 2013 Party plenary 

meetings provided a real opportunity for fresh economic reform, the first such opportunity in a decade. 

This is a potentially vital development, but the success and direction of reform 

are open questions. Pro-competition reforms—the ones the U.S. is interested in—are 

strongly opposed by some elements of the Party, both nationally and locally. In addition, Beijing has a full menu of items competing for high-level attention—including 

corruption, pollution, and an aging population—and internal disagreement over priorities. 17 Even progressive steps such as the promised modification of the one-child 

policy do not enhance economic competition. For the next 5 years, at the very least, 

Chinese subsidies will be a major problem. 

Immediate Impacts 

Chronicling the full impact of Chinese subsidies would require multiple books. At 

one level, Chinese subsidies drive national imbalances and contribute prominently 

to global imbalances. 18

Subsidies do not appear from thin air, someone always pays for them. In the PRC, 

it is consumers and savers. Consumers pay because State monopolies charge higher 

prices and offer lower quality. Savers pay because interest rates on deposits lag inflation so that banks can afford to hand money to SOE’s. These implicit taxes on 

savings and consumption are transferred to producers and borrowers. 

The obvious result is not enough consumption and too much investment, a decadelong phenomenon that is now driving Xi Jinping’s China toward an investment-consumption imbalance reminiscent of Mao Zedong’s China. The PRC’s large trade and 

other external surpluses arise from this imbalance and are a destabilizing factor 

globally. 

At the corporate level, subsidies mean that all foreign and private Chinese companies face an unbalanced fight when competing with SOE’s in China or other markets. Focusing on American firms, the unbalanced competition is embodied in American imports, American exports to China, and in third markets. 

A disproportionate amount of attention, some of it misguided, has been paid to 

unbalanced competition from imports. Chinese subsidies certainly affect American 

imports. Measuring this through the bilateral trade imbalance is unwise, however, 

since it reflects neither value added nor the new phenomenon of Chinese production 

moving off-shore. 19 More important, even while some American producers suffer, 

most American consumers benefit from Chinese subsidies in the form of lower producers. 

The same cannot be said for American exports. There, Chinese subsidies do nothing than deny sales to American firms and workers. The demand for State dominance leads to regulatory barriers that ensure that exports of American goods and 

services can claim only a tightly limited share of the market in banking and many 

other sectors. The same is true for firms operating within the PRC, especially in 

oil and gas. Financial subsidies cap American exports of environmental technology 

and other areas of U.S. comparative advantage. 

The blocking of American exports is well-established and by far the worst problem 

but a new area of difficulty is Sino-American competition in third markets. Guaranteed revenue at home from regulatory protection and financial subsidies targeted at 

48 

20For an illustration, see Japan External Trade Organization—Institute of Developing Economies, ‘‘China in Africa: The Role of China’s Financial Institutions’’, October 2009, at http:// 

www.ide.go.jp/English/Data/Africalfile/Manualreport/cial11.html (September 27, 2011). 21 Cyrus Lee, ‘‘ZTE Receives $20B Loan From China Development Bank’’, ZDNet, December 

5, 2012, http://www.zdnet.com/cn/zte-receives-20b-loan-from-china-development-bank7000008321/. For an overview, see ‘‘China’s Superbank: Debt, Oil and Influence—How China 

Development Bank Is Rewriting the Rules of Finance’’, by Henry Sanderson and Michael Forsythe. 22Derek Scissors, ‘‘China’s Steady Global Investment: American Choices’’, The Heritage Foundation, July 16, 2013, http://www.heritage.org/research/reports/2013/07/china-s-steady-global-investment-american-choices. 23 Helene Cooper and Eric Dash, ‘‘Obama Presses Biggest Banks To Lend More’’, New York 

Times, December 14, 2009, http://www.nytimes.com/2009/12/15/business/economy/ 

15obama.html?lr=0. 24Federal Reserve Board, ‘‘Financial Accounts of the United States’’, Table B.102: Balance 

Sheet of Nonfinancial Corporate Business, September 25, 2013, at http:// 

www.federalreserve.gov/releases/z1/current/accessible/b102.htm versus Xinhua, ‘‘Corporate 

Debt Reaches ‘Alarming Level’ ’’, China.org.cn, May 18, 2012, at http://www.china.org.cn/business/2012-05/18/contentl25416137.htm. 25Liyan Qi and Grace Zhu, ‘‘Researcher Puts China’s Local Government Debt at $3.3 Trillion’’, The Wall Street Journal, September 17, 2013, http://online.wsj.com/article/ 

SB10001424127887324665604579080683134844374.html. 26Derek Scissors, ‘‘A Better Committee on Foreign Investment in the United States’’, The 

Heritage Foundation, January 28, 2013, http://www.heritage.org/research/reports/2013/01/enhancing-the-committee-on-foreign-investment-in-the-united-states-cfius. 

overseas expansion make Chinese firms artificially competitive outside the PRC, 

too. 20

Not surprising, the main areas for financing are what are labeled strategic industries such as power, transport, and telecom. 21 The Heritage Foundation’s China 

Global Investment Tracker puts Chinese overseas investments from January 2005 

through June 2013 at $430 billion. Though their share is slowly declining, SOE’s 

still account for slightly over 90 percent of this. 22 That’s another $400 billion in corporate spending that is heavily subsidized. It does not measure up to the amount 

of spending subsidized at home but it is directly and increasingly salient to American companies and workers trying to compete with Chinese in foreign markets. 

The American Response 

It is extremely unwise to enter into a subsidies battle with the People’s Republic 

of China. Beijing has myriad ways to intervene in the market, starting with simply 

telling companies and banks what to do. In 2009, President Obama was frustrated 

that American banks were not lending more. 23 Chinese banks, meanwhile, were following orders and expanding lending 34 percent. State ownership is the ultimate 

trump card for subsidies. 

Rather than having subsidies envy, the President and Congress should be thankful for their limited authority. American corporate balance sheets have been returning to normal while Chinese corporate debt is worst among major economies. 24 The 

PRC has doubled local government debt while seeing macroeconomic indicators deteriorate. 25 Chinese subsidies without question hurt individual American companies, 

but they harm the entire Chinese economy. Promoting competition, not sinking to 

China’s level, is by far America’s best response. 

The obvious first step is negotiation. This has failed to now. The Strategic and 

Economic Dialogue (S&ED) is a sensible idea that, for 8 years running, has yielded 

precious little in the way of results. The latest hope for better Sino-American economic relations is renewed talks on a Bilateral Investment Treaty (BIT). But a BIT 

has only limited scope to deal with internal Chinese policies—at most it will create 

a few new hurdles to subsidization which can be easily overcome if Beijing desires. 

What matters is not the acronym governing talks but the nature of the Chinese 

Government. A pro-market Chinese Government will act on its own to enhance competition to some extent. In turn, the U.S. should have a very small number of priorities in negotiations, with reducing regulatory protection first in line. A long list of 

American demands on scattered issues, formulated to satisfy interest groups here, 

will continue to be ignored. The U.S. should compile a comprehensive measurement 

of subsidies to enable concrete bargaining and, more important, objectively measure 

progress over time. The U.S. should also be ready to offer something of value in return, such as a faster, clearer review process for Chinese investors here. 26

In contrast, it has proven to be a waste of time to merely negotiate with a proState Chinese Government. Such a Government, such as the one which just left office, will only reduce subsidies if pushed hard, which will require considerable time 

and effort. 

49 

27Office of the United States Trade Representative, Executive Office of the President, ‘‘United 

States Details China and India Subsidy Programs in Submission to WTO’’, October 2011, 

http://www.ustr.gov/about-us/press-office/press-releases/2011/october/united-states-detailschina-and-india-subsidy-prog. 

The first step in this case is also a needed action with a Chinese Government 

positively disposed to reform. Though it is dull politically, the U.S. must periodically 

identify and measure Chinese subsidies, including regulatory protection. 

Measuring the subsidy provided by protection against competition will be difficult 

and controversial. If it is not done, though, subsidies will be seriously underestimated and considerable harm will continue to be inflicted on American companies 

and workers, as well as the Chinese and global economies. Including regulatory protection along with capital and other subsidies means that initial estimates will be 

inexact, but they will improve over time. And measuring subsidies will enable important actions. 

A fairly exhaustive measure of Chinese subsidies may somewhat improve bilateral 

negotiations, or at least clarify their status. Another route is through the WTO. The 

U.S. has asked for Chinese documentation of subsidies via the WTO but this has 

accomplished almost nothing, in part because the American inquiry was based on 

too little information. 27

Last, if renewed and better informed bilateral and multilateral approaches fail, 

a rigorous measurement of subsidies is necessary to determine the best unilateral 

actions. Otherwise American policy risks being ill-targeted or even, if seen as unjustified protectionism, counterproductive. 

Pushing China Toward Genuine Competition 

In sum, 

1. The U.S. should not engage in competitive subsidization against the PRC. This 

will waste hundreds of billions of dollars and achieve almost nothing. 

2. The United States Trade Representative (USTR), with assistance from the Department of the Treasury, Department of Commerce, and International Trade 

Commission, should immediately begin the process of measuring Chinese subsidies, featuring regulatory protection and noncommercial loans. 

3. The Department of the Treasury, with assistance from the USTR, should make 

the economic segment of the 2014 S&ED primarily about subsidies. 

4. Failing identifiable progress at the S&ED, the USTR should petition the WTO 

regarding China’s failure to disclose the subsidies documented in the USTRled effort. 

5. If these steps fail to change Chinese policy, the U.S. should use the subsidies 

measurements to inform unilateral actions. 

Chinese subsidies are certainly not the biggest challenge for American companies 

and workers. But they are the biggest international challenge. As a first step, the 

U.S. can do a far better job of the information gathering and economic diplomacy 

that can reduce what is become a global threat to the health of American manufacturing. 

PREPARED STATEMENT OF JULIE SKIRVIN 

GENERAL COUNSEL, OREGON IRON WORKS

DECEMBER 11, 2013 

Mr. Chairman and Members of the Committee, thank you for the opportunity to 

testify today. My name is Julie Skirvin, and I am General Counsel of Oregon Iron 

Works, a small business headquartered in Clackamas, Oregon. Oregon Iron manufactures structural steel parts for bridges, commercial buildings, and dams. We 

build silos to house the interceptor missiles that protect our country from attack, 

renewable energy devices, containers to store nuclear waste safely, marine vessels, 

rocket launch platforms, and sophisticated metal processing equipment. Oregon 

Iron, together with its subsidiaries, employs over 450 workers at living-wage jobs 

in Oregon, Washington, and Pennsylvania. 

One of our company’s newest product lines is streetcars. When Oregon Iron created our subsidiary United Streetcar in 2005, it had been over 60 years since an 

American company had built a modern streetcar. I am pleased to report that after 

years of hard work, Oregon Iron and United Streetcar are now completing modern 

streetcars at a rate of 1 every 6 weeks. We have delivered seven cars this year to 

customers in Portland, Oregon, and Tucson, Arizona. 

50 

During the Great Recession our streetcar business provided work for 100 people 

earning family wages with good benefits at our Clackamas facilities. To support our 

streetcar production we purchased parts and materials from 350 U.S. companies in 

32 States. In Oregon alone, we sourced materials from 140 local businesses. 

I am honored to appear today before the Committee to address your questions 

about the role of manufacturing in the U.S. economy, challenges U.S. manufacturers 

face, and how we can strengthen this important sector. Drawing on Oregon Iron’s 

recent experience launching a streetcar business, as well as my work for 10 years 

in the manufacturing sector, I welcome this chance to share my perspective. 

The Role of Manufacturing in Creating a Solid Middle Class 

The leaders at Oregon Iron believe that American manufacturers create the kind 

of good, middle-class jobs that are essential to a strong United States economy. The 

Great Recession was hard on our sector, but we are coming back. The Oregonian 

reported that between 2008–2010, Clackamas County lost more than 3,500 manufacturing jobs. Since the first quarter of 2010, however, one in three jobs gained has 

been in manufacturing. Fabricated-metal manufacturing saw a gain of more than 

700 jobs. 

Unemployment in Oregon remains high, at 7.7 percent. Even with a job, workers 

in the service sector may not earn enough to meet a family’s basic needs. In contrast, a skilled machinist can earn well over $50,000 per year. Manufacturing jobs 

pay good wages that support strong, stable families. 

Challenges and Opportunities Facing the U.S. Manufacturing Sector 

Below are some of the policy steps that I believe would invigorate the U.S. manufacturing sector. 

1. Ensuring a Supply of Skilled Workers 

Oregon Iron and other manufacturers need access to skilled, work-ready employees. Many young workers entering the manufacturing environment do not possess 

the skills and training necessary to be successful. While skilled workers are crucial 

for a business like ours, it can be difficult for small businesses to invest in training 

without an imminent project. At times, our company has had difficulty finding applicants who have a solid grasp of shop math, possess hands-on experience, and can 

pass a drug test. 

I believe our public education system should place more emphasis on technical 

training for high school students. There are some stellar technical training programs in our area, including the Clackamas Academy for Industrial Sciences and 

Sabin-Schellenberg High School, but too many schools, and too many public officials, 

downplay the value of technical training. We need to ensure these programs receive 

the funding and respect that they deserve. 

The community college system and local workforce training centers also play a 

key role in helping manufacturers identify and train workers who can thrive in this 

environment. Oregon Iron is currently in conversations with Clackamas Community 

College and the Workforce Investment Council of Clackamas County to identify potential new hires and to help our current employees gain the shop math and other 

skills they need. This collaboration should benefit both our workers and Oregon 

Iron’s ability to compete for and fill contracts. 

Finally, we believe that support for programs linking industry employers and engineers-in-training can be productive. Oregon Iron has benefited from our close relationships with Oregon State University and Portland State University through the 

Multiple Engineering Co-op Program (MECOP). Through MECOP, students obtain 

paid internships with manufacturers during their training. That helps students, including those from historically underrepresented groups, learn and understand the 

sector. It also helps companies find local workers to hire. 

We applaud the Manufacturing Jobs for America Initiative, which you, Mr. Chairman, are helping to lead. This initiative’s focus on workforce training is an important step in ensuring an adequate supply of skilled workers. 

2. Buy America Provisions 

Government contracts that include Buy America requirements also have the potential to invigorate American manufacturing. For one thing, they help level the 

playing field; Oregon Iron knows first-hand that if you want to build a boat for 

Brazil, you build it in Brazil. Other countries include local sourcing requirements 

when they procure goods, and it makes sense that when the United States Government uses public dollars to buy boats or build bridges, it should contract with 

United States companies to do that work. 

We support efforts to ensure that companies maintain ongoing operations in this 

country as a condition of satisfying Buy America requirements. Such an approach 

51 

creates longer-term local jobs than would an interpretation of Buy America rules 

that enabled a foreign company to set up a temporary operation in the U.S. to qualify for a job and then exit once it completed the contract. 

Mr. Chairman, you have led recent efforts to improve the way Federal agencies 

do business, and to ensure that when Federal funds are used, they are used to buy 

products from American companies. We are grateful for these efforts, and for the 

improvements made through the passage of MAP–21. We are hopeful, Mr. Chairman, that your Buy America provisions in the Senate’s Water Resources Development Act are retained during conference with the House on their version of this important water infrastructure legislation. 

We also appreciate work by the U.S. Department of Transportation (DOT) to manage Buy America requirements in a manner that strengthens the domestic supply 

chain. Former Secretary Ray LaHood and current Deputy Secretary John Porcari 

have been creative and proactive in helping people find and create U.S. products 

where many thought none were available. This effort continues under the leadership 

of Secretary Foxx. 

The Federal Transit Administration (FTA) has also been a leader in this area, requiring that FTA-funded transit vehicles/rolling stock contain at least 60 percent domestic content. (The streetcars we produce contain an average of at least 70 percent 

domestic content, and 100 percent domestic assembly.) FTA has also ensured that 

Federal dollars are invested in U.S. business and labor. From 2008–2012, initial requests to FTA for Buy America waivers numbered 37. FTA has been able to reduce 

that number to just 3 for 2013 by working hard to identify local suppliers of components. Recently, the FTA and the United States Department of Commerce’s National Institute of Standards and Technology entered into an interagency agreement 

that will help transit properties and companies more easily find U.S.-made components. This will benefit our company and many others. 

We also appreciate the U.S. Dept. of Commerce’s many initiatives to ‘‘make it in 

America’’ and to launch the Investing in Manufacturing Communities Partnerships. 

The Buy America rule has given Oregon Iron and United Streetcar the ability to 

compete where no American company had competed in over 60 years. When we 

started out, streetcars operated in the U.S. generally came from the Czech Republic, 

Germany, Spain, and Japan. By creating a minimum requirement for domestic content in this industry, the United States Government created an opportunity for domestic manufacturers to enter a new market. It also created an incentive for foreign 

companies to start investing in facilities and products in the U.S. Buy America rules 

have strengthened competition in the U.S. streetcar market. 

We encourage you to support and strengthen Buy America rules as part of your 

economic policy agenda. 

3. Access to Capital 

A crucial ingredient to Oregon Iron’s success, including to the success of our 

streetcar work, has been access to private and public capital. 

Private Capital: In the midst of the Great Recession our company’s leaders did 

not sit on their money. Instead, they invested it to create a new industry by building 

the production facilities and purchasing the equipment we now use to build streetcars. Significant private investment is crucial to any start-up; when times get tough, 

there is no substitute for personal skin in the game to keep business people working 

hard. 

At the same time, modest levels of Government investment, including through tax 

credits to support capital investments, provide a crucial complement to private capital. We think some efforts to increase access to capital for business creation could 

be helpful if accompanied by a strong requirement for entrepreneurs to also put 

their own resources on the line. Through tax reform, small businesses could have 

improved access to working capital. Current tax law requires small businesses to 

pay taxes on in-process projects despite not receiving complete payments from either 

a prime contractor or Government entity. Without substantial bank funding, small 

business growth is limited by its access to operating capital. 

Public Capital: Eight years ago Congress provided a modest level of funding to 

stimulate domestic streetcar production. The U.S. DOT, this Administration, and 

the FTA invested research dollars to investigate the potential for a U.S.-made propulsion system and off-wire technologies. The U.S. DOT (along with HUD and EPA) 

through the Urban Circulator and TIGER grants, has helped transit entities all over 

the country develop streetcar systems and other public transit systems. These investments have generated significant returns by creating a new industry, jobs, improved transportation systems, and more livable communities. 

Mr. Chairman, this Committee provided the foundation for critical transit investments and changes in SAFETEA–LU and in MAP–21 that have reduced red tape 

52 

and costly steps in the approval of transit projects. I want to thank you for all this 

Committee has done to ensure more efficient and cost-effective Federal investments 

in critical infrastructure. 

Local governments make all kinds of investments to stimulate economic development. Procurement decisions are some of the most powerful investments. The decision by officials in Portland, Tucson, and Washington, DC, to buy streetcars from 

our company, and to pay us for our work as we hit our performance benchmarks, 

has provided some of the most important capital we have received. 

We remain thankful that the Oregon Legislature and Oregon Department of 

Transportation provided crucial capital to help build Portland’s transit system. We 

also appreciate that Clackamas County has provided approvals, permits, a low-cost 

lease, and other support so that Oregon Iron could remain and grow in Clackamas 

County. 

Conclusion 

Manufacturing provides the kinds of good middle class jobs that help families 

thrive. By supporting technical training for workers, retention and strengthening of 

Buy America rules, and tax credits and other tools to help entrepreneurs access necessary capital, the Members of this Committee can help our country’s manufacturing sector thrive and grow. That would be good for the economy and good for 

local families. 

Thank you again for this opportunity to testify. I would welcome your questions.