U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

65–560 PDF 2011

MADE IN THE USA: MANUFACTURING POLICY,

THE DEFENSE INDUSTRIAL BASE AND U.S. NATIONAL SECURITY

HEARING

BEFORE THE

SUBCOMMITTEE ON NATIONAL SECURITY

AND FOREIGN AFFAIRS

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED ELEVENTH CONGRESS

SECOND SESSION

SEPTEMBER 22, 2010

Serial No. 111–153

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.fdsys.gov

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

EDOLPHUS TOWNS, New York, Chairman

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

JIM COOPER, Tennessee

GERALD E. CONNOLLY, Virginia

MIKE QUIGLEY, Illinois

MARCY KAPTUR, Ohio

ELEANOR HOLMES NORTON, District of

Columbia

PATRICK J. KENNEDY, Rhode Island

DANNY K. DAVIS, Illinois

CHRIS VAN HOLLEN, Maryland

HENRY CUELLAR, Texas

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

PETER WELCH, Vermont

BILL FOSTER, Illinois

JACKIE SPEIER, California

STEVE DRIEHAUS, Ohio

JUDY CHU, California

DARRELL E. ISSA, California

DAN BURTON, Indiana

JOHN L. MICA, Florida

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

BRIAN P. BILBRAY, California

JIM JORDAN, Ohio

JEFF FLAKE, Arizona

JEFF FORTENBERRY, Nebraska

JASON CHAFFETZ, Utah

AARON SCHOCK, Illinois

BLAINE LUETKEMEYER, Missouri

ANH ‘‘JOSEPH’’ CAO, Louisiana

BILL SHUSTER, Pennsylvania

RON STROMAN, Staff Director

MICHAEL MCCARTHY, Deputy Staff Director

CARLA HULTBERG, Chief Clerk

LARRY BRADY, Minority Staff Director

SUBCOMMITTEE ON NATIONAL SECURITY AND FOREIGN AFFAIRS

JOHN F. TIERNEY, Massachusetts, Chairman

CAROLYN B. MALONEY, New York

PATRICK J. KENNEDY, Rhode Island

CHRIS VAN HOLLEN, Maryland

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

PETER WELCH, Vermont

BILL FOSTER, Illinois

STEVE DRIEHAUS, Ohio

STEPHEN F. LYNCH, Massachusetts

MIKE QUIGLEY, Illinois

JUDY CHU, California

JEFF FLAKE, Arizona

DAN BURTON, Indiana

JOHN L. MICA, Florida

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

JIM JORDAN, Ohio

JEFF FORTENBERRY, Nebraska

BLAINE LUETKEMEYER, Missouri

ANDREW WRIGHT, Staff Director

(III)

C O N T E N T S

Page

Hearing held on September 22, 2010 ..................................................................... 1

Statement of:

Faux, Jeff, founding president and distinguished fellow, the Economic

Policy Institute; Robert Baugh, executive director, Industrial Union

Council, the American Federation of Labor and Congress of Industrial

Organizations; Mark Gordon, executive committee, the National Defense Association; and Michael Wessel, president, the Wessel Group,

commissioner, U.S.-China Economic and Security Review Commission,

and senior advisor, the Alliance for American Manufacturing ................. 10

Baugh, Robert ............................................................................................ 22

Faux, Jeff ................................................................................................... 10

Gordon, Mark ............................................................................................. 66

Wessel, Michael ......................................................................................... 109

Letters, statements, etc., submitted for the record by:

Baugh, Robert, executive director, Industrial Union Council, the American Federation of Labor and Congress of Industrial Organizations,

prepared statement of ................................................................................... 25

Faux, Jeff, founding president and distinguished fellow, the Economic

Policy Institute, prepared statement of ...................................................... 12

Foster, Hon. Bill, a Representative in Congress from the State of Illinois,

information concerning U.S. manufacturing job loss ................................. 7

Gordon, Mark, executive committee, the National Defense Association,

prepared statement of ................................................................................... 68

Tierney, Hon. John F., a Representative in Congress from the State

of Massachusetts, prepared statement of ................................................... 4

Wessel, Michael, president, the Wessel Group, commissioner, U.S.-China

Economic and Security Review Commission, and senior advisor, the

Alliance for American Manufacturing, prepared statement of ................. 110

(1)

MADE IN THE USA: MANUFACTURING POLICY,

THE DEFENSE INDUSTRIAL BASE AND U.S.

NATIONAL SECURITY

WEDNESDAY, SEPTEMBER 22, 2010

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON NATIONAL SECURITY AND FOREIGN

AFFAIRS,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 10:05 a.m., in room

HVC–210, the Capitol, Hon. John F. Tierney (chairman of the subcommittee) presiding.

Present: Representatives Tierney, Murphy, Welch, Foster, and

Luetkemeyer.

Staff present: Andy Wright, staff director; Talia Dubovi, counsel;

LaToya King, professional staff; Boris Maguire, clerk; Matt Donaldson, legal fellow; Ian Churchill and Eric Inafuku, interns; Kathryn

Prael, communications director; Laura Keiter, press assistant; Justin LoFranco, minority press assistant and clerk; Tom Alexander,

minority senior counsel; and Christopher Bright, minority senior

professional staff member.

Mr. TIERNEY. A quorum being present, the Subcommittee on National Security and Foreign Affairs’ hearing entitled, ‘‘Made in the

USA: Manufacturing Policy, the Defense Industrial Base, and the

U.S. National Security’’ will come to order.

I ask unanimous consent that only the chairman and ranking

member and Mr. Foster of the subcommittee be allowed to make

opening statements. Without objection, so ordered. I ask unanimous consent that the hearing record be kept open for 5 business

days so that all members of the subcommittee will be allowed to

submit a written statement for the record. Without objection, that

is so ordered as well.

So again, good morning and thanks to all our witnesses for being

here. Today the subcommittee turns its attention to a matter that

has far-reaching consequences for both our economy and our national security: The U.S. manufacturing and defense industrial

base.

For decades manufacturing has been the backbone of the American economy. The United States has been known as the land of

innovation, the home of the car, the computer and the jet plane.

These innovations lead to good jobs for hard working Americans.

American manufacturing is also a bastion of quality where the

words ‘‘Made in America’’ signifies superior craftsmanship, durabilVerDate 11-MAY-2000 15:54 Jun 23, 2011 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\65560.TXT KATIE PsN: KATIE
2

ity and value. However, despite the importance of innovation and

manufacturing to our national economy, manufacturing jobs have

been dropping steadily over the last several decades. Right after

World War II, manufacturing accounted for 40 percent of the American jobs; today that number is closer to 11 percent. While the decrease in manufacturing affects many aspects of U.S. economy,

today we will focus on one area in particular, the defense industrial

base.

The decrease in manufacturing at home has forced the Department of Defense to look abroad to acquire the tools it needs to arm

our forces and provide for our national security. Outsourcing takes

control of our supply chain out of our hands, and when foreign companies or governments control the production of necessary parts

our critical defense needs are subject to geopolitical forces that are

beyond our control.

Now as far back as May 2003 and the 108th Congress I was focusing on this issue, and I remember that during consideration of

the fiscal year 2004 defense authorization bill I offered an amendment that sought to expand the scope of the Defense Industrial

Base Assessment Program, and it was included in the committeeapproved bill. It required additional information on why contracts

are transferred outside this country, it would have mandated an

action plan on how our defense manufacturing sector could be revitalized and restored. In fact, the amendment was approved by a

voice vote and it had the support of the then chairman of the

Armed Services Committee, Republican Duncan Hunter. But opposition from the Bush administration caused it to be stripped from

the final version, and the regrettable effect of that was that the Defense Industrial Base Assessment Program wasn’t nearly as effective as I think it should have been.

The following year I went a step further and I offered an amendment to the fiscal year 2005 defense authorization bill that was

aimed at keeping taxpayer support of defense jobs here in this

country. My amendment would have required the Secretary of Defense as a condition of any defense-related manufacturing contract

to mandate that the contract performed substantially all or in no

event less than 65 percent of defense-related manufacturing services in the United States. The provision allowed the Secretary of

Defense to waive that requirement in cases where the products and

services were not available in the United States or if national security concerns necessitated a waiver. Unfortunately, the then Republican-led Rules Committee prevented the amendment from receiving a vote on the House floor.

But we have had a number of examples where relying on foreign

companies has been detrimental. For example, in 2003 a Swiss

company decided to delay delivery of essential parts of the Pentagon’s Joint Direct Attack Munitions [JDAMs], commonly known as

smart bombs due to their ability to pinpoint targets, because of the

Swiss Government’s opposition to the Iraq war. Not only did this

force the Defense Department to acquire these parts at a higher

price, it was a significant delay in getting these munitions to our

forces overseas.

Further, it is only when critical parts are made in America that

we can be sure that the quality meets our needs. There have been

3

countless situations where the Department of Defense has received

foreign parts that did not meet its quality standards, including substandard and counterfeit materials. In one example seatbelt clasps

purchased by the U.S. Army would break when they were accidentally dropped because they were fabricated from a substandard

grade of aluminum.

One particularly salient example of our dependence on foreign

countries to supply us with essential materials used for defense is

our need for rare earth materials. These metals are used for making a wide range of commercial and defense applications, including

the engines of the F–14, F–15, F–16 fighter jets. Such materials

are also critical components of high tech computer chips, cell

phones, and smart bombs that are hallmarks of warfighting in the

Information Age. China produces and therefore controls 97 percent

of rare earth oxides. It would take about 15 years to establish a

domestic supply chain, and the national security implications of

this imbalance are impossible to ignore.

We also face significant work force training and capacity issues.

The Government Accountability Office has consistently reported

that there are not enough highly skilled workers to perform the

critical tasks needed to sustain our industrial base. We have more

people retiring than entering the work force, which means companies that want to build in America cannot find workers with the

right skills to do so. As such, we will have to invest in our education system as well as our training programs.

We must also look at our manufacturing capacity and ensure

that we have modern, technologically advanced facilities that can

respond to both civilian and defense needs. We need smart policies

that assure that a skilled manufacturing work force has the flexible

capacity to shift between defense, public works, and commercial activity as the times demand.

Creating a robust manufacturing sector also requires careful consideration of tax, trade, innovation and regulatory policies. I want

to stress that this is not about protectionism or stifling free trade;

it is about being competitive.

I applaud the House for passing H.R. 4692, which would require

each President to develop a national manufacturing strategy and

assess progress. I encourage the Senate to do the same. We can no

longer afford to jeopardize our economy, the livelihood of Americans, or our national security by ignoring the manufacturing sector.

Modernizing and improving our industrial base will ultimately improve our economy, provide better employment opportunities to

Americans, and strengthen national security. We have to start to

think strategically about the industrial challenges we face and take

aggressive action to fully address them. Our economic and national

security demand it.

With that, I would like to ask Mr. Luetkemeyer for his opening

statement.

[The prepared statement of Hon. John F. Tierney follows:]

4

5

6

Mr. LUETKEMEYER. Thank you, Mr. Chairman, and I welcome

our panelists today.

The debate today raises important questions about how traditional free market principles coincide with national security concerns. While the United States sometimes relies on foreign labor

and equipment because they can provide cheaper alternatives to

domestic sources, the result at times can be less than ideal. The

sensitivity and quality of foreign made equipment are valid concerns. Does this mean that all military equipment should be produced in the United States? We should consider whether a logical

balance can be struck. Sensitive equipment should be made in the

United States or in collaboration with our closest allies. For nonsensitive equipment we should employ greater quality controls and

more stringent oversight of foreign products.

I believe we should go a step further and examine the policies

that drive business offshore to begin with. We should examine

whether Congress and the administration need to reform corporate

tax rates, labor policies and environmental regulations so that they

are conducive to domestic industrial growth. Creating an environment in which businesses will financially thrive will go a long way

toward bolstering the domestic industrial base. Whichever path we

take we must also be mindful of likely retaliation as a factor if we

choose a path that many of our trading partners will construe as

protectionist and in violation of international trade agreements.

Mr. Chairman, I thank you for convening this hearing and look

forward to today’s testimony.

Mr. TIERNEY. Thank you. The subcommittee will now receive testimony from the panel before us today. Oh, before we do that even,

Mr. Foster has an opening statement. Mr. Foster, we invite you to

present that.

Mr. FOSTER. I would like to thank the chairman and I would also

like to introduce a graph, which I think often a picture is worth

tens of thousands of words and this graph, which I hope will be

visible to our panel.

Mr. TIERNEY. Without objection, it’s entered into the record.

[The information referred to follows:]

7

8

Mr. FOSTER. This is simply a plot of manufacturing employment

in the United States from 1973 until today. And it was remarkably

constant for 30 years, from the early seventies until early 2001. It

was basically 17 to 18 million. It didn’t matter who was in charge,

good times and bad, Democrats and Republicans, it was relatively

healthy. During this period of course industrial output more than

doubles because of increases in productivity and technology. But in

early 2001 a cataclysm overtook us and more than a third of our

manufacturing jobs have been lost. This is not and should not be

a partisan issue. We are able—we were able for decades to keep

healthy manufacturing going in the United States. Of course businesses grew, businesses failed, sectors increased and decreased.

But overall we stayed relatively healthy. But something very bad

happened starting in early 2001 and as a country we have to understand what it was that did that. It wasn’t a single cause; it was

a number of things. We have to understand how to reverse this.

And I am someone who started a manufacturing company when

I was 19, actually, back right around 1973. I started a company

that now provides hundreds of manufacturing jobs in the Midwest

and has competed and exported a very high fraction of our production. And we are faced, every single trade show we go to, we are

worried that one of our competitors will have offshored their production and be undercutting us. And so we have to understand

things like currency manipulation that we ought to be able to fix,

and things like labor arbitrage which are going to be very tough.

And so we have to have an honest national discussion about this

and we have to decide what fraction of things like national defense

frankly trump mindless free trade points of view, and that there

be certain things we are going to have to be able to do. It has to

be a national goal that after an electromagnetic pulse event that

wipes out all of our electronics that we have the ability, by ourselves, to recover our capacity to communicate in this country. And

things like that have to be thought out and very consciously separated.

Anyway, this is a wonderful hearing and I thank the chairman

for having it.

Mr. TIERNEY. Thanks, Mr. Foster.

Now the subcommittee will receive testimony from the panel before us today. First I will introduce the panel.

Mr. Jeff Faux, is the founding president and distinguished fellow

at the Economic Policy Institute. Mr. Faux has studied, taught, and

published on a wide variety of economic and political issues, is the

author or coauthor of five books. He also has worked as an economist for the Departments of State, Labor and Commerce, as a manager of the finance industry, as a blueberry farmer, and as a member of the Municipal Planning Board in the State of Maine. He sits

on the boards of several nonprofit institutions and magazines, has

written articles for numerous newspapers and journals, and regularly appears on television and radio. Mr. Faux holds a B.A. from

Queens College, an M.A. from George Washington University, and

an honorary degree from the University of New England.

Mr. Robert Baugh is the executive director of the Industrial

Union Council of the American Federation of Labor and Congress

of Industrial Organizations [AFL–CIO]. The Council is comprised of

9

the Nation’s leading industrial unions and is chaired by the AFL–

CIO president, is the coordinating body for the AFL–CIO’s manufacturing policy and legislative initiatives. Mr. Baugh is also the cochair of the AFL–CIO Energy Task Force and served as a leader

as the U.S. Labor Delegation to the U.N. Climate Change Conference Negotiations in Bali, Posman, and Copenhagen. Mr. Baugh

is also the author of several publications on issues ranging from

economic development to manufacturing and climate change. He

holds a B.A. from the University of Detroit and an M.A. in industrial and labor relations from the University of Oregon.

Mr. Mark Gordon, serves on the Executive Committee of the National Defense Industrial Association and is the director for defense

programs at the National Center for Advanced Technologies, where

he covers all technology, manufacturing, and research and development policy topics. He also heads the Evolutionary Acquisition

Training Team, which provides industry perspective to the Department of Defense technical and policy groups on acquisition policy.

Additionally, Mr. Gordon sits on the Joint Defense Manufacturing

Technology Panel as a defense industry representative and as a

member of the Diminishing Manufacturing Sources of Materials

Shortages Working Group of the Department of Defense. He is a

board member of National Center for the Defense Manufacturing

and Machining and a member of the National Defense Industry Association Manufacturing Division Executive Committee. For the

purposes of full disclosure, Mr. Gordon is also under government

contract as an industry liaison for strategic planning initiatives involving technology transition mechanisms within the Department

of Defense. He holds a B.A. from the University of Rochester and

an M.A. from the Georgia Institute of Technology.

Mr. Michael Wessel is a member of the U.S.-China Economic and

Security Review Commission, a senior advisor at the Alliance for

American Manufacturing and president of the Wessel Group, a

public affairs consulting firm. He is also a member of the Council

on Foreign Relations, staff advisor to the Labor Advisory Committee to the U.S. Trade Representative and previously served on the

U.S. Trade Deficit Review Commission from 1999 to 2000. Mr.

Wessel worked for House Majority Leader Richard Gephardt for

more than 20 years. In addition to serving as general counsel he

also served as Mr. Gephardt’s principal Ways and Means aide, participating in the enactment of major trade policy initiatives, and as

the executive director of the House Trade and Competitive Task

Force. Mr. Wessel holds a B.A. and a J.D. from George Washington

University.

So thank you to all of our witnesses for making yourselves available today, for sharing your substantial expertise. It is the policy

of this committee to swear you in before you testify, so I ask that

you please stand and raise your right hands.

[Witnesses sworn.]

Mr. TIERNEY. The record will please reflect that all the witnesses

answered in the affirmative. We can advise you that your full written statement will be entered into the record. I thank all of you for

substantial witness statements that were very informative and ask

that you might keep your opening remarks to approximately 5 minVerDate 11-MAY-2000 15:54 Jun 23, 2011 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\65560.TXT KATIE PsN: KATIE
10

utes so we can get a good series of rounds of questions and answers

on that.

Mr. Faux, we will start with you, please.

STATEMENTS OF JEFF FAUX, FOUNDING PRESIDENT AND DISTINGUISHED FELLOW, THE ECONOMIC POLICY INSTITUTE;

ROBERT BAUGH, EXECUTIVE DIRECTOR, INDUSTRIAL

UNION COUNCIL, THE AMERICAN FEDERATION OF LABOR

AND CONGRESS OF INDUSTRIAL ORGANIZATIONS; MARK

GORDON, EXECUTIVE COMMITTEE, THE NATIONAL DEFENSE

ASSOCIATION; AND MICHAEL WESSEL, PRESIDENT, THE

WESSEL GROUP, COMMISSIONER, U.S.-CHINA ECONOMIC

AND SECURITY REVIEW COMMISSION, AND SENIOR ADVISOR, THE ALLIANCE FOR AMERICAN MANUFACTURING

STATEMENT OF JEFF FAUX

Mr. FAUX. Well, thank you, Mr. Chairman, for holding this hearing on such a vital and often ignored national issue, and Mr. Foster

and Mr. Luetkemeyer and the rest of the subcommittee for inviting

me to share my thoughts and concerns.

It seems self-evident to many people, most people I think, that

a healthy industrial base is essential to our national defense. Yet

over the last several decades we have followed the national policy

of allowing that base to deteriorate with little regard for our future.

As a result, our supply lines for strategic parts and materials are

stretched around the world, the pool of domestic workers with

high-tech industrial skills needed in future national emergencies

has been allowed to drain. We’ve accumulated massive overseas

debt to China because of our trade deficit and other creditor nations, which is a potential economic and national security threat.

And many American manufacturing corporations, including those

producing advanced technology products, now see their future and,

disturbingly, perhaps in the future their corporate loyalties elsewhere.

Now in this country we have a long successful history dating to

the beginning of the republic of government encouraging and guiding the private sector to build and maintain a strong manufacturing base in support of national goals. But beginning in the 1980’s

administrations headed by both parties have slowly adopted the

posture that a strong industrial base is in effect not the public’s

business. Leave it all to the market.

The problem is that the market is essentially indifferent to our

country’s national security. And the global market, subject to currency manipulation, mercantilist trade policies and similar practices by potentially rival states, can be hostile. To its credit the current administration and Congress recognize some of this and are

beginning to make important initiatives, but there’s still in the

country and in the government and in our political discussions that

we listen to every day on television and radio, there’s a lack of

sense of urgency about this.

Ironically, we have had a sort of industrial policy over the last

several decades, but the favored industry has not been manufacturing but finance. So it’s no surprise that while our goods markets

have shrunk, we lead the world in the finance sector’s major prodVerDate 11-MAY-2000 15:54 Jun 23, 2011 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\65560.TXT KATIE PsN: KATIE
11

uct, debt. Offshoring and downsizing manufacturing may often be

in the short run financial interest of the average investor, but at

a heavy cost to the long-term interest of the average American citizen.

One result of these imbalanced policies has been a continuous

trade deficit for 30 years, after having 100 years of trade surpluses

and balance, and a growing deficit in high-technology products for

the last 12. Yes, we have a trade surplus in high-technology services, but that is not necessarily good news. It represents the relentless transfer of advanced skills and knowledge to other nations.

This experience as well as economic common sense tells us that

without government leadership, private investors will not largely

make the long-term commitment necessary to rebuild and retool a

competitive manufacturing sector. There is no one single magic bullet that will solve this problem. We need a variety of mutually reinforcing trade, tax procurement, currency adjustment and other policies. But today our economic and national security policies are too

often made in separate multiple unconnected silos.

For example, there is now wide agreement that government

should finance more high-tech research and development. But without a policy to assure that the products that are generated are

made in the United States, it will end up subsidizing the future

economies and strengthening the global power of other nations at

our taxpayers’ expense.

Another set of silos are our policies toward China. For 20 years

one part of the government has been helping buildup China’s hightech industrial capacity while another part of the government is

practicing for future conflict. Taken separately, each policy might

be rationalized, but taken together they make no sense at all.

My testimony outlines a few suggestions on how we might begin

to organize for more integration of our policies, including a Presidential commission on linking the two areas and the appointment

of select committees in Congress to deal with integrated global

strategies. But whatever the most effective organizational structure, the most important point is that we urgently need an integrated national industrial strategy to promote a future for Americans that is both prosperous and secure. And my fear, Mr. Chairman, is that the time may be running out.

Thank you again for taking the leadership on this, and I’ll be

happy to answer any questions.

[The prepared statement of Mr. Faux follows:]

12

13

14

15

16

17

18

19

20

21

22

Mr. TIERNEY. Well, thank you, Mr. Faux. I appreciate it.

Mr. Baugh.

STATEMENT OF ROBERT BAUGH

Mr. BAUGH. Thank you, Chairman Tierney and members of the

committee, for inviting me here this morning to testify on this important subject.

We believe the decade long decline in the American manufacturing base is a crisis that has undermined our economic security, national security, and I subscribe to all the comments that were made

by members of the panel this morning.

The question before us is what has happened to that prosperity

and security and what must we do to strengthen the Nation’s industrial base. I would like to make three main points in this testimony. One, the health of our manufacturing base and the health

of our defense industrial base are one and the same, and the diagnosis is critical. No. 2, our own trade, tax, and investment procurement policies and the globalization of production has helped create

this situation. And three, it simply doesn’t have to be this way.

There are steps we can and we must take to revitalize our manufacturing base and our national security with policies, investments

and incentives we enact that must be both strategic and employment linked. To Jeff’s point a moment ago on research and development policy.

For the American manufacturing communities this recession has

just been one more big wave in a decade of economic tsunamis. Mr.

Foster, your chart says it all. In little more than a decade we lost

6 million manufacturing jobs, one-third of our manufacturing jobs,

57,000 facilities closed. And I would make note I’m not just speaking for the front line skilled workers but I’m talking about a million of those jobs that were engineers, designers, developers, scientists, the very core of our professional and technical capacity for

innovation in this Nation lost their jobs. They are out of that market. That is part of our future and we have been wasting it away.

It is a myth to think that the manufacturing base and the defense industrial base are somehow separate and independent. The

National Research Council has made this point over and over, and

it is in the other papers we have submitted as part of our testimony, the manufacturing and security paper that documents critical industries, critical technologies that are fading away from our

economy and our expertise. And your point that was made about

the metals is absolutely correct and straightforward, and something is very serious and strategic consequences when China controls 90 percent of the world market for those rare earth metals.

Import penetration studies by the U.S. Business and Industry

Council parallel this and show the degree of import penetration

into the U.S. economy. It’s dominated. In 27 of 114 sectors, over 50

percent of our consumption is of imports in manufactured materials, and this shows up. These are global trends and these are economic trends that are a disaster for this country.

The military policies of dual use have helped do this because we

seek the cheapest vendor, the cheapest product. We find decisions

made by the Navy to lease vessels rather than make them, the

Coast Guard to make ship parts over in Korea and just assemble

23

them here. It diminishes our capacity to address these things in

the future. The threatened closures of Avondale and Ingalls Shipyards are a case in point.

While we’ve had these warnings from the National Research

Council, I think more poignant is watching how research and development innovation has been offshored, and nothing is more

striking than the recent announcement by Intel and Applied Materials and other major technological innovators in our economy that

have gotten billions of dollars of illegal subsidies and have opened

major facilities in China. These are the same products that will

come back to haunt us as they already do in so many other fields.

Our trade deficits, as Jeff has pointed out, are symptomatic of

the rot eating away at our industrial base. The Economic Policy Institute estimates that we have lost up to $2.4 million to China

alone from this. And what do we do with about China’s strategy?

Will they target industries, target technologies? They back it with

a whole series of illegal trade practices, the leading one of which

we are talking about in this Congress. That is currency manipulation. It is time we do something about it. A 40 percent subsidy goes

a long way. It not only subsidizes the issue of things that are imported into our economy; more importantly, it subsidizes the research and development that’s going into their economy from

American firms and other international corporations.

We need to take action to end currency manipulation, and House

bill 2378 does that, and this Congress should move on it immediately. The Ways and Means Committee has had it under consideration, and we had a hearing on it just this last week.

The Congress has made important steps, and this was noted in

the chairman’s testimony, of the idea that we actually need a national manufacturing strategy, that we need a trade deficit commission, that we need to take the steps forward to address a manufacturing strategy for the Nation. Every other country in the world

has one, and it’s focused on employment and income. We do not.

Shame on us, shame on us. It is part of our problem.

What you have done so far is a start, but we need to do much,

much more. And we need policies in the Senate, as I said before,

that are strategic and employment linked. And we don’t necessarily

have that in this case. It is the silo effect that Dr. Faux was talking about, it is the idea that the one hand doesn’t see what the

other is doing here as we move on these things. We put a good policy in place around energy, for clean energy production, but it’s not

employment linked, and therefore we stand to spend a good portion

of that resource on foreign corporations producing these things. We

have to be more strategic in how we do this.

There are six things we need to do. One is about bringing fairness to the global economy. That strengthens our laws practiced by

America, but it means we enforce our trade laws and we do something about currency. We must invest massively in this Nation’s infrastructure, not just to bring it up to speed but for the future. We

should do that strategically with employment linked policies that

in fact make the technologies and the things that we are going to

build our country with. And the same thing needs to happen in the

field of energy and our infrastructure. Again, 48(c), section 136 for

autos, the idea that we are going to have loan guarantees, and

24

these things that invest in the American economy are technologies

that we used to lead the world in and we no longer do. And we

need to reinvest in these things and recapture that. It is about revitalizing the manufacturing base that protects our defense industrial base. We need tax policies that encourage investment, as Mr.

Luetkemeyer talked about. We agree with you on that. We also

need to get rid of the tax policies that are incentives for offshoring

work. I think we have conflicting ideologies on this, that we need

to fix and address in terms of a strategy. And we must protect innovation and we must invest in our R&D so that things are made

here.

And finally, we absolutely have to have a skilled and trained

work force for our future. As I said in the beginning, the health of

our economy and our national security are inextricably tied together, and we must have a vibrant manufacturing sector to make

sure it works. We must revive manufacturing as a clear centerpiece

for our Nation’s economic and national security strategy.

Thank you.

[The prepared statement of Mr. Baugh follows:]

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

Mr. TIERNEY. Thank you, Mr. Baugh.

Mr. Gordon.

STATEMENT OF MARK GORDON

Mr. GORDON. Chairman Tierney and members of the committee,

on behalf of our members, 1,700 corporate and 83,000 individual

members, I am pleased to appear before the House Subcommittee

on National Security and Foreign Affairs today to discuss the national security implications of the U.S. manufacturing policy and to

present some recommendations to improve that policy.

Succinctly, the U.S. manufacturing sector is of vital importance

to our country, given its enormous impact across the fundamental

underpinnings of our Nation’s security, both economic and defense

related. Manufacturing remains the largest productive center—sector in the overall economy at 12 percent and the U.S. produces

more goods than any another country, although it is close. Manufactured goods also represent 50 percent of country’s exports, limiting the deficit and our balance of trade. And to further bolster its

importance, manufacturing generates a substantial benefit from

other economic sectors, multiplying each dollar spent within the

sector of manufacturing into an additional $1.41 in other sectors,

higher than any other one. This raises the complete impact from

the manufacturing sector to one-quarter of our GDP.

An often overlooked aspect of manufacturing is not simply the

size of the sector, but the fact that manufacturing creates wealth

within the United States by producing something of higher value

from materials or components. There is only three ways of creating

wealth—dig it up, grow it or make it. And unlike other wealth creating sectors, manufacturing jobs are generally high paying and

represent an entry into the middle class for a large portion of the

work force.

Our national security depends heavily upon our domestic manufacturing capabilities. The DOD relies upon the industrial base for

leap-ahead, innovative technologies to provide combat equipment

for our warfighters, and upon trusted domestic suppliers to deliver

on time and at quality.

In my testimony today I would like to discuss four main things

vital to manufacturing policy—leadership, research and development, strategic capabilities, and then work force and infrastructure.

The defense manufacturing capabilities have to be elevated to a

higher level in the scope of U.S. policy considerations, and this requires active and senior leadership. To crystallize this point, let me

make a simple comparison. The agriculture sector represents 1 percent of GDP, employs 1 percent of the work force, and is represented by a Cabinet Secretary. The manufacturing sector is 10

times larger and is represented by an Assistant Secretary for Manufacturing and Services within the International Trade Administration of the Department of Commerce.

In turn, defense manufacturing issues need more senior leadership within the Department of Defense to unite policy, strategy, investment, and implementation. This is a strategic requirement

above all others, and I have recently seen congressional language

on this topic.

67

Manufacturing research and development is literally the core of

our national engine. Seventy percent of R&D in the United States

is performed by manufacturing companies, and the technology and

innovation results will make the United States more competitive,

but only if the results of the R&D stay in the United States and

add to the GDP. But simply, if R&D stays within the United States

it represents an investment for us. If it goes offshore it represents

simply a cost and the country gains little benefit from the R&D.

Turning to R&D for national security, DOD has a single program

that is chartered under USC Title 10 to develop and transition

manufacturing capabilities for defense systems. The DOD ManTech

program. This program has recently delivered to Congress a strategic plan titled ‘‘Delivering Defense Affordability,’’ with four strategic thrusts, and I have referenced the executive summary with my

testimony today. However, more investment is needed. A Defense

Science Board study recently concluded that the proper investment

level for ManTech should be 1 percent of RDT&E, a 3 times increase.

Now for strategic considerations one of the most critical balancing acts that we’ve heard today with an industrial policy is between open competition and active support or subsidy of an industry capability. Industrial capabilities and manufacturing processes,

raw materials components and technologies are disappearing from

United States every day, and while some can be replaced with

overseas suppliers, this is not possible for defense essential needs

where access to domestic sources is a national security requirement. Therefore, when absolutely necessary the department will intervene to create or sustain essential manufacturing capabilities.

There is a program that is part of the Defense Production Act, that

needs to be adequately funded and fully utilized across the whole

of government in order to help this.

Other strategic needs, the need for steady long-term access to affordable raw materials, counterfeit parts, environmental regulations and visibility into the lower levels of the supply chain. An

NDIA white paper titled ‘‘Maintaining a Viable Defense Industrial

Base’’ lays out the technical challenges and policy opportunities for

each of these issues.

Finally, advance manufacturing technologies require a work force

with core technology, skills, and an updated industrial infrastructure that is highly connected and enterprise driven for the future

of the United States. An effective role for the defense industry

would be as a first adopter for many of these enterprise level, advance manufacturing practices which would then transition to the

domestic manufacturing base and help strategically position the

United States in the increasingly hypercompetitive global economy.

Chairman Tierney, I’m honored to have this opportunity to provide with you an industry perspective on the critical nature of

manufacturing and would be available to answer your questions.

[The prepared statement of Mr. Gordon follows:]

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

100

101

102

103

104

105

106

107

108

109

Mr. TIERNEY. Thank you, Mr. Gordon.

Mr. Wessel, your remarks, please.

STATEMENT OF MICHAEL WESSEL

Mr. WESSEL. Thank you, Mr. Chairman, Mr. Luetkemeyer, other

members of the committee, for the invitation to be here this morning, and I want to testify on this important topic. First, the general

disclaimer. I’m here today in my individual capacity, and any views

I express are my own. But as a Commissioner on the U.S.-China

Economic and Security Review Commission, let me highlight that

most of the past several years we have issued unanimous reports

by the six Democratic and six Republican commissioners. Confronting our national and economic security does not have to divide us

and can unite us in terms of moving forward.

Our national security interests have changed dramatically over

the years. But while cyberspace and electronic spectrum are increasingly important to our national security interests, there will

still be a need for a U.S. presence around the globe. The requirement for actual boots on the ground will not disappear. ‘‘Made in

the USA’’ may be more important than it has ever been. The

globalization of supply chains and decimation of our manufacturing

base have already put our interests at risk. We no longer produce

enough ammunition for our troops and law enforcement. Reports

are that there is no longer a domestic supplier for the propellant

used in Hellfire missiles. As you noted, Mr. Chairman, we are dramatically undermined by Chinese policies regarding the rare earth

minerals that we need in JDAMs and smart bombs.

And as you also noted, Mr. Chairman, as we look at how other

countries approach these issues, you mentioned the Switzerland example, but also France refused to grant the U.S. overflight rights

for the bombing run on Libya. Turkey denied U.S. combat troops

access to a northern invasion route in the run-up to the Iraq war.

What would happen on a broader and longer term basis if other

countries followed their example and limited our supply of spare

parts, basic components, or full weapons systems?

The risks to our national security run far deeper. The first salvos

in our next conflict may be lobbed in bits, bytes and bots. The electronic spectrum is key to everything we do and technology must be

part of a secure and reliable supply chain. The growing risk that

results from too many of our countries and our military abandoning

the ‘‘Made in America’’ logo have increased dramatically.

As the United States has outsourced and offshored its production, we are increasing our security risks. We aren’t just letting the

fox guard the hen house. We are inviting the fox to the dinner

table.

Several years ago there was a plan to procure Chinese produced

Lenovo computers for our classified systems. This would have been

a huge opportunity for their intelligence services. Our procurement

officials weren’t originally even cognizant of the original problem.

Afterwards promises were made to update GSA’s procurement regs,

but to date I’m unaware of any real change in that area. Indeed,

one government entity that I’m aware of that has to go unnamed

recently had to seek a specific clause in a contract with a previously cleared government contractor to ensure that equipment by

110

the Chinese state-owned telecommunications firm Huawei was excluded from its systems. Despite ongoing and increasing concerns

about Huawei’s activities, the Chinese technology giant continues

to supply telecommunications equipment across the country for networks that could carry U.S. Government traffic or other critical

traffic.

The risk from the globalization of supply chains in the technology

area are clear.

Our military and our Nation’s critical infrastructure are completely dependent on computers and the Internet, and they are vulnerable.

As manufacturing capabilities move offshore, the basic skills of

our workers are put at risk. The skills of such workers are too

often taken for granted. And the decimation of our manufacturing

base has an enormous impact on the strength of our economy,

which is directly related to our national security.

Let me quickly highlight three areas for action. First, in the

trade area, we need to update and reform our Nation’s trade policies to make them results oriented. We cannot afford to look the

other way when our rights and the commitments that our trading

partners have made are violated.

As has been already noted, the failure to deal with China’s manipulation of its currency is a perfect example of this problem. It

is a much as a 40 percent subsidy for their exports and a 40 percent tax on our goods going there. How can U.S. manufacturers

compete against those margins, not to mention other subsidies and

predatory practices?

The resulting shift in production poses risks to our national security, but by failing to address China’s currency manipulation we

are also helping to fund China’s massive buildup in advanced

weaponry and strengthening its leadership.

In procurement, we should use the leverage of our procurement

dollars to support the revitalization of our manufacturing sector

and defense industrial base. ‘‘Buy American’’ policies are consistent

with our international commitments and should be aggressively

pursued as part of our procurement efforts, not only to help revitalize our manufacturing and defense industrial base but to advance

our security interests.

We also need an assessment of where defense dollars are actually

going and how the globalization of supply chains may threaten our

interests.

We need to do a better job of focusing our tax and economic policies on revitalizing our Nation’s manufacturing industrial base to

R&D. We should extend the R&D credit to first stage deployment

in domestic facilities so that produced with taxpayer-subsidized research are actually produced here. As well, we need to examine

what the migration overseas of American R&D and production by

some of our companies is doing to undermine our manufacturing

and defense industrial base here and enhancing the capabilities of

others.

Mr. Chairman, thank you for the opportunity to be here this

morning, and I look forward to your questions and working with

you and your staffs in the future.

[The prepared statement of Mr. Wessel follows:]

111

112

113

114

115

116

117

118

119

120

121

122

123

124

125

126

127

Mr. TIERNEY. Well, thank you Mr. Wessel. I thank all of our panelists for very good testimonies as well as the written comments

that you supplied earlier. We are going to go to our question-andanswer period, 5 minutes per member on that, and probably more

than one round if you’ll bear with us on that.

The U.S. Business and Industrial Council, a paper that was presented with some of the remarks here today, talked about import

penetration. Mr. Baugh, I think you made mention of that report

in there. One of the quotes is that high import penetration continues to deny the stimulus support of U.S. economy of major private

sector growth and employment opportunities. Better control of the

U.S. imports could have boosted domestic manufacturing output

and overall growth by as much as $404.59 billion in 2008 alone in

the 114 capital and technology intensive manufacturing sectors examined. In essence, it’s easier to sell into one’s own domestic market than it is into a foreign market.

So tell me, Mr. Baugh, if you would, how does one better control—get better control over U.S. imports in that situation?

Mr. BAUGH. Thank you, Mr. Chairman. I think this was stated

in terms of a number—it is actually our trade policies and how we

enforce them, how we deal with these questions. You know, I know

the author of the paper, Alan Tomlinson from USBIC and I can tell

you any number of the things he would say. He would talk about

firsthand you have to address currency manipulation as part of

this. But actually the trade agreements we have in place we don’t

enforce our trade laws, and we need to do that and we need to

strengthen them. That’s part of a multiple approach to this, because it is not just one thing and there is no silver bullet to this.

In terms of China it’s more than just currency, they have all

forms of illegal subsidies, the lack of enforcement of standards and

laws in their own country, environmental safety and health standards and worker rights. So it’s a series of actions that our trading

partners engage in that we shouldn’t stand for frankly. And these

things all act as incentives. It is not just the 40 percent on the dollar currency. Instead all these other things are incentives for manufacturers from our country and other countries to go to China to

produce access to the American market, short and simple, and we

need to stop that.

Mr. TIERNEY. Thank you. Mr. Faux, this is not just endemic to

China, and I have heard a lot about China today, because I think

they are a major source, but there are a number of other countries

that are involved in the same types of practices, whether it is currency manipulation or subsidizing industries, failure to enforce

their own laws and regulations on environmental safety and all

that. Are our trade agreements, as they are currently structured,

adequate for us to address these situations and, if not, what must

we do?

Mr. FAUX. The trade agreements are not.

Mr. TIERNEY. You might have to turn your microphone on.

Mr. FAUX. As a matter of fact, they are misnamed. These trade

agreements are not particularly aimed at trade so much as they

are about allowing American corporations, multinationals, to invest

overseas and bring the products back into the United States. We

still call them trade agreements, but you know, beginning with

128

NAFTA and going through to the entrance of China into the WTO,

we have consistently negotiated on behalf of American investment

interests overseas rather than American production here. This now

is built into our economy. For every 1 percent increase in incomes

in America we have a more than 1 percent increase in the trade

deficit. So we have a ratchet effect going on now. And that’s—your

point about how the stimulus demonstrates that. We’ve poured

money not to create jobs elsewhere but to create jobs in the United

States in the midst of a recession. And a good deal of that, I certainly hope—not all of it certainly, but a good deal of that just

leaked out.

The famous case in Texas with the solar panels where the money

was supposed to go for green technology, and it turned out that 80

percent of the solar panels were coming from China. Now nobody

designed that. It’s now built into the way we run our economy, and

that’s why this is a multi-policy problem.

Mr. TIERNEY. Thank you. Mr. Gordon, give us some short-term

solutions to this.

Mr. GORDON. Well, the short-term solutions I will go back to

what you talked about in terms of H.R. 4692——

Mr. TIERNEY. Just put your mic up a little bit. There you go.

Thank you.

Mr. GORDON. I’ll go back to the 4692, National Manufacturing

Strategy. That essentially will take a good long-term view on what

you can do in the short term for tax policy as well as trade, but

certainly intervention in markets which are distorted.

I want to say one thing—I heard you whisper—wind turbines.

Wind turbines were one of the things that also were funded, hundreds of millions of dollars, and it went to foreign manufacturers

of wind turbines that were then brought back into the United

States. That’s just something that did not at all meet the purposes

of the stimulus funds.

For the Defense Department there is a program such as the Title

III program, this is the Defense Production Act Title III, and it’s

not simply for DOD. It is for eight of the largest Federal agencies.

It is revolving fund authorities that would support any number of

different national security industry capabilities within the United

States. This is one of the short-term actions that could happen if

that was funded and actually implemented across all the agencies.

Currently there is a Defense Production Act committee that was

just stood up in January of this year, and they are trying to figure

out how to use these authorities across energy, across Homeland

Security and in other agencies. To this point there can be loan

guarantees, production commitments and other authorities that are

used in order to essentially intervene in those capabilities and

bring manufacturing back into the United States. This directly

combats the offshoring because it provides to corporate, to board

rooms a required demand for the foreseeable future, and that takes

the uncertainty out of the decision since therefore the offshoring

equation now is unbalanced. And you can bring back to the United

States or you can preserve manufacturing capabilities in the

United States through Title III.

Mr. TIERNEY. Thank you, thank you very much. Mr.

Luetkemeyer, you’re recognized for 5 minutes.

129

Mr. LUETKEMEYER. Thank you, Mr. Chairman. Let me start with

Mr. Wessel here, we haven’t got to him yet.

You have in your testimony talked about some of the trade policies and your comments with regards to how we’ve gotten boxed in.

What do you see are some things—currency manipulation is one of

your key items here. Is there something else in there we need to

be looking at? What do you see as a way we can find a balance here

to be able to keep ourselves out of hot water with our allies as well

as be able to protect ourselves? What do you see we need to do?

Mr. WESSEL. First of all, and thank you for the question. All of

this can be done in compliance with our international commitments.

Mr. LUETKEMEYER. You must have some special powers.

Mr. WESSEL. Shedding light on the issue. All of this can be done

in compliance with our international commitments, so we’re not

talking about WTO legality or anything else. We’re talking about,

No. 1, enforcing our laws better than we are and creating confidence among manufacturers so that there’s actually a future here

in America.

Fifty-eight percent of China’s exports come from foreign invested

enterprises. Those are United States and foreign companies that

have moved to China in part hoping that they will be able to have

a market to serve, but for many of them it’s the products from the

United States that are industrial tourists that go into their facilities there and come right back.

We’ve had haphazard implementation and enforcement of our

trade laws so that our companies don’t know where they should invest for the future. As you’ve seen in the papers recently, our companies are sitting on over a trillion dollars of cash. Now if we were

to take a set of policies to create confidence, one that if we break

the rules there are going to be repercussions for that, which is

again haphazard.

No. 2, that we are going to have a set of domestic policies that

make it clear that whatever your views are and what are causing

those that there is a business climate here for the employers to be

able to make the investments, R&D, all the various other things

we need to do.

So it is a set of policies and a mindset that quite frankly has not

existed for a while that needs to tell business, government, workers

that we’re behind you and we’re going to be doing this for the long

term.

Mr. LUETKEMEYER. In your view, if we would start enforcing the

trade laws, which I’ve got a company that I’m well aware of and

working on right now, the individual spent over a million dollars

of his own money to document a dumping charge against China.

We can’t get enforcement of the law, it’s just ridiculous. But I mean

if we were to start enforcing the law and really hammering on it,

what in your opinion do you think would happen internationally?

Are they going to start realizing that there’s a new guy in town,

a new sheriff in town and start behaving themselves and respect

us for that or are we just going to get ourselves in real big trouble?

Mr. WESSEL. Well, despite my party affiliation I think probably

the President who did the best job on trade over the last many administrations was Reagan, who basically said, you know, we’re

130

going to implement the rules, we’re going to be tough and we’re

stand up for American interest. This was at a time, as you may recall, when Japan was breaking the rules right and left. As a result

of that, with the Plaza Accord, with VRAs, with what he did in the

technology industry with Semantec and a number of other things,

he basically said we need to have a national security defense industrial base here. And the result was our trading partners ultimately

realized that they couldn’t get away with this. Japan, for better or

worse, started moving many of their supply chains here. As you

know, last year they actually started fielding for the first time.

Toyota did a team at NASCAR, I mean they have been Americanized in a lot of different ways.

Our trading partners need to understand that we’re serious

about enforcing our rules, we’re going to stand by them and we are

going to stand by our companies and our workers, and it is not

going to be a question of what do you have to influence the political

system. If you are being damaged, you’re going to get recompense.

Mr. LUETKEMEYER. OK. Mr. Faux, you in your testimony have a

number of solutions here or suggestions of things that we need to

do. Can you explain a couple of them that you think are important

or identify what you believe is the most important of those solutions that can be most impactful and something we may be able to

do for the short-term.

Mr. FAUX. The big gap that I see, Congressman, is that there is

no place in the Federal Government where this kind of discussion

takes place, at the place where we can make policy. We’ve got these

silos of policymaking, and I think after so many years of continuous trade deficits, of this problem, as Mr. Wessel said, beginning

back in the 1980’s that President Reagan understood, so that we

know that the organizational structure doesn’t work. We need in

the Congress—and I think in the executive branch—we need a

place where this discussion gets had and it connects with policy.

My suggestion is to begin with some Presidential Commission on

National Security, which includes economic security. We have to

broaden the definition of national security beyond that of the Defense Department.

Second, I think this needs to be some parallel reorganization in

Congress. I suggested some select committee. You are a better expert on how all of that works than I am, but I know that we have

these silos here in Congress.

One of my other suggestions is that the U.S. Trade Representative be taken out of the Cabinet. I think what’s happened in trade

policy is that making trade agreements has become the measure of

success or failure, rather than trade policy in the service of U.S.

national goals. And I think it was a big mistake to elevate the

making of trade deals to the Cabinet level.

So I would start with those.

Mr. LUETKEMEYER. Thank you, I will yield back, Mr. Chairman.

Mr. TIERNEY. Thank you. Mr. Welch, you are recognized for 5

minutes.

Mr. WELCH. Thank you very much, Mr. Chairman. And I very

much appreciate the witnesses. Manufacturing obviously is important everywhere, related to defense. Important everywhere including Vermont. General Electric in Rutland is a big, big employer,

131

and people are always anxious to hang onto those jobs. They do a

great job in green aviation.

But you know, the thing that is troubling is this: We’ve got a Republican leader here—our ranking member and our chairman, Mr.

Tierney, and I think they both share the objective that we have

more manufacturing in this country. And there is probably across

the aisles—both aisles—a lot of support for that in theory, but it

doesn’t happen.

And the question I have is what are the dynamics that are the

impediment to this Congress being able to do something that,

whether you are in a red state or a blue state, would be good for

the folks who are struggling to have jobs? And I don’t think Mr.

Faux as much as it would be beneficial to have that kind of fight

to concentrate attention that’s necessary—I would agree with that,

but my question is what are the dynamics that are making it from

the perspective of those opposing real action that make its rational

for them to oppose something that I think all of us at this table,

Republicans and Democrats, think would be in the long-run beneficial for this country?

Mr. FAUX. If I could answer that.

Mr. WELCH. Yes, go ahead. Go down the line.

Mr. FAUX. I think one part of it is the way economic policy is

nested in a view of economics that doesn’t consider what it is that

we make, and there is a long history of this. It—it, I think, started

after World War II, and we didn’t have to worry about what we

were making. But today at the highest levels of policymaking,

whether it’s under Republican or a Democratic administration,

raising this question in a small room without the press gets snickers and ridicule.

Well, you’re talking about the government intervening in some

way. And this is an ahistorical look at our country. From the very

beginnings, I said before, we had governments that were concerned

about what we made in this country. And it started with Alexander

Hamilton’s famous report on manufacturers. There is a wonderful

story about Franklin Roosevelt at the end of World War I when he

was Secretary of the Navy. What he found out was that the British

were buying up patents for long-distance radio communication.

Marconi had invented it and they were buying it from the Italians

and everyone else.

Many of those patents were in the United States in Westinghouse, GE and others. Franklin Roosevelt called it in—this is the

end of the Woodrow Wilson administration—and said we’re not

going to give this technology away. And so he got them to organize

a corporation. The individual patent holders donated their patents

and got equity from the corporation. And that corporation was

charged with developing long-distance radio communication. It was

called the Radio Corp. of America [RCA]. And I am not—I am not

a military historian, but people I talk to tell me that the war in

the Pacific in World War II would not have gone the way it did so

easily had we not had the advantage of long-distance radio communication over the Japanese.

So this is embedded in our history. But for reasons that would

take me a 2-hour speech about the sociology of economics and the

influence of the finance industry, which I think is part of this, this

132

is seen as something that is obsolete. Manufacturing is gone. We

have to have a new kind of economy. I think we see where that’s

gotten us, and it’s time to go back to our roots on this issue.

Mr. BAUGH. Briefly, I think there are a couple of things that are

very apparent about the conflictual interests. One is the multinational corporations and the financial interests which say go to

the low-cost producer overseas and do that and take advantage of

all of those things, the seduction of the low wages and the lack of

standards and the currency manipulation in China, etc. And other

governments understand this. China has a strategy. They’re not

the only one. So does Germany, so does France. I mean, our other

competitors actually have a strategy to put policies in place to encourage manufacturing and employment to occur in their economy.

We have done the opposite. All of the encouragement has been

through our tax policy to do this.

So here in Congress—I sit as a partisan working from the labor

side saying we need to do these things, but here in Congress we

end up having this conflict where you find the transnational corporations opposing action on these things. You find the retail, the

large, jumbo retailers, the Wal-Marts of the world, opposing doing

things around currency manipulation. And you find the financial

communication saying no. And all of this is directed toward shortterm return as opposed to long-term investment dollars, which is

one of manufacturing’s problems. And I mean I think it’s part of

the source of the conflict. It’s some of the things that we have to

come to grips with and address and change the investment patterns back to saying that we are investing in this country for the

right reasons. We can be competitive. We are competitive. But we

actually want to create jobs income and employment in this country and be the technological leader.

Mr. TIERNEY. Thank you, Mr. Welsh. Mr. Foster.

Mr. FOSTER. Thank you, Mr. Chairman. I’d like to ask the whole

panel, what you think the large sources of leverage that we have

to deal with the currency manipulation problem are? And the relative merits of unilateral versus multilateral approaches to this.

Because obviously currency manipulation is hurting the Europeans

and many advanced countries.

And there is also a fairly well-documented dragging effect where

the other low-cost Asian and south Asian currencies tend to follow

the big dog in this, which is the Chinese. So that fixing the Chinese

problem will also cause the other currencies to move as well.

I just wonder what you think the effective leverage that we have

to try to apply to this problem are and I will go down the line.

Mr. FAUX. Well, I think what we have left is still the largest consumer market in the world. I don’t know how long that piece of leverage is going to last. The Chinese eventually are going to buildup

their own source of demand and that’s—that’s clearly their longterm plan.

So I’m not sure that we have leverage left under WTO and I

would defer to Mike Wessel on this. But it seems to me that the

efforts at persuasion, the effort at telling the Chinese—which is

often what we do when we go there—that it is better for them if

they would let their—let their currency get back to more realistic

levels, that has not worked.

133

So we need a 2-by-4 here. At least a 2-by–4 behind our back. And

the only 2-by-4 that I know that we have left is the U.S. market.

So in some way we have to ratchet up our determination to make

it too costly for the Chinese to continue this kind of currency manipulation.

Mr. BAUGH. Thank you Congressman Foster for the question. I

think there are a couple of things here and I think testimony

brought it out in the Ways and Means Committee the other day.

I think you actually have to operate off of your own piece of paper

in negotiating, as Leo Gerard, the President of the Steelworkers

said. You actually have to have a strategy and a plan and as Teddy

Roosevelt said, ‘‘the ability to speak softly and carry a big stick.’’

We aren’t doing that. We are just talking with no stick and no

threat of action and no actions having been taken that give veracity to what you are trying to do at the negotiating table. What we

do need is leadership in a number of ways that give you that. Dr.

Faux is absolutely right. The market is the No. 1 thing and that

is what everybody wants in this country. That is why other people

want to come here and do business here and that is why they want

to import to the United States.

So that is the one thing that we do have. But what do we do

about defending it and carrying our case forward? Action by Congress to pass legislation sends a strong message and provides some

tools that we obviously need since the Commerce Department says

they can’t find specificity and charges of currency manipulation of

specific products. Well, let’s fix it. We have a law to do that.

Congress and congressional action sends a message to the people

who are violating and it is other countries. It’s not just China, they

are the poster child, but there is a whole series of countries as I

noted in my testimony that are doing this.

The second thing is take multilateral action. Absolutely. Engage

with our partners and trading partners out there that are just as

troubled. Intervention by the Japanese last week was a very, very

serious move. They are troubled. So we should take multilateral action. We should take the unilateral action of passing legislation.

We should engage in trade cases. We should consider the 301 case.

It is not one tool or the other; it’s all of the above that sets you

straight on a path in negotiations so that when you sit down and

talk to the other side, they are going to take you seriously.

We have learned the Chinese will talk us to death. That is the

role their government plays in this. And until they take us seriously, they keep talking to us till the sun sets.

Mr. GORDON. I agree, especially with the multilateral. When you

have that type of coordination and a coordinated response, it is

much more powerful.

I would also say that the Congress has a platform and one of the

ways of using that platform in order to deny or change access to

a very, very large market is to really make the case to American

citizens that when you buy from China, with the currency manipulation, what is the harm that you are doing to this country? And

that perception is a strong perception that can sway markets more

than a unilateral action or more than a trade agreement.

Mr. WESSEL. Quickly, and there is staff here from the China

Commission, so I will ask them to validate my figures afterwards.

134

We have leverage as Jeff and others have pointed out. If I remember correctly, 22 percent of China’s exports come to the United

States and 4 percent of our exports go there. We have leverage.

The Chinese leadership cannot afford what might come from

trade conflict. There were 80,000 incidents of public unrest in

China the year before last, the last time it was publicly noticed.

That is incidents where there are 10 or more people who are coming together to raise concerns. The Chinese leadership needs this

market. And the answer is, while they will huff and puff and do

everything else, if we are serious, we can put them on a path to

eventual market based currency. It is not going to happen overnight. I don’t think anyone is asking for that. The question is how

do we put them to a sustained course toward a market-based currency, with confidence that it is going to change quickly enough.

I am all for doing it multilaterally, but I’m not sure we have a

lot of time left. When we talk about what is happening to our manufacturing base, the confidence of our businesspeople in terms of

investments, if we take the full 3 years that it could take to go

through a WTO action, I don’t know what is going to be left at that

point.

Mr. FOSTER. Thank you, I yield back.

Mr. TIERNEY. Thank you. Interesting enough, Mr. Baugh, you

were talking about in your testimony about innovation being

offshored, subsidies, money manipulation and things of that nature

and you talk about Intel. I think you said that Intel had gotten

some R&D investment and actually had taken it offshore; is that

accurate? So it reminded me of not too many weeks ago Andy

Grove, who was, what, one of the co-founders of Intel, wrote an article in New Yorker or New York Magazine or something of that

basis where he basically called for a tariff. He basically said that

we should take any product that is the result of cheap labor overseas and gets dumped on to our market at a disadvantage to our

companies, assess a fee or levy on it, take the money from that levy

and deposit it in banks, but only those banks that agree to lend to

only those businesses that agree to scale up in this country, their

research, development, and manufacturing.

So I’d be curious to know what the reaction of each of the panelists is to that, starting with Mr. Faux.

Mr. FAUX. I think, as Mike said, we are running out of time. If

it was 10, 15 years ago, we might have answered that question

with—in a more deliberate way. But I think when Grove and Warren Buffett and other people have come to point—and these are,

nobody can doubt their free market capitalist credentials—when it

has come to the point where they think that in order for this country to save its economic future, we have to raise barriers if other

countries don’t play on an equal playing field, I think that’s a signal that the Members of Congress and in government need to pay

attention to.

The interesting thing is that someone like Buffett who is a financier and, of course, has made a lot of money on the current condition, understands what this is doing to our basic economic future.

And the movement away from this country is going on daily. A few

years ago, the President of Cisco Systems, CEO of Cisco Systems

said that what we are trying to do is outline an entire strategy of

135

becoming a Chinese company. Now that was several years ago. I

don’t know how far along he is on that plan, but I’m sure he is

more far along than he was then. So time, as Mike said, is not our

friend. And something like the Andy Grove or the Warren Buffett

proposal, I think, needs to be serviced right now and supported.

And maybe then that will get the Chinese attention.

Mr. TIERNEY. Mr. Baugh.

Mr. BAUGH. I think it is a good idea. I think we should consider

things like this. The whole point is to punish the behavior of countries taking illegal practices. This form of punishment is a tariff

and the money that then is plowed back into this economy to create

good jobs and technology and secure our leadership. That is the

fundamental thing, whether it is this proposal or another, that is

what needs to be done. We need to be serious about it and we need

to think of scale. I wish we were hearing more from current executives, the retired executives. Unfortunately, I think the dynamic of

the financial markets and the incentives are all the other way. And

that is the kind of change we have to come to in the course we

have been on. We have to find another path that changes that behavior, that changes that pattern, that changes those incentives for

our economy, not someone else’s.

Mr. GORDON. I’d agree with conforming tariffs, especially as it

brings the capital and productivity back to the United States. It is

a natural consequence when you take manufacturing facilities and

you offshore them that the next step a year or two later is to put

product development facilities right to it so they can understand

the manufacturing. And so the next step after that is that R&D facilities are now moving out of the United States and overseas in

order to be lined up in this area and we need to stop that.

The chart that Representative Foster put in earlier showed a

huge turn right around the 2000 timeframe. And there is no secret

that is the time period which one sector in manufacturing products,

which is advanced technology products, all of a sudden started to

look at a deficit in our trade—in our trade balance. Before that advanced technology was not a trade deficit, and since then it has

gone down.

And so what we see is we see all the of our seed corn in terms

of R&D going offshore. So if that tariff was to bring that back and

put capital and productivity enhancements into manufacturing in

the United States, that would be successful.

Mr. TIERNEY. If my colleagues will indulge me, I will ask Mr.

Wessel for his opinion as well.

Mr. WESSEL. I think it is a great idea. I think that as the House

earlier this year looked at having border adjustment mechanisms

regarding climate change, that the right or the privilege of selling

into the U.S. market and accessing our consumer bears with it certain responsibilities. Whether it is to address the questions of labor

issues, labor rights, labor arbitrage, whether it is a question of

bespoiling the environment, etc. Our public wants to be able to

maintain their standard of living and their quality of life and they

don’t want it denigrated by a race to the bottom. So any mechanisms that can be put in place, serious mechanisms that will have

a real impact, I think they are worth pursuing.

136

Mr. TIERNEY. Thank you very much. Thank you for the indulgence, Mr. Luetkemeyer.

Mr. LUETKEMEYER. Absolutely, Mr. Chairman. Good questions. I

don’t have a specific question for anybody right now. I just want

to ask a question, and anybody can jump in with regards to—to

me, one of the things in my opening statement, I made a comment

that sensitive equipment should be made either in the United

States or in collaboration with our closest allies. I think we have

a huge problem. We have sensitive equipment and we can’t control

the parts that make up that piece of equipment—someone made

the comment, I don’t know if it was in testimony, that 97 percent

of the rare earth minerals are in China. I mean, this is a huge

problem for us.

To me, at some point, we need to have some sort of legislation

or rules or some sort of agency that is able to not necessarily waive

the rules, but be able to allow the rules to be put in place to be

able to produce or mine these minerals in our country here in a

way that is economically viable as well as environmentally safe. I

can’t believe that we can’t do that in this country. At some point

we ought to be able to have policy.

What do you all think of something like that? And where do we

need to start on that?

Mr. WESSELL. If I can, let me—first of all, I think your point is

right on. And I think this committee, this subcommittee, the jurisdiction will allow you to really look deeply into these supply chains.

At the China Commission, we commissioned a report to look at

what was happening with the defense industrial base and how it

was dispersing. We had a classified contractor that was in charge

of the study. They were unable beyond the tier 2 suppliers—and if

tier 1 is Boeing, tier 2 may be a major system within there—beyond tier 2, they had no ability to get information on where things

were.

So as the chairman noted about his amendments in the past,

whether it was with Mr. Hunter or others, we have to do a full assessment of what is happening with our supply chains. That is No.

1.

If you look at, for example, high-tech, we have one trusted foundry left in the United States to be able to deal with—I think somebody raised EMP chips, radiation-hardened chips, etc. So we need

to do a much better job of understanding the risks and then addressing them. And we’re not—information is the first thing I think

we need to look at.

Mr. LUETKEMEYER. Anyone else want to tackle that? Mr. Baugh.

Mr. BAUGH. I would just note that there is a bill in the House

currently—and I apologize I don’t have the number, it doesn’t come

off the top of my head—but it was a bipartisan bill that actually

looks at rare earth metals. And it says we actually need to understand where this is. We need to develop a strategic supply. In a period of time, we need to redevelop this industry in this country on

that specific piece, but I agree very broadly with what Mr. Wessel

said that we need an assessment of this base. We have been in the

conversations. We do not know what is going on below tier 2.

And Mr. Chairman, you made reference to some of the scandals

where people found defective parts and defective materials. What

137

happened here? Well, we do not pay attention. And frankly, this is

the nature of what has happened in manufacturing where the people who used to make things as the prime contractors—when I was

a kid, I went to the Ford Rouge plant in Detroit. You walked in

those gates and they made everything there that went into a car.

By the time I worked in the plant, we only made some of the

things. By this century, things were outsourced and then they were

offshored. And this has happened across industries where the

prime developers, it’s been passed on to subcontractor to subcontractor to subcontractor. And we have been living on a legacy

of the way we used to make things as opposed to the way we do

make things. And we need to get a better handle on that.

Mr. LUETKEMEYER. My time is running, Mr. Faux. One more

question. Mr. Baugh you brought up the question here and continue to develop the idea and the topic here of our industry, our

manufacturing base is leaving. What in your judgments is the

things that we need to do? I know that there is one of when we

talked about tax rates, level policies, and environmental regulations are a problem right now. What do you see, what are your suggestions on how we need to get our manufacturing base to this

country?

Mr. BAUGH. I think we need to do things on the trade front immediately to change that pattern of behavior and understand that

we are going to enforce those laws. And again, secure sort of the

investments of the businesses into this country by having some

surety of how we’re going to do that.

The second thing is to change the tax policies to direct investment into domestic manufacturing in a way that we are not doing.

We have tax deferrals that allow corporations to hold these profits

offshore. They are not invested in the U.S. economy. The last time

people were allowed to bring them back and not pay much tax on

it, they didn’t invest here to create jobs. So we need to change that

behavior.

We need to do what Secretary LaHood did. I commend him, he

and Ron Bloom, our manufacturing person in this administration,

they pulled together the high-speed rail industry or the rail industry and they said to them: ‘‘We are going to build high-speed rail

in this country. We want to make sure we make it here. We’re not

going to grant waivers.’’ We have to bring the industry together to

think about industry developing the ways that we move forward on

things like that.

So that is a form of leadership within government that we have

suggested that fits with what Dr. Faux has talked about, what everybody has talked about, in the way of bringing focus toward the

incentives in the investment policies and bringing industry together and say this is the way we’re going to start doing business

here and thinking and acting in a way like a business as a government.

Mr. LUETKEMEYER. Thank you, Mr. Chairman.

Mr. TIERNEY. Thank you, sir. Mr. Welch, you are recognized for

5 minutes.

Mr. WELCH. Thank you very much. I want to go back to this

question of how we can make some progress. In listening to your

testimony, it seems as though in a very broad sense economic poliVerDate 11-MAY-2000 15:54 Jun 23, 2011 Jkt 000000 PO 00000 Frm 00141 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\65560.TXT KATIE PsN: KATIE
138

cies have favored the increase in the gross domestic product as opposed to the reduction of unemployment, and that finance has triumphed over manufacturing. And the dilemma that we have here

in Congress is that it doesn’t seem that even when we agree on the

long-term objective, we can’t seem to agree on doing it together. So

there is a political impediment to doing things that are in our interest to do.

So the question I have for a quick round of suggestions from each

of you would be give two ideas that you believe potentially could

have the support of Mr. Tierney and Mr. Luetkemeyer, who both

share the objective of increasing manufacturing employment. And

I will start with you, Mr. Wessel.

Mr. WESSELL. I will give you the first one which I noted in my

testimony is make the R&D credit. Research, development, and deployment credit. We all want research here. We all want innovation

to occur here.

We should also be moving to the next stage to make sure that

research is being applied in our own factories, again, within the

boundaries of international commitments, etc., and I believe it can

be done in a WTO legal way.

Another thing that I think we need to do——

Mr. WELCH. I want to get two suggestions from everyone.

Mr. WESSEL. The other one is to address asymmetry in our law

that’s a problem. It was mentioned, the wind farm earlier today.

The problem with the Texas wind farm is that we allowed uncapped money to go out and build wind farms, but we capped the

money to help develop the domestic supply chain. So you had all

of these financial people going out here wanting to build a wind

farm, but not enough domestic supply and the result was they went

out and made orders for Chinese goods.

The President last December said let’s increase 48(c), which was

the domestic support and said $5 billion. We are still waiting for

that. That is the kind of thing that we can do immediately to start

revitalizing the supply chain.

Mr. WELCH. Mr. Gordon.

Mr. GORDON. I would tell you, overall, one of the things you want

to do is have that R&D investment come back and that directly

deals with the false perception that you can’t be competitive while

manufacturing in the United States. That is just false. One of the

ways to do that, or one of the ways to build on it for national security is to combine different functions within the defense industrial

base assessments. Right now within the DOD there is the industrial policy division which finds out where defense essential production is needed and then somewhere else where they implement

things, such as Title III for capital investment or ManTech for substitutes. We need to combine those things together into one implementation as well as identification of those capabilities.

Mr. WELCH. Thank you. Mr. Baugh.

Mr. BAUGH. No surprise here. I think this Congress should pass

currency legislation. A bipartisan bill, the Ryan-Murphy bill, that

has 140 or more cosponsors, a lot of Republicans and Democrats together on this. It is simple. We should do it. That is No. 1.

And I agree completely with this issue of asymmetry of policies

in research and development. This is the holy grail of the business

139

community. R&D tax credits, not that you have to come back here

and renew it every year. They want it made permanent and the

President has said that. I would say 25 years ago you could assume

that money for commercialization—R&D and commercialization

would be done in this economy. We would make it here. That it is

a false assumption today.

You need to think like a State economic development agency, like

I did when I used to run one. What is the return on the investment? Will that R&D investment create jobs in our domestic economy with making the things we invested in the R&D for? That is

something that we should do and something frankly that every

other country does with their industrial policies. I met with the

Japanese MITI folks a month ago and they told me this. And they

laughed when they said we don’t.

Mr. WELCH. Thank you. Dr. Faux.

Mr. FAUX. Quickly, I think the research and deployment issue is

one of the two more important. The other is currency. The currency

manipulation in trade. I think that we ought to insist and have a

time line. I think the Congress ought to come up with a time line

that will get people’s attention for reducing the trade deficit dramatically with China. If we can do that, perhaps again we could

get some serious discussion at the table.

Mr. WELCH. Thank you, thank you very much. I yield back.

Mr. TIERNEY. The gentleman yields back. Mr. Murphy you for

recognized for 5 minutes.

Mr. MURPHY. Thank you, Mr. Chairman. And gentlemen, I’m

sorry I’m joining the hearing late today. This is as important an

issue as this Congress is going to talk about and it hits home for

each and every one of us.

I am going to maybe pose an initial question to Mr. Wessel by

means of an example. I have a company in my district in Connecticut by the name of Ansonia Copper and Brass. It is the last domestic company that makes copper nickel tubing for the defense industry. It is found on submarines but also in our entire ship fleet.

They have one international competitor. And right now, that company in Waterbury, Connecticut, is at risk of losing its remaining

contracts with the U.S. Government, making a foreign supplier the

only supplier of a critical element of our shipbuilding process to the

U.S. Navy.

And I guess this gets to a few issues, and I present them to Mr.

Wessel. I’m concerned about one major component of our U.S. ship

fleet being unavailable from U.S. suppliers. Currently this company

is a German company based in Italy and so we could, I guess, have

some relative sense of security that we’re hopefully not going to

war with Germany or Italy any time soon. But we do not know too

much about their supply chain and where it comes from. We know

that Ansonia Copper and Brass’s supply chain was largely a domestic supply chain. We know that the supply chain of their foreign competitor is largely a foreign supply chain.

I am happy to pose this question to the entire panel. I imagine

although this is one specific industry in which we could potentially

lose total domestic capability, I imagine that there are others. I

imagine that there are other major and important parts and major

and important industries that may be nonexistent or risk being

140

nonexistent here in the United States because of our overreliance

on foreign contracts.

And so I merely pose that question first to you, Mr. Wessel and

to others: Are there elements of our manufacturing base right now

that we are in special jeopardy of losing? Are there areas of focus

that this Congress should have in terms of making sure that we

preserve manufacturing bases critical to the defense supply chain

that may vanish in the next 5 to 10 years, or may have already

vanished with respect to this specific technology? It could be gone

within a year or two. And something that is not easy to create with

respect to this specific type of tubing.

Mr. WESSEL. Well, the answer is I agree completely that we need

to have domestic sourcing on anything that is a critical system

where there is not, you know, a multitude of suppliers that we can

ensure that our defense needs are met. There is a large list of

items—I mentioned in my testimony, for example, the propellant

used for the hellfire missile. That is a missile launched from helicopters used as antitank. If there is a Taiwan scenario for example,

that may be a missile that people might want to use, that the military might want to use again landing craft as well and we’re going

to be going to China to get the propellant. I think that is a greater

problem than Italy; however, as I also noted with France denying

overfly rights, with Switzerland as the chairman noted refusing to

provide products for JDAMs, the fact is we can’t be secure on anything unless we know that we are going to have a supply base here

to be able to produce it.

Titanium rivets for airplanes was an issue 2 years ago under the

Berry amendment. My view is that your manufacturing company

should be getting the support of our own military and our own government to make sure that we have a secure, quality supplier that

is going to have the ability to produce those goods for the future.

It is vital to our national security.

Mr. MURPHY. And then let me ask a followup—and happy to take

comments from the rest of the panel—what about that supply

chain? Given the rapid escalation of parts and contracts being

outsourced, we saw just from 2007 to 2008 in this country a 450

percent increase in the number of waivers given to the Buy American clause. That is an almost unexplainable increase in the number of waivers to our existing law. How do we better track the supply chain when it starts maybe in a country that they are not as

worried about like Germany, but can then go into countries that we

are much less confident about a long-term alliance with? How do

we address that supply chain issue?

Mr. WESSEL. I think it has to be addressed quite frankly by this

committee and this Congress. You have to make a question of supply chain integrity, globalization of supply chains a priority. Right

after the cold war, the military moved off of Mil Spec procurement

to what was called COTS, commercial-off-the-shelf. So they are just

looking to find the cheapest way, cheapest price they can do to obtain any good.

We have to look at our supply chains and understand what is

critical. We have what is called the MTCL, the military critical

technology list, MCTL. It doesn’t go deep enough. It is not being

enforced aggressively enough. To Mr. Luetkemeyer’s question reVerDate 11-MAY-2000 15:54 Jun 23, 2011 Jkt 000000 PO 00000 Frm 00144 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\65560.TXT KATIE PsN: KATIE
141

garding rare earth minerals, CFIUS approved, in 1996, the sale of

the last rare earths company here that was making the rare earth

magnets, etc. They made a promise that they would continue to

produce here. Three or 4 years later they moved all the production

equipment to China. There was no after action review. So this is

a holistic issue and we have to take national security a lot more

seriously than we have been.

Mr. MURPHY. Thank you, Mr. Chairman.

Mr. TIERNEY. Thank you. Would one of you volunteer to explain

the concept of offsets in the context of manufacturing and trade?

Mr. BAUGH. I will take a shot at it. Actually I had recommended

that this committee at some time should talk with one of my colleagues, Owen Hernstadt, from the International Association of

Machinists, who has written extensively and testified on this.

Mr. TIERNEY. He testified years ago in front of a subcommittee

hearing as well.

Mr. BAUGH. He has testified in other committees as well and he

has written again on it recently. And he is who I look to for advice

and guidance on this. Very simply—and I may not get this completely correct—but the idea of offsets, when we do defense contracting and sales to other countries, one of the questions is about

where are parts going to be secured, where are these things going

to be maintained, how much money is in that contract. And, in fact,

we’re ending up spending more money—or getting more money

being spent in the people that are buying it in terms of the offsets

than we are in our own country producing these things.

What this does is two things: one, it builds up their capacity and

capability around the production for those goods. And capacity and

capability to produce for that all the sudden become a producer as

an ally of ours that qualifies under the Buy America rules. It comes

back to haunt us and bite us in a number of ways. So I don’t want

to go any further because there is a good chance I’ll get it wrong,

Mr. Chairman.

Mr. TIERNEY. No, the point I want to point out is that we do have

agreements where people get a contract and the result of that is

we end up obligated to send them technology and then to buy parts

and equipment. It makes them compete, sometimes not even fairly,

against our own operations on that. And that is an issue that we

have addressed in past committee hearings, and we will have to

address it again.

One of the things we haven’t talked much about is the manufacturing work force and the fact that we don’t seem to have enough

college graduates and others pursuing science, technology, engineering, and math. And that is going to take a while to get that

turned around. I guess my question is what do we do in the shortterm about this shortage of skilled personnel in the advanced manufacturing field? And what kind of incentives can we give to manufacturers to manufacture here in the face of that apparent shortage?

Mr. BAUGH. Mr. Chairman, I believe there are a number of

things we can do. We actually have to put more funding in the

training and education, both employed and unemployed. And I

think in your opening statement, you noted a phenomenon that is

coming up here very, very quickly. It is what we call the Silver

142

Tsunami. That is the fact that I am a Boomer like many people

around here and we are out of the work force very, very soon. That

is a real challenge. At the same time we have denigrated manufacturing in a such a way that it is not attractive to young people to

go in. And frankly, there haven’t been jobs here and we have lost

millions in the last couple of months in manufacturing.

So we have to get around those impediments. Investments in

that and our training and technical education system are part of

that puzzle. There is another part too. That really has to make

sure that we have employers adequately invested in the training

and education of their work force too. It is not an either-or that

they are just doing it or that the educational system is just responsible for it, but it is what both of them are doing together at the

same time.

Mr. TIERNEY. We are in the process of reauthorizing the Workforce Investment Act, and this is a major part of this. How do we

get that cooperative efforts between labor, industry, academia,

technical schools, and things of that nature to get this turned

around?

One of the issues that we have, not just here but also in energy

technology and other areas, is getting the industries to spend the

time and the effort and delegate the personnel to identify the

standard of quality that they need out of our workers. What are

the standards? What do they need to know to come in at a base

level into your corporation so that you can then take them there

and apply that to whatever it is you do, and determine who is it

going to write the curriculum. And where? Is it going to be a technical school? Is it going to be at a community college or a 4-year

college? Is it going to be some private vendor on that and get that

working on that gear?

So if any of you have any comments or improvements you think

we can have as we reflect on that, I’d like to hear it. If not now,

I will certainly accept it in writing later. Mr. Gordon, I know you

wanted to say something.

Mr. GORDON. I wanted to bring up one thing just in terms of the

first question, how are we going to get in there and whether people

are interested in it. There was a PricewaterhouseCooper survey on

manufacturing about 6 months ago, and while in the high 70’s and

80’s everybody agreed that manufacturing was important, it had

good jobs, and it was great for national security, only 30 percent

of those same people said they would recommend that somebody in

their family go into manufacturing. That is the problem. They believe there is no future in it, or that it is one of the three Ds: It

is dull, dirty or dangerous.

If people understood in this country that it is a very, very clean,

safe, enjoyable career, you would have more people going into it

and more families pushing them into it. And I think that an advertising campaign much like the U.S. Army or the Navy, you know

‘‘Soldier of One,’’ ‘‘High Tech,’’ that is the kind of thing that would

get people involved in it and say I am going to be involved in being

a part of building this Nation.

Mr. TIERNEY. Mr. Luetkemeyer, any further questions? Mr. Murphy.

143

Mr. MURPHY. Mr. Chairman, on the work force issue I would

note that I was visiting another company in my district, a District

that has 9, 10 percent unemployment, an advanced manufacturing

aerospace company who has had a help wanted sign out for months

now because they can’t find the type of tooling expertise that they

need. Even though we have an enormous amount of our manufacturing work force base out of work, we don’t have the high-skilled

type of workers that they need.

Just one remaining question, and let me pose it to you Mr. Faux,

but also to Mr. Baugh as well. It is this: How do we assess the true

price of a particular contract when we are looking at a domestic

supplier and a foreign supplier? Right now, the price is simply the

contract price. That we will buy it overseas if it is a certain percentage cheaper than the contract that is offered to us by a domestic supplier.

And though that certainly is an accurate assessment for a private company who is only responsible for paying the bill that they

get sent, the U.S. Government, I think, has a different calculation

because that contract being awarded overseas, and by extrapolation, a job being lost in a U.S. manufacturing plant and then

gained in a foreign manufacturing plant, has other costs to the U.S.

Government. At the top of the list, obviously, lost payroll taxes, the

lost income taxes, and then the increased social safety net costs of

unemployment compensation and the like.

So I guess it is a loaded question to an extent, but the question

is right now we seem to simply award, based on contract cost with

no holistic understanding of the full cost of moving that contract

overseas. How do we get—if we should make a change, and maybe

I’m prejudging your response—but should we make a change? And

if we should, how do we make that change given the fact that we

have the Department of Defense making those decisions?

Mr. FAUX. Clearly, we need to make that change because that is

basically at the heart of what we have been talking about all morning. The social costs. Not simply the employment costs and the

costs of government programs, but the long-term costs to the economic health of the United States are not included in that contract,

even though the United States is the contractor. And the problem

is no one is responsible for that. And for those in the government

who care, and there are people who care, they have no access to

the levels of power that would change that calculation.

So the short answer is we don’t have the calculation. We know

that there are huge costs out there and huge benefits and historically, as I said before you came, there is plenty of history here. But

we need to elevate that question to the highest levels of this government and public discussion. Because leaving it—we have found

that leaving it to the Department of Defense, leaving it to the

Treasury Department, leaving it to the CBO, who are not mandated to make that calculation simply puts us back into this simple, narrow and destructive obsessed-with-price issue.

Mr. MURPHY. And historically we have done that by some fairly

inartful requirements: 50 percent content from the United States

with certain percentages of waivers, a percentage above cost that—

above the contract offered in the United States that gets you out

of that Buy American clause. Is there a different way to force a calVerDate 11-MAY-2000 15:54 Jun 23, 2011 Jkt 000000 PO 00000 Frm 00147 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\65560.TXT KATIE PsN: KATIE
144

culation of the true cost to the U.S. economy? Is there a way to,

for instance, add on a percentage increase to a foreign contract that

accounts for all of those lost taxes and increased government costs

to that job moving overseas? Is there just a different way of calculating the cost that we are not looking at today?

Mr. FAUX. Yes, there is a different way, and the history of the

literature on tariff economics is full of formula and theoretical discussions on that. But I think our history shows that the most important thing was a change in the consciousness of the people writing those contracts. And an understanding that there is this larger

national interest floating on top of that—of that contract. And historically we have been successful when, from at the very top of

Congress and the executive branch, that message has gotten to the

civil service and the people making those contracts. So it is not just

how do I figure this out; it is my job to figure this out. And if that’s

their job, the formula will come.

Mr. MURPHY. Thank you.

Mr. TIERNEY. Thank you very much. I have one last question. We

talked about the rare earth minerals and metals in China having

97 percent of that market. There is a possibility or likelihood that

the United States could get some of that market back, and do we

have the wherewithal to do it? And what timeframe are we talking

about getting to that if we were to start today? Mr. Wessel.

Mr. WESSELL. Well, first of all, as you may know, 2 weeks ago

the steelworkers filed a trade case regarding the alternative and

renewable energy sector. One of the five areas of action within that

is to address China’s actions and policies in the rare earth minerals

area, which are clearly a WTO violation. So No. 1 is to open up the

markets that will be able to get it.

No. 2, there are efforts to reopen mines here in the United

States. There is a mine that is presently under discussion for California, as I recall, right near the Nevada border. There has not—

because of the uncertainty in the market for so long, it has not

been worthwhile to do it. Now that China is withholding so much,

it is becoming economical to do it here again.

But, as I believe Mr. Luetkemeyer has said, it is going to take

15 years not only to get the mine back and operating but also to

be able to transform those items into products that we can use in

the clean and green chain, JDAMs, and everything else. So we can

take action but the first thing is we have to get China to change

its policies.

Mr. TIERNEY. Thank you. If there is anybody on the panel that

believes we haven’t addressed a matter that needs attention, I

would like to give you one opportunity to state that for us. Otherwise, we will wrap it up. Mr. Faux.

Mr. FAUX. Just a quick footnote on the training question. One of

the problems here is credibility. For the last 20 years, the government and other leaders have been telling young people that get

into computers, get into this sort of technology, get into that. And

it turns out that in many of these areas, the supply of workers is

much greater than demand. So there is a confidence issue both in

the labor market—that is to make it clear to people that there is

government policy to create those jobs and to create that dynamic

145

sector, both for the labor market and for the financial markets to

get the investment.

Mr. TIERNEY. Anything else? Mr. Gordon.

Mr. GORDON. I’d like to add one other comment on Representative Murphy’s interests in how you add costs or take into account

offshoring. Right now in Federal procurement policy you have a

source election criteria and that source selection criteria doesn’t

allow you to understand or take into account what happens to domestic manufacturing capabilities. That means that a program

manager that is making those decisions is not allowed—even if he

understands those consequences, is not allowed to make a decision

for a domestic versus an offshore supplier and that is a barrier to

making that right decision.

The Aerospace Industries Association has an industrial base report that it put out that said we should add what happens to the

industrial capabilities on the domestic front as a source selection

criteria when its defense essential needs. And that would take care

of that.

Mr. BAUGH. I would also add the same point. We have suggested

over and over that we really do have sort of a social impact cost

on those things about the employment side, the income side, which

you have been getting to with your question, Mr. Murphy. And

frankly, I would note that the industrial policies of most of our

competitors, whether they are communist or whether they are

democratic societies, they actually do have strategies for manufacturing, and it is based upon the desire to have employment and income and technology in their society and to be making those

things. We’re the only ones that really don’t.

So it is just about twisting us all into a pretzel to find a cost accounting mechanism to get to it, it is also about the broader overview of how we think about manufacturing. It is not just the consumer interest. There is a vast society interest and an employment

and income interest.

Mr. WESSEL. Many years ago there was a bill called the Save

American Jobs Act which looked at the offshoring or outsourcing of

production, and basically said we are going to look at the cost that

you are leaving behind. So if a company is going to look at moving

its operations or sourcing offshore, the public has a right to know

what costs are being left behind. Whether it is diminution of the

tax base or unemployment benefits, welfare, or anything else. And

there is a way of doing that, to look almost at a severance tax, if

you will, if you are going to pick up and leave. Which can be done

in the defense area as well.

So when the internal rate of return is looked at by a company

as to what their return is when they move operations, they will

have to factor in the cost of those people that they leave behind.

And that is something I suggest be looked at that hasn’t been

brought up in many years.

Mr. TIERNEY. I thank all of our witnesses again for your testimony. It has been extremely helpful to us and I hope this is not

the last hearing that we have on this issue. And we would like to

give a little bit of impetus to our colleagues in other committees to

get moving on this, as well as the White House. And I thank my

colleagues and staff as well. Meeting adjourned.

146

[Whereupon, at 11:55 a.m., the subcommittee was adjourned.]

Æ