Trade Adjustment Assistance: Commerce Program Has Helped Manufacturing and Services Firms, but Measures, Data, and Funding Formula Could Be Enhanced
Published: 2012-11-14T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: This testimony discusses the Trade Adjustment Assistance (TAA) for Firms program, which is administered by the Department of Commerce's (Commerce) Economic Development Administration (EDA). Over the past decade U.S. imports have almost doubled, reaching $2.7 trillion in 2011. During the same period, the United States entered into free trade agreements that liberalize trade with 14 partner countries. Further trade liberalization is being pursued, including a Transpacific Partnership among 11 nations in the Asia-Pacific region.
Although trade expansion can enhance the economic welfare of all trade partners, many firms and workers experience difficulties adjusting to import competition. Congress has responded to concerns about these difficulties with trade adjustment assistance programs. Established in 1962, the TAA for Firms program provides technical assistance to help trade-impacted, economically distressed firms make adjustments that may enable them to remain competitive in the global economy. In fiscal years 2009 through 2012, EDA received $15.8 million annually for the TAA for Firms program. EDA uses its appropriation for the TAA for Firms program to fund 11 TAA Centers (center), which provide assistance to U.S. manufacturing, production, and service firms in all 50 states, the District of Columbia, and the Commonwealth of Puerto Rico.
Congress amended the TAA for Firms program under that part of the American Recovery and Reinvestment Act of 2009 known as the Trade and Globalization Adjustment Assistance Act (TGAAA) of 2009 and mandated that we review the operation and effectiveness of these amendments. This testimony is based on our September 2012 report that examined (1) the results of the legislative changes on program operations and participation, (2) the performance measures and data that EDA uses to evaluate the program and what these tell us about the program's effectiveness, and (3) how program funding is allocated and spent.
section_title: What GAO Found
paragraphs: First, we found that the four changes mandated by the 2009 legislation contributed to improvements in program operations and increased participation: (1) Creation of director and other full-time positions: The creation of a director and other full-time positions for the program resulted in reduced firm certification processing times for petitions. (2) New annual reporting on performance measures: EDA has submitted three annual reports to Congress on these performance measures as a result of the legislation. (3) Inclusion of service sector firms: According to our analysis of EDA data, the inclusion of service sector firms allowed EDA to certify 26 firms not previously eligible for assistance from fiscal years 2009 through 2011. (4) Expansion of the "look-back" period from 12 months to 12, 24, or 36 months: Our analysis of EDA data shows that 32 additional firms participated in the program from fiscal years 2009 through 2011 based on the expansion of the look-back period from 12 months to 12, 24, or 36 months. Prior to the legislative changes, firms were only allowed to compare sales and production data in the most recent 12 months to data from the immediately preceding 12-month period.
Second, we found that EDA's performance measures and data collection for the TAA for Firms program provide limited information about the program's outcomes, although our economic analysis found a statistically significant association between participation in the program and an increase in firm sales. EDA collects data to report on 16 measures to gauge the program's performance, such as the number of firms that inquired about the program and the number of petitions filed, but most of these measures do not assess program outcomes. EDA is exploring better ways to assess the effect of their efforts on firms.
Third, in terms of how funds are allocated and spent, we identified key weakness pertaining to EDA's funding formula. EDA has allocated funding to the 11 TAA Centers using a funding allocation formula that comprises a set of weighted factors; however, the formula does not take into account the potential number of firms in need of the program and differences in costs across the centers. According to a key standard--beneficiary equity--a funding allocation formula should distribute funds according to the needs of respective populations and should take into account the costs of providing program services, so that each service area can provide the same level of services to firms in need.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the Trade Adjustment  Assistance (TAA) for Firms program, which is administered by the  Department of Commerce’s (Commerce) Economic Development  Administration (EDA). Over the past decade U.S. imports have almost  doubled, reaching $2.7 trillion in 2011. During the same period, the United  States entered into free trade agreements that liberalize trade with 14  partner countries. Further trade liberalization is being pursued, including a  Transpacific Partnership among 11 nations in the Asia-Pacific region.
Although trade expansion can enhance the economic welfare of all trade  partners, many firms and workers experience difficulties adjusting to  import competition. Congress has responded to concerns about these  difficulties with trade adjustment assistance programs. Established in  1962, the TAA for Firms program provides technical assistance to help  trade-impacted, economically distressed firms make adjustments that  may enable them to remain competitive in the global economy. In fiscal  years 2009 through 2012, EDA received $15.8 million annually for the  TAA for Firms program. EDA uses its appropriation for the TAA for Firms  program to fund 11 TAA Centers (center), which provide assistance to  U.S. manufacturing, production, and service firms in all 50 states, the  District of Columbia, and the Commonwealth of Puerto Rico.
Congress amended the TAA for Firms program under that part of the  American Recovery and Reinvestment Act of 2009 known as the Trade  and Globalization Adjustment Assistance Act (TGAAA) of 2009 and  mandated that we review the operation and effectiveness of these  amendments. My testimony is based on our September 2012 report that  examined (1) the results of the legislative changes on program operations  and participation, (2) the performance measures and data that EDA uses  to evaluate the program and what these tell us about the program’s  effectiveness, and (3) how program funding is allocated and spent.
My statement today summarizes our findings on each of the three issues  discussed in our report.
First, we found that the four changes mandated by the 2009 legislation  contributed to improvements in program operations and increased  participation:    Creation of director and other full-time positions: The creation of a  director and other full-time positions for the program resulted in  reduced firm certification processing times for petitions.     New annual reporting on performance measures: EDA has submitted  three annual reports to Congress on these performance measures as  a result of the legislation.
Inclusion of service sector firms: According to our analysis of EDA  data, the inclusion of service sector firms allowed EDA to certify 26  firms not previously eligible for assistance from fiscal years 2009  through 2011.     Expansion of the “look-back” period from 12 months to 12, 24, or 36  months: Our analysis of EDA data shows that 32 additional firms  participated in the program from fiscal years 2009 through 2011  based on the expansion of the look-back period from 12 months to 12,  24, or 36 months. Prior to the legislative changes, firms were only  allowed to compare sales and production data in the most recent 12  months to data from the immediately preceding 12-month period.
Our review found that from fiscal years 2008 through 2010 EDA certified  and approved an increased number of petitions and business recovery  plans. According to staff at several TAA Centers, the economic downturn  contributed to the increase in firms applying for and receiving assistance  from the TAA for Firms program during this time period because more firms  could demonstrate a decline in sales and employment. Additionally, EDA  officials and TAA Centers staff stated that the 2009 legislative changes  increased interest in and demand for the program by prospective firms.
EDA certified fewer petitions and approved fewer recovery plans in fiscal  year 2011 than in fiscal year 2010. EDA officials and TAA Centers staff  attributed the decline to a lapse in the legislative changes from February  to October 2011; uncertainty regarding the program’s future funding; and  improvement in the economy, which prevented some firms from  demonstrating decreases in employment, sales, and production.
Second, we found that EDA’s performance measures and data collection  for the TAA for Firms program provide limited information about the  program’s outcomes, although our economic analysis found a statistically  significant association between participation in the program and an  increase in firm sales. EDA collects data to report on 16 measures to  gauge the program’s performance, such as the number of firms that  inquired about the program and the number of petitions filed, but most of  these measures do not assess program outcomes. EDA is exploring  better ways to assess the effect of their efforts on firms.
We found that EDA does not systematically maintain data collected by the  TAA Centers on the firms they assist, resulting in gaps in centralized data  that EDA could use to evaluate the program and meet reporting  requirements. We identified the following issues:     Gaps in centralized data. According to EDA officials, the agency  maintains databases of information from petitions, such as firm  location, or information about sales or production, but EDA does not  maintain the necessary data to conduct a quantitative analysis of the  program, such as whether a firm is a public or private firm or a  multiplant firm.     EDA relies on multiple data requests from the TAA Centers. EDA  frequently makes additional requests to the centers to obtain their  program data when preparing required reports.    Data requests require verification but can still result in inaccuracies. In  addition, EDA relies on each of the centers to validate its data.  However, when we compared EDA’s data with data provided by the  centers, we identified errors in EDA’s data.     Lack of guidance results in dissimilar information across centers. EDA  has also not developed guidance on the format and types of program  data that centers collect, which has contributed to a lack of  comparable data on program activities across the centers.
Given the weaknesses we found in EDA’s performance measures and  data collection, we undertook further analysis to determine the impact of  the TAA for Firms program. Our analysis of data collected from the TAA  Centers showed that the program was statistically associated with  increased sales and productivity for manufacturing firms, although some  factors were more strongly correlated with improved performance than  was participation in the TAA for Firms program.
We determined the following:    There is a small positive and statistically significant relationship  between program participation and sales. Overall, we estimate that  the effect of participation in the program was an increase in firm sales,  ranging from 5 to 6 percent on average, if all other factors are held  constant. The effect was greater for firms with 300 or fewer  employees, which account for 95 percent of firms in our sample.  Using productivity (firm sales divided by employment) as one outcome  variable, we also found that the effect of the program on productivity  was about a 4 percent increase.    As imports rose, sales declined for TAA for Firms clients. Our analysis  shows that import penetration was highly statistically significant and  most likely had a very negative effect on firm sales. According to our  estimates, for every 1 percentage point increase in the industry import  penetration ratio, sales of firms included in our analysis decreased by  about 16 percent on average.    TAA for Firms participation combined with market growth increased  firm performance. We found a statistically significant and positive  effect of industry market growth on firm sales after firms participated  in the program. Specifically, for firms participating in the program, the  percentage change in firm sales increased as market growth  increased. For firms in relatively high growth industries, such as  certain types of metal manufacturing, plastic pipe manufacturing, and  flooring industries, the combination of participation in the program and  industry growth affected sales more positively, with such firms  experiencing a 6 to 10 percent increase in sales.     Our survey of TAA for Firms participants also showed that the  program had a positive effect. We conducted a survey of 163 firms  that had a recovery plan approved in fiscal year 2009 to obtain their  views about their experience with the program; we received  responses from 117 of the 163 firms, with a final response rate of 72  percent. The survey included questions about the TAA Centers, the  consultants who carried out the projects included in the business  recovery plans, and the outcomes of the firm’s participation in the  program.  More than 90 percent of responding firms reported that  they were either very or generally satisfied with the services they  received from their TAA Center and the consultants who performed  work for them (see fig. 1). Over 80 percent reported that the program  helped them to identify projects and business process improvements,  and 62 percent said that the program helped them to identify  management weaknesses.
In narrative responses to our survey’s open-ended questions, 22 firm  representatives said that the program helped their business to grow or  improve. In addition, 30 respondents wrote positive comments about their  TAA Center’s attentiveness to their needs and the ease of working with  their center. For the complete results of our survey, please see GAO’s e- supplement, GAO-12-935SP.
Third, in terms of how funds are allocated and spent, we identified key  weakness pertaining to EDA’s funding formula.
EDA has allocated funding to the 11 TAA Centers using a funding  allocation formula that comprises a set of weighted factors; however, the  formula does not take into account the potential number of firms in need  of the program and differences in costs across the centers. According to a  key standard—beneficiary equity—a funding allocation formula should  distribute funds according to the needs of respective populations and  should take into account the costs of providing program services, so that  each service area can provide the same level of services to firms in need.
EDA’s funding formula divides two-thirds of allocated funding equally  among the 11 centers according to base funding and two fixed factors— geographic size and number of firms. The funding formula divides the  remaining one-third of allocated funding among the centers according to  three variable factors:    approved business recovery plans,    employees in approved recovery plans, and  firms achieving expected results.
However, EDA’s funding formula does not include a direct measure of the  number of firms potentially in need of the program. To meet the  beneficiary equity standard, the formula should use reliable and  appropriate measures of need in each state or region. Consequently,  centers that may have a greater number of distressed firms due to import  competition potentially receive similar funding as those centers serving a  much smaller number of trade-impacted firms.
EDA’s allocation of funding also does not take into account variations in  TAA Centers’ costs of providing firms assistance, even though to meet  the beneficiary equity standard, a formula should account for differences  in the cost of providing services in each region so that each firm may  receive the same level of assistance. However, we found that centers’  direct and indirect costs to operate the centers varied considerably from  one center to another during the cooperative agreement years 2008 to  2010. Because EDA’s funding formula does not take into account  variations in centers’ costs of providing firms assistance, EDA cannot  ensure trade-impacted firms in different service areas receive the same  opportunities for assistance through the centers. The available evidence  we analyzed suggests there is wide variation in the number of firms  centers are able to assist and the amount of funding they may provide to  implement approved business recovery plans, raising questions about  whether limited program funding is being used as effectively as possible.
In conclusion, although funding for Commerce’s TAA for Firms program,  at less than $16 million, is small relative to the $1.3 trillion rise in imports  over the past decade, our economic analysis and survey results show  that the program has delivered positive results for participating  manufacturing and services firms. We found that these firms receive  individual attention from TAA Center professionals located in their  regions, practical help in developing business recovery plans, and federal  matching funds to pursue projects designed to address competitive  weaknesses and capitalize on strengths.
The changes to the TAA for Firms program that Congress enacted in the  TGAAA in 2009 gave EDA and TAA Center officials more flexibility in  certifying firms, strengthened professional management of the program,  and improved transparency regarding the program’s performance.  However, enhanced accountability can be accomplished only through  better measures of how the program is helping firms adjust to import  competition. Better and more readily retrievable data would give EDA and  Congress a more comprehensive and complete picture of program  activities and enable more meaningful and ongoing analysis of impact.  EDA can do more to ensure that its allocations reflect firms’ and regions’  varied needs for assistance and TAA Centers’ varied costs in providing  this assistance. EDA can also encourage more efficient program  administration by making the cost of services a criterion in its funding  formula and by incentivizing TAA Centers’ cost-containment efforts, so  that more funds are available to serve firms.
In our report, we recommended that Commerce establish more effective  measures of program outcomes, improve its data collection, and allocate  funds in a way that considers program needs and costs. Commerce  concurred with our findings and recommendations. EDA has recognized  many of the weaknesses we identified and has already made initial efforts  to address them.
Chairman Platts, Ranking Member Towns, and Members of the  Committee, this completes my prepared statement. I would be pleased to  respond to any questions you may have.
subsections: section_title: Contacts and Staff Acknowledgments
paragraphs: For further information on this statement, please contact J. Alfredo  Gomez, at (202) 512-4101 or gomezj@gao.gov. In addition, contact  points for our Offices of Congressional Relations and Public Affairs may  be found on the last page of this statement.
Individuals who made key contributions to this testimony include Kim  Frankena, Assistant Director; Christina Bruff; David Dayton; Leah DeWolf;  Barbara El Osta; Bradley Hunt; and Erin Preston.
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