November 14, 2006    Volume 13, No. 20

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Interview: NAM President John Engler Addresses Thorny Issues Raised By Domestic Manufacturers And Comments On Proposed New Rival, The American Producers' Coalition



BY RICHARD McCORMACK richard@manufacturingnews.com


It's been a stormy period for the National Association of Manufacturers. Globalization and the rapid rise of China's manufacturing sector have created tension within the organization's membership, with domestic manufacturers feeling increasingly under stress. The "little guys" -- though many of them aren't so little -- have gone to battle against NAM's large multinational members, such as Caterpillar, GE and GM, and the fight has spilled out of closed-door meetings and into the press.

The chief concern is China's manipulation of its currency and what to do about it. The domestic manufacturers have pushed for NAM to endorse legislation that would allow U.S. companies to petition the U.S. government for relief under trade laws due to unfair foreign subsidization of currency. But NAM have refused to do so, even though that legislation, called the Hunter-Ryan bill (HR-1498), has been endorsed by about 180 members of the House of Representatives.

NAM says there are good reasons not to endorse the bill, but the domestic manufacturers smell a rat: NAM's big multinational (or transnational) dues-paying members are calling the policy shots. They claim that these big companies benefit from Chinese currency manipulation because they have located their production there and export back to the United States, making for one of the most profitable corporate periods in history. The real protectionists, domestic manufacturers argue, are the multinational companies and big-box retailers that now argue in favor of Chinese protectionism.

NAM is caught in the middle of a debate that doesn't look like it's going to go away. The trade deficit with China continues to go up, from $22 billion in September to $23 billion in October, an increase of $17.5 billion since December 2001.

In June, NAM's International Economic Policy Committee met and voted in favor of having NAM endorse the Hunter-Ryan bill. But its recommendation was overturned at the recent NAM annual board meeting by a vote of 55 to 25. NAM officials note that there were 50 small manufacturers involved in the board members' vote. The decision did not sit well with some domestic manufacturers, particularly steel companies. Nucor CEO Dan DiMicco said it was a "blatant stab in the back" to domestic manufacturers.

Not long after the vote, a new Washington-based organization was proposed to represent the interests of domestic manufacturers. It is called the American Producers Coalition. The new group intends to represent the interests of U.S.-based manufacturers, and will include farmers, ranchers and workers (see MTN Oct. 25, 2006, page one), owes its existence to the schism that has emerged within NAM's membership.

Mfg. & Technology News editor recently sat down with NAM president John Engler, the former Republican governor of Michigan, at NAM's Washington headquarters and asked him about these matters. Here's what he had to say.

Question: What do you think of the proposed American Producers Coalition?
Engler:
Groups like this come and go. The NAM is 110 years old and going strong. When I look back to 1895, interestingly enough, NAM was put together to deal with the issues of trade and commerce. So not much has changed over that period of time. The dimensions of the challenge and the concerns change, but the fact of the matter is everybody would like to have an advantage against any other country or against any other company in the marketplace. What the United States has stood for globally is a rules-based system, where we try to develop a level playing field. We're passionate about having a level playing field because we can win.

Q: The organizers of the new coalition don't believe it's a level playing field.
Engler:
I agree, it's not a level playing field. That's why we need agreements like CAFTA. I look at that tough vote [in Congress] and wonder, "What are people thinking?" U.S. duties have already been dropped on products from those nations coming this way. CAFTA was about getting rid of the duties and tariffs on U.S. products going to them. People were so interested in making a political statement that they were willing basically to trade away the economic advantage that CAFTA represented.
There were people voting against the Australian Free Trade Agreement, which has already proven to be worth billions of dollars in trade opportunities for American companies. So trade liberalization continues to be important.
We've never agreed with any other nation that it's okay to steal our intellectual property. So enforcement is very important. We've also never agreed to have a hidden subsidy or a bank loan that you don't have to pay back. We think international enforcement mechanisms need to be stronger, that's why we raised the currency issues.
Maybe it's in the category of no good deed goes unpunished, but the NAM was first to speak out about the currency issue. Then, subsequently, it began to be talked about more and more widely.
The U.S. was out in front even of the EU. It was the U.S. through Tim Adams [Undersecretary of International Affairs at the Treasury Department] who put this on the agenda at the International Monetary Fund. Today you have a pretty good global chorus saying look, in China there is an undervalued currency and it has to be adjusted.
We've had and continue to have an ongoing vigorous debate about tactics, but what I find somewhat offensive is that we have members of Congress who aren't in the Chinese government, but are trying to run [on] what they're going to do to reform China. At the same time, they're here in our Congress voting against things that would help a manufacturing company in America today. In effect, they want to be able to speak yes and vote no against U.S. manufacturing, based on a foreign threat.

Q: There is a very high level of frustration with NAM among the domestic manufacturers who don't follow their big customers in setting up shop overseas.
Engler:
The fact is that a majority of NAM membership is involved in global trade. We've got member companies who are still unhappy that Toyota makes cars in this country because they grew up as a company that sold to GM only. They were a GM or a Ford supplier pretty much all their lives. That's what dad did and who are these new domestics here? Well, we have to adapt to a changing global force and figure out how to win.

Q: The 30 percent cost advantage, the subsidies and currency manipulation seem very unfair to domestic manufacturers. They are frustrated by the lack of action by the U.S. government on their behalf.
Engler:
Many of these companies feel if they can get a 30 percent disadvantage removed, they'd be pretty competitive. That is one of the reasons we have stressed our structural cost study, which finds that we have a 31.7 percent structural cost disadvantage because of decisions our government has made. This disadvantage is not caused by China or the EU, but by our litigation system, our health care costs and energy situation.
You recently featured an article from a North Dakota Senator [Byron Dorgan, MTN Oct. 25, 2006 page eight] who says he's for manufacturing. Well what does he do? He votes against access to increased energy. He votes against class-action reform. He votes against trade agreements that are favorable for the United States. But he's for us other than that.

Q: The Democrats say you're counting the wrong votes. Dorgan likes the Manufacturing Extension Partnership program.
Engler:
Well, so do 534 other members of Congress. When it comes to spending money in Congress, pretty much anything can get done. Spending hasn't been the problem up there. And on the MEP, Congress has not been the problem. On a bi-partisan basis they've consistently stood up to the administration, which has raised this issue either by zeroing it out or by requesting status-quo budgets.
Interestingly enough, the existence of the MEP makes the point that there are companies out there that say, "Look the world has changed, the game is different, I've got to change. I have to bring in lean, I have to look at Six Sigma and look at quality every step of the way, inventory every step of the way and I have to look at how I do my innovation and R&D."

Q: After the Japan threat, many companies really improved their operations and started adopting best practices, now the number-one beef for domestic manufacturers is trade. Yet they don't see action. They don't see the Treasury Department's report on international currency saying China is manipulating its currency, when everybody knows that's the case.
Engler:
Again, it's easy to say, "Well maybe if just this one thing changes, all of my problems will go away." In talking with manufacturers, I don't think it's just one thing. That's a very important thing and we would very much like to see that changed. We had a debate at a recent NAM meeting, which, by a 55 to 25 vote, it was decided it would be better to give Secretary Paulson a chance, and oddly enough, so did two people who have been even further out on this issue to the point where they have even been willing to advocate things that are flatly contradicted by the WTO and that would be [endorsing Sens. Lindsey] Graham [R-S.C.] and [Charles] Schumer [D-N.Y.] on their China tariffs bill. Even they said let's give Paulson this opportunity.
I think there is a recognition on the part of everybody that if you start into a regulatory bureaucratic process you're two or three years away [from action on China's currency]. Someone will say you should have started two years ago, but I think the case today is that there is a much more unified international community than we had two years ago. Two years ago it would be largely the U.S., but thanks in the large part to some of the work that has been done by the National Association of Manufacturers there is a focus on the issue in international meetings, whether it's the G-8 Finance Ministers or the European Community. There is a conversation going on about currency at the International Monetary Fund. That to me is all positive. People can say, "When China announced they were breaking the fixed peg to the dollar and they were going to let it float within a range, that was nothing." But it was the beginning of something that hadn't even begun until that happened.
We're not satisfied that those are big enough steps, but there is no act of Congress that can actually change the currency system in China and what Congress needs to do is support the Administration. I think they've done that. In 2008, everybody will have an opportunity to have presidential candidates talk about what their administration would do.

Q: You might get Duncan Hunter [R-Calif.], and he's the biggest protectionist of them all.
Engler:
So now we can have a debate about has the rate of progress been acceptable. It is legitimately a big issue.

Q: There has been a Republican Congress and a Republican White House for six years and costs have still gone up in that time period.
Engler:
I would point out that we did get class-action reform done. That's a start. We made some progress on taxes. Virtually every Democrat opposed capital gains and dividend tax cuts. On FSC-ETI -- something that is criticized by the Senator from North Dakota saying that we're letting people bring these earnings from overseas back home and charging a very low tax rate -- well the alternative is to keep a high tax rate and let them spend it overseas, which would presumably accelerate further investment offshore.

Q: But they didn't see the JOBs Act that reformed [FSC-ETI] create any manufacturing jobs. It was promised to be reinvested in the United States, but where is the proof of that?
Engler:
If we look at agriculture we see that over a century output increased while on-farm employment declined. In many ways manufacturing is in a similar position. You would think that our manufacturing economy is smaller than that of Latvia today. In fact, it's the largest in the world: more than two times Japan's which is in second place and larger than China's today. Manufacturing output in the United States in 2005 set an all-time record. It's been done with fewer people, although we've seen over the last year, thousands of manufacturing jobs have been added in manufacturing. In fact, today in manufacturing one of the biggest challenges is finding skilled, trained people. You have some manufacturing companies that want to be smaller in terms of their employment not just because productivity, innovation and technology have allowed that to happen, but in some cases because they can't find people with the skills they need in this country to do that work. A very big priority of ours is to work on that.

Q: Despite the growth of manufacturing output the big gorilla in the room is the $800-billion trade deficit in goods. What is the United States going to sell to pay that off that debt: assets and scrap metal?
Engler:
To get the deficit leveled out, you would logically be in favor of free-trade agreements with Australia or CAFTA. Yet we have people in the Congress voting against the agreement with Oman. I'm not sure if the Oman trade threat to us is great, but we ought to expand our markets where we can expand them.
If you look at NAFTA, which is still criticized by some despite having at least a presidential level bipartisan support, it has created jobs and sustained employment in the U.S. When you look at the free trade agreements in place, the manufacturing goods deficits have actually narrowed. That's why Doha has been important for market access and stripping away some of these non-tariff trade barriers. That's how you deal with it in part.
When you've got the potential development of a middle class in a couple of countries that is bigger than the entire population of this country, those are markets that you probably don't want to just say, "We're going to take a pass on those and try to get our 300 million people to buy a fifth television or a third car."

Q: There is still a huge gap between manufacturing output being at an all time high and the U.S. having to import so many high value-added manufactured goods. How do you assuage that concern?
Engler:
I want them working and making stuff, and a lot of them are doing that today. The unemployment rate in the country is 4.7 percent. There is a skills gap that makes it hard to hire somebody to replace a worker. The company that is not competing well today isn't going to survive because someone creates a protected share of the market to keep them in business.

Q: But they freely say they don't want that. They just want somebody to go to bat for them against what's happening overseas, in their own protected markets, with subsidies and currency manipulation. Many of these subsidies now seem to be defended by the people who are benefiting from them, which are the large U.S. multinational or transnationals that have moved there and now have a stake in preserving that system. These big companies are now being called the new protectionists, because they have to protect their interests, which happen to be where there are subsidies and big benefits to operating there. They view NAM as being somebody carrying that water for them.
Engler:
I heard it 30 years ago, when I was in the state legislature. It has been around for a long time. I read history books. They talked about this 100 years ago. And your point is?

Q: Does NAM represent the interest of the big companies that are benefiting from protectionism abroad?
Engler:
We represent the interests of manufacturers who make things in the United States. We celebrate the idea that in 2005 we made more things in the United States than we ever made in our history. We celebrate the fact that we've got among the makers of things in the United States an array of companies large and small that have never been more competitive in their history than they are today -- that are able to meet global competition anywhere. Some are so successful that they have been able to go into foreign countries, build facilities and carve out large shares of those markets. Even companies like General Motors and Ford, which are struggling mightily for a share of the domestic market here, have the number-one or two- positions in some foreign nations.
The idea that they shouldn't go there and they shouldn't build those plants, they shouldn't be in the Chinese market where they've actually made money is preposterous. Why would you want the auto companies to only produce here, especially at a time when other nations' auto companies can come here and compete? So we ought to go there and compete.

Q: What do you think of the perception that U.S. companies are making money overseas at the expense of the United States?
Engler:
That is rich and fertile ground for candidates to till, and so there is a great desire to keep it just that way -- to keep that perception there because it's hard to go back and look in the mirror and say, "Are we doing all that we can do? Are we getting $500-billion worth out of our annual public education expenditure? Are we spending money on innovation or is that investment slowed down? What does it take to compete?"
How is it that small companies of similar size, one's thriving and one's failing? Let's say you have 3M, where 63 percent of its sales of products made here go out around the world, and they've got one supplier that's making it and another one that's failing. Could it be there are differences in these companies in the kind of management, the kind of decisions they made, the preparation? I suspect there is, just like we've seen some of the very largest companies in this nation be subject to takeover by private equity funds, go into bankruptcy and get split up and sold.
One of the things in your article [about the new Coalition of American Producers], and this was not in quotes so it appeared to be your description, is that it says that organization "is not going to be infiltrated by foreign interests." Here's the point: Cummins is adding jobs in Indiana. In March, Toyota announced it will hire 1,000 people. In June, Honda announced plans to build a 2,000-worker plant in Greensburg, [Ind.]. These "infiltrating foreign interests" are hiring American workers. Are we trying to stop them or not? In other words, how are they able to advance at a time when the [U.S.] auto industry is in retreat?
Earlier in the year I was down in Montgomery, Alabama. This is a state that has nearly 100,000 auto workers. Where did those come from in the last decade?
Last year, we had 17.1 million vehicles produced in the United States. It was one of the best auto years in North American history. The problem is who's getting the market share? Here's Ford closing a plant in Hapeville, [Ga.], losing 2,000 jobs when the last Taurus rolls off the assembly line. But Rome Tool and Die in Rome, Ga., which serve Ford and GM, do not see them as a source of growth. They're looking at growing their business mainly by selling to the transplants. Prestolite Wire in Tifton, Ga., has 140 workers making ignition wire. They say if Ford's not selling cars they'll slow down too, but their customers also include Chrysler, Nissan and Honda. In other words, there is a dynamism that goes on in the economy. Some companies are coming up, some are going down, and that pretty much goes back all the way to the beginning.
I don't think any association or any lawyer in Washington is going to be successful at reversing the trend for one company or five companies if they're not able in their own right to be competitive. There is nothing that can be done to protect them from change and can keep them going. That's what we're dealing with.
When I talk about the goals here at the National Association of Manufacturers, we want to reduce production costs in the U.S. and level the international playing field. We want to make sure there is a workforce to do the 21st Century work that is to be done and we want an environment in this country that fosters and sustains innovation and productivity.

Q: NAM isn't really criticized on any of those points.
Engler:
I know. I'm criticized because I'm not the Chinese Politburo, and I can't fix the Chinese currency issue.

Q: Come on, you're John Engler!
Engler:
Yeah, but I don't have that much influence.

Q: If not you, who?
Engler:
At this point, who is Hank Paulson. There is a guy who's been to China some 70 times. He knows their top leaders. He's got a dialogue underway. He, better than anyone, can say that the Chinese problem is going to lead in the near future to social unrest. Some of it is going to come from a banking system that will collapse if they don't get it right.

Q: What are the chances that Paulson succeeds?
Engler:
First of all, he has to be given a chance. We're willing to do that and even Senators Graham and Schumer are willing to do that. I haven't heard of a strategy put forward by anyone that says there's a faster way to do it. The strategy debate is one where I think we've got to say, who are the people best positioned to make the argument? I have to conclude that I think it's Hank Paulson because he's the guy the president put in that spot, because of the relationships he has and the experience he has in understanding this issue. We will see. The stakes are high. Q: Did you respond to the e-mails [criticizing NAM for favoring international interests] from [Nucor CEO] Dan DiMicco or the Steel Manufacturers Association?
Engler: I will be formally answering them. Yesterday I was down in Atlanta at a meeting of FabTech where the number-one issue is high steel prices and they want to know when are we going to get rid of these unfair tariffs? I offered to have Dan come down and explain why those tariffs made sense.

Q: What do you think of NAM's June 27 International Economic Policy Committee vote to endorse the Hunter-Ryan currency manipulation bill?
Engler:
It's a working group. In our process, you could have 500 people walk in that room. At the Board of Directors meeting where the vote was 55 to 25 there were as many small companies [50] as large companies there.

Q: There was a sense that the vote went exactly as the board's makeup, which is two-thirds multinationals.
Engler:
I was there. I heard the people speaking. You had small companies speaking up in opposition to this. You had large companies that were supporting it. It doesn't just break along size. Steel companies are large companies and their alliance is to support anything that will keep tariffs in place.

Q: Is there any chance this vote will go to your membership?
Engler:
It just did. We have a board of directors.

Q: Would you endorse any type of currency legislation, such as the Bunning bill?
Engler:
Well let's see who's in control of Congress and what proposals they offer.

Q: The domestic members felt you took sides when you commissioned the Greenberg Traurig report on questions of WTO compliance of the Hunter-Ryan bill.
Engler:
I don't even know the lawyer. I haven't met him to this day. I said who is the most experienced lawyer we've got that would know something about this and be objective. Here's a guy who just happened to chair the WTO appeals panel for eight years. It's his integrity too. If people have a problem with that it's too bad, but in reality, nobody challenged the credentials of the person, and I thought it was better to know that.
But putting the substance of the [Hunter-Ryan] bill aside, from a purely tactical [perspective], you were beginning a two- to three-year process of going through a regulatory process. I would be willing to bet that some of the same people who voted for it in six months would say, "What are you doing?"
"Well we're following the process you laid out."
"Well it's not moving fast enough."
"We told you that when we went into this."
"Well I didn't understand that. It should move faster. You make it move faster."

Q: China's currency has been an issue for years. If you started that process two years ago, you'd be there now.
Engler:
Hindsight is a beautiful thing, it's always 20/20. But I can tell you this: if it hadn't been for this organization, maybe nobody would even be talking about currency.

Q: The China Currency Coalition still exists, but NAM's Coalition for a Sound Dollar doesn't even have a Web site any more. So they say you started it but where's the follow up?
Engler:
Today, they've got a Secretary of the United States Treasury going to China on their behalf. How do you get better than that, unless they send Dan DiMicco.

Q: There was another Secretary going to China whose name was Snow, but still nothing got done.
Engler:
You have a lot of people egging them on who don't want to do the things that they themselves can do here at home. The bottom line is while they're waiting, while they're unhappy and while they're worrying about the speed of action on China, there are a whole heck of a lot of things that can be done right here in America, and we control those.



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