Global supply-chain management is key to US manufacturing success, and there is no turning back. Almost every product that meets “Made in U.S.A.” criteria also includes some imported raw materials or components. A trade war with China will increase the cost of imports and domestic goods. The solution is a combination of trade negotiations and incentives that drive 21st century American innovation, production, job creation, and economic growth.
Products that add value, like energy-efficient LED lights, rely on components such as capacitors that are largely imported from China. Plus, raw materials, like rare earth minerals that are integral to petroleum refinement, are almost exclusively sourced from China. As an example, without lanthanum oxide, we cannot cost-effectively convert our own oil into gasoline. A trade war would leave us in the dark without smartphones and a limited ability to pick up groceries, drive to work, or drop kids off for a Little League baseball game. Spending even one day in a cold, dark house, with hungry, screaming kids is a direct challenge to our American way of life, economic growth, and national security.
The Presidential candidates disagree on many levels but see value in creating more American manufacturing jobs and rejecting the Trans-Pacific Partnership (TPP). Donald Trump has repeatedly referenced Chinese currency manipulation in discussing our $500 billion trade deficit. Hillary Clinton has spoken out aggressively against corporate inversion as a “perversion” when companies move overseas to avoid paying US taxes. Following are two scenarios highlighting the interconnection.
Scenario 1: A US-based company moves a factory overseas or manufactures all of their products overseas, but they continue to pay US taxes. They create jobs for Americans in design, engineering, and sales, and they add economic value through the positive ripple effect of domestic spending on advertising, legal services, consulting, etc.
Scenario 2: A US-based company takes advantage of corporate “inversion” and moves its company overseas to pay lower taxes. They may choose to manufacture products in the US where jobs are created, but the corporate taxes are not paid to the US, and many of the higher-paying jobs are not for Americans.
Neither scenario is ideal relative to a goal of having more US-based companies that make products in America, pay reasonable taxes here, and deliver quality products at price points that attract domestic and overseas buyers.
The following Five Star plan starts and ends with the important economic connection between supply and demand.
#1: Incentivize the supply side – US manufacturing companies.
Increase tax incentives for companies that make products in America. These incentives would apply for companies selling in the US with additional incentives for those that also export. Selling to ourselves is key versus sending dollars overseas, and selling our products to buyers in other countries is excellent for generating new revenue.
#2: Discourage corporate inversion.
Lower the US federal corporate tax rate from 35% to 21% to match the average among industrialized countries. Simplify the tax code by eliminating the write-offs, often referred to as tax expenditures. To date, these write-offs have helped lower the statutory rate, but they add an unnecessary level of complexity. Less tax burden will help prevent companies from leaving and may also attract others to the US. Incentive “carrots” over penalty “sticks” often work more effectively across the long term.
#3: Promote the companies that make products and pay taxes in the US.
Seed US manufacturers with the marketing idea to add “U.S.A. Taxpayer” along with “Made in U.S.A” on product labels, websites, advertising, press releases, etc. Many consumers may assume that “Made in U.S.A.” products come from American companies, but that is not always the case. Buyers may be more inclined to make a purchase if they know that their dollars are going to a company that is paying their share to support the overall American economy.
#4: Level the playing field on currency manipulation.
Set benchmark metrics that trigger customs adjustments. In short, tariffs should not be imposed if the currency ratio stays within reason compared to previous levels. Plus, we should reduce tariffs on raw materials and components relative to tariffs on finished goods.
#5: Incentivize the demand side – American business and consumer buyers.
Provide tax incentives for the private sector to buy goods and equipment that are both made in America and made by American companies. Require the US government to “walk the talk” and buy US-made products at the federal, state, and local levels for everything purchased by the Pentagon through to the lights at the public schools, police stations, and fire houses across the county.
A trade war with China will stall US manufacturing growth, given that so many manufacturers incorporate raw materials and components from China. In America, we have the intellect, creativity, and tenacity to compete on a global playing field. Let’s embrace interconnectivity and use supply, demand, incentives, and thoughtful trade negotiations to drive economic prosperity and strength.
With over 100 years of family innovation and US manufacturing experience, I have provided these insights to advance the trade deficit and manufacturing conversation. For context, by 1913, my great-grandfather had secured over a dozen patents of his engineering designs for what we now call the modern toilet. By the end of the 1920s, he had built the family’s US porcelain sanitary plant in Kalamazoo, MI into one of the largest manufacturing facilities of its kind in the world. Almost a century later, in 2010, we moved our light-emitting diode (LED) manufacturing from China to southeastern Pennsylvania. Our award-winning, energy-saving lights are now installed in accounts ranging from the Fortune 100 to the US military and from small businesses to large-scale real estate portfolio companies. We have always sold on value over the less expensive Chinese imports. Our quality and 10-year warranty set us apart from the typical 5-year warranty imports. Through economies of scale, advanced engineering, automation, and reduced shipping costs, we now have less expensive products than the Chinese, and we add the Made in America quality with the strongest warranty. We have done it the hard way, and the recommendations in this article are about paving another road to encourage others to engage in US manufacturing.