Industry Today: The World of Manufacturing

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 Date:9/15/2009

 

News & Views
Does Uncle Sam Really Want You?
Creating jobs that can’t be outsourced will require strong policies, not just wishful thinking, says William R. Hawkins.

The U.S. House passed the controversial Waxman-Markey American Clean Energy and Security Act (H.R. 2454,) by the narrow margin of 219-212 on June 26. The day before, President Barack Obama said at a White House press conference, “This legislation will finally make clean energy the profitable kind of energy. That will lead to the creation of new businesses and entire new industries. And that will lead to American jobs that pay well and can’t be outsourced.” Obama told reporters, “make no mistake – this is a jobs bill.” During his presidential campaign, he had pledged to “create five million new green jobs, good jobs that cannot be outsourced.”

The theme of preventing the outsourcing of jobs has been widely used by proponents of Waxman-Markey as the bill has moved to the Senate. Keeping new high tech industries at home has also been linked to national security, as the title of the bill makes explicit. New energy sources are to break U.S. dependence on foreign sources that could be disrupted or require costly military interventions to defend.

The bill, however, did little more than assert these goals in the hope that new, “green” technology would simply appear if restrictions were placed on conventional energy sources such as oil, natural gas and coal. Necessity would be the mother of invention. And once the inventions appeared, their production would stay in America, only going overseas in the form of exported products. But will these efforts really create jobs for Americans, or will the private sector continue to do what it has been doing, taking domestic contracts – even government contracts – then outsourcing the work overseas to improve profit margins?

Joel Kotkin, a weekly columnist for Forbes, said in the Aug. 4 issue, “In terms of national competitiveness, the green sector seems to be going in the wrong direction. The U.S.’s overall ‘green’ trade balance has moved from a $14.4 billion surplus in 1997 to a nearly $9 billion deficit last year. As the country has pushed green energy, ostensibly to free itself from foreign energy, it has become ever more dependent on countries such as China, Japan and Germany for critical technology. Some of this is directly attributable to the often massive subsidies these countries offer to green-tech companies.”

U.S. policy will also depend on subsidies. On Aug. 13, the Treasury and the Department of Energy announced a program to award $2.3 billion in tax credits to manufacturers of advanced energy equipment; the money having been authorized by the American Recovery and Reinvestment Act (H.R.1). On Sept. 2, Treasury awarded $502 million in “cash assistance to energy production companies in place of earned tax credits” to 12 projects in eight states. The Investments for Manufacturing Progress and Clean Technology Act (S. 1617) introduced by Sen. Sherrod Brown (D-OH) would create a $30 billion revolving loan fund for small and medium-sized manufacturers to produce “clean energy technology products.” Waxman-Markey is filled with mandates on government agencies and departments to devise strategies to promote “commercial scale deployments” of “indigenous energy alternatives to fossil fuels.” However, because Waxman-Markey is not an appropriations bill, it cannot provide the funds needed to carry out its instructions.

Despite the reliance on government direction and money in support of clearly articulated national goals of domestic development and job creation, there are no “Buy America” provisions in Waxman-Markey. And there is certainly nothing stronger, such as import-substitution tariffs to encourage U.S. production of “green” equipment. There is “Buy America” language in H. R. 1, but it is limited in scope and President Obama was concerned it was not limited enough. The bill came under heavy fire from foreign producers who felt entitled to a share of the American taxpayer’s dollars.

The usual suspects in the business community are already taking preemptive action against “protectionist” measures. An Aug. 3 letter to President Obama signed by the National Foreign Trade Council, U.S. Chamber of Commerce, Emergency Committee for American Trade, Information Technology Industry Council, National Manufacturers Association, Organization for International Investment, and the Retail Industry Leaders Association called for a new global agreement eliminating barriers to trade in green technology products. These groups mainly represent transnational firms more interested in outsourcing than exporting. The inclusion of the retailers and IT lobbyists, who represent the country’s import leaders, gives away the real objective of this effort. All of these groups oppose “Buy America” legislation, even in the defense industry. Neither national security nor American jobs are their concern.

The Heritage Foundation has been explicit about outsourcing energy technology. A paper from the conservative think tank entitled Nuclear Energy Renaissance: Global Supply Chain Critical argued, “Trade measures including tariffs, quotas, domestic preferences in procurement, and excessive regulation increase costs, limit access to critical expertise, and undermine the broad expansion of nuclear power in the U.S.” It also called for the elimination of loan guarantees for American reactor construction. The case made for outsourcing was, however, contradictory and short-sighted.

Heritage analysts Jack Spencer and Daniella Markheim claim that “The U.S. currently lacks the industrial capacity to support a substantial expansion of domestic nuclear power” because of the long drought in American construction. But later, they acknowledge that “while building commercial reactors in the U.S. stopped, building reactors altogether did not. As commercial construction waned, the nuclear components industry consolidated to meet government demand for nuclear aircraft carriers and submarines, as well as other federal requirements. These companies are now reengaging in the commercial nuclear business and will likely be at the forefront of a resurgent U.S. nuclear components industry.” Also, “America's vast national laboratory system and private sector expertise provides the resources and a scientific foundation for the U.S. to again compete as a global leader in the commercial nuclear world.”

The Environmental Protection Agency’s April analysis of the initial Waxman-Markey draft legislation included nuclear power along with renewables and improved efficiency as “low- or zero-carbon primary energy” sources. The EPA model postulates that nuclear power will be “allowed to increase by ~150 percent” by 2050. The Nuclear Regulatory Commission has already received 17 license applications for 26 new nuclear power reactors. These are the first applications for new reactors since the late 1970’s. For nuclear power to maintain its 20 percent share of electricity generation in a growing economy, the NRC says 50 new commercial reactors will have to be built by 2030. If the development of “renewable” energy sources such as wind and solar do not progress as fast as hoped, nuclear power will have to expand even more.

Given that it will take years to win approval and start construction on the plants for which licenses have been requested, there is time to gear up domestic production, attract investment, and bring back to America work that has moved overseas. Policy should be designed to actively promote the rebuilding of the domestic nuclear industry rather than merely hope it will happen as do Spencer and Markheim. It is their brand of laissez-faire that has allowed the massive trade deficit in manufactured goods to develop, with the loss of millions of jobs.

The leading U.S.-based nuclear energy firm is General Electric. In the 1990s, the NRC certified GE's ABWR reactor as the first advanced Generation III design. GE is also involved in solar and wind energy generation. Because it has been export oriented, GE has been a proponent of “fair trade” while opposing “protectionism.” Yet, it has outsourced work to meet requirements of foreign governments for local production and technology transfers. In the May 14 issue of Business Week, Adam Aston reported that when building wind mills in China, “From simple parts, such as steel towers, to complex components such as turbine blades and gear boxes, GE cultivated local suppliers wherever possible. And the company followed Beijing's cues on where to set up.”

As American demand for low carbon energy increases, GE and other firms must expect and comply with similar U.S. requirements to capture the economic benefits of growth for the domestic economy. GE’s 2006-2007 Citizenship Report claimed, “Our history of supporting national interests is strong.” It needs to continue that tradition.

In a speech at the Detroit Economic Club June 26, the same day President Obama was pushing for the passage of Waxman-Markey, GE CEO Jeff Immelt said of America, “Our competitive edge has slipped away, and this has hit the middle class hard.” He noted, “Our budget and trade deficits have reached levels that are clearly not sustainable.” He then called for “a national goal to create high value added jobs and have manufacturing jobs be no less than 20 percent of total employment, about twice what it is today.” Nuclear power and the larger green technology movement will not be able to move the economy to this industrial renaissance alone. But policies drafted for this sector can be the spearhead for the recovery of other parts of manufacturing.

Since some form of public support will be involved in most green energy projects, “buy America” requirements should be invoked throughout the supply chain. Subsidies funneled through, or provided by, state and local governments are free under current trade agreements to enforce “buy America” provisions, and Federal government involvement in the energy industry to mandate American production can be legitimately defended on the basis of the national security objectives set out in green tech legislation. Being independent of foreign factories in strategic, high-tech sectors is even more important in the long run than being independent of foreign oil fields.