87-53

SUBMITTED STATEMENT OF MARK A. ANDERSON, INTERNATIONAL ECONOMIST

AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS

BEFORE THE SUBCOMMITTEE ON TRADE

COMMITTEE ON WAYS AND MEANS

U.S. HOUSE OF REPRESENTATIVES

ON H.R. 3211, A BOX TO AMEND THE TARIFF SCHEDULES OF THE

UNITED STATES BY REPEALING TSUS ITEM 807

DECEMBER *, 1987

The AFL-CIO welcomes this opportunity to present its views in favor of H.R. 3211. The AFL-CIO strongly supports repeal of TSUS item 807.00 as one way of encouraging domestic production and reducing this nation's massive trade imbalance.

The Federation believes that the use of this tariff item has contributed to the loss of domestic employment by encouraging imports and providing an incentive for the transfer of U.S. production to foreign countries. In addition to harming the domestic economy, the Federation believes that this tariff break does little to aid the development of the exporting countries.

The harmful impact of this tariff exemption is of grave and longstanding concern to the AFL-CIO and to the workers we represent. Seventeen years ago, in testimony before the U.5. Tariff Commission, the Federation expressed its opposition to this provision explaining: "Item 807 is one small loophole in the tax structure for the advantage of U.S. based multinational companies. It operates as a lubricant for the growing export of U.S. capital, which is a major factor in America's balance of payment difficulties. It provides financial encouragement of foreign production, by U.S. firms, of goods that are sold in the U.S. market. It is a factor in the deterioration of both the volume and composition of the U.S. trade balance." . . . "Continued delays in repeal of 807 and similar sections of the Tariff Code encourage the growth of these operations, with the displacement of U.S. production and employment."

When that testimony was given the total value of 807.00 imports was about $2 billion. By 1983 that value had reached $30 billion, and is no doubt higher today. It is an understatement to say that our worst fears have been realized.

The continued existence of governmental incentives like 807.00 make little sense at a time when domestic industry and employment are suffering under record and unprecedented trade imbalances. Last year the U.S. experienced a merchandise trade deficit of $170 billion, of which $145 billion was for manufactured goods alone. While domestic demand has increased steadily over the last few years, that demand has been satisfied almost solely by imports, rather than increases in domestic production. Employment in manufacturing has declined by some 2 million over the last seven years and estimates of total jobs displaced by trade are millions higher. 1987 has shown no improvement in this dismal picture.

There is widespread recognition that the huge imbalance in America's external accounts poses a clear and present danger to this country's economic well being. To turn this situation around, domestic production must be inhanced to boost exports and reduce this country's reliance on imports.

Rather than contributing to these goals, Item 807 actually serves to subvert progress toward their achievement. U.5. exports are not aided because there are no real exports under this provision. By definition the U.S. content is returned. Imports certainly are not reduced. Indeed, they are promoted by easing the transfer of domestic production to countries that serve as export platforms to the American market for transnational enterprises.

Public interest in the impact of this tariff provision has recently been growing, spurred in no small measure by the U.S. Commerce Department's attempted sponsorship of a 1986 conference in Acapulco that was designed to encourage U.S. investment in Mexico's Maquiladora Program. Companies involved in this program are heavy users of 807 and its operation is illustrative of the provisions general impact, particularly insofar as low wage countries are concerned.

In 1970, there were some 120 companies employing about 19,000 workers in the Mexican border program. Today it is estimated that more than 800 plants are in operation, employing more than 300,000 workers. The value of 807 imports from Mexico has skyrocketed from $1*5 million in 1969 to 5.5 billion in 1985. The dutiable portion of those imports, or the value added in Mexico has also increased during that period from 34 percent to 17 percent.

The motivations for the use of Item 807.00, particularly in a country like Mexico are clear, and center almost wholly on its advantages when used in conjunction with cheap labor. The promotional brochure for the Conference mentioned above emphasized this reality in listing the so-called advantages of Mexico's Maquiladora program." ... An even higher potential for profit. . . a highly trainable workforce. . . low cost foreign labor. . . duty free importation of equipment. . . U.S. customs laws which allow American parts and components to be exported, repaired, processed or assembled abroad and then imported back into the U.S. with duties paid only on the value added. . ." While tariff breaks, the intricacies of U.S. custom procedures, various tax advantages, and Mexican regulations, or their absence were no doubt examined in detail at the conference, cheap labor appeared to take center stage. As reported in a number of American newspapers, one participant was quoted "The bottom line is this. Your cost per Mexican worker is 69 cents an hour versus at least $9.00 in the States. That's a saving of $15,000 per year per worker."

The attraction of cheap labor was also noted in a recent USITC publication concerning these tariff provisions. "Operations using Item 807.00 in LDC's tend to be affiliated with U.S. producers. These are basically assembly facilities that have gone 'offshore' to take advantage of lower labor rates."

What isn't explained, and what is most difficult for American workers to understand is why the U.S. government maintains programs that aid and abet this export of jobs. That large numbers of jobs are transferred by American companies in this fashion cannot be in serious dispute. In the case of Mexico, they can virtually be counted. If this production had remained in the U.S. tens of thousands of American workers would now be gainfully employed. Proponents of Item 807.00 attempt to blunt this reality with a mere assertion; that domestic employment would suffer even greater losses in the absence of this governmental incentive. The AFL-CIO believes that in evaluating public policy, facts should carry more weight than predictions.

Beyond the immediate question of jobs, the use of 807, particularly in a country like Mexico turns the traditional concept of international trade on its head, and raises real questions about the future of American industry. Production in Mexico's in-bond plants is almost entirely destined for the U.S. market. In fact, the Mexican government essentially prohibits these goods from entering their own domestic economy. Here, an industry's competitiveness, or a nation's comparative advantage is not determined on the basis of the cost or quality of a completed product. Rather, comparisons can now be made for each stage of the production process in deciding on foreign or domestic sourcing. The historic strength of the U.S. economy has been based on a variety of factors including a highly educated, productive and well-paid workforce, ample capital and natural resources, innovative production techniques, strong managerial skills, and continued technological advances. Together, these elements have led to the high standard of living enjoyed by so many Americans. This wealth, however, and its continued growth requires high income levels. Mexico's in-bond program, together with U.S. government incentives, permit a company to separate decent and justified wage levels from all other aspects of production. Mexico's single comparative advantage is the poverty of its citizens and their willingness to work for subsistence wages. The skill, productivity and contributions of American workers become irrelevant in this context, and the growth of this activity threatens one of the essential pillars of the American economy. No matter how productive, U.S. workers cannot compete with labor costs of less than $1 an hour.

Item 807, together with other U.S. programs like the Generalized System of Preferences and Foreign Trade Zones, encourage the establishment of low wage enclaves that are basically within the U.S. market but not within U.S. territory. Producers are able to disregard not only U.S. wage rates, but important domestic regulations concerning such things as occupational safety and health and environmental protection. With this structure, any developmental gains by Mexico are marginal at best. Subsistence wages do not generate the demand necessary for a healthy and growing economy. Even if permitted, the workers could not afford to purchase the products they help produce. Claims by some that the existence of these plants boosts the economy of the border region are simply not credible in light of $4 a day wages.

The AFL-CIO believes that the only benefits derived from the existence of 807 are reaped by transnational enterprises through increases in profits. This however, cannot offset the harm done to the thousands of Americans whose livelihoods have been sacrificed in the pursuit of those profits.

U.5. public policy must be redirected to encourage investment and production at home if this country is going to meet the challenge of international competition. Repeal of 807, through the enactment of H.R. 3211, would be one step in that direction.

The Honorable Sam M. Gibbons

Subcommittee on Trade

Committee on Ways and Means

U.S. House of Representatives

1111 Longworth House Office Building

Washington, DC 20515

Dear Chairman Gibbons:

The American Apparel Manufacturers Association wishes to register Its opposition to H.R. 321l, a bill which would repeal Section 807 of the Tariff Schedules of the United States.

The AAMA is the central trade association for domestic manufacturers of garments. Our members are located in virtually every state, producing every type of garment and accounting for about two-thirds of domestic production.

Our Association supports the retention of Section 807 for garment production for two reasons: It provides many of our members an alternative to foreign sourdng and 1t 1s good foreign policy for the United States.

The apparel Industry 1n this country Is being severely challenged by Imports from low-wage countries, primarily in the Far East. Imports have taken 52 percent of our market, reaching new high levels each year since 1979. They are Increasing another eight percent this year, replacing still more workers and causing the failure of more businesses.

Faced with this problem, domestic manufacturers have two options: become as efficient as possible domestically and explore the possibility of foreign sourcing. Our members have responded to the technical challenge. They are as efficient as any apparel industry in the world ~ for example it takes only two-thirds the time to make a dozen pair of jeans in the United States as it does in the Far East. Further, we are making significant strides In computer communication with our suppliers and customers, reducing the time it takes to get goods on the shelf and cutting down on costly inventory.

As regards the second option, many of our members have turned to Section 807 as a means of reducing costs while maintaining domestic employment. The existence of Section 807 has enabled many apparel makers to reduce their average costs while maintaining significant production facilities in the United States. It also has enabled them to retain many jobs in cutting and distribution for the products sewn in Central America or the Caribbean. Without Section 807, many of these manufacturers would resort to regular Imports from other low-wage countries.

2500 Wilson Boulevard/ Suite 301/ Arlington, Virginia 22201 • 703/524-1864 • FAX 703/522-6741

We also believe that the jobs created and the economic development provided In Latin America by the Section 807 program are good In the long run for the United States. Economic progress for and good trading relations with our closest neighbors can only be in our national Interest.

Section 807 seems to be working well for the countries of Latin America. Apparel Imports from the region grew 22.5 percent in 1986 and are runing 25.9 percent ahead of last year for the first eight months of 1987. They have Increased from 8.6 percent of total Imports in 1985 to 10.2 percent this year.

Our Association,s formal policy on Section 807 Is that It should be retained. Further, our policy calls for Increased Imports from the Caribbean in direct ratios to decreases from major suppliers. He maintain, however, that Section 807 Imports should be treated the same as regular Imports for quota purposes under the HultIfIber Arrangement.

He appreciate the opportunity to comment on H.R. 3211. We hope the Subcommittee on Trade will not give it a favorable report.

Sincerely yours,