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Statement Submitted by The Society of the Plastics Industry, Inc. (SPI) is pleased to submit comments to the House Ways and Means Committee for the October 30-31, 2003, hearings on U.S. - China Economic Relations and China's Role in the Global Economy. SPI applauds the Chairman and the committee for addressing this critical issue. Founded in 1937, SPI is the primary plastics industry trade association representing the entire plastics industry supply chain which includes plastics products processors, manufacturers of machines and molds, and raw material (resin) suppliers. The plastics products industry is the nation's fourth largest manufacturing segment and can be found in every state. The U.S. plastics industry provides products that impact and enhance every aspect of our lives. Plastics is a dynamic industry that has grown more rapidly than overall manufacturing for the past 25 years. It has continued to adapt to meet the ever-growing needs of consumers and to meet ever-changing economic challenges. Employment in the plastics industry grew 2.2% per year between 1980 and 2001. Real value added in the industry grew 3.7% per year from 1980 to 2001. The value of shipments grew 3.3% per year from 1980 to 2001. Plastics industry growth rates slowed significantly in terms of shipments, employment and number of establishments towards the end of the 1990s and into 2001. This slowdown mirrored what happened to the rest of manufacturing for various reasons including rising energy costs, the high value of the dollar, and the bursting of the 1990s "tech bubble." The industry gets a double hit from high energy prices: plastics resins are made from natural gas, and the manufacturing process is energy intensive. The industry slowdown accelerated in 2001. Today the industry is facing especially difficult times, having been hard hit over the past several years during the nation's economic slowdown and by policies that have put U. S. manufacturing at a disadvantage in the global marketplace. These policies make it more expensive to manufacture products in the U.S. at a time when the resultant cost increases cannot be passed on in the form of price increases in products that are competing in the global marketplace. Such market conditions force U.S. companies to make tough decisions, such as whether to relocate outside of the U.S. in order to compete or lay off employees. The U.S. plastics industry in 2002 employed some 1.4 million workers and shipped $309 billion in raw material, products and equipment. This is down 4.7 percent from 2001 in terms of jobs, and down 1.1 percent in terms of shipments. Compared to 2000, the number of jobs lost is 8 percent and shipments are down 6.5 percent. The U. S. plastics industry is going through a transformation. It retains its strong export surplus in resins, but its trade in molds and machinery remains in deficit, and its plastics products trade has swung from surplus to deficit in the last two years. The U. S. plastics trade balance with China has deteriorated especially fast. On a global basis, the industry had a large and growing trade surplus over the past decade. That trend, however, appears to have been reversed starting in 2001 with net exports falling 23.3% in 2002. Total plastics industry imports rose 6.9% and reached $24 billion in 2002. The biggest problem was plastics products, as defined by Chapter 39 of the Harmonized Tariff Schedule, which went from an $894 million trade surplus in 2000 to a $1.4 billion trade deficit in 2002. Plastics products imports grew 8.9% to $14.7 billion in 2002. More importantly, the net trade deficit of plastics contained in all traded goods has grown significantly. The net trade deficit of plastics contained trade in 1997 was $4.2 billion. In 2002, it was $14 billion. That is an increase of 26.9 percent annually. The causes of the deterioration of the U. S. plastics trade surplus to a rapidly increasing plastics trade deficit needs to be understood, especially with regard to the double-digit growth in imported Chinese products. Much of the deterioration in the plastics industry trade balance has been with China. Where it is due to deleterious domestic and international policies that have coalesced to drive plastics processors out of business or offshore and forced workers into unemployment, U.S. policymakers must undertake efforts to change these policies. If unfair trade practices are responsible, then the U.S. must use its resources to address and rectify such policies. Trading partners, including China, must operate consistent with U.S. trade laws and international trade rules, and enforce their World Trade Organization (WTO) commitments. We want to compete with the Chinese on a fair and level playing field both internationally and in our domestic marketplace. During the past couple of years, many SPI members have become increasingly alarmed that unfair Chinese competition may be destroying U.S. plastics manufacturing.
Examples of Plastics Business Lost to China In 2003 a plastics cutlery and house wares manufacturer lost 14% of his sales valued at $4 million to imports from China. The imported products are being sold for less that the U.S. manufacturer's raw material cost alone. The manufacturer says he cannot understand how this is possible when the products have to be made then shipped half way around the world. Lower-wage Chinese labor is not the issue because the manufacturing process is quite automated. This manufacturer would like to see the U.S. government do a study to understand how his prices can be so undercut by the Chinese. To retain customers, the manufacturer has had to lower selling prices while absorbing higher raw material prices that have resulted from high natural gas prices in the U.S. This company has done a lot to hold its own successfully against U.S. and European competitors but is worried about the impact on his business from the increasing imports from China. The manufacturer is concerned that his lost profits means less money to invest in the company to help ensure its future and the jobs of his employees. A medical device manufacturer makes Class II patented medical devices which are registered with the FDA and sells them internationally. He discovered that unauthorized copies of his patented products made in China were being offered for sale in Canada. For this manufacturer, the lack of enforcement of Intellectual Property Rights is his biggest concern for the long-term viability of his business because he is convinced that China is developing the capability to make and copy increasingly sophisticated products. A household goods manufacturer found his product for sale in Europe packaged to look like it was his, including the Made-in the USA label. But the U.S. manufacturer didn't make it here or anywhere. It came from China, including the Made in the USA label! A packaging company lost a $600,000 per month customer to China for whom he had already cut his price to the bone. The packaging company believes it is THE low cost producer in the U.S. A molder and tool maker lost a contract on tooling that was 60% less and on a widget that used commodity resin that was priced at a level that made it unprofitable for him. A medical molder that makes proprietary stints for the medical imaging market had his product knocked off overseas for sale in less regulated markets overseas. A film manufacturer that makes substrates for tape was approached by Chinese representatives about locating a plant in China that would have insured him fixed costs on lease holds and other benefits that he cannot duplicate even in the rural South. SPI has not undertaken any studies specific to China plastics production costs and trade practices that support suspicions of unfair trade practices. However, SPI contracted for a trade study by Probe Economics 1 that looks at U.S. plastics import and export data, the results of which are cited below. The SPI trade study concludes that: Plastics Industry Imports From China - Probe Economics
The trade study notes that the U. S. previously had a trade surplus in plastics because the country had: (A) a large home market, which provided scale economies, (B) relatively low feedstock costs, (C) good logistics, especially in the Gulf Coast, and (D) some of the best technologies. The report states:
International Trade and Domestic Policies Need to Be Addressed International trade and domestic policies need to be addressed by policymakers to improve the competitive environment for U.S. industry including plastics. Many policies significantly increase the manufacturing costs in the U. S., some policies and practices put U.S. products at a disadvantage in the global marketplace, and other policies are inadequately implemented thus contributing to a weakened manufacturing base. Because SPI believes that U.S. manufacturing including the plastics industry remains critical to America's economic success and security, it is essential to modify policies that collectively are making it increasingly more difficult for U.S. manufacturers to compete in the global marketplace. We urge policymakers to change policies that hinder U.S. manufacturing and adopt approaches that best advance manufacturing competitiveness. Economic stimulus efforts have been supported by the White House and enacted by Congress, and recent indicators suggest a recovery is underway. However, that good news has yet to translate to the manufacturing segment of this economy. Therefore, many in the plastics industry remain very concerned that their businesses and the industry are threatened by a global marketplace in which they find it increasingly difficult to compete. China has become a manufacturing powerhouse. Its central and local government policies have supported development of key industrial sectors. Since the 1990's, China has become a global supply chain for many traded products and has seen its share of global trade in manufactured goods triple. In the meantime, there is increasing unease in the U.S. over the declining share of manufacturing output and employment in our overall economy. And this is happening while China's currency - the yuan - remains pegged to the U.S. dollar at a rate set by government fiat nine years ago. Many believe that this maintains an artificially undervalued currency. Congress needs to understand the impact of China's growth as a manufacturing powerhouse on the U.S. economy and security, particularly on the U.S. manufacturing sector. Congress needs to understand the relocation of manufacturing, high-technology, and R&D facilities to China and the implications of these transfers on the United States' national security, employment and the standard of living of the American people. Are China's governmental policies - currency valuation, stimulation of exports, industrial capacity building policies, and non-compliance with WTO mandates - contributing to an unfair trading advantage detrimental to U.S. economic and security interests? SPI thinks that the answer is yes. China's Currency Policy SPI believes that China continues to follow a policy of one-way market interventions to maintain its currency at a level that economists estimate is between 15-40 percent undervalued. We believe that the artificially undervalued Chinese yuan is having a serious adverse impact on the competitiveness of U.S. manufactured goods and is contributing to a migration of world manufacturing capacity to China, and to an erosion of the U.S. manufacturing base. We believe that China is in violation of both its IMF and WTO obligations by manipulating its currency for trade advantage. Therefore, we think that the Treasury Department must immediately enter into negotiations with the Chinese Government to successfully resolve this matter. Otherwise, China's continued maintenance of an undervalued exchange rate with the U.S. dollar will continue to promote major distortions in trade and investment, to the detriment of American companies and workers, including plastics. SPI also is concerned that the banking system in China is structurally weak. SPI urges the Administration to address this issue with the Chinese government. For U.S. economic strength, it is imperative to maintain stability in the financial markets in the Asian region. China's Industrial Policies and WTO Non-Compliance China has attracted a total of over $400 billion of foreign direct investment (FDI), most of it in the last six years. This compares with $1.3 trillion for the U.S., $497 billion for the U.K., $482 billion for Belgium-Luxemburg, and $480 billion for Germany. As FDI flows to China are now expanding by over $50 billion per year, China will soon have accumulated the second largest amount of FDI in the world. Experts have concluded that China's undervalued currency is just one of several factors behind its success in attracting massive inflows of FDI, particularly into its manufacturing sector. China has pursued industrial policies that have catalyzed its growth as a manufacturing powerhouse. The Chinese Government has designated a number of "pillar industries," for which it provides preferential benefits for domestic development and foreign investment. Manufacturers in China are supported through a wide range of national industrial policies, which include: tariffs; limitations on foreign firms' access to domestic marketing channels; requirements for technology transfer by foreign investors; government selection of partners for major international joint ventures; preferential loans from state banks; privileged access to listings on national and international stock markets; tax relief; privileged access to land; and direct support for R&D from the government. Some of these industrial practices violate China's WTO obligations. The Administration needs to engage more forcefully with the Chinese government where it violates China's commitments under the World Trade Organization (WTO). Importance of Manufacturing to the U.S. Economy In his September 15, 2003 remarks to the Detroit Economic Club, Commerce Secretary Don Evans stated that "the President believes that our economic and national security require a stable, robust manufacturing sector that produces sophisticated and strategically significant goods here, in the United States." While manufacturing employs 14 percent of the American workforce, it has accounted for nearly 90 percent of all the job losses since total U.S. employment peaked in March 2001. Over 2.7 million American manufacturing jobs have been lost over the past three years, roughly one in every six manufacturing jobs. SPI was heartened when the Administration announced the President's Manufacturing Initiative earlier this year and we look forward to reviewing its proposals for dealing with the China-related concerns as well as with domestic policies. We think that China's undervalued currency and government industrial policies are having an adverse impact on the competitiveness of U.S. manufacturing and contributing to a migration of world manufacturing capacity to China, with a concurrent erosion of the U.S. manufacturing base. Domestic Policies SPI also believes strongly that in addition to international policies, U.S. domestic policies have played a major role in the decline of manufacturing in this country. Congress and the Administration must understand the urgency in changing domestic policies that are, in effect, forcing U.S. manufacturers to relocate overseas. Some of these domestic policies are noted below. Energy - The plastics industry is doubly dependent on energy - not only for power for this energy-intensive industry but for its feedstocks as well. Of those feedstocks, 70 percent come from natural gas. The plastics industry has lost its energy and feedstock advantage. For years, natural gas costs in the United States were below crude oil prices on a Btu basis. Most of the world had to base its energy on crude oil. U.S. natural gas prices in the last couple of years have been at or above parity, thereby becoming a significant factor hurting competitiveness. Congress should adopt a balanced, comprehensive policy that will assure adequate supply of multiple sources of affordable energy plus a secure and reliable supply of reasonably-priced natural gas for U.S. manufacturing. Health Care Insurance - Rapidly rising health care costs are the largest cost increase for many manufacturers. We need policies that contribute to lowered costs and greater access to health care including passage of federal Association Health Plan (AHP) legislation. Tax - Tax rules affecting trade and international business need to be reformed and simplified. The U.S. must resolve the WTO Foreign Sales Corporation/Extraterritorial Income case in such a way as to avoid EU trade retaliation while keeping U.S. manufacturers competitive. Congress must address the WTO ruling on taxation of extraterritorial income with either tax credits for manufacturers or lowered corporate tax rates for U.S. manufacturing that will make U.S. manufacturers more competitive. Legal/Tort Reform - Litigation including that related to product liability has been one of the significant and growing contributors to the increasing cost of manufacturing in the U.S. Congress should adopt reforms to eliminate abuses of the current tort system that are destroying jobs and undermining the U.S. economy and the civil justice system. Skilled Workforce - Surveys have found that many manufacturers face a shortage of skilled workers, and that many workers and applicants need training in the basic skills of reading, writing and math. Also, many employers have lacked the resources to provide technical training and the development of basic skills, especially during the economic downturn of the last couple of years. Congress should expand policies such as the Workforce Investment Act to help ensure that American industry will have the essential skilled workforce. Conclusion The plastics industry is stepping up to the challenge by continuing to innovate and further increase productivity to compete in the global marketplace. We cannot, however, win the battle alone. We implore our nation's leaders to recognize the importance of U.S. manufacturing to the overall economic health of the U.S. and its sustainability, and to take appropriate actions. We would like to close with a quote from an SPI member who is working creatively to compete in this increasingly global marketplace. Among nearly 12,000 industry workers who recently signed a Plastics Manufacturing Matters petition supporting U.S. policies to encourage plastics manufacturing growth in this country, he expressed the following: "Our company has been in business for 32 years. We don't fear our [global] competition; we fear playing in a game with different rules and standards for the players. Please help my father keep a legacy for our family, our employees, our community and our country." has been in business for 32 years. We don't fear our [global] competition, we fear playing in a game SPI thanks the Chairman for providing SPI the opportunity to put its concerns regarding China on the record. We look forward to the committee's continued efforts on this critical matter and would like to work with you wherever possible. For Further Information Contact: Lori Anderson 1 "U. S. Plastics Industry Trade Through 2002; Trends, Partners, Hot Products, and Impacts on Employment" prepared by Probe Economics, Inc. for The Society of the Plastics Industry, Inc. August 2003
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 © Copyright 2003 The Society of the Plastics Industry.
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