US shelves move on “factoryless goods” manufacturers

The US has put off plans to redesignate US firms which offshore their manufacturing as “factoryless goods producers”. Chakravarthi Raghavan explains why this goes beyond a question of terminology and why it matters to developing countries.

GENEVA: The United States appears to have shelved, at least for now, its move to reclassify US corporations offshoring their manufacturing as “factoryless goods” manufacturers.

This is perhaps the counterpart of the so-called “global value chains” theory that the World Trade Organization (WTO) and its economists have been promoting, a concept that they had unveiled in 2011 (see C. Raghavan, “WTO catching up with two-century-old manufacturing models”, TWE No. 495). Most recently the Organization for Economic Cooperation and Development (OECD) and the WTO advocated this concept in a paper presented by them to a meeting of finance ministers of the G20 countries in Sydney.

According to a post on the Eyes on Trade blog by Global Trade Watch (GTW) (a division of US-based public interest organization Public Citizen), which had initially alerted US civil society groups to the US administration move, some 26,000 comments, many from labour groups and other civil society organizations, were filed in opposition to the “factoryless goods” proposal.

This large opposition appears to have induced the US administration to shelve the move for now.

Whether the US shelving of the move will have an impact on the Paris-based OECD, the rich men’s club trying to become an international organization, and the WTO secretariat, which has been pushing the “global value chains” concept, remains to be seen.

The Trade Facilitation Agreement (TFA) promoted by the US and the EU in the WTO would, according to former WTO Director-General Pascal Lamy, result in the equivalent of a 10% tariff cut by developing countries. The developed countries, Lamy said in a recent speech in Australia, need do nothing to implement the TFA.

The costs of implementation of the TFA (including on some infrastructure expenditures outlined by the World Bank) have been estimated by UN development body UNCTAD at about $1-2 billion for developing countries as a group, which would have to divert that money from current social expenditures to comply with WTO obligations. This would be a bonanza for the developed countries, whose corporations would reap these benefits without the developed countries having to pay any price to developing countries at the WTO in the Doha Round!

Deceptive reclassification

GTW said in its post that the US administration proposal “to disguise offshoring” has been shelved after a groundswell of opposition.

The GTW post noted that in July, “we warned of an administration proposal to reclassify US corporations that offshore their manufacturing as ‘factoryless goods’ manufacturers.”

“Calling Apple a ‘manufacturer’ – though its iPhones are made in Foxconn factories in China – defies common sense,” GTW said.

“But why does it matter? Because it would mask the erosion of US manufacturing incentivized by offshoring-friendly policies, including a raft of unfair trade deals. The Orwellian proposal would undermine efforts to replace more-of-the-same policies with a fair trade model.”

GTW said that “under the administration’s proposal for reclassification (now shelved), reported US ‘manufacturing’ jobs and wages would balloon overnight, as brand managers and programmers would suddenly be counted as ‘manufacturing’ workers.

“The broad reclassification initiative would also deceptively deflate the large US manufacturing trade deficit. US imports of made-in-China iPhones would not be tallied as manufactured goods imports but as imports of Foxconn’s ‘services,’ while iPhones exported from China to, say, Europe would actually be re-branded as ‘US’ manufacturing exports.”

During an official period to comment on the proposal, Public Citizen, many labour groups and other allies invited people to send their comments to the administration. “The response was overwhelming,” GTW said.

In short order, about 26,000 people filed comments in opposition to the “factoryless goods” proposal. The last time the administration tried to implement this proposal, it received 10 comments.

On 8 August, the administration responded. The following announcement appeared in the US Federal Register: “Given these initial research results and the large number of public comments submitted on the topic of FGPs [Factoryless Goods Producers], OMB [the Office of Management and Budget] here announces that the FGP recommendation will not be implemented in 2017.”

GTW said that the voice of reason “contributed to a chorus that helped convince the administration to rethink the wisdom of categorizing firms that do not manufacture anything as US manufacturers. Advocacy, as it turns out, can work.”

GTW added: “Thanks to the groundswell of public opposition (and the contributions of some clear-minded naysayers within the administration), the ‘factoryless goods’ proposal has been shelved. But it has not been dust-binned.

“OMB makes clear that the ‘factoryless goods’ fantasy will likely emerge again, albeit in a different form: ‘Without the deadline imposed by the 2017 NAICS revisions, the relevant statistical agencies will now have the opportunity to complete the additional research, testing, and evaluation needed to determine the feasibility of developing methods for the consistent identification and classification of FGPs that are accurate and reliable. This process will also be informed by questions raised in public comments. Results of this research, testing, and evaluation could lead to a different FGP proposal for consideration or implementation.’

“As ‘factoryless goods’ proponents regroup and decide what to do next, we will remain vigilant. Future bouts of pressure will likely be needed to keep our data, and the policymaking that it informs, free of distortion. As we push to change our trade policies, we will need to keep pushing against efforts to simply change our numbers. But for now, kudos,” said GTW.

Hapless developing countries, being pushed and pressured at the WTO to accept the TFA, perhaps need to thank US civil society activists for putting a spoke in the wheel of the march of the “global value chains” that would have relegated the developing world forever to be “hewers of wood and drawers of water”. (SUNS7864)

Third World Economics, Issue No. 575, 16-31 Aug 2014, pp8-9