In June, U.S. Trade Representative Katherine Tai gave a speech in which she outlined her vision of worker-centered trade, a popular phrase among Biden administration officials. According to Tai:
“Build Back Better starts by growing the economy from the bottom up and the middle out and putting workers at the center of our economic plans…In the United States, real wages have stagnated for decades and the wealth gap—particularly between Black and white workers—has widened significantly…President Biden is leading us on a new path. He wants an economic policy, including a trade policy, that delivers shared prosperity for all Americans, not just profits for corporations.”
Trade policy reform is important for worker-centered economic policies because of harmful trade deals and naïve trade policies that have decimated many U.S. manufacturing sectors, costing millions of good jobs, and increasing dependence upon imports for so many product categories. Policy makers often don’t realize that manufacturing jobs tend to pay more than service sector jobs. So income inequality worsens when we shift from industrial production to tourism, home health care and food service employment. However, the best way to begin rebuilding U.S. industry is not through more trade negotiations with foreign countries, but by taking direct action here at home to rebuild U.S. industries, even if some of those actions are inconsistent with legacy trade deals.
The COVID-19 pandemic, the shortages in the aftermath, and the strategic competition with China has made many Americans more receptive to new industrial rebuilding strategies. As it happens, one industry group, the American Mask Manufacturers Association (AMMA), has put forward a set or proposals which showcase a thoughtful reshoring plan for masks, aimed at building up U.S. production and reducing our dependence on Chinese imports. Rebuilding our mask-making industry would have economic benefits as well as health security benefits. The economic benefits stem from the fact that the average annual income of a worker in the medical equipment industry, at $60,770, is 8% above that of the average U.S. worker. Manufacturing industries also generate a substantial number of support jobs, creating more income and prosperity in surrounding areas. On the health security side, the U.S. must have a plan to avoid a recurrence of the desperate shortage of masks our health care professionals suffered from last year.
The AMMA includes 26 small companies, most of them founded last year during the pandemic by individual entrepreneurs. Expanding this sector would bring good-paying jobs to some depressed regions and to minority groups that have suffered from U.S. manufacturing decline. Most of them were self-funded and rushed into production to meet the huge demand at the height of the pandemic. A typical example is Premium-PPE of Virginia Beach, Virginia, founded by Brent Dillie and three others. The four men put up $5 million of their own money to launch the company. At its peak, it employed 300 and was churning out thousands of masks a day for hospitals and other customers. Together, the member companies of AMMA employed 7,800 workers at their peak last year. Now many of those companies are laying off hundreds of people and facing bankruptcy.
According to the AMMA, the prime cause of their members’ impending failure is that China has resumed shipping face masks at below-cost prices. The AMMA points out that the raw materials in a surgical mask cost 3 to 6 cents per mask yet Chinese masks are selling at a penny each. How can China do this? Chinese industry is funded with multibillion-dollar government subsidies, typically delivered via the state-owned Chinese banking system. In addition, China’s provincial governments provide support for many businesses often in an uncoordinated fashion, competing with each other to boost their local loss-making businesses at the expense of others, leading to global oversupply in many industry sectors.
The AMMA also points out that many of the Chinese-made masks do not meet U.S. health standards. One study found that 31% of masks imported from China did not meet U.S. standards and another found a stunning 70% of Chinese masks provided to U.S. hospitals failed to meet U.S. standards.
The solution is to rebuild the U.S. industry. The AMMA proposes a simple plan. The linchpin of the plan is to require all hospitals and similar organizations that receive federal funds to purchase 40% of their masks from U.S. manufacturers by 2023. They also propose that the federal government review the Strategic National Stockpile of masks. They suggest that all foreign-made masks be discarded and replaced with masks manufactured in the U.S. Their members are currently sitting on an inventory of 260 million masks.
The effect of this plan would be to throw a lifeline to the 26 small U.S. manufacturers, and allow them to regain profitability and begin hiring again. This reshoring plan would be a step towards Ambassador Tai’s “shared prosperity for all Americans.” It would also restore competition to the industry. Many in Congress, on both left and right, have criticized the decline of competition and the dominance of many sectors of our economy by a handful of huge, highly profitable multinationals. With more companies in the mask industry, there would be more competition, more innovation, better customer service, and more modest profits, which also leads to more evenly shared prosperity.
Opposition to the AMMA plan would come from the major multinationals who manufacture masks offshore, mainly in China. The two largest U.S.-based mask producers are 3M and Honeywell, both of whom do some manufacturing in the U.S. but the majority in Asia. This is where the Biden administration needs to take a firm position and show some leadership. The tradition, notable at the Commerce Department, of listening to U.S. corporate interests and then trying to arrive at a consensus, is not the same thing as pursuing the national interest. Today, our national interest lies in pursuing “shared prosperity for all Americans,” greater economic and national security, and reduced dependence on hostile nations. This is very different from the consensus views of the multinationals (and their lobbying organizations) that visit Commerce and other government agencies every day.
The number one U.S. supplier of masks today, 3M, is a huge, sprawling business with hundreds of product lines. Last year, 3M booked $32.2 billion in revenue. It claimed in its year-end statement that it fought the pandemic “from all angles, making and delivering more personal protective equipment than ever before.” This is doubtless true. However, because of 3M’s dominant position in many markets, it sees less opportunity to invest for the future. Investment is the most critical ingredient in economic growth. Investment makes workers more productive and enables companies to pay them higher wages. 3M’s financial statements for 2020 show that its capital investment last year was $1.5 billion. (It is not required to disclose how much of that investment was in the U.S. and how much abroad.) But last year it also returned $3.8 billion to shareholders, in the forms of dividends and share buybacks. That’s more than twice as much as it invested in the future of its business. Like many large American companies, it can’t find enough ways to grow, so it returns cash to shareholders, aiming to boost its share price, which increases the bonuses payable to senior management.
3M management is already doing pretty well. Last year, CEO Michael Roman’s pay was $20.7 million, or 308 times the pay of the median 3M employee ($67,109). While the 26 members of the AMMA do not disclose their chief executives’ pay, we can be sure it is not 300 times that of their median employee. I would hazard a guess that the multiple is nearer 3, or in some of those struggling companies, zero.
So far the Biden administration has done a lot of talking about “Build Back Better” and “shared prosperity” but not taken enough action. On Oct. 19th, Ambassador Tai reiterated that she would like to reorient the U.S.-China relationship in a way that helps American workers. The administration should take what I would call a Rooseveltian approach to the challenge, commissioning multiple small experiments in a variety of industries to find a formula that works. Too many in Congress think talking about a problem is solving it.
The mask industry is a great place to start taking action. The U.S. has a national interest in a reliable health care system that is not dependent on China. It has an interest in rebuilding U.S. production to rebuild our economy, create jobs that pay above the average and reduce income inequality.