INSIGHT: US manufacturers facing $2.6bn in costs over ‘pork’

07 August 2014 16:20 Source:ICIS News

By Joe Kamalick

US trade could see downturn due to tariffs issueWASHINGTON (ICIS)--US chemicals producers and other manufacturers are facing as much as $2.6bn in taxes and business losses because members of Congress can’t agree on the difference between 'pork' and tax relief.

A little- known but widely applied tax relief measure called the miscellaneous tariffs exemption (MTE) has routinely been granted to domestic manufacturers.

That exemption eliminates US tariffs on hundreds, even thousands of imported substances, chemicals or other items - feedstocks or elements of one sort or another - not produced domestically but used in production of or as end-product components in US manufactured goods and materials.

If domestic producers have to pay tariffs on those component materials, it makes US finished goods more costly domestically and less competitive when exported.

For more than two decades, Congress has exempted domestic manufacturers from those tariffs by means of a miscellaneous tariffs bill (MTB), which has been almost routinely renewed by Congress every two years.

But the most recent version of the MTB expired at the end of 2012 without renewal, and since then thousands of manufacturers have been obliged to pay those import tariffs, a cost that producers, especially chemical makers, say is undermining their competitiveness at home and abroad.

There is almost universal support in Congress for renewing the miscellaneous tariffs bill - almost but not quite universal.

Some in Congress, especially among Republicans but also including Democrats, contend that exempting domestic manufacturers from import tariffs on materials not locally available amounts to an 'earmark', a special funding or tax benefit.

An earmark is a longstanding tradition in Congress, especially on the House side, by which a legislator gets language inserted into a funding bill that directs a specific amount to a particular project or organisation in his or her home district.

The term comes from agriculture and livestock management, when a farmer would notch or otherwise mark the ear of one of his pigs or cows for identification.

In Congress, an earmark is a legislative notch that allows a legislator to deliver specific benefits or 'pork' to his constituents - and without drawing much attention, other than in his or her home district where the 'pork' feeds local interests and aids the representative’s re-election prospects.

But in a recent outbreak of legislative rectitude among some in Congress, that sort of sleight-of-hand funding has come into disfavour, with many in both the House and Senate vowing to swear off earmarks and pork and pressing their colleagues to get fiscally righteous as well.

As a consequence, some on The Hill have singled out the miscellaneous tariffs exemption as a form of earmark, a particular piece of pork for privileged producers. These zealots want the practice ended.

Manufacturers reject the earmark charge.

The National Association of Manufacturers (NAM) the Society of Chemical Manufacturers and Affiliates (SOCMA), the American Chemistry Council (ACC) and others argue that the MTB is not an earmark because it does not benefit a single organisation or even a specific industry but rather anyone who imports a foreign substance that is not available domestically.

To qualify for the tariff exemption under the MTB, firms that import foreign-made substances must petition Congress for a duty suspension for each individual element or chemical. The petitions are reviewed by the Department of Commerce and other US trade-related agencies to ensure the nominated substance is not available domestically, and the specific suspension bill must be approved by key committees in Congress. 

Right now, there are nearly 3,000 suspension bills pending before Congress, but the usual process is hung up because the MTB has expired while legislators debate pork vs tax relief, or do nothing on the matter at all.

“This is really frustrating for manufacturing companies,” said Bill Allmond, SOCMA vice president for government and public relations.

By failing to act on an MTB renewal, he says, “Congress is essentially raising taxes on those companies, undermining their competitiveness in the global marketplace and reducing the quality of their products”.

Product quality is affected, said Allmond, because some domestic producers cannot afford to pay the tariffs and remain price-competitive, so they turn to a less costly raw material that is domestically produced, but it means the end product is not of the same high quality.

“This means that some domestic products are not being manufactured,” Allmond says, “and some foreign customers are dropping US manufacturers in favour of producers in Europe or Asia.”

NAM and SOCMA estimate that if the MTE is not reinstated before the end of this year, over the next three years US manufacturers will see a tax increase of some $750m (the tariffs) and business losses of approximately $1.8bn, for a total cost of $2.6bn.

Those costs, say NAM, could put some 90,000 domestic manufacturing jobs at risk.

Jessica Lemos, NAM director of international trade policy, said she hopes that a compromise can be reached in Congress before the US midterm elections in November this year.

In the 4 November elections, all 435 members of the House and 36 of the Senate’s 100 members are facing re-election, and both Allmond and Lemos hope the re-election hopefuls will face voter pressure to renew the MTB.

“We remain optimistic,” said Allmond. “The MTB is a jobs bill, and for all the talk in Congress about wanting to support American jobs and keep the tax burden low, they really need to pass this.”

Lemos said there may be a solution in the works.

One proposal would remove Congress from any role in approving the individual suspension petitions, leaving those decisions to trade regulators alone, such as the US International Trade Commission (ITC).

Congress would renew the miscellaneous tariffs bill but leave to the ITC decisions on which imported materials are granted tariff exemptions. In this way, there are no congressional earmarks, no perceptions or allegations of pork.

“We fully support that sort of approach,” said Allmond, “to remove it from Congress as a first step and hand it over to a regulatory agency for more transparency, to get us all away from this idea that these are earmarks.”

In addition to the specialty and batch producers who make up SOCMA’s membership, NAM says that many other chemicals manufacturers among its ranks are being hard hit by the absence of MTB.

NAM quoted LANXESS North America chief executive Flemming Bjoernslev as saying that “the MTB has been critical to keeping LANXESS competitive in the global marketplace”. With MTB in limbo, Bjoernslev fears that the US manufacturing renaissance may be thwarted to some degree.

NAM cites similar cautionary tales from senior executives at DuPont, Milliken & Company, FMC, Gowan Company, BASF and Bayer CropScience, among others.

If Congress is to work a solution to the MTB issue in what remains of this year, time is short.

Congress is now on its August vacation until 8 September and then will be in session for perhaps six weeks before the November election.

After the election, Congress will be in a lame-duck session, so called because some members will have been defeated at the polls and will not be part of the new 114th Congress that convenes in January 2015.

Many argue that a lame-duck Congress should not act on major issues confronting the nation because its departing members necessarily will not be responsible to the public for the outcome of their decisions.

Consequently, if the MTB issue is not resolved before November, a remedy in the lame-duck session does not have the earmarks of success.

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy

By Joe Kamalick