Sen. Brown Calls for Greater Transparency from Administration on Changing Definition of "Manufacturing" in Order to Ensure Complete Data for Measuring Trade Imbalances, Job Growth

Administration has Proposed Allowing American Companies with no Production in U.S. to be counted as Domestic Manufacturers; This Would Inflate U.S. Manufacturing Statistics

WASHINGTON, D.C.—Today, U.S. Sen. Sherrod Brown (D-OH) called on the Administration to justify proposed changes to the Census Bureau’s definition of “manufacturing.” In a letter to Acting Director of the Office of Management and Budget (OMB), Brown and six of his colleagues questioned why OMB would allow American companies without production in the U.S. to count statistically as domestic manufacturers. Brown also urged OMB to work with Congress on this issue before it takes actions that could potentially hurt America’s economy and workers. Brown was joined on his letter by U.S. Sens. Jeff Merkley (D-OR), Ben Cardin (D-MD), Debbie Stabenow (D-MI), Chris Coons (D-DE), Tammy Baldwin (D-WI), and Jon Tester (D-MT).

“We are gravely concerned that the announced changes to the manufacturing classification will have sweeping, adverse effects on the economic statistics upon which Congress and the public rely for accurate depictions of U.S. trade flows, trade balances, manufacturing, and employment and compensation,” the Senators wrote. “We urge you to consult with Congress and stakeholders about the classification changes before implementing them.” 

OMB has proposed making revisions to the North American Industry Classification System (NAICS) by introducing the concept of a “factoryless goods producer.” This would allow a company to count as a domestic manufacturer in the U.S. Census even if its manufacturing is conducted entirely overseas. Brown is concerned that this change will have large policy implications and could potentially encourage companies to outsource jobs overseas since they would still be categorized as domestic manufacturers. Brown is also concerned that this would adversely affect economic statistics that we rely on for accurate depictions of U.S. trade flows, trade balances, manufacturing, and employment and compensation. That is why Brown wants OMB to work with Congress and answer questions that would help them understand the agency’s motives and process on this issue.

Brown continues to fight for Ohio’s manufacturers. Described as “Congress’ leading proponent of American Manufacturing,” Brown is a member of the Senate Manufacturing Caucus, currently Vice-Chair of the Senate Auto Caucus, and was recently named incoming Chair of the Senate Steel Caucus. Last week, bipartisan manufacturing jobs legislation introduced by Brown and U.S. Sen. Roy Blunt (R-MO) moved one step closer to becoming law by passing through a House committee following its passage through a Senate committee. Brown-Blunt would establish a National Network of Manufacturing Innovation (NNMI) and create thousands of high-paying, high-tech manufacturing jobs while enhancing the United States’ role as the world’s leader in advanced manufacturing. 

Brown’s letter to Brian Deese, OMB’s Acting Director, can be read in its entirety below: 

 

Brian Deese

Acting Director

Office of Management and Budget

725 17thh Street NW

Washington, DC 20503

Dear Acting Director Deese:

We are writing to express deep concern about the impact of proposed revisions to the North American Industry Classification System (NAICS) that appear to inflate the amount of manufacturing actually conducted in the U.S. by introducing the concept of a factoryless goods producer.  While we have no doubt that the Census Bureau is well intentioned, we do not understand why a company that does not manufacture in the U.S. would be considered a manufacturer for U.S. statistical purposes.  Specifically, we are troubled by Part V of the Notice relating to an update of the classification of manufacturing units that outsource.  We believe this update, at a minimum, will have far-reaching, distortive effects on the calculation of U.S. economic data and the definition of domestic manufacturing.  We also fear these changes may encourage the outsourcing of good-paying American manufacturing jobs. 

Given the complicated nature of NAICS classifications, an in-depth briefing is necessary to understand the announcement’s full impact.  Despite repeated attempts by some of our offices to schedule such a briefing, OMB would not provide one.  The Notice indicates the updated guidance will change the traditional definition of manufacturing, a policy shift that could have expansive statistical and statutory implications and warrants meaningful consultations with Congress.

We take seriously Congress’ oversight role and all changes to U.S. manufacturing policy, and we have numerous questions about the updated classifications.  We ask OMB to provide comprehensive answers to the following questions so that we may understand the justification for and impact of the policy change. 

1)      Why does OMB believe the classification of outsourcing establishments needs to be changed?  What, if any, benefits will accrue from this change in definitions?

2)      How does OMB define “manufacturer” for the purposes of the Notice? 

3)      Does OMB believe there should be a statistical distinction between an establishment that has outsourced all manufacturing processes to a location in another country and an establishment with domestic manufacturing processes?

4)      How does OMB define “entrepreneurial risk”?

5)      On what basis did OMB determine that an establishment “should remain classified in the manufacturing sector,” even when “individual steps in the complete process are outsourced”?  Is there a limit to the number of steps that can be outsourced in order for an establishment to still be considered a manufacturer? 

6)      How does OMB define “factoryless goods producer” (FGP)? What are examples of FGPs currently operating in the U.S.?

7)      Will a company be defined as an FGP if only the establishment’s headquarters were located in the U.S. but no other steps of the complete manufacturing process?

8)      The Notice states that the inclusion of revenues from FGP activities in manufacturing “will effectively change the traditional definition of manufacturing.”  According to OMB, what will be the change to the definition of manufacturing? 

9)      What impact will the changes to the definition of manufacturing have on other manufacturing policy, such as tax policy, energy policy, etc.?

10)  The Notice states that the inclusion of revenues from FGP activities in manufacturing will “affect statistical estimates at the national, State and regional levels.”  What statistics will be affected at the national, state, and regional levels?  How will they be affected?

11)  How will the classification of FGPs as manufacturers affect U.S. export statistics? Will a good produced offshore by an FGP and shipped to a third country be counted as a U.S. export?

12)  How will the classification of FGPs as manufacturers affect U.S. import statistics? Will products manufactured offshore by FGPs and then shipped to the U.S. for sale count as U.S. manufacturing imports?

13)  What changes to current account balance and trade deficit calculations will occur as a result of the inclusion of FGPs in manufacturing?

14)  What changes to wage statistics will result from the inclusion of FGPs in manufacturing?

15)  How will the classification of FGPs as manufacturers affect manufacturing employment data?

16)  The Notice links to a document from the Economic Classification Policy Committee that includes additional recommendations, including a reclassification of manufacturing service providers (MSP).  Is OMB planning to announce a change to the definition of MSPs as well? If so, when?

We are gravely concerned that the announced changes to the manufacturing classification will have sweeping, adverse effects on the economic statistics upon which Congress and the public rely for accurate depictions of U.S. trade flows, trade balances, manufacturing, and employment and compensation.  We urge you to consult with Congress and stakeholders about the classification changes before implementing them. 

We are not inclined to support a policy that changes the traditional definition of manufacturing, particularly if it would obfuscate the effect of American companies sending their production offshore.

We look forward to OMB’s responses to the questions included in this letter and welcome a meaningful dialogue with you about the importance of growing the U.S. manufacturing sector by increasing production here at home.

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