The International Trade Commission is conducting an investigation into the economic impact of the Korea Free Trade Agreement on small and mid-sized enterprises (SME) in the U.S.  Oddly, or perhaps predictably, they are only looking for anecdotes on export opportunities for SMEs.

CPA members met with the ITC as part of this investigation.  We let them know that SMEs don’t generally export.  Rather, the vast majority are domestic supply chain participants.  Thus, the trade agreement focus on “global supply chains” basically displaces our small manufacturers.

The Federal Register Notice for the investigation is here.  Our CPA written submission is below.

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Dear Secretary:

This is a written submission by the Coalition for a Prosperous America regarding the investigation:  U.S.-Korea Free Trade Agreement: Effects on U.S. Small and Medium-Sized Enterprises.

The Coalition for a Prosperous America (CPA) is a national, nonprofit organization representing the interests of 2.7 million families through our agriculture, manufacturing, and labor association and company members.  We advocate balanced trade and a national production strategy for America.

CPA manufacturing members are include SMEs from the tooling, machining, plastic mold building, steel, copper, aluminum, electronics components and other industries.  Our members are domestic supply chain companies.  Many of our members, and most SMEs, do not export.  CPA members that do export, do so on a limited basis.  Our members supply aerospace, automotive, electronics, medical, energy, defense, telecommunications, and other U.S. industries. Their lifeblood is the domestic U.S. supply chain.

The questions posed for this study are misleading and not carefully tailored to gain facts relating to economic benefits or harm of the KORUS FTA.  SMEs generally do not export.  The domestic market is, by far, the biggest and wealthiest market that is feasible for SME sales.  The questions posed are targeted to that small minority of SME producers who do export as a portion of their sales.

Another false assumption of the way the question is framed is that the US supply chain will grow and thrive by exporting just like the OEMs.  The assumption is that, while more trade agreements like KORUS may lead domestic OEMs to offshore much of their supply chains and thereby increase their global competitiveness to take advantage of new export markets, their former domestic suppliers can also use these trade agreements to join a more global supply chain that offers far more opportunity for them as well.

The fallacy here is the failure of US trade negotiators to recognize that the trade strategies of competing nations is to enact trade agreements that enable them to capture the supply chains of key industries, not to open their markets to US suppliers.  They know the real economic growth engine is the value added by the supply chain of key industries.

CPA members have been harmed by the KORUS FTA and prior free trade agreements because they tend to reduce domestic supply chain participation in favor of global supply chains.  The U.S. has the worst trade performance of any country in the world and the worst trade performance in world history.  We imported $530 billion more than we exported in 2012.  Our 2011 trade deficit subtracted 4% from GDP according to the Bureau of Economic Affairs.

Our goods trade deficit in 2012 was over $700 billion.  We are a net importer of nearly all types of goods, including advanced technology.  A substantial cause of this extra-ordinarily poor trade performance is the fad for pursuing participation in global supply chains rather than recognize and foster the value of domestic supply chains.

The economic muscle of domestic supply chains comes from the massive number of jobs, the innovation, the value add, the wealth creation and the growth that stems from them.  National policies that try to transform supply chain participants into exporters, while helping reduce SME business by helping globalize the supply chain, are impoverishing CPA member companies.  Successful trading and producing countries optimize domestic supply chains in major industries, rather than try to offshore under a “global supply chain” theory.

The industries represented by our members have been suffering significant decline because of poorly negotiated US trade agreements.  Prior to Congress’ passage of KORUS, we warned that it would have the same impact.

The KORUS FTA is continuing this trend.  Prior trade agreements, and China’s accession to the WTO, directly caused CPA member companies to lose business to companies in other countries.  The U.S. tooling, machining, plastic mold building, electronic components and other industries are very innovative and efficient.  These industries employ many people and produce astounding amounts of innovation which become embedded in final products.  However, trade agreements, including the KORUS FTA, continue encouraging the offshoring of this supply chain business.

The KORUS FTA, like previous trade agreements, does not include provisions neutralizing foreign mercantilist practices like currency manipulation, border adjustable (value added) taxes, state-controlled company subsidies.

New Economic Modeling Needed: The ITC models for future economic performance from trade agreements, including we believe, the KORUS FTA, have proven repeatedly optimistic and thus not reflective of reality.  Trade performance has been far worse than ITC models have predicted.  The assumption that reduction in foreign trade barriers will result in net exports for U.S. producers has proven flawed.  The ITC should engage in an analysis of why its models have been over-optimistic in projections, including developing new cause-effect dynamics based upon past performance in other agreements and their trade balance results.  The ITC should then substantially revise and then apply its models so they are more accurately calibrated to real results.

In sum, any report about the KORUS FTA that is based upon anecdotes by SME exporters will, at best, produce a smattering of stories relating to those few SMEs that do export.  The supply chain displacement dynamic - the most important impact economically - is untouched by the export oriented questions underlying this study.