Building in a global environment

PHOTO SUBMITTED A man works in the shop at National Machinery in Tiffin. According to the firm, National uses state-of-the-art machine tools to manufacture the critical tolerance parts that go inside its formers. PHOTO BY JIMMY FLINT Seneca Industrial and Economic Development Corp. President and CEO David Zak poses for a photo at his office. PHOTO BY JIMMY FLINT Laminate Technologies CEO Fred Zoeller speaks with an employee of the company during a tour. Several area business and manufacturing leaders are preparing for change in the midst of uncertainty under President Donald Trump's administration, as they plan ways to continue to compete in a global market. Rhetoric from Trump and his administration has at times appeared to lean toward moving to a more protectionist policy, which is an economic theory or practice of shielding a country's domestic industries from foreign competition by taxing imports. How will these policies affect local business? 'A much more global environment' John Bing, a retired Heidelberg University professor of political science, said free trade agreements generally are seen as a positive. "Business locally, we do a fair amount of cross-border trade in this part of the United States," he said. Bing said companies often import raw materials to find the cheapest ways to assemble a product. "Companies do this because it provides the lowest cost of production, which means (these companies) can compete globally," he said. A local example was given by Laminate Technologies CEO Fred Zoeller, a Trump supporter, who said scaling back free trade agreements could have negative consequences. "I believe in today's economy, it's very global," he said. "The old adage of purchasing raw materials in Fremont, producing it in Tiffin and selling it to Findlay is no longer here. We have to purchase products throughout the world, produce it throughout the world and sell it throughout the world. We are in a much more global environment." Zoeller, who said he follows federal government policy, said underdeveloped countries have the advantage of cheaper labor costs, so his company and others have to utilize technology and innovation to be competitive. "We have to pair our advantages to overcome those disadvantages," he said. "The consumer wins, the company wins, there are jobs created," Bing added. Seneca Industrial and Economic Development Corp. President and CEO David Zak said many companies he has worked with prefer being able to export without duties or tariffs. "To the extent that free trade agreements contribute to a company's ability to increase and enhance their export products, I'm in favor of it. The second item, free trade agreements tend to make imports cheaper," he said. Zak gave an example in which a table is produced and part of the material needed to make the table was imported from China. "If the cost goes up, because of protectionist policies and increased duties, it's going to cost me more to make my product," he said. "If I'm selling my product at a higher price, generally it's going to increase costs (for consumers)." Zoeller agreed. "I'm a strong believer of free trade," he said. "The less government intervention we have in our day-to-day operations, and let private enterprise dictate the marketplace, the better off we are." Zach Myers, staff professional at WOB Accountants and Advisers in Lexington who has a bachelor's degree in political science and business administration and a master's degree in business administration, said free trade agreements have become commonplace because they work. "It's effective," he said. "It can be painful at first, but it's a long-run benefit." Zoeller, who said his company imports about 40 percent of its raw materials, said he already has noted changes in policy since Trump took office. "We buy plywood out of China; we have always bought our plywood from either Philippines, Indonesia, Malaysia or China," he said. Zoeller said in the past 30 years, the company hasn't been able to purchase plywood in the U.S. because of cost, adding that companies in China that Laminate Technologies purchases from could have as many as 2,000 employees. "It's an extremely labor-intensive, manual process," he said. "We have to go where there's a lot of trees or where there's low-cost labor." Zoeller said three years ago, under the Obama administration, a group of domestic plywood manufacturers filed a petition with the U.S. International Trade Commission, saying Chinese plywood companies were using unfair practices. He said the case was dropped after it was investigated for about two years, until about two weeks after Trump took office when the petitioners refiled the complaint. "It has already been granted," he said. "Here's the kicker, it was effective April 10. Anything we receive from the Pacific Rim will be assessed a duties and tariffs fee, but they can't tell us how much it is until sometime in July. How do we know what to charge our customers?" he said. Abandoning a new trade deal Among Trump's first actions as president, he signed an executive order Jan. 23 withdrawing the U.S. from the Trans-Pacific Partnership trade deal, a free trade agreement between the U.S. and 11 Asian nations. According to the Office of the U.S. Trade Representative, the deal was supported by former President Barack Obama's administration to create a single market for the countries involved, who together compose one-third of global trading. The agreement would have made goods flow more cheaply and freely between partners. Bing said the goal of the deal was to create a more even playing field globally, so other nations were required to abide by safe working conditions, wage floors and environmental concerns. "In part, we negotiated what we thought was an arrangement that would raise the cost of manufacturing elsewhere," he said. During the campaign, Democratic presidential candidates Hilary Clinton and Bernie Sanders joined Trump in opposing the proposal. Trump claimed during the campaign the agreement was unfair and would hurt American workers. Myers said supporting the agreement was a no-win situation for presidential candidates. He said benefits such as more business for U.S. agricultural exporters and cheaper imported goods for consumers would be overlooked. "Politicians were against the TPP because it would be detrimental to a lot of voters," he said. "People won't recognize the overall benefits of the deal, but they will recognize that their hometown plant shut down. Politicians go against free trade because it's an easy political gain. They don't have to point at something and say, 'I caused a loss of money or a loss of jobs.'" Turning doubt on an old one Trump also mentioned during the campaign he intended to renegotiate portions of the North American Free Trade Agreement and even has mentioned withdrawing from it. According to NAFTANow.org, the agreement became official in 1994 and removed restrictions on trade among the U.S., Canada and Mexico. The agreement has gotten mixed reviews. Critics say the deal caused a major loss of American jobs, as companies moved production overseas. Supporters have said the U.S. experienced major economic growth, partly because of the agreement. NAFTANow.org states U.S. manufacturing output rose by 62 percent between 1993 and 2008, compared with 42 percent between 1980 and 1993. In 2008, U.S. manufacturing exports reached an all-time high of $1 trillion. Zak said it is difficult to evaluate NAFTA's effect on the economy because there are many factors involved. "Different people get advantaged and different people get hit and hurt by any economic policy," Bing said. Bing said the mixed result is a consequence of people evaluating deals in different ways. "People say some of these agreements didn't benefit the American worker, but it did advantage (national) economic interests considerably," he said. "It's not entirely true that all trade agreements are equally good. There is a sense in which the greater good of some kind of economic calculation, is not in the interests of maybe more than half the population. We have to look at what is happening in the bank accounts and back pockets of hundreds of thousands of workers." U.S. Rep. Jim Jordan, R-Urbana, said Trump was clear on the campaign trail that he wanted trade agreements that were best for the U.S., a position Jordan said he agrees with. "I'm for free trade, trade is good. … I just want to make sure it is always in the best interest of the United States," he said. Myers said free trade works as long as countries don't play favorites. "If no foul play is involved, let the market dictate whether a product is made in the U.S.," he said. National Machinery CEO Andrew Kalnow said free trade promotes more international commerce. "Take the example of NAFTA, it's interesting," he said. "We've certainly seen a trend before Trump taking office of our 'customers' customers and then some of our direct customers migrating to Mexico. Put aside the issue whether U.S. jobs are being lost or not with that, if we look at it as, 'anytime someone puts a new factory up, moves some of our machinery in … that's usually good for us.'" Myers said NAFTA does kill American jobs, but he argues those jobs are inefficient in today's economy. "You could grow bananas in Alaska if you had a greenhouse," he said. "You could be protectionist, but you'd be using a lot of resources when you could use the same resources to get far more units of caribou than you could ever get with bananas." Myers said protectionism leads to an inefficient allocation of resources. "I can use my cellphone as a decent hammer for five or six whacks, but I'm not using it in the way that I should," he said. "In a way, capitalism and protectionism are against each other. You create a flawed marketplace for no other reason than protecting a special interest." Hopes for job creation Zoeller said more protectionist policies could, in the long-term, bring more jobs back to U.S., but he said the labor force may not be ready for it. "This is sort of a double-edged sword for a local company," he said. "It may force us to purchase domestic product, but, we have to realize it's a greater problem than that." Myers agreed, saying the policies could create more American jobs in the manufacturing sector, but it also would lose sight of a larger issue. "Don't throw good money after bad money," he said. "Just because you spent all this money on manufacturing in the past, doesn't mean you should come back and spend more on it." Zoeller said when he started 35 years ago, his biggest concern was finding enough business to pay the bills. "Today, my biggest single concern is, 'Am I going to have enough people to take care of the business we have.' No matter who you talk to in the manufacturing environment, people is of major concern for everybody." Zak cited a local study by Heidelberg University student Mark Linslata that found about 70 percent of Seneca County companies could not find enough workers and half of those companies could not move forward with expansion plans because of it. "Absolutely, (these policies) can bring more jobs back to the U.S., but, we have to fundamentally change the attitude and atmosphere of government taking care of people through welfare and government assistance," Zoeller said. He said if more production is done domestically, changes have to be made to labor laws and the welfare system. "While I support what Trump is doing, I think we've got to look at it further than just putting up borders and fences around our country," Zoeller said. "We have to create an environment where people are willing to work, they want to work and they have the ethics to work." Zoeller predicted "tremendous shortages" of workers if restrictions are made to free trade. "Yeah, we've got the potential of bringing business back, but if we don't have the people to run the factories, produce the product, at a competitive wage and doing it in an environmentally acceptable way, we're going to defeat the purpose of what we're attempting to do," he said. Zoeller believes the workforce has changed. "It is so easy for someone who is paying child support and alimony to say, 'Well, by the time I have to pay half of my wages to those entities and the government takes their share of it, then it's really better for me to just go on welfare and be done with it,'" he said. "Reforming of the welfare system is essential to incentivize people to work. The old adage of, 'You work, you eat,' is over. Government has taken that incentive away. That needs to be revamped." The growing role of technology Innovations in technology and automation are changing the future of the workforce and the economy, Myers said, because companies must continue to improve or be left in the dust. "The driver industry is going to be replaced by self-driving cars," he said. "Those jobs aren't going to exist anymore. It's not a matter of China taking your jobs or Mexico taking your jobs, it's just not going to be needed. It's why we have only a few hundred horses for transportation now rather than 5 million." "The idea we can compete with low-wage manufacturing by providing lower wage manufacturing," Bing said. "Once we solve problems of robotic equipment, then our robotic manufacturing will be lower wage and lower cost." Bing said it will be hard for business owners to pass on the advantages of automation. "All the advantages will go to the people who own the businesses," he said. "We have to look out for the people who are paying the price for change and progress and not just treat them as collateral." Zak said changes in technology and in federal trade policy affect companies. "If companies are growing, they're hiring more people," he said. "The interesting thing about manufacturing is the continual increase in productivity, in automation and in international competition over the years. Successful companies continue to innovate, to make new products and design solutions for new problems and old problems in better ways. It's not something everyone can do, it's something we can do and we can do it better than our competition." Zak said he views advances in technology as good. "Sometimes, I think automation has helped companies become more competitive. The unintended consequence, the productivity of the American worker increases," he said. "Therefore, companies don't need as much manual labor and the skills needed for American workers increase. The reality is that the global marketplace is competitive, more countries are developing and competing." Uncertainty of future policy Kalnow said among his biggest concerns is not knowing what is going to happen in regard to Trump administration policy. "It's a tough planning environment," he said. "How do you plan in this sort of environment, where there could be major change? That's been, quite frankly, disconcerting." Kalnow said the company's name, National Machinery, is a misnomer because the company is very international. "On the new machine side, roughly half our business is overseas on average," he said. "We also have considerable servicing and rebuilding of machines in overseas markets. Europe, Japan and to some extent now, China. That's good business to us." Kalnow said National Machinery is a significant exporter and he said a border abatement with Mexico, that could assess duties or tariffs to goods exported to the country, is an issue he follows. "I think the conventional thinking — if we put up major trade barriers, in terms of taxing imports or having some other major obstacles or prohibitions — that there would be retaliation on the international front," he said. "That's probably true, but how far does that go? Is this simply a southern border skirmish with Mexico?" Myers said a global trade war would hurt all sides. "People don't seem to understand it is a double-sided equation. It's true you'll create more (American) jobs (by implementing tariffs), but you're also taking money out of the pockets of everyone. The only ones who benefit are the ones protected," he said. "If other nations put a tariff on our corn, it makes it more expensive. One of the reasons we do well, we export a lot of things." Kalnow gave Trump credit for reaching out to several international leaders. "This is the real world, I will give credit to him, as opposed to throwing spears, let's make contact," he said. Kalnow said the Trump administration plans to build a border wall between the U.S. and Mexico plays into the discussion. He wonders if the trend of companies moving into Mexico will be affected by a border wall. "Is now the trend, decisively, where American businesses will pull back out of Mexico and retreat into the U.S. and invest in the U.S?" he asked. "That is the presumption of the Trump administration." Kalnow said some companies already have announced further investment in the U.S., but he said some of those companies may have invested back in the country regardless of policy. He said because most of the company's competition is foreign, being in Tiffin gives them an advantage. "We arguably have the ability to service companies in Mexico better than our foreign competition," Kalnow said. He also said he could envision a positive scenario in which these policies could bring business back into the U.S. Myers warned against protectionist policies. "Protectionism blames improper causes and rectifies them with tariffs," he said. "The only way to stop that from happening is a version of (George Orwell's novel) '1984.' A society that bans all innovation," he said. "You could save one person's job, but all you'll be doing is killing your own economy 30 years down the road when everyone surpasses you in technology and innovation." Myers said tariffs and duties generally are bad. "It's a redistribution of wealth not based on efficiency, skill or insight," he said. "There's no reason to make cars in the U.S. because you can't get the cost down. Instead of wasting those resources on something else, you can use those resources in a more efficient way." Zak said regardless of who is in the White house, businesses must find ways to compete to survive and thrive in a market that is becoming more global. Sunday Editor Nick Dutro interviewed U.S. Rep. Jim Jordan April 21.