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Trade Adjustment Assistance for Firms

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Trade Adjustment Assistance for Firms: Economic, Program, and Policy Issues J. F. Hornbeck Specialist in International Trade and Finance February 14August 19, 2011 Congressional Research Service 7-5700 www.crs.gov RS20210 CRS Report for Congress Prepared for Members and Committees of Congress Trade Adjustment Assistance for Firms: Economic, Program, and Policy Issues Summary Economists generally acknowledge thatAlthough trade liberalization enhancescan enhance the economic welfare of all trade partners, but with stiffer global competition, many firms and workers also face difficult adjustment problems trade partners, it also causes difficult adjustment problems for some firms and workers. Congress has responded to these adjustment costs by authorizing four trade with trade adjustment assistance (TAA) programs to assist trade-impactedfor workers, firms, farmers, and communities. This report discusses the TAA program for firms (TAAF). The TAAF program provides technical assistance to trade-affected firms to help them develop strategies and make other adjustments to remain competitive in the changing international economy. The 111th Congress authorized the program through February 12, 2012, and it continues to operate at FY2010 levels of $15.8 million under a continuing resolution (see CRS Report RL30343, Continuing Resolutions: Latest Action and Brief Overview of Recent Practices, by Sandy Streeter.)for Firms (TAAF) program. Congress first authorized TAA in Title III of the Trade Expansion Act of 1962 (P.L. 87-794), including a new firm and industry assistance program, which is administered by the Economic Development Administration (EDA) of the U.S. Department of Commerce. It provides technical assistance to help trade-impactedaffected firms make strategic adjustments, which may allow them to remain competitive in a global economy to improve their competitiveness. Originally firm TAA also included loans and loan guarantees, but Congress eliminated all direct financial assistance in 1986 because of federal budgetary cutbacks and concern over the program’s high default rates and limited effectiveness. Debate early in the 111th Congress over TAA reauthorization led to a bipartisan agreement on February 5, 2009, bipartisan agreement to expand and extend the existing programs for workers, firms, and farmers, and to add a fourth program for communities. The agreement became part of the American Recovery and and Reinvestment Act (ARRA) of 2009 (P.L. 111-5—the Stimulus Bill). Congress changed the TAA for Firms TAAF program in a number of important ways. It expanded eligibility for trade adjustment assistance to include services firms, authorized an extension of the program through December 31, 2010to include services firms, increased annual authorized funding levels from $16 million to $50 million, provided greater flexibility flexibility for a firm to demonstrate eligibility for assistance, established new oversight and evaluation evaluation criteria, created a new position of Director of Adjustment Assistance for Firms, and required required submission to Congress of a detailed annual report on the TAAF program. AuthorizationAs authorization of the TAA programs was setabout to expire on January 1, 2011. The, Congress passed the Omnibus Trade Act of 2010 (H.R. 6517), which the House and Senate passed on December 22, 2010, of 2010 (P.L. 111-344). This act extended the TAAF program through February 12, 2012. However, because of expiring language in the act, those expanded provisions February 12, 2012, but allowed those expanded provisions in P.L. 111-5 covering eligibility for services firms and other matters passed in the ARRA all expiredto expire on February 12, 2011, although the program continues to be authorized and operate at FY2010 levels of $15.8 million under the continuing resolution. On February 8, 2011, S. 308, the Trade Extenders Act of 2011 was introduced in the Senate. This bill would authorize the TAA for Firms program to operate through June 30, 2013. It would also authorize appropriations of $50 million for FY2011 and $37.5 million for the nine months ending June 30, 2012. Because the TAA for Firms program awards grants to the eleven regional Trade Adjustment Assistance Centers (TAACs) on July 1 of the fiscal year, S. 308 would allow grants for FY2011 to be funded at the $50 million level, if Congress fully appropriates that amount, and a nine-month pro rated share ($37.5 million) would be available for FY2012. Funds would be awarded for the grant fiscal year July 1, 2012 through June 30, 2013. Congressional Research Service Trade Adjustment Assistance for Firms: Economic, Program, and Policy Issues Contents Introduction ................................................................................................................................1 Recent Developments..................................................................................................................1 The Economics of Trade Adjustment ...........................................................................................2 The Firm Trade Adjustment Assistance Program .........................................................................3 Eligibility and Certification...................................................................................................4 Program Evaluation ..............................................................................................................6 Economic and Policy Issues ........................................................................................................7 Tables Table 1. Firm TAA Authorizations and Appropriations, FY2000-2010 .........................................3 Table 2. Trade Adjustment Assistance, Select Program Indicators for FY2003-2009 ....................6 Contacts Author Contact Information ........................................................................................................8 Congressional Research Service Trade Adjustment Assistance for Firms: Economic, Program, and Policy Issues Introduction Economists generally acknowledge that trade liberalization enhances the economic welfare of all trade partners, but with stiffer global competition, many firms and workers also face difficult adjustment problems. Congress has responded to these adjustment costs by authorizing four trade adjustment assistance (TAA) programs to assist trade-impacted workers, firms, farmers, and communities. This report discusses the TAA program for firms (TAAF). The TAAF program provides technical assistance to trade-affected firms to help them develop strategies and make other adjustments to remain competitive in the changing international economy. The 111th Congress authorized the program through February 12, 2012, and it continues to operate at FY2010 levels of $15.8 million under a continuing resolution. Recent Developments Debate early in the 111th Congress over TAA reauthorization led to a February 5, 2009, bipartisan agreement to expand and extend existing programs for workers, firms, and farmers, and to add a fourth program for communities. The agreement became part of the American Recovery and Reinvestment Act (ARRA) of 2009 (P.L. 111-5—the Stimulus Bill). Congress changed the TAA for Firms program in a number of important ways. It expanded eligibility for trade adjustment assistance to include services firms, authorized an extension of the program through December 31, 2010, increased annual funding levels from $16 million to $50 million, provided greater flexibility for a firm to demonstrate eligibility for assistance, established new oversight and evaluation criteria, created a new position of Director of Adjustment Assistance for Firms, and required submission to Congress of a detailed annual report on the TAAF program. Authorization of the TAA programs was set to expire on January 1, 2011. The Omnibus Trade Act of 2010 (H.R. 6517), which the House and Senate passed on December 22, 2010, extended the TAAF program through February 12, 2012.1 However, because of expiring language in the act, those expanded provisions covering eligibility for services firms and other matters passed in the ARRA all expired on February 12, 2011, although the program remains authorized and continues to operate at FY2010 levels of $15.8 million under a continuing resolution. On February 8, 2011, S. 308, the Trade Extenders Act of 2011 was introduced in the Senate. This bill would authorize the TAAF program to operate through June 30, 2013. It would also authorize appropriations of $50 million for FY2011 and $37.5 million for the nine months of FY2012 ending June 30, 2012. The TAAF program operates by awarding grants to the regional Trade Adjustment Assistance Centers (TAACs). The grants are awarded on July 1 of the fiscal year in which appropriations are made. Therefore, TAACs are currently working off FY2010 funds and the TAACs are scheduled to be awarded FY2011 grants on July 1, 2011, so no interruption of operations in the near term is expected. However, the program is funded under a continuing resolution. The implications of S. 1 This legislation affected the workers program more, with many provisions expired on February 12, 2011. See: CRS Report RL34383, Trade Adjustment Assistance (TAA) for Workers: Current Issues and Legislation, by John J. Topoleski. Congressional Research Service 1 Trade Adjustment Assistance for Firms: Economic, Program, and Policy Issues 308 are, that if passed by Congress, grants for FY2011 would be funded at the $50 million level, with a nine-month pro rated portion ($37.5 million) made available for FY2012. Grants would likely be awarded to TAACs on July 1 of that year. The Economics of Trade Adjustment Economists tend to agree that in defining the rules of exchange among countries, freer trade is preferable to protectionism. Insights from traditional trade theory (comparative advantage) point to the mutual gains for countries trading on their differences, producing those goods at which they are relatively more efficient, while trading for those at which they are relatively less so. Additional gains are realized from similar, intra-industry trade based on efficiencies from segmented and specialized production.2 Firm-level evidence supports theory. Trade appears to “enable efficient producers within an industry, and efficient industries within an economy, to expand,” leading to a reallocation of resources that increases a country’s productivity, output, and income. 3 Consumers (both firms and households) also gain from a wider variety of goods at lower prices. 13, 2011. The TAAF program remains authorized and continues to operate at FY2010 spending levels of $15.8 million under a full-year continuing resolution, so no interruption of operations is expected in the near term. The pre-ARRA TAA program authorizations are set to expire in early 2012 and the 112th Congress is considering legislation to extend all TAA programs. Although there are multiple bills addressing TAA that range in scope from repealing the authorizing legislation to providing expanded multiyear extensions, the issue is taking form as part of the debate on passage of implementing legislation for the proposed free trade agreements (FTAs) with Colombia, Panama, and South Korea. As Congress seeks to resolve this debate, two issues dominate the discussion: (1) reauthorization of TAA programs; and (2) procedural issues on how to move TAA legislation. At present, a bipartisan compromise is being considered to reauthorize TAA programs through December 31, 2013, including many, but not all, of the enhanced programs and funding levels contained in the ARRA. The firms program would be reauthorized at an annualized level of $16 million. Procedural issues over how to move the TAA and FTA implementing bills are still under discussion, but include moving TAA legislation either as part of an FTA implementing bill or in separate legislation. A final determination has not been announced. For a broader policy discussion on TAA, see CRS Report R41922, Trade Adjustment Assistance (TAA) and Its Role in U.S. Trade Policy. Congressional Research Service Trade Adjustment Assistance for Firms: Economic, Program, and Policy Issues Contents Introduction and Recent Developments........................................................................................... 1 The Economics of Trade Adjustment............................................................................................... 1 The Firm Trade Adjustment Assistance Program ............................................................................ 2 Eligibility and Certification....................................................................................................... 3 Program Evaluation ................................................................................................................... 5 Economic and Policy Issues ............................................................................................................ 6 Proposed Legislation ....................................................................................................................... 7 Tables Table 1. Firm TAA Authorizations and Appropriations, FY2001-2011........................................... 3 Table 2. Trade Adjustment Assistance, Select Program Indicators for FY2003-2010..................... 5 Contacts Author Contact Information............................................................................................................. 8 Congressional Research Service Trade Adjustment Assistance for Firms: Economic, Program, and Policy Issues Introduction and Recent Developments Although trade liberalization can enhance the economic welfare of all trade partners, it can also causes difficult adjustment problems for some import-competing firms and workers. Congress has responded to these adjustment costs with trade adjustment assistance (TAA) programs for workers, firms, farmers, and communities. This report discusses the Trade Adjustment Assistance for Firms (TAAF) program, which provides technical assistance to trade-affected firms to help them develop strategies to remain competitive in a dynamic international economy. Debate early in the 111th Congress over TAA reauthorization led to a bipartisan agreement on February 5, 2009 to expand and extend the existing programs for workers, firms, and farmers, and to add a fourth program for communities. The agreement became part of the American Recovery and Reinvestment Act (ARRA) of 2009 (P.L. 111-5—the Stimulus Bill). Congress changed the TAAF program in a number of important ways. It expanded eligibility to include services firms, increased authorized funding levels from $16 million to $50 million, provided greater flexibility for a firm to demonstrate eligibility for assistance, established new oversight and evaluation criteria, created a new position of Director of Adjustment Assistance for Firms, and required submission to Congress of a detailed annual report on the TAAF program. As authorization of the TAA programs was about to expire on January 1, 2011, Congress passed the Omnibus Trade Act of 2010 (P.L. 111-344). This act extended the TAAF program through February 12, 2012, but allowed those expanded provisions in the ARRA covering eligibility for services firms and other matters to expire on February 13, 2011. The program remains authorized and continues to operate at FY2010 spending levels of $15.8 million under a full-year continuing resolution, so no interruption of operations is expected in the near term. There is, however, a debate in the 112th Congress over reauthorizing the program, and whether to reinstate some or all of the recently expired provisions.1 The Economics of Trade Adjustment Economists tend to agree that in defining the rules of exchange among countries, freer trade is preferable to protectionism. Insights from trade theory point to the mutual gains for countries trading on their differences, producing those goods at which they are relatively more efficient, while trading for those at which they are relatively less so. Additional gains are realized from similar, intra-industry trade based on efficiencies from segmented and specialized production.2 Firm-level evidence supports theory. Trade appears to “enable efficient producers within an industry, and efficient industries within an economy, to expand,” leading to a reallocation of resources that increases a country’s productivity, output, and income.3 Consumers (both firms and households) also gain from a wider variety of goods at lower prices. 1 For a broader discussion on the policy debate over TAA, see CRS Report R41922, Trade Adjustment Assistance (TAA) and Its Role in U.S. Trade Policy, by J. F. Hornbeck and Laine Elise Rover. 2 For an accessible summary of these effects, see Paul Krugman, “The Increasing Returns Revolution in Trade and Geography,” American Economic Review, vol. 99, no. 3 (June 2009), pp. 561-571. 3 On how trade affects total factor productivity based on U.S. manufacturing firm and plant level data, see Andrew B. Bernard and J. Bradford Jensen, “Exporting and Productivity in the USA,” Oxford Review of Economic Policy, vol. 20, no. 3 (2004), pp. 343-344, 350, 352, and 356. Congressional Research Service 1 Trade Adjustment Assistance for Firms: Economic, Program, and Policy Issues It is also true, and commonly cited, that increased competition from trade liberalization creates both “winners and losers,” presenting adjustment problems for all countries. The more efficient firms and plants may grow as they expand into overseas markets; the less efficient may contract, merge, or perhaps even fail when faced with greater foreign competition. While the adjustment process may be healthy from a macroeconomic perspective, much like market-driven adjustments that occur for reasons other than trade (e.g., technological change), it can be a harsh transition for some firms and their workers.4 Critics of free trade agreements often highlight the adjustment costs of reducing trade barriers. To avoid business closures and layoffs, trade-impacted firms often seek to weaken, if not defeat, trade liberalizing legislation. This makes economic sense from the perspective of affected industries, firms, and workers, but economists argue that in the long run it can be more costly for the country as a whole. The costs of protection arise because competition is suppressed, reducing pressure on firms to innovate, operate more efficiently, and become lower cost producers. The brunt of these costs falls to consumers, both individuals and businesses, who must pay higher prices, but the national economy is also denied higher standards of living because of forgone productivity gains. One way to balance the large and broad-based gains from freer trade with the smaller and more highly concentrated costs is to address the needs of firms negatively affected. Congress has done so in authorizing the trade adjustment assistance (TAA) programs, including the one for firms.5 2 For an accessible summary of these effects, see Paul Krugman, "The Increasing Returns Revolution in Trade and Geography," American Economic Review, vol. 99, no. 3 (June 2009), pp. 561-571. 3 On how trade affects total factor productivity based on U.S. manufacturing firm and plant level data, see Bernard, Andrew B. and J. Bradford Jensen, “Exporting and Productivity in the USA,” Oxford Review of Economic Policy, vol. 20, no. 3 (2004). pp. 343-344, 350, 352, and 356.Supporters justify TAA policy on grounds that (1) it helps those who are hurt by trade liberalization (the “losers”), (2) the economic costs are lower than protectionism and can be borne by society as a whole (“the winners”), and (3) given rigidities in the adjustment process, it may help redeploy economic resources more quickly, thereby reducing productivity losses and related public sector costs (e.g., unemployment compensation). Others dispute these claims and have raised concerns over the effectiveness and costs of the program, arguing that it should be limited or discontinued.6 The Firm Trade Adjustment Assistance Program7 Congress first authorized TAA in Title III of the Trade Expansion Act of 1962 (P.L. 87-794), including a new firm and industry assistance program, which is administered by the Economic Development Administration (EDA) of the U.S. Department of Commerce.8 It provides technical assistance to help trade-impacted firms make strategic adjustments that may allow them to remain competitive in a global economy. Originally, firm TAA also included loans and loan guarantees, but Congress eliminated all direct financial assistance in 1986 because of federal 4 Both the benefits and costs of trade derive from resources moving from less to more productive plants (intra-industry) and firms (inter-industry). Employment dislocation is the most noticeable cost, giving rise to congressional interest in TAA programs. Ibid., pp. 345 and 356. 5 Howard F. Rosen, Strengthening Trade Adjustment Assistance, Peterson Institute for International Economics, Policy Brief PB08-2, Washington, D.C., January 2008, pp. 1-2. Congressional Research Service 2 Trade Adjustment Assistance for Firms: Economic, Program, and Policy Issues Supporters justify TAA policy on grounds that (1) it helps those who are hurt by trade liberalization (the “losers”), (2) the economic costs are lower than protectionism and can be borne by society as a whole (“the winners”), and (3) given rigidities in the adjustment process, it helps redeploy economic resources more quickly, thereby reducing productivity losses and related public sector costs (e.g., unemployment compensation). The Firm Trade Adjustment Assistance Program6 Congress first authorized TAA in Title III of the Trade Expansion Act of 1962 (P.L. 87-794), including a new firm and industry assistance program, which is administered by the Economic Development Administration (EDA) of the U.S. Department of Commerce. 7 It provides technical assistance to help trade-impacted firms make strategic adjustments that may allow them to remain competitive in a global economy. Originally, firm TAA also included loans and loan guarantees, but Congress eliminated all direct financial assistance in 1986 because of federal 6 Details may be found in CRS Report R41922, Trade Adjustment Assistance (TAA) and Its Role in U.S. Trade Policy, by J. F. Hornbeck and Laine Elise Rover. 7 Based on 13 C.F.R. § 315, which provides details for applying for TAAF assistance. 8 The TAA for firms program was originally administered jointly by the Tariff Commission (predecessor to the USITC) and the U.S. Department of Commerce. Congressional Research Service 2 Trade Adjustment Assistance for Firms: Economic, Program, and Policy Issues budgetary cutbacks and concern over the program’s high default rates and limited effectiveness. Congress has amended the program many times over the nearly half century that it has been in existence, most recently in the American Recovery and Reinvestment Act of 2009 (P.L. 111-5). Key changes include extending eligibility to services firms, increasing funding, and introducing greater flexibility to demonstrate eligibility for assistance These amendments have since expired, with program rules reverting to those in pre-2009 statutes. TAA authorizations and appropriations for fiscal years 2000-20102001-2011 appear in Table 1. The TAA for firms program has been reauthorized through December 31, 2010, at an annual level of $50 million. Historically, appropriated funds have fallen short of authorized spending levels, which remains the case under the most recent authorization and appropriations actsFebruary 12, 2012, and is currently operating under a full-year continuing resolution at an annual appropriated level of $15.8 million. Table 1. Firm TAA Authorizations and Appropriations, FY2000-2010FY2001-2011 ($ millions) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Authorizations 10.0 10.0 1016.0 16.0 16.0 16.0 16.0 16.0 1650.0 50.0 500.0 Appropriations 10.5 10.5 10.5 10.0 11.9 11.0 12.8 12.8 14.1 15.8 15.8 15.8 Data Source: U.S. Department of Commerce. Economic Development Administration and P.L. 111-5. In practice, technical assistance is provided through one of the 11 Trade Adjustment Assistance Centers (TAACs), which apply for grants from EDA to operate their programs. All appropriated funds have beenare used to support the TAAC process; no funds go directly to firms. TAACs may operate operate through universities, private firms, or non-profit associations. They provide or contract for for technical assistance to assist firms from the initial certification process through implementation of the adjustment proposal adjustment proposal implementation. TAACs are staffed by professionals with broad business expertise who can help firms develop “recovery strategies” and also identify financial resources. They are, in effect, consultants specializing in business turnaround strategies specific 6 Based on 13 C.F.R. § 315, which provides details for applying for TAAF assistance. Note that many of these rules expired on February 12, 2011 and it remains to be seen if Congress will reinstate them. 7 The TAA for firms program was originally administered jointly by the Tariff Commission (predecessor to the USITC) and the U.S. Department of Commerce. Congressional Research Service 3 Trade Adjustment Assistance for Firms: Economic, Program, and Policy Issues to the needs of each firm, which typically faces adjustments in many areas to compete with lowerpricedlower-priced imports.8 Eligibility and Certification The process for receiving TAA unfolds in three phases. First, a firm must submit a petition to become certified as eligible. EDA is statutorily required to accept or reject the petition within 40 days of receiving all materials. The firm must demonstrate eligibility by documenting that (1) “a significant number or proportion of workers”99 Eligibility and Certification There are three phases to successful completion of a trade adjustment assistance project. First, to receive TAA, a firm must demonstrate that it is eligible to apply for assistance. The firm submits a petition for eligibility documenting that it has met three conditions: (1) “a significant number or proportion of workers”10 in the firm have become or are threatened to become totally or partially separated; (2) sales, or production, or both of an article decreased absolutely, or sales, or production, or both of any article that accounted for not less than 25% of total sales or production of the firm during the 12-month period preceding the most recent 12-month period for which data are available have decreased absolutely; and (3) increased imports of competing articles “contributed importantly”11 to the decline in sales, production, and/or workforce. 9 P.L. 93-618, Section 253, as amended and U.S. Department of Commerce. Economic Development Administration. http://www.taacenters.org. 10 5% of a firm’s work force or 50 workers, whichever is less, with EDA discretion to set other parameters in special cases. Congressional Research Service 3production, or both of a firm “decreased absolutely;”10 and (3) increased imports of competing articles “contributed importantly”11 to the decline in sales, production, and/or workforce. Declines in these variables must be demonstrated, but may be done so in five different ways to establish “minimum certification thresholds” for eligibility: • Twelve-month decline—using all three criteria, compare the most recent 12month period for which data are available with the immediately preceding 12month period. • Twelve-month versus twenty-four-month decline—using all three criteria, compare the most recent 12-month period for which data are available with the immediately preceding 24-month period, using average annual data for sales and production. • Twelve-month versus thirty-six-month decline—using all three criteria, compare the most recent 12-month period for which data are available with the immediately preceding 36-month period, using average annual data for sales and production. • Interim sales or production decline—using all three criteria, but defining a base period based on sales and production figures that compares at a minimum a most recent six-month period during the most recent 12-month period for which data are available, with data in the same six-month period for the immediately preceding 12-month period. • Interim employment decline— using all three criteria, but defining a base period based on employment data that compares at a minimum a most recent sixmonth period during the most recent 12-month period for which data are available with data in the same six-month period for the immediately preceding 12-month period. 8 P.L. 93-618, Section 253, as amended and U.S. Department of Commerce. Economic Development Administration. http://www.taacenters.org. 9 5% of a firm’s work force or 50 workers, whichever is less, with EDA discretion to set other parameters in special cases. 10 A firm’s sales or production or both (or of any article or service that accounted for not less than 25% of total sales or production ) have declined by a minimum of 5% relative to statutory comparison guidelines below. 11 A cause which is important, but not necessarily more important than any other cause. A firm must provide a list of four important customers, of which the TAAC must interview two, to help evaluate whether the firm has been “tradeimpacted.” U.S. Department of Commerce. Economic Development Administration, "Program Announcement for the Trade Adjustment Assistance for Firms Program," 73 Federal Register 6925, February 6, 2008. Congressional Research Service 4 Trade Adjustment Assistance for Firms: Economic, Program, and Policy Issues Second, once certified as eligible, a firm has two years to develop and submit its adjustment proposal. Approval of the adjustment proposal depends on EDA’s finding that it (1) is reasonably calculated “to materially contribute” to the economic adjustment of the firm; (2) gives adequate consideration to the interests of the firm’s workers; and (3) demonstrates that the firm will use its own resources for adjustment. EDA typically makes a determination within two to four weeks. Third, the firm has five years to implement an approved adjustment proposal. The standard time to completion tends to beSuccessful firms typically implement the adjustment proposal within two years.12 EDA can provide technical assistance to a firm for preparation of the petition for eligibility certification, and to a certified eligible firm for developing and implementing an approved adjustment proposal. EDA is statutorily required to make a final determination on petitions within 60 days. In recent years, this time has averaged six weeks. There is no cost for assistance provided in developing the petition, but the firm must pay at least 25% of the cost to prepare the adjustment proposal and at least 25% of any awarded adjustment assistance. For project assistance exceeding $30,000, a firm must cover at least 50% of the total cost.13 In provided in developing the petition.13 The TAACs also provide detailed assistance in formulation of the adjustment proposal, which seeks to identify business planning and practices that can be enhanced to improve firm competitiveness. EDA has another 60 days to accept or reject the adjustment proposal. In practice, because technical assistance is provided in the preparation of the petition and adjustment proposal, there is a high formal acceptance rate, likely because petitions are completed these submissions are completed correctly and poor proposals or candidates can be weeded out early in the process. The TAACs also provide detailed assistance in formulation of the adjustment proposal, which seeks to identify business planning and practices that can be enhanced to improve firm competitiveness in at least three major areas. First, since firms must be experiencing falling sales or declining production to be The firm must pay at least 25% of the cost to prepare the adjustment proposal and at least 25% of any awarded adjustment assistance. For project assistance exceeding $30,000, a firm must cover at least 50% of the total cost.14 Adjustment proposals may involve strategic restructuring of various aspects of business operations. First, because firms must be experiencing falling sales or declining production to be eligible, TAACs often focus on marketing or sales strategies to identify new markets, new products, promotional initiatives, and export opportunities. The core idea is to increase revenue. Second, Second, production inefficiencies are correctedoften targeted to reduce firm costs and improve price competitiveness. Third, TAACs can develop debt restructuring strategies and frequently act as intermediaries in in finding new sources of business financing. In 2009, 65% of petitioning firms proposed projects to improve marketing-sales or production-engineering, and 35% proposed projects to enhance support services or management systems. 14 Table 2. summarizes trade adjustment data for fiscal years 2003-2009. The TAAF program targets small- and medium-sized enterprises (SMEs), which is borne out in the firm data. In 2009, firms tended to have fewer than 100 employees and less than $11 million in sales. The federal government provided 48.5% of adjustment costs, for an average $60,123 per firm. 12 U.S. Department of Commerce. Economic Development Administration, "Trade Adjustment Assistance for Firms Program Fiscal Year 2009 Annual Report," 75 Federal Register, January 15, 2010, p. 2495. 13 2010, 35% of adjustment assistance focused on improving marketing-sales, 32% on production-manufacturing, and 25% on enhancing support or management systems.15 (...continued) 11 A cause which is important, but not necessarily more important than any other cause. A firm must provide a list of four important customers, of which the TAAC must interview two, to help evaluate whether the firm has been “tradeimpacted.” U.S. Department of Commerce. Economic Development Administration, “Program Announcement for the Trade Adjustment Assistance for Firms Program,” 73 Federal Register 6925, February 6, 2008. 12 U.S. Department of Commerce. Economic Development Administration, Annual Report to Congress on the Trade Adjustment Assistance for Firms Program for Fiscal Year 2010, Washington, D.C., December 15, 2010, p. 5. 13 The recently expired legislative changes in P.L. 111-5 reduced the time required for EDA to make a final determination on the petition to 40 days. 14 13 CFR 315.6 (c)(2) and Federal Register. Program Announcement for the Trade Adjustment Assistance for Firms Program. February 6, 2008. Vol. 73. No. 25. p. 6925 1415 U.S. Department of Commerce. Economic Development Administration, "Trade Annual Report to Congress on the Trade Adjustment Assistance for Firms Program for Fiscal Year 2010, Washington, D.C., December 15, 2010, p. 38Fiscal Year 2009 Annual Report," 75 Federal Register 2492, January 15, 2010, p. 2508. Congressional Research Service 54 Trade Adjustment Assistance for Firms: Economic, Program, and Policy Issues Table 2. summarizes trade adjustment data for fiscal years 2003-2010. The TAAF program targets small- and medium-sized enterprises (SMEs), which is borne out in the firm data. By 2010, however, firms averaged over 100 employees and sales had grown to an average of $19 million. The federal government provided 48.6% of adjustment costs, for an average $61,953 per firm. Table 2. Trade Adjustment Assistance, Select Program Indicators for FY2003-20092010 2003 2004 2005 2006 2007 2008 2009 2010 Number of Firms AssistedAssisteda 162 177 132 137 126 139 172 265 Avg Firm Sales (millions) $7.2 $11.6 $8.4 $10.6 $11.2 $13.1 10.73 19.1 68 88 64 91 68 82 77 Govt79 138 Gov’t Share (millions) $8.1 $8.5 $5.9 $6.7 $7.1 $7.9 10.3 16.4 Firm Share (millions) $7.4 $8.1 $5.4 $6.0 $5.9 $7.5 9.8 15.6 Total TAA (millions) $15.5 $16.6 $11.3 $12.7 $13.0 $15.4 20.2 32.1 $50,000 $48,023 $44,697 $48,905 $56,449 $56,827 60,123835 59,884 61,953 Avg Firm Employees Avg TAA Per FirmaFirmb Data Source: U.S. Department of Commerce. Economic Development Administration. a Annual Report To Congress on the Trade Adjustment Assistance for Firms Program. Fiscal Year 2010. December 15, 2010. pp. 23-24. a. Number of adjustment proposals approved. b. Government share of TAA Firm program divided by the number of accepted adjustment proposals. Program Evaluation Historically, program evaluation has been limited, with EDA lacking a formal evaluation process. Congress addressed this issue by requiring EDA to submit an annual report on the TAAF program by December 15 of each year. Earlier Early efforts to analyze the TAAF program includeincluded comprehensive studies by the Urban Institute in 1998 and the Government Accountability Office (GAO) in 2000.1516 Both found deficiencies with the TAAF program, such as a cumbersome certification process, long approval times, and little oversight and evaluation of projects. Many of these criticisms have been corrected. The petition and adjustment proposal approval process has been automated and streamlined. In fact, over the past two years, the time between submission of petitions for certification and acceptance has fallen from an average of 28 to 11 days. The average time between acceptance of the petition and certification has been 45 days, higher than the statutory 40 days. EDA notes that a 49% increase in petitions caused processing time to increase for 2009.16 EDA reports that TAACs are now allocated funds in part based on performance measures Congress addressed some of these issues by requiring EDA to submit an annual report on the TAAF program by December 15 of each year, putting stricter time frames on processing petitions for assistance, and providing additional funding for TAAF staff, requirements that have expired.17 Under the expired 2009 statute, EDA has released two annual reports that point to administrative and operational improvements. In addition, TAACs are now allocated funds in part based on performance measures (number of firm certifications and adjustment proposals generated) and quality measures developed in part from a firm survey feedback mechanism. Created by Dunn & Bradstreet, it is intended to provide some indication of “successful interventions” and “program best practices.” This survey has helped reduce the time between submission of the petition and approval of final adjustment proposal. 17 Anecdotal evidence points quality measures.18 Anecdotal evidence from the TAACs also point to numerous “success” stories, but more sophisticated analysis is needed to estimate adequately the effectiveness of this 16the effectiveness of this program approach. It is difficult to isolate the effects of the firm TAA program in determining why a particular firm might 15 U.S. Department of Commerce. Economic Development Administration. Effective Aid to Trade-Impacted Manufacturers: An Evaluation of the Trade Adjustment Assistance Program. Prepared by the Urban Institute, Washington, D.C., November 1998 and. GAO. Trade Adjustment Assistance: Impact of Federal Assistance to Firms Is Unclear. Report GAO-01-12. Washington, DC. December 2000. 1617 U.S. Department of Commerce. Economic Development Administration, "Trade Annual Report to Congress on the Trade Adjustment Assistance for Firms Program for Fiscal Year 2010, Washington, D.C., December 15, 2010, p. 7 and 39. 18Fiscal Year 2009 Annual Report," 75 Federal Register 2491-2495, January 15, 2010. 17 U.S. Department of Commerce. Economic Development Administration, "Program Announcement for the Trade Adjustment Assistance for Firms Program," 73 Federal Register 6926, February 6, 2008, and correspondence with EDA. Congressional Research Service 65 Trade Adjustment Assistance for Firms: Economic, Program, and Policy Issues program approach. It is difficult to isolate the effects of the firm TAA program in determining why a particular firm might succeed in its turnaround effort. Previous studies mentioned above have suggested suggest that many firms might have been able to do so on their own. The fact that small- and medium-sized firms are targeted, however, suggests that the program is attempting to reach that pool of firms most vulnerable to increased globalization and with the fewest resources for undertaking adjustment. Without a more in-depth analysis, however, the issue of TAAF effectiveness remains a somewhat speculative, if not open question. Economic and Policy Issues By any measure, firm and industry trade adjustment assistance is a small federal program; it remains, nonetheless, controversial. Critics point to fundamental arguments opposing TAA that have been debated since before the program was initiated in 1962. First, if competition resulting from trade liberalization is not considered “unfair trade,” why should the federal government be involved? Second, why should federal assistance be necessary for adjustment to trade competition when there is no similar assistance for adjustment to domestic competitive pressures? Third, should not this adjustment process simply be accepted as part of a dynamic market economy working to allocate resources more efficiently and in a way that is in the country’s long-term interests? Proponents of the program argue that TAA is only modestly funded and provides benefits to firms, owners, managers, and workers that amount to many times the value of federal expenditures. Also, if changes in national trade policy have altered the rules under which businesses compete, does not the federal government have some responsibility for assisting firms that bear the costs of adjustment?18 Finally, a point in favor of firm TAA is that it focuses on adjustment, not long-term financial assistance. Firms must commit their own resources and have every incentive to adjust successfully to ensure their very survival. They are not faced with the potential for dependency on long-term cash payments, which critics charge is a problem with some federal assistance programs. In addition to economic concerns, political considerations also define the TAA debate. Congress has accepted, with some reservations, that freer trade is in the long-term interests of the United States. While those skeptical of trade liberalization may support TAA for the assistance it provides to affected workers and firms, proponents of freer trade may also embrace TAA as a complement to an open trade policy along with other domestic economic policy adjustments.19 To the extent that TAA can address some of the concerns of adversely affected firms, it may support trade liberalization as a continuing foundation of U.S. trade policy and temper calls for relief through increased tariffs, quotas, or other restrictions on trade. Advocates of trade liberalization may find support for firm TAA as compelling from a cost-benefit perspective, if it leads to broader acceptance of trade opening legislation. 18 Citing President Kennedy prior to congressional passage of the first TAA statute, “There is an obligation to render assistance to those who suffer as a result of national trade policy.” Howard F. Rosen, Strengthening Trade Adjustment Assistance, Peterson Institute for International Economics, Policy Brief PB08-2, Washington, D.C., January 2008, p. 1. 19 Ibid. Congressional Research Service 7 Trade Adjustment Assistance for Firms: Economic, Program, and Policy Issues Author Contact Information J. F. Hornbeck Specialist in International Trade and Finance jhornbeck@crs.loc.gov, 7-7782 firms might have been able to do so on their own. The FY2010 TAAF annual report illuminates two other interesting points. First, over a two-year assessment period, firms that fully implemented their adjustment proposals experienced on average a 14% increase in sales, a 3% rise in productivity, and a 16% decrease in employment.19 The fall in employment may be a common result for firms in decline. It is also possible that a longer evaluation period may be necessary to fully capture employment effects, which often lag behind recovery, particularly in the aftermath of the recent deep recession. Second, of the 102 firms that left the TAAF program in 2010, 56% completed the program and were operational. The remaining 44% did not complete the program for various reasons, including exceeding the fiveyear threshold (23%); going out of business (11%); or losing interest, being sold, or having inadequate funds (10%). Given that TAAF focuses on firms facing bankruptcy, in part because of foreign competition, these results may not be surprising. Economic and Policy Issues The 112th Congress is considering reauthorizing and extending the TAAF program. Should Congress decide to do so, a key issue, in addition to deciding the size and spending limits of the program, is whether to reinstate some or all of the statutory changes added in 2009 under the ARRA (P.L. 111-5). These affect multiple aspects of the TAAF program and include the following, all of which expired on February 13, 2011: 1. Service Firm Eligibility—first time service firms were eligible for assistance. 2. Change in Certification Requirements: to demonstrate eligibility, firms were allowed to expand the “look back” period for determining declines in sales, production, and employment beyond the 12 months set out prior to the 2009 legislation. The expanded “look back” included: • Twelve-month decline—using production, sales, and employment criteria, compare the most recent 12-month period for which data are available with the immediately preceding 12-month period (currently only program criterion). • Twelve-month versus twenty-four-month decline—using all three criteria, compare the most recent 12-month period for which data are available with the immediately preceding 24-month period, using average annual data for sales and production. • Twelve-month versus thirty-six-month decline—using all three criteria, compare the most recent 12-month period for which data are available with the immediately preceding 36-month period, using average annual data for sales and production. • Interim sales or production decline—using all three criteria, but defining a base period based on sales and production figures that compares at a minimum a most recent six-month period during the most recent 12-month period for which 19 Productivity is defined as sales per worker, a simple measure that can be used across industries, but which may have limitations for evaluative purposes. Congressional Research Service 6 Trade Adjustment Assistance for Firms: Economic, Program, and Policy Issues data are available, with data in the same six-month period for the immediately preceding 12-month period. • Interim employment decline—using all three criteria, but defining a base period based on employment data that compares at a minimum a most recent six-month period during the most recent 12-month period for which data are available with data in the same six-month period for the immediately preceding 12-month period. 3. Basis for Determinations—increases of like or directly competitive articles or services may be determined by firm customer certification representing a significant percentage of the decrease in sales or production of the firm. 4. Determination Time for Petition on Eligibility—was reduced from 60 to 40 days. 5. Notification Requirement—the Secretary of Commerce, upon receiving information from the Secretary of Labor that workers were covered under the TAA for workers program, is required to notify the related firm that it too is potentially eligible for TAA for firms. 6. Oversight and Administration—requires alignment of annual contracting schedules of the TAACs and standardized formula for distribution of funds based on new annual reporting requirements. The formula is to be determined in consultation with the House Ways and Means and Senate Finance Committees, and funds are to be allocated promptly. 7. Authorization of Appropriations—increased for $16 million to $50 million annually, with $350,000 made available for full-time positions in EDA to administer the TAAF program, including a new Director of Adjustment Assistance for firms. 8. Enhanced Penalties—for firms misrepresenting information on petitions for assistance or the adjustment proposals. 9. Annual Report—requires enhanced and detailed report on the TAAF program by EDA to be completed by December 15 following the most recent fiscal year. Proposed Legislation The pre-ARRA TAA program authorizations are set to expire in early 2012 and the 112th Congress is considering legislation to extend all TAA programs. Although there are multiple bills addressing TAA that range in scope from repealing the authorizing legislation to providing expanded multiyear extensions, the issue is taking form as part of the debate on passage of implementing legislation for the proposed free trade agreements (FTAs) with Colombia, Panama, and South Korea. As Congress seeks to resolve this debate, two issues dominate the discussion: (1) reauthorization of TAA programs; and (2) procedural issues on how to move TAA legislation. At present, a bipartisan compromise is being considered on TAA that would allow for extension through December 31, 2013, of many, but not all, of the enhanced programs and funding levels contained in the ARRA.20 The language incorporated in the draft implementing bill for the 20 “Congressional Staff Close to Deal on How to Move FTAs, TAA,” Inside U.S. Trade, July 27, 2011. Congressional Research Service 7 Trade Adjustment Assistance for Firms: Economic, Program, and Policy Issues proposed U.S.-South Korea Free Trade Agreement (KORUS FTA) provides a preliminary view of this compromise. The draft bill would reauthorize the TAA for firms program at annualized levels of $16 million through calendar year 2013. It would also reinstate eligibility for services firms and the more detailed reporting requirements stipulated in the ARRA.21 Procedural issues over how to move the TAA and FTA implementing bills are still under discussion. The two Houses of Congress first debated whether to attach TAA to the KORUS FTA draft implementing bill. The Senate Finance Committee completed a “mock markup” of the KORUS FTA draft implementing bill on July 7, 2011, that included TAA. The House Ways and Means Committee, in a simultaneous mock markup, approved a draft bill without it. Including TAA as part of a trade agreement implementing bill has proven problematic because opinions differ over how rules governing the treatment of FTA implementing bills under Trade Promotion Authority (TPA) would apply in this case.22 Because TAA and the three FTAs are controversial issues, Members also have differing viewpoints on each of the four possible bills. Many, therefore, would like the chance to vote separately on each of them.23 Congress is now considering the possibility of taking up TAA in a separate bill. This option has presented a sequencing problem, with congressional leaders still debating the order in which the various bills might be taken up to ensure that all will be considered, if not voted on.24 A final determination on how Congress may proceed has not been announced.25 Author Contact Information J. F. Hornbeck Specialist in International Trade and Finance jhornbeck@crs.loc.gov, 7-7782 21 U.S. Congress, Senate Committee on Finance, United States-South Korea Free Trade Agreement Implementation Act Statement of Administrative Action, Draft, 112th Cong., 1st sess., June 28, 2011, pp. 32, 36-39. 22 “Finance Approves FTAs, TAA at Mock Markup, Rejects All Amendments,” Inside U.S. Trade, July 8, 2011. 23 “Some Progress on FTAs,” Washington Trade Daily, July 14, 2011. 24 “Congressional Staff Close to Deal on How to Move FTAs, TAA,” Inside U.S. Trade, July 27, 2011. 25 For more on this policy discussion see, CRS Report R41922, Trade Adjustment Assistance (TAA) and Its Role in U.S. Trade Policy, by J. F. Hornbeck and Laine Elise Rover. Congressional Research Service 8