A Step in the Right Direction: OMB Will Not Implement Plan to Include “Factoryless Goods Producers” In Manufacturing

Last week, the Office of Management and Budget (OMB) announced that it was cancelling plans to reclassify factoryless goods producers (FGPs) such as Apple and Nike—most of which are now in wholesaling or management of companies (both service industries)—into manufacturing. The FGP proposal is part of a broader set of changes to the North American Industry Classification System (NAICS) that were scheduled to take effect in 2017. The FGP plan would have also required government agencies to move trade in goods made by manufacturing service providers (MSPs), such as China’s Foxconn (which builds Apple products) into services. The OMB proposal was highly controversial, and more than 26,000 comments were submitted for the record. In addition, more than 40 members of the House and Senate signed letters to the OMB raising objections and requesting clarification on a number of unresolved issues regarding the proposal.

In a recent policy memo, I noted that the proposal would artificially inflate manufacturing output and employment by treating outsourced production as part of domestic manufactured output, while artificially suppressing the reported U.S. goods trade deficit, with offsetting reductions in the services trade surplus. The proposal would also require manufacturing firms to begin reporting trade and manufacturing activities on a value-added basis, which would introduce a new level of distortion in U.S. international trade statistics that would undermine enforcement of U.S. fair trade laws. Finally, adoption of the FGP proposal, as initially formulated, could undermine U.S. Buy American Laws and U.S. Export-Import Bank policies.

In its published decision, OMB noted the extensive public comments received, and also reported that preliminary research had yielded “inconsistent results” which “fail to yield responses that provide accurate and reliable identification and classification of FGPs.” OMB encouraged federal agencies to engage in further “research, testing and evaluation” of the FGP proposal, in a process that will be “informed by questions raised in the public comments.” The results of the process “could lead to a different FGP proposal.”

OMB is wise to delay implementation of the FGP proposal in order to consider the objections raised in the comment period, by both agency officials as well as members of the public and Congress. While it could be beneficial to systematically treat and collect information on corporations such as Apple and Nike that outsource 100 percent of their production, this can be done without permanently distorting U.S. trade in goods and services, and without fundamentally altering the definition of “made in the USA” products.